## Facts

- Midland States Bank (as successor to Strategic Capital Bank) held several perfected security interests in collateral of Sports Publishing LLC (the debtor).
- Strategic and the debtor executed a commercial security agreement in July 2001, and Strategic filed UCC financing statements with the Illinois Secretary of State in 2001 and a continuation in 2006, maintaining a prior perfected lien.
- InnerWorkings LLC was also a secured creditor of the debtor and held security interests in some of the same collateral, but those interests were generally subordinate to the bank’s earlier security interests.
- InnerWorkings and the debtor executed a commercial security agreement in January 2005, and InnerWorkings filed a UCC financing statement in March 2005.
- InnerWorkings later asserted that, as to certain inventory it financed for the debtor, it held a purchase-money security interest (PMSI) that would take priority over the bank’s earlier blanket lien.
- The debtor filed a voluntary Chapter 11 petition on October 15, 2008.
- In the bankruptcy case, the bank filed an adversary proceeding seeking a determination of the validity, extent, and priority of the competing security interests.
- InnerWorkings contended that its PMSI in inventory (and related proceeds) was entitled to priority; the bank contended that InnerWorkings had not satisfied Article 9’s requirements for PMSI priority in inventory, including the requirement of authenticated notice to the prior secured creditor.
- At trial, a former president of the bank testified that, although he had conversations with InnerWorkings personnel, he never received specific authenticated notice stating that InnerWorkings had or expected to acquire a PMSI in the debtor’s inventory.
- InnerWorkings relied in part on documents and agreements that referenced a PMSI, but the bankruptcy court found that InnerWorkings did not prove the bank received the statutory notice required for PMSI super-priority.
- The bankruptcy court ruled for the bank. InnerWorkings appealed to the U.S. District Court for the Central District of Illinois under 28 U.S.C. § 158(a).

## Issues

1. Whether InnerWorkings proved it held a valid, properly perfected PMSI in certain inventory that had priority over the bank’s earlier perfected security interest under Illinois UCC Article 9.
2. Whether InnerWorkings proved compliance with the inventory PMSI priority conditions, including receipt by the bank of authenticated advance notice describing the inventory and stating a PMSI claim.
3. Whether the bankruptcy court’s findings on notice (including credibility findings) were clearly erroneous on appeal.

## Decision

- The district court affirmed the bankruptcy court’s judgment in favor of the bank and against InnerWorkings.
- The court held that InnerWorkings failed to establish entitlement to PMSI priority in inventory because it did not prove the bank received the authenticated notice required by Article 9.
- Applying the clear-error standard to the bankruptcy court’s factual findings, the district court found sufficient record support for the bankruptcy court’s determination and declined to reweigh the testimony and exhibits.

## Legal Principles

- Under Illinois UCC Article 9, a secured party claiming PMSI priority in inventory over an earlier perfected security interest must satisfy the statutory conditions for that priority, including:
  - perfection of the PMSI when (or before) the debtor receives possession of the inventory, and
  - an authenticated notification sent to the holder of the conflicting security interest, received before the debtor receives the inventory, stating that the sender has or expects to acquire a PMSI in inventory and describing the inventory.
- The party asserting PMSI super-priority bears the burden to prove the statutory elements, including that the required notice was received by the prior secured creditor.
- References to a PMSI in agreements or general communications do not substitute for proof that the required authenticated notice was sent and received in the manner Article 9 requires.
- On appeal from a bankruptcy court decision under 28 U.S.C. § 158(a), the district court reviews legal conclusions de novo and reviews factual findings (including findings about notice and witness credibility) for clear error.

## Conclusion

The district court affirmed the bankruptcy court’s ruling that InnerWorkings did not obtain PMSI super-priority in the debtor’s inventory because it failed to prove the bank received the authenticated notice required for inventory PMSIs under Article 9, leaving the bank’s earlier perfected security interest in first priority.


In the Matter of Sports Publishing Inc., 2010 WL 750008 (2010)