Contributed by Nelly Almeida and Brian Wells
It’s that time again. Whether you are romantically involved or not, the assortment of dashing flowers and delectable sweets being delivered all around you has surely alerted you to the (perhaps nerve-wracking) fact that today we celebrate St. Valentine’s Day. On this day, offices, homes, schools, and the like will be accepting deliveries of orchids, lilies, daisies, and the all time classic—roses. Yes, with its rich history, enchanting smell, and striking appearance, it is no wonder that lovers everywhere have chosen to use roses as a symbol of their affection and love for Valentine’s Day. As a result, the rose industry is thriving—U.S. consumers spend over $2 billion on flowers for Valentine’s Day alone. But the business of selling flowers is not always a bed of roses. Case in point: In re Flores De New Mexico, Inc., where broken promises and upset expectations show that all is fair in love and bankruptcy court.
This un-rosy tale, set in New Mexico, centered on Flores de New Mexico, Inc., a floriculturist specializing in cut roses. With over 60,000 rose bushes, Flores provided these instruments of love to thousands upon thousands of people—indeed, its bushes produced over 100,000 roses for a single Valentine’s Day. Perhaps Flores was looking at things through rose-colored glasses when it decided to take out a $1,100,000 loan from Banda Negra, to be secured by all of its assets because just over a year later Flores filed for protection under chapter 11 of the Bankruptcy Code. Flores’ assets were sold at auction for a combined total of $900,000, and Banda Negra undoubtedly expected to recover all of these proceeds in satisfaction of its secured loan. Flores, however, claimed that the proceeds from the auction of its rose bushes belonged to the estate under section 544(a) of the Bankruptcy Code because Banda Negra’s security interest had not been properly perfected.
Was it time for Banda Negra to wake up and smell the roses? Its financing statement did not specifically mention the rose bushes, but it did include a catch-all for “miscellaneous equipment.” Chief Judge McFeeley identified two steps for determining whether this description was sufficient—first, the court had to identify what category of “goods,” as defined in former U.C.C. section 9-109, the rose bushes fell within; second, the court had to determine whether the financing statement sufficiently described the rose bushes so as to put a potential lender on notice of Banda Negra’s interest, as required by former U.C.C. section 9-402.
A rose bush is a rose bush is a rose bush is a rose bush, but for purposes of secured transactions, is it a “consumer good,” “equipment,” “farm product,” or “inventory”? Looking to the definitions in former U.C.C. section 9-102, Chief Judge McFeeley immediately crossed off “consumer goods,” as the rose bushes were not “primarily for personal, family, or household purposes,” and “inventory” because the bushes themselves were not held for sale. While the debtor was engaged in farming operations, it was less clear whether the rose bushes were “farm products,” defined under former U.C.C. section 9-102 as “crops or supplies used or produced in farming operations” or “products of crops in their unmanufactured states.” McFeeley noted that the bushes couldn’t be “products of crops” because the debtor was selling cut roses, and not the rose bushes, so the farm products question boiled down to whether the rose bushes were “crops.”
This, perhaps unsurprisingly, presented a thorny issue. From a tangle of precedent, Chief Judge McFeeley drew the following rule: where a tenant plants seeds (or very young plants), raises them, and harvests the entire plant, they constitute crops, but when only the fruit of the plant is harvested, the plant would be considered equipment. Turning to the facts of the case, McFeeley noted that the rose bushes were not harvested annually, but rather produced successive blooms that were periodically harvested. Further, he noted that the “rose bushes had a life expectancy of seven to eight years and testimony at trial showed that there was no intent to remove the bushes until the they ceased producing adequate crops of cut roses.” On this basis, a rose bush is not just a rose bush—but equipment.
While a rose by any other name is known to smell just as sweet, does calling a rose bush “miscellaneous equipment” create an interest just as perfect? To this Chief Judge McFeely answered no. While usually a financing statement need only identify the type of goods in which a secured party claims an interest, here Banda Negra included a general type of goods (miscellaneous equipment) and also listed all of the major assets with complete and exact descriptions. Under these circumstances, the judge found it ambiguous whether “miscellaneous equipment” extended to the 60,000 rose bushes. In other words, while roses, and even rose bushes, are objects of perfection, Banda Negra’s interest in these bushes was not. Because it was unperfected, Bankruptcy Code’s avoiding powers kicked into action, Banda Negra was left with nothing more than an unsecured claim, and the proceeds from the sale of the bushes accrued to the estate.
The moral of this story? Next time you are asserting a security interest, be sure that you “rose” to the occasion by clearly identifying the covered property so as to put any future lenders on notice of your interest.
Happy Valentine’s Day!