Accidental Release Forfeits Security

Being careful when filing releases is even more evident in light of the decision rendered by the 4th U. S. Circuit Court of Appeals in In Re Kitchen Equipment Company of Virginia, Inc. In Kitchen the secured creditor, a bank, accidentally checked the "termination" box instead of the "partial release" box on a multipurpose security form. The creditor had intended to release only two items of the debtor's collateral. The two items were specified in the description block. The Court ruled, however, that by filing the release checked "termination," the creditor lost its entire security interest when the debtor filed for bankruptcy protection under Chapter 11. The bank argued that the interest should be honored under equitable principles and under the Virginia form of the Uniform Commercial Code. Nevertheless, the Court refused to allow the bank's financing statement to prevail over the bankruptcy trustee's statutory lien.