Facts:

1.  Debtor, Specialty Contracting and Supply Company, granted a security interest in its equipment, among other items of collateral, to one Richard Fraley; Fraley was an officer of Specialty Contracting and he filed a financing statement in Texas where Specialty Contracting operated at that time.

Two years later, the debtor’s business moved to Georgia. Chronologically, the time sequence proceeded as follows:

2. In September, a federal tax lien was filed on all of debtor’s equipment.

3. In November, debtor purchased a Ford Ranger (“truck”) and granted a purchase money security interest to Bank of Newnan (“Bank”) in the truck to the extent of $10,100.

Issue:

Whether the federal tax lien had priority over the initial secured party (Fraley) as well as over the purchase money security interest of the bank.

Ruling:

Georgia law, which is similar to many other States’ laws, provides that a security interest perfected in another state continues for only a period of four months after the debtor moves to Georgia, unless the creditor renews the security interest in Georgia.

Here, the court held that although Fraley’s lien was first in time, Fraley lost priority when he did not file a financing statement in Georgia within four months after the debtor moved to that state.

Next, the court held that the federal tax lien, although second in time, would have priority over Fraley’s lien, but not over the third lien in time which was the purchase money security interest filed by the bank.

The court reasoned that Fraley had lost his security interest by failing to follow Georgia law when the debtor moved to that state; however, priority was given to the bank only as to the purchase money security interest because the bank was considered to be the seller and owner, in fact, of the collateral. United States of America v. Specialty Contracting and Supply Company, Inc. et al., 140 B.R. 922.

EDITOR’S COMMENT

The case above is significant to credit unions since many of the loans granted to its members do not qualify as purchase money security interests.

Only loans granted for the purchase of collateral are considered to be extended the privilege and priority over a prior lien on “equipment”. Many credit union loans are secured by property that the debtor already owns, such as a vehicle.

Credit unions should be aware of the risk in jeopardizing its collateral when loans are granted and the loan does not result in a purchase money security interest.

In addition, when collateral is moved to another state, the credit union should consult its attorney as to whether any further filings are required to continue its perfected security interest.

Author: Charles R. Harroun, Attorney at Law.