Priority of Creditors Claims Against an Estate

Union Bank Co. v. Heban, 6th Dist. App. No. 11-005, 2012 Ohio 30. As part of the administration of decedents estate, the administrator liquidated some of decedents business property, the proceeds of which were subject to five creditors claims. Decedents business property was financed by Union Bank and National Bank subject to the following terms:

Union Bank owned four of the five promissory notes (PN1, PN2, PN4, PN5) and National Bank owned one promissory note (PN3). With regard to the filing of each loan, the following occurred: Union Bank filed a financing statement on June 27, 2003 covering all of decedents property and any after acquired property; on March 14, 2006, PN1 and security agreement, mentioning the financing statement were executed; PN2 specifically stated this loan is unsecured and was executed on February 2, 2007; on October 25, 2007, Union Bank filed a financing statement covering a piece of large equipment whether owned now or in the future; PN3 and commercial security agreement were executed in favor of National Bank on December 21, 2007; on December 24, 2007, National Bank filed a financing statement covering all of decedents equipment, even after acquired; PN4 and a security agreement were executed on May 9, 2008 in favor of Union Bank, specifically mentioning a piece of Bobcat equipment and on the same day a financing statement for the Bobcat equipment was filed; PN5 and a security agreement with Union Bank were executed on October 16, 2008.

The trial court found that PN3 took first priority as it was first properly perfected by the filing of a financing statement, followed by PN4 which was also perfected by the filing of a financing statement subsequent to PN3. They held that the remaining promissory notes were on equal footing because the financing statements were deficient because they did not have a sufficient description of the collateral or stated that the loan was unsecured.

The trial court was reversed because unless an agreement expressly postpones the time of attachment, a security interest attaches to collateral when it becomes enforceable against the debtor with respect to the collateral, which occurs when (1) value has been given; (2) the debtor hs rights in the collateral or power to transfer rights to other secured party; or (3) the debtor has authenticated a security agreement that provides a description of the collateral. Unlike the trial court, the appellate court recognized the filing of a financing statement as sufficient perfection of a security interest if the financing statement names the parties involved, as well as a description of collateral that would put a reasonably prudent prospective lender on notice that the collateral sought to be purchased or encumbered might be the subject of a preexisting security interest, and does not need specific property information. Additionally, the appellate court held that the financing statement does not have to be tied to a specific loan to be perfected and therefore, the priority of the loans as determined by the trial court was reversed as to PN1 and PN5. PN2 was still last priority because it expressly stated in the promissory note that it was unsecured.