Security Interest Protected in Future Advances

Virginia Code §8.9A-232 provides that a security agreement may provide for collateral securing future advances. Subsection (a) clarifies the result when the initial advance is paid and a future advance is subsequently made. Specifically, subsection (a) of this section replaced and clarified former §8.9-312(7) discussed in In re Enfolinc, Inc. The former section provided that the priority of a new advance turned on whether it was made “while a security interest is perfected.”  The code as it is written today resolved the ambiguity by omitting that requirement.

In the bankruptcy case In re Enfolinc, Inc., the United State Bankruptcy Court for the Eastern District of Virginia, Alexandria Division, was requested to make a determination of the priority of three competing claims of creditors in a debtor’s bankruptcy case.  The debtor filed under Chapter 11, and the court ordered the sale of assets, but the proceeds did not satisfy all of the liens.  Three creditors then asserted a senior claim in the proceeds of the sale.

One of the creditors had a security agreement with the debtor to secure a promissory note.  The creditor renewed and refinanced the original loan with some modification in the terms and with additional collateral to secure the increased amount owned several times after the original promissory note was made.  The creditor contended that the original security agreement contained a future advance clause that included all debts owed to the creditor under the original security agreement.  A future advance clause was codified in Virginia Code §8.9-312(7), and is now codified in Virginia Code §8.9A-323.  The former section provided that “if future advances are made by a secured creditor to the debtor while a security interest is perfect, the security interest has the same priority with respect to future advances as it does with respect to the original advance.”  The creditor’s original security agreement was found to have had sufficient language to constitute a future advance clause as defined in the case of In re Brice, so the court held that the later renewals and refinancing done by the creditor was not another loan, but an advance of the original transaction.  The court granted the creditor a first priority security interest in the remaining funds generated from the sale of the debtor’s assets.