PMSI, a Financing Statement Missing 'LLC', and a Note Indorsed Without Recourse
Ridgeline Equipment Finance loaned $310,000 to Kestrel Machining in April to buy a five-axis CNC machine, taking a security agreement and a promissory note payable to Ridgeline in 60 monthly installments. Ridgeline filed a financing statement in May under the name 'Kestrel Machining' rather than the debtor's registered name, 'Kestrel Machining LLC.' Kestrel had earlier given Meridian Bank a blanket lien on all assets, perfected in 2021. In September, Kestrel sold the CNC machine to Apex Tooling, a competing machine shop that bought it for $180,000 without checking any lien registry, and Apex moved the machine to its own plant. Meanwhile, Ridgeline indorsed the promissory note 'without recourse' to a factoring company, Halcyon Capital, which paid $240,000 and took the note in good faith without notice of any defense. Kestrel has now defaulted and filed Chapter 11; the trustee asserts that Ridgeline's lien is unperfected and that Halcyon is subject to Kestrel's fraud claim that Ridgeline misstated the machine's spindle hours.
1. Did Ridgeline obtain a perfected purchase-money security interest with priority over Meridian's blanket lien?
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PMSI timing. A purchase-money security interest in equipment has priority over an earlier perfected blanket lien if it is perfected when the debtor receives possession or within 20 days afterward. Ridgeline's May filing came roughly a month after the April loan, so timing may be inside or outside the 20-day window depending on the delivery date; this must be established first. Assume it was timely; the timing is not the fatal problem.
The name defect. Section 9-503 requires a registered organization's financing statement to provide the debtor's registered name, which here is 'Kestrel Machining LLC.' Under Section 9-506, a financing statement that does not sufficiently provide the debtor's name is seriously misleading and ineffective. The safe harbor asks whether a search of the correct name using the filing office's standard search logic would disclose the record. In a state using exact-match logic, a search for 'Kestrel Machining LLC' will not retrieve a record indexed under 'Kestrel Machining,' so the filing fails and the interest is unperfected. In a state using 'contains' logic, the record may still be found, and the omission would be a minor error that does not defeat the filing.
Consequences. If unperfected, Ridgeline loses PMSI priority, is subordinate to Meridian's 2021 blanket lien, and its interest is avoidable by the trustee as a hypothetical lien creditor. Ridgeline becomes an unsecured creditor in the Chapter 11 case. Meridian's lien, perfected well outside the preference window, survives.
2. What is Apex Tooling's position against Meridian and Ridgeline?
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Buyer in ordinary course? Section 9-320(a) protects a buyer in the ordinary course of business, which requires goods to be bought from a seller in the business of selling goods of that kind. Kestrel is a machining business, not a machine tool dealer. The CNC machine was equipment used in Kestrel's operations, not inventory. Apex therefore cannot be a buyer in ordinary course, and its failure to search the registry is beside the point - the BIOC rule has no knowledge requirement, but it also does not apply here.
Meridian's lien. A security interest continues in collateral notwithstanding a sale unless the secured party authorized the disposition free of the interest. Nothing suggests Meridian authorized the sale. Apex therefore takes the machine subject to Meridian's perfected blanket lien and faces a competing priority claim.
Ridgeline's lien. A buyer who gives value and takes delivery of goods without knowledge of an unperfected security interest takes free of that interest. If Ridgeline's filing is seriously misleading and therefore unperfected, Apex - a purchaser for value with no actual knowledge - takes free of Ridgeline's interest. That outcome is ironic: the weaker lienholder loses to Apex, while the stronger earlier lienholder wins.
Apex's claims. Apex can sue Kestrel for breach of the warranty of title and quiet enjoyment and may have a claim for fraudulent concealment. The purchase price of $180,000 is also relevant to Kestrel's estate as a potential avoidable transfer if the machine was sold for less than reasonably equivalent value while insolvent.
3. Is Halcyon Capital a holder in due course, and does Kestrel's fraud claim defeat the note?
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HDC status. Halcyon took by indorsement and negotiation, paid $240,000, acted in good faith, and had no notice of any defense, claim, or insolvency. Those are the elements of holder-in-due-course status. The 'without recourse' indorsement does not prevent Halcyon from becoming a holder in due course; it only disclaims Ridgeline's contingent liability to pay if the maker defaults. The note itself appears negotiable: a fixed principal, a definite payment schedule, and an unconditional promise to pay.
The fraud defense. Kestrel's claim that Ridgeline misstated the machine's spindle hours is fraud in the inducement - a personal defense. A holder in due course takes free of personal defenses and of claims to the instrument. It remains subject to real defenses such as fraud in the factum, forgery, material alteration, infancy, and discharge in insolvency, none of which appears here. Halcyon therefore enforces the note free of the spindle-hours defense.
Ridgeline's exposure. The 'without recourse' indorsement does not eliminate the transfer warranties. Ridgeline warranted to Halcyon that the instrument is not subject to a defense or claim in recoupment assertable against Ridgeline. If Kestrel can establish fraud, Halcyon has a warranty claim against Ridgeline even though it cannot collect from Ridgeline on the instrument itself.
Bankruptcy. Halcyon enforces the note against Kestrel's estate and the other obligors by filing a proof of claim; the automatic stay bars collection outside the case. Because Kestrel's liability on the note is independent of the fraud defense against Halcyon, the estate's principal argument is limited to Ridgeline's own breach of warranty.