## Facts

- Diabetes America, Inc. (Debtor) was incorporated in Delaware and conducted its business operations in Texas.
- Before the bankruptcy filing, Frank Basile (Creditor) loaned Debtor $150,000.
- Creditor asserted that the loan was secured by a security interest in Debtor’s assets.
- To perfect the security interest, Creditor filed a UCC-1 financing statement in Texas.
- Creditor did not file a financing statement in Delaware, Debtor’s state of incorporation.
- Debtor later filed a chapter 11 bankruptcy case in the U.S. Bankruptcy Court for the Southern District of Texas.
- After the bankruptcy filing, Creditor submitted a proof of claim asserting secured status based on the purported lien.
- Under the confirmed chapter 11 plan, H. Malcolm Lovett, Jr. (Plan Agent) was authorized to pursue estate causes of action, including avoidance actions and claim objections.
- Plan Agent challenged Creditor’s secured status and sought summary judgment, arguing that Delaware’s version of UCC Article 9 governed perfection and that Creditor’s lien was unperfected.
- The dispute proceeded as an adversary proceeding between Plan Agent (plaintiff) and Creditor (defendant), with summary-judgment briefing focused on perfection and avoidance.

## Issues

1. Under UCC Article 9, is a Delaware-incorporated corporation “located” in Delaware for purposes of determining which state’s law governs perfection of a security interest in its assets?
2. If Delaware law governs, does filing a financing statement only in Texas perfect the security interest?
3. May the Plan Agent, acting under authority granted in a confirmed chapter 11 plan, use 11 U.S.C. § 544(a) to avoid an unperfected security interest and treat the creditor’s claim as unsecured?

## Decision

- The court determined that Debtor, as a registered organization, was “located” in its state of organization (Delaware) for Article 9 purposes.
- Because Debtor was incorporated in Delaware, Delaware law governed perfection (and the effect of perfection or nonperfection) of Creditor’s asserted security interest in Debtor’s relevant personal property.
- Creditor’s Texas filing did not perfect the security interest under the governing Delaware filing rules.
- As a result, Creditor’s security interest was unperfected as of the bankruptcy petition date.
- The court held that the Plan Agent could exercise the estate’s avoidance powers granted under the confirmed plan, including the “strong-arm” power in 11 U.S.C. § 544(a).
- Applying § 544(a), the court avoided Creditor’s unperfected security interest.
- The court reclassified Creditor’s claim as a general unsecured claim.
- The court denied Creditor’s request for summary judgment and granted relief to Plan Agent on the unperfected-lien/secured-claim dispute.

## Legal Principles

- Under UCC § 9-301, perfection and the effect of perfection or nonperfection of a security interest in most types of collateral are governed by the law of the jurisdiction where the debtor is located.
- Under UCC § 9-307, a debtor that is a registered organization is located in the state under whose law it is organized.
- For a registered organization, the state of principal operations does not control the Article 9 debtor-location analysis; the state of organization does.
- When the governing jurisdiction’s Article 9 requires filing in that jurisdiction to perfect, a financing statement filed only in another state is ineffective to perfect against third parties.
- Under 11 U.S.C. § 544(a), the estate representative (trustee or properly authorized successor under a confirmed plan) has the rights of a hypothetical lien creditor as of the petition date and may avoid an unperfected security interest.
- Once an unperfected lien is avoided, the creditor is left with an unsecured claim for the underlying debt (subject to any other applicable bankruptcy rights and defenses).

## Conclusion

In In re Diabetes America, Inc., the bankruptcy court held that a Delaware-incorporated debtor is located in Delaware for UCC Article 9 perfection purposes, so Delaware law governed perfection even though the debtor operated in Texas. Because the creditor filed a UCC-1 only in Texas and did not file in Delaware, the security interest was unperfected. The plan agent, authorized under the confirmed chapter 11 plan, could use § 544(a) to avoid the unperfected lien, resulting in avoidance of the security interest and treatment of the creditor’s claim as unsecured.


In re Diabetes America, Inc., 2012 WL 6694074 (2012)