## Facts

- American Equities Group, Inc. (AEG) entered into a 1996 factoring agreement with Ahava Dairy Products Corp. (Ahava Dairy), and Lewis County Dairy Corp. (Lewis) guaranteed Ahava Dairy’s obligations.
- To secure payment, Ahava Dairy and Lewis granted AEG security interests in substantially all of their assets; AEG filed UCC financing statements and claimed a first-priority perfected interest in the collateral (which was not consumer goods).
- AEG later became a judgment creditor against Ahava-related entities.
- AEG filed for bankruptcy, and a post-confirmation liquidation trust (AEG Liquidation Trust) was created to pursue AEG’s remaining rights and claims.
- At some point, termination statements purporting to terminate AEG’s UCC filings were filed by an unknown entity; the Trust alleged the terminations were unauthorized and did not extinguish AEG’s perfected security interests.
- Signature Bank (Signature) later perfected its own security interests in the same collateral, took possession of the collateral, and sent a notice of disposition to AEG and others consistent with UCC notice requirements (including UCC § 9-613(1)(E)).
- The Trust notified Signature in writing that it claimed a security interest in the collateral and asserted that actions affecting that interest would violate the bankruptcy automatic stay.
- Signature nonetheless conducted a sale of the collateral.
- The Trust sued multiple alleged transferees/continuing business entities (including Toobro entities and related Ahava entities) seeking, among other relief, a declaration of uninterrupted first-priority lien rights and recovery based on successor-liability and de facto merger theories, as well as relief tied to the collateral sale proceeds.
- The matter came before the New York Supreme Court, New York County (Commercial Division), on motions to dismiss challenging the sufficiency of the Trust’s pleading and the ability to litigate priority/proceeds issues without joining Signature.

## Issues

1. Whether the Trust stated a claim that AEG’s perfected security interests continued despite purported UCC termination statements filed by an unknown party and despite later events, including Signature’s disposition of the collateral.
2. Whether the Trust adequately pleaded successor liability and de facto merger against entities alleged to have received or continued the Ahava business and assets.
3. Whether Signature, as the secured party that seized and sold the collateral, was a necessary party to adjudicate lien priority and entitlement to the sale proceeds.

## Decision

- The court largely denied the motions to dismiss, allowing the Trust to proceed on its core theories that it held a continuing perfected security interest and that various defendants could face successor-liability/de facto merger claims based on alleged asset transfers and continuation of the business.
- The court treated the effectiveness and authorization of the termination statements, and the resulting priority dispute, as issues that could not be resolved against the Trust at the pleading stage given the allegations that the filings were unauthorized.
- The court concluded that Signature was a necessary party because the requested relief concerned the validity, priority, and effect of liens in collateral that Signature possessed and sold, and because the proceeds from that sale were central to the dispute.

## Legal Principles

- A UCC termination statement is effective only if authorized; where a complaint plausibly alleges that purported terminations were unauthorized, a claim that a perfected security interest continued should not be dismissed at the pleading stage.
- Under Article 9, a secured party’s disposition of collateral generally does not eliminate a senior perfected security interest; a foreclosure sale can cut off interests that are subordinate, not those with higher priority.
- Successor liability and de facto merger claims may proceed past a motion to dismiss where the pleading alleges facts supporting continuity of the enterprise and transfer of assets in a manner that could support imposing liabilities on the transferee entities.
- A party whose lien, possession, and sale of the collateral are directly implicated in determining priority and distribution of sale proceeds is a necessary party for complete relief and an enforceable determination.

## Conclusion

The court allowed the AEG Liquidation Trust’s action to proceed in substantial part, holding that the complaint adequately alleged an uninterrupted perfected security interest despite purported unauthorized UCC terminations and that successor-liability theories were sufficiently pleaded, while requiring joinder of Signature Bank because its foreclosure sale and the resulting proceeds were directly at issue.


AEG Liquidation Trust v. Toobro N.Y. LLC, 2011 WL 2535035 (2011)