Tales of whoa!: legal caveats in commercial lending

RMA Journal, The, Sept, 2002 by Michael L. Weissman

On the Docket: Absence of landlord's agreement allows landlord to seize and retain property of tenant for unpaid rent.

Wee Scots, LLC v. Fleming, 765 N.E. 2d 668 (Ind. App. 2002) provides a poignant demonstration of the need for a landlord's agreement when the borrower is occupying leased premises. Although the case did not involve a lender, it did involve a priority dispute between a landlord and a trustee in bankruptcy who has the status of a secured creditor pursuant to Section 544 of the Bankruptcy Code.

In March 1999, Wee Scots leased a building from Fleming and converted it into a restaurant. Later, Wee Scots defaulted on its monthly rent payments and had to close the restaurant. In June 2000, Fleming changed the locks on the premises, and filed suit for possession and damages. Negotiations about the value of the equipment locked inside the building proved fruitless. When Wee Scots told Fleming that a third party was coming to remove the equipment, Fleming responded by obtaining a prejudgment attachment of the equipment.

In January 2001, Wee Scots filed for bankruptcy and a stay order was entered, excluding, however, "secured creditors with nonavoidable perfected security interests" in the debtor's property.

Wee Scots moved to dismiss Fleming's attachment action, arguing the prejudgment attachment was invalid, primarily because Fleming already had possession of the restaurant equipment when she obtained .the attachment.

Reviewing the requirements for attachment under Indiana law, the court ruled that the order for attachment had been properly granted, saying it "made no difference whether Fleming or Wee Scots was in possession of the equipment at the time Fleming filed her motion for attachment."

The court went on to hold that when Fleming obtained an order for prejudgment attachment, she had obtained a perfected lien under Indiana law. It also noted that the perfection of the lien allowed Fleming to claim, for purposes of Wee Scots' bankruptcy, the status of a secured creditor with a nonavoidable perfected security interest.

What's the paint? Even though there was no lender holding a perfected Uniform Commercial Code security interest on the debtor's equipment, the case is instructive for lenders. If the landlord's prejudgment attachment lien can prevail over the strong-arm status granted to a trustee in bankruptcy (as it obviously did), it will certainly prevail over the perfected security interest of a lender. The case clearly demonstrates the need for a landlord's agreement in favor of the lender, in which the landlord waives all possible statutory and nonstatutory rights to seize and sell property of the tenant-borrower to satisfy unpaid rental obligations.

Contact the author by e-mail at Michael. Weissman@bridgeviewbank.com or by telephone at 773-975-5308.

[c] 2002 by RMA. Weissman is EVP and General Counsel of the Bridgeview Bank Group and counsel to the Chicago law firm of Holland & Knight, LLP He has documented a wide variety of financial transactions and has prosecuted civil and bankruptcy matters on behalf of many financial institutions and defended them in lender liability lawsuits. He lectures frequently on lending topics. He also is the immediate past chair of the Illinois Institute on Continuing Legal Education.