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Seriously Misleading UCC Filing. Can You Solve the Mystery?

Seriously Misleading UCC Filing. Can You Solve the Mystery?

Who enjoys a good ol’ mystery game? Today’s mystery is why a Georgia Bankruptcy Court deemed one creditor’s UCC filing seriously misleading, thus making the creditor’s security interest unperfected. First, we’ll go through the facts of the case, then review the requirements under Article 9, and then the big reveal: why was the UCC seriously misleading!

Facts of Case: In re Wastetech, LLC, Bankr. Court, ND Georgia 2019

In 2017, the debtor executed six agreements granting a secured interest to the creditor. The six agreements were executed on the following dates in 2017: June 13, July 6, July 19, August 3, August 18, and September 26.

The Debtor’s Name Change

Smack in the middle of these six agreements, on July 27, 2017, the debtor changed its name from NTC Waste Group, LLC to Wastetech, LLC.

The Creditor’s UCC Filing

On November 14, 2017, the creditor filed a UCC-1 Financing Statement. The creditor identified the debtor on the Financing Statement as NTC Waste Group, LLC. Within the Financing Statement, the creditor also provided the following collateral description:

“Certain future receivables sold by said business seller and purchased by Crown Funding Group, Inc., as buyer, pursuant to that certain purchase and sale of future receivables agreement between seller and purchaser dated 8/7/2017 (the “agreement”).”

Timeline of Pertinent Events seriously misleading timeline of events

The Debtor Files for Bankruptcy & Trustee Begins the Search

February 13, 2018, the debtor filed for bankruptcy protection. After the bankruptcy filing, the bankruptcy trustee set out to identify the creditors with UCC filings in place.

The trustee searched for UCC filings by two variations of the debtor’s current name: “Wastetech” and “Wastetech, LLC”. The trustee’s searches did not reveal any UCC filings. The trustee then submitted to the court that it also searched by the debtor’s former name (NTC Waste Group, LLC), which did reveal a UCC filing. Searching got a bit technical, here’s an excerpt from the court decision:

“… the Trustee recently conducted several UCC index searches through the GSCCCA database using the Debtor’s correct name as well as its former name… According to the Affidavit, statewide “searches using the search terms `Wastetech’ or `Wastetech LLC’ did not lead to finding the Financing Statement.” Only searches using the former name of the Debtor produced the Financing Statement.”

But wait, there’s more! The trustee was certainly thorough.

“Further searches conducted using the standard search logic in the Debtor’s name through the GSCCCA database in the Coweta County UCC Index along with a stem search for the Debtor’s name also failed to return the Financing Statement, though UCC-1’s for another entity were disclosed. Finally, additional statewide stem searches using the Debtor’s name did not disclose the Financing Statement. Based on these results, the Trustee through counsel states that ‘a search of the Coweta County UCC Index, and the Georgia Statewide UCC Index, using a debtor name stem search in the GSCCCA database for the Debtor’s correct legal name of record did not disclose the Financing Statement.’

No Safe Harbor

The search type described above was to prove the creditor’s Financing Statement didn’t appear under the “single exception” aka safe harbor. (The single exception, according to the court decision, is “a search of the records of the filing office under the debtor’s correct name, using the filing office’s standard search logic” which would disclose such financing statement.”)

Corporate Search & Public Organic Record Are Not the Same

The creditor argued “…that a search of the UCC records under “NTC” did produce the Financing Statement, and that a search of “wastetech” in the records of the Georgia Corporations Division led to Wastetech LLC, which was formerly known as NTC Waste Group, LLC…

Yes, you read that correctly “Georgia Corporations Division” (a corporate search, not the public organic record).

The creditor cited several cases regarding effective UCC filings, despite the debtor name being incorrect. Unfortunately for the creditor, the cases cited all related to UCC filings that were filed PRIOR to a debtor’s name change. The creditor also tried to argue that it filed its UCC within 4 months of the debtor’s name change — but that’s not how it works. It appears the creditor wanted the 4 month window under Article 9-507(c) to apply, except that section applies to UCCs filed prior to a name change.

OH, and the Collateral Description

There was an issue with the creditor’s collateral description – which seems minor compared to the flurry of back & forth over the correct name of the debtor. Within the UCC-1 Financing Statement, the collateral description is “certain future receivables sold by said business seller and purchased…” But it did not please the court because the collateral description is specific rather than of a category.

“Had the description been “all future receivables of the Debtor,” it would have met the requirements under Section 11-9-108 by describing the collateral through category.”

The judge is ready to decide. Is the UCC filing seriously misleading?

The judge did not mince words in the decision. The creditor’s UCC filing was seriously misleading, which made the filing ineffective and the security interest unperfected.

“First, the Debtor’s name as listed in the Financing Statement is inconsistent with its legal name on the public record. Moreover, a search of the Georgia Superior Court Clerks’ Cooperative Authority’s Lien records for the Debtor’s correct name would not have disclosed the existence of the Financing Statement. Second, the Financing Statement does not indicate that it covers all assets or all personal property of the Debtor, and it fails to provide a description of, or reasonably identify, the Debtor’s Accounts Receivable that are subject to the Defendant’s security interest. Accordingly, the Financing Statement is seriously misleading, and perfection of the Defendant’s security interest in Debtor’s Accounts Receivable is legally ineffective.

OK, So Maybe It’s Not a Mystery. Seriously.

I admit, as far as mysteries go this was kind of lame. I mean, given the facts of this case, is it really a mystery that the creditor was left with an ineffective Financing Statement, hanging out with unsecured creditors? Failing to correctly identify the debtor on the Financing Statement, relying on a corporate search versus the public organic record, and providing a poor collateral description? Definitely no mystery. I promise to craft a better mystery next time, until then, don’t be like this creditor!

  • Always identify your customer by their name as it appears in the public organic record
  • Public organic record and a corporate search are NOT the same thing
  • Carefully review your collateral description
  • After filing, conduct a reflective search to confirm the filing has been indexed properly

Will Safe Harbor Ever Exist for Florida UCC Filings? Zero Tolerance

Safe Harbor Can’t Save This Creditor’s UCC Filing or Any UCC Filed in Florida: Sorry, Your UCCs Are Seriously Misleading

Florida is serious about UCC filings. A recent Court of Appeals decision left a creditor with an unperfected security interest, when its UCC Financing Statements were deemed Seriously Misleading because it identified its debtor as “1944 Beach Blvd., LLC” instead of “1944 Beach Boulevard, LLC.”

We previously reviewed this case (you can read our original post), hoping that perhaps Safe Harbor could rescue the creditor’s security interest. Unfortunately, in Florida, you must strictly comply with Article 9-503(a), or your security interest is toast.

Yep, You Know the Importance of Complying with Article 9-503(a)

You file UCCs. So, I know you already know how critical it is to strictly comply with Article 9, and you know Article 9-503(a) dictates how the debtor’s name should appear on the UCC Financing Statement. And yet, you and I watch as creditors lose their security because they fail to comply.

The difference between Boulevard and Blvd. may seem minor. It’s a common abbreviation, right? Sure, maybe in the context of a street address. But, when it’s an organization’s name and you are filing a UCC on that organization, you’re best served to list the organization’s name exactly as it appears on the public organic record.

Article 9-503(a) of the Uniform Commercial Code dictates how the debtor’s name should appear on the UCC Financing Statement.

Whether the debtor is a registered entity or an individual, Article 9 says:

  • Registered Entity: list the name on the Financing Statement as it appears in the public organic record
  • IndividualAlternative A or Alternative B
    • Alternative A: if the debtor holds an unexpired driver’s license, the Financing Statement must list the debtor’s name as it appears on the unexpired driver’s license.
    • Alternative B: the debtor’s driver’s license name, the debtor’s actual name or the debtor’s surname and first personal name may be used on the Financing Statement.

Now, there may be occasions where a minor error can be overlooked: enter Safe Harbor.

What Is Safe Harbor? Look to Article 9-506

Even if there are minor errors or omissions on your UCC filing, you may still have a valid filing. How? Safe Harbor essentially saves your UCC filing, if a search of your debtor’s name, using a filing office’s “standard search logic,” discloses the UCC – even with minor errors.

Now, the tricky thing here is although International Association of Commercial Administrators developed standard search logic rules, “standard search logic” is actually dictated by the filing office (not really standard, right?).

Case Recap & Decision

1944 Beach Boulevard, LLC (Beach Boulevard) filed for Chapter 11 bankruptcy and later filed a complaint to avoid Live Oak Banking’s (Live Oak) UCCs because Live Oak abbreviated Beach Boulevard’s name on the Financing Statements.

Live Oak listed Beach Boulevard’s name as “1944 Beach Blvd., LLC” and claimed the abbreviation of Boulevard to Blvd. was a minor error and didn’t unperfect its security interests.

While contemplating its decision, the Court of Appeals reviewed two different cases. The first case says “Hey, if the UCC doesn’t show on the first page of search results, it’s seriously misleading. End of story.” The second case says “Well, you know, the website says to view additional search results you can click previous or next. So really, the search on prior pages or subsequent pages, should be reviewed by the searcher, as long as it’s within reason.”

But, before the Court of Appeals could issue a decision on the fate of Live Oak’s security interest, it needed the Supreme Court to answer three questions:

(1) Is the “search of the records of the filing office under the debtor’s correct name, using the filing office’s standard search logic,” as provided for by Florida Statute § 679.5061(3), limited to or otherwise satisfied by the initial page of twenty names displayed to the user of the Registry’s search function?

(2) If not, does that search consist of all names in the filing office’s database, which the user can browse using the command tabs displayed on the initial page?

(3) If the search consists of all names in the filing office’s database, are there any limitations on a user’s obligation to review the names and, if so, what factors should courts consider when determining whether a user has satisfied those obligations?

The Supreme Court only needed to address one: “Is the filing office’s use of a ‘standard search logic’ necessary to trigger the safe harbor protection of section 679.5061(3)?” The answer, much to the dismay of Live Oak, is “Yes.”

In short, since the filing office doesn’t use “standard search logic” the creditor’s security interests can’t be saved by Safe Harbor.

Will Safe Harbor Ever Exist for Florida UCCs? Zero Tolerance

Safe Harbor is dependent on the filing office using a “standard search logic.” Since Florida’s registry doesn’t have a “standard search logic” that means Safe Harbor can’t save your UCC.

“Because the Registry lacks a “standard search logic,” the search contemplated by section 679.5061(3) is impossible, which means that filers are left with the zero-tolerance rule of section 679.5061(2).” 1944 Beach Boulevard, LLC v. Live Oak Banking Co., No. SC21-1717, 13 (Fla. Aug. 25, 2022)

Zero Tolerance.

A stark reminder to ALWAYS correctly identify your debtor on the UCC Financing Statement and complete a reflective search to ensure your UCC has been correctly filed.

Failure to Use the Proper Forms Can Prevent Perfecting Your Security Interest

A Seemingly Minor Error Cost One Creditor $4,153,137.79

When preparing documentation to perfect a UCC filing, the requirements may not be too complex, but you must strictly follow the requirements. Precise compliance with federal and state requirements is necessary to prevent a secured debt from being treated as unsecured during bankruptcy and to protect a secured creditor’s priority position.

You may only discover your UCC filing is unperfected when it is treated as unsecured debt during a bankruptcy.  UCC perfection prior to a debtor filing bankruptcy is essential because of the bankruptcy trustee’s strong-arm powers under Section 544(a)(1) of Title 11.  The debtor or trustee can avoid an obligation that is not perfected and treat it as an unsecured obligation.

Regions Bank – Should Have Done It Right

The case In Re Camtech Precision Mfg. Inc. v. Regions Bank, 443 B.R. 190 (2011) provides a concise example of how the incorrect use of forms, when perfecting a UCC, can have devastating consequences.  The debtors in the jointly administered cases were R & J National Enterprises, Inc. (“R&J”), Avstar Fuel Systems, Inc. (“Avstar”) and Camtech Precision Manufacturing, Inc. (“Camtech”), collectively (“Debtors”).

Through a series of finance agreements, the Debtors owed Regions Bank (“Regions”) $4,153,137.79 at the time of the bankruptcy filing.  Regions claimed it was protected by a security interest that had been properly perfected.

Although Florida had an approved addendum for listing additional debtors, the attorney who prepared the UCC filings provided an affidavit that he did not use the approved form. Instead, the attorney listed Camtech and Avstar on a separate attachment.

There was nothing noted in the additional debtor box of the UCC form referencing an attachment for additional debtor information. Because the approved addendum for additional debtors was not used and there was no indication on the UCC-1 form in the additional debtor box to review the attachment for other debtors, the court ruled that the security interests were, in fact, not perfected.

It’s Seriously Misleading

Failure to indicate other debtors on the approved addendum or to reference them on the unapproved attachment meant the UCC filings were not indexed properly and therefore determined by the court to be “seriously misleading.”  It was deemed that Regions failed to have perfected its security interest in the assets of Camtech and Avstar, relegating the bank’s status to that of an unsecured creditor.

Correct use of the approved form would have ensured that searches would have revealed the additional debtor names.

The Takeaway

Although few states still require the use of a “paper” form, this seemingly minor error cost Regions $4,153,137.79.  This case illustrates how a subtle deviation from the appropriate procedures in perfecting a security interest can eliminate the protections provided by the security interest in collateral.

This type of mistake can be avoided simply by hiring experts to complete, review and file your UCC Financing Statements. NCS has the industry’s greatest UCC experts – contact us today!

*Originally published April 2014, updated September 2022.

UCC Filings: Does DBA Matter?

computer with a lightbulb on the screen

Does “d/b/a” Really Make a Difference in UCC Filings?

One of the most common — and most preventable — mistakes creditors make when creating a security interest via a UCC filing, is inaccurately or incorrectly identifying their customer on the Financing Statement.

Errors in identifying your customer may include the wrong legal name, spelling and spacing errors or omissions. Seemingly trivial deviations in the name of the debtor can prevent a security interest from being perfected.

When these errors occur, the filing may be deemed “seriously misleading.” What constitutes “seriously misleading”? According to UCC Article 9-506(b), a Financing Statement is seriously misleading if a search for the debtor’s legal name does not reveal the filing.

Correctly Identify Debtor

You may assume it is enough to simply conduct an online search to determine the correct spelling of your customer’s legal name. However, UCC Article 9-503 (a) states that the registered entity’s name will be the name as it is found in the organic public record.

(a) [Sufficiency of debtor’s name.]
financing statement sufficiently provides the name of the debtor:
(1) except as otherwise provided in paragraph (3), if the debtor is a registered organization, or the collateral is held in a trust that is a registered organization, only if the financing statement provides the name that is stated to be the registered organization’s name on the public organic record of most recently filed with or issued or enacted by the registered organization’s jurisdiction of organization which purports to state, amend, or restate the registered organization’s name

Here’s an Example

Let’s say your customer is commonly known as, “Z & Y, Inc. d/b/a ABC Company.” However, when you review the organic public record you see your customer’s name is “Z & Y, Inc.” The name you should list on the Financing Statement is “Z & Y, Inc.” (no d/b/a), just as it appears on the organic public record.

To that end, the answer to the question “Does d/b/a really make a difference in UCC filings?” is “Yes, it certainly does.”

Real Life: “Insufficient due to the addition of d/b/a”

In Nebraska, the case of EDM Corporation, doing business as EDM Equipment, doing business as NOVI, LLC, Debtor Hastings State Bank, Plaintiff-Appellant v. Thomas D. Stalnaker, Chapter 7 Trustee of EDM Corporation, went before the Court of Appeals in 2010 (pre-2010 Amendments).

The court affirmed the bankruptcy court’s ruling that the creditor’s Financing Statement was “insufficient due to the addition of d/b/a” as part of the debtor’s name. When the creditor identified its debtor on the UCC filing they listed both the debtor’s public record name and the debtor’s d/b/a name.  Ultimately, when subsequent UCC searches were done, the creditor’s Financing Statement was not revealed, because the name on corporate record was simply “EDM Corporation.”

 “…it is clear from the language of the statute itself that § 9-503 requires that, as to registered organizations, the debtor’s name (as listed in the name field on the form) must be “the name of the debtor indicated on the public record of the debtor’s jurisdiction of organization.”[19] Viewed with § 9-503(b)(1), which provides that “[a] financing statement that provides the name of the debtor in accordance with subsection (a) is not rendered ineffective by the absence of… a trade name or other name of the debtor,” and § 9-503(c), which provides that “[a] financing statement that provides only the debtor’s trade name does not sufficiently provide the name of the debtor,” we interpret the comment to mean that trade or other names may be added as other or additional names on a financing statement, but not in place of, or as part of, the debtor’s organizational name.”

(Today, one could argue it is possible that the creditor would maintain their security interest, if the public organic record identified the debtor as “EDM Corporation d/b/a EDM Equipment”.)

A similar case in Texas also determined the d/b/a was too much: JIM ROSS TIRES, INC.; dba HTC Tire Pro; dba HTC Tires & Automotive Centers, Debtor(s). On the UCC Financing Statement, the creditor listed the debtor by including both the debtor’s legal name and d/b/a – “Jim Ross Tires Inc. DBA HTC Tires and Automotive.”

The creditor argued their security interest was perfected, because their filing could be located using a “non-standard wild card search.” Unfortunately for the creditor, the court did not agree with their argument.

“Accordingly, the Court finds that the Financing Statements are ineffective to grant security interests in Debtor’s collateral. Although this result is harsh, the Court must examine the result in the context of claims between competing creditors.”

Since the hearing of these two cases, standard search logic and wild card searches have been streamlined, minimizing human error. Although there have been improvements, it is vital to your security interest that the Financing Statement lists your customer’s name as it appears in the public organic record.

Alternative A in Action and Your UCC Filings

Alternative A in Action: The Debtor’s Name as it Appears on the Unexpired Driver’s License — Even if it’s Incorrect

In a recent court decision, one creditor’s security interest was eliminated because they spelled the individual debtor’s name correctly.

Yes, I said “correctly.” Because, in this case, “correctly” and “as the name appears on the driver’s license in compliance with § 9-503(a)” resulted in two different spellings of the debtor’s name.

Case Background

In 2014 and 2015, MainSource Bank (MainSource) entered into two different loan agreements with the debtor (specific to this case is debtor Ronald Nay). With each loan agreement, there was a signed security agreement and MainSource filed the appropriate UCC Financing Statements toperfect their security interest.

At the end of 2015, LEAF Capital Funding, LLC (LEAF), executed an agreement with one of the debtors, Ronald Nay, for the purchase of two pieces of equipment. With the finance agreement, LEAF also obtained a signed security agreement and subsequently filed a UCC Financing Statement to perfect their security interest.

In May 2016, the Nays filed for bankruptcy protection. As a presumed secured creditor, LEAF filed their proof of claim in September 2016, and soon after, MainSource filed a complaint arguing that LEAF did not have a perfected security interest.

The court agreed with MainSource, leaving LEAF with an unperfected security interest.

The Difference Between Two Financing Statements

MainSource’s UCC identifies the debtor as “Ronald Markt Nay” (emphasis added) which is not how Ronald spells his middle name, it is however, the way Ronald’s name appears on his driver’s license.

LEAF’s UCC identifies the debtor as “Ronald Mark Nay” (emphasis added) which is the correct spelling of Ronald’s middle name, but not the spelling as it appears on his driver’s license.

Why is LEAF’s UCC unperfected? After all, LEAF correctly spelled Ronald Nay’s middle name!

Because, to be compliant with Alternative A under § 9-503(a), the debtor’s name must appear on the UCC Financing Statement exactly as it appears on the unexpired driver’s license.

The Amendments & The Alternatives

July 1, 2013. A day that will live in infamy! That is, if you are familiar with Article 9 of the Uniform Commercial Code, as it is the date the 2010 Amendments went into effect.

One issue addressed in the 2010 Amendments was how to determine the debtor’s name as it should appear on the UCC Financing Statement.

In compliance with § 9-503(a), when the debtor is a registered organization, creditors should rely on the information found on the public organic record.

If the debtor is an individual, creditors must first look to the state’s legislation.  With the 2010 Amendments, each state had to decide whether they would implement “Alternative A” or “Alternative B.”

  • Alternative A: if the debtor holds an unexpired driver’s license, the Financing Statement must list the debtor’s name as it appears on the unexpired driver’s license. (If the debtor does not have a driver’s license, the Financing Statement should list the “individual name” of the debtor or the debtor’s surname and first personal name.)
  • Alternative B: the debtor’s driver’s license name, the debtor’s actual name or the debtor’s surname and first personal name may be used on the Financing Statement.

Most states opted to enact Alternative A, including Indiana — the state where Nay is located and the Financing Statements are filed.

Seriously Misleading or Minor Error

In its decision, the court admitted the spelling error on LEAF’s UCC was minor, and per Indiana Code § 26-1-9.1-506(a) “A financing statement substantially satisfying the requirements…is effective, even if it has minor errors or omissions, unless the errors or omissions make the financing statement seriously misleading.”

But, per code § 26-1-9.1-506(b), “Except as otherwise provided in subsection (c), a financing statement that fails sufficiently to provide the name of the debtor in accordance with IC 26-1-9.1-503(a) is seriously misleading.” So, we must circle back to IC 26-1-9.1-503(a), which is Alternative A, and is, in fact, the technicality that invalidated LEAF’s security interest.

“§ 26-1-9.1-503(a)(4) … if the debtor is an individual to whom this state has issued a driver’s license or an identification card for nondrivers under IC 9-24-16 that has not expired, only if the financing statement provides the name of the individual which is indicated on the driver’s license or identification card.”

The Court

As you may know, the UCC is considered seriously misleading, thus invalid, if a search of the debtor’s name does not reveal the UCC. The court held that LEAF’s UCC would not have been uncovered via a search using standard search logic.

“In this case, considering the plain language of the statute, given its ordinary meaning, and reading section 503 together with section 506, it seems clear that the “only” correct name of the Debtor under section 503 is the name on his Indiana driver’s license, Ronald Markt Nay. Section 506 provides relief to LEAF only in as much as a search of the debtor’s “correct” name (as established by section 503), using standardized search logic, would reveal its financing statement. It does not.”

Parting Thoughts

At face value, this opinion seems quite extreme. But it is a clear reminder that compliance is king. Use caution when identifying your customer on the UCC filing, whether it is an organization or an individual. If it’s an individual, carefully list their name exactly as it appears on their unexpired driver’s license.

If you have questions regarding this recent court decision or UCC filings, please contact NCS today!

What You Should Know Before Filing Your Own UCC in Florida

What You Should Know Before Filing Your Own UCC Financing Statements in Florida

You have taken the meticulous steps to properly perfect your security interest. You may have spent countless frustrating hours going back and forth with your legal department to agree on the security language. You have created a collateral description that others have only dreamed about. You have overcome obstacles with your sales team and even with your customers. But now you are here — you have conquered the proverbial mountain.

You’ve done it all & you are ready to secure your right to payment!

And just like that, you are tumbling back down the mountain, because someone missed a keystroke when indexing your filing… poofyour security interest is gone.

OK, perhaps I’m a smidge dramatic… but, the devastation that accompanies an invalid security interest is real.

“I can do it!” Just because you can, doesn’t mean you should.

When we discuss the UCC filing process with creditors, we frequently hear “Eh, it’s easy, we just do it ourselves.” Recording a Financing Statement may appear to be a simple task, but appearances can be deceiving.

We’ve said it before & I’ll say it again, UCC filings are more than a form fill document! A properly perfected security interest requires a detailed and accurate security agreement and a carefully completed, reviewed and indexed Financing Statement.

There are 50 states and over 3000 counties in the United States, which means there are hundreds of different processes for recording Financing Statements and fixture filings. Our UCC experts are familiar with all recording offices & processes — after all, they are experts. In some states, the Secretary of State’s office is responsible for the recording of the UCC, while in others the state may hire a third party to process the filings.

Recently, our NCS experts conducted an audit of UCC filings filed by a state-hired third party in sunny Florida. The results were unfortunate.

What Our Experts Were Looking For – Errors

The state of Florida uses a private company to manage their UCC filings. Unfortunately, this third party Florida has hired does not utilize electronic data entry.

Most Secretary of State offices operate an online system and although each system is different, they are online nonetheless. However, Florida didn’t get the memo. No electronic data entry means that every filing has to be faxed and/or physically mailed to this third party and the staff of this third party will manually index the info into their system.

It should come as no surprise, but this third party makes mistakes and they don’t subsequently review their own data entry, so the errors can go unnoticed quite easily.

As you know, even simple errors in UCC Financing Statements can quickly invalidate a security interest. (Remember the ‘falling down the mountain’ analogy above?) Companies operate on margins of error, and those margins are typically low, so how does this third party stack up?

Our UCC experts tracked this third party’s errors in July & August, here are the results:

  • July: 13% error rate
  • August: 7.5% error rate

In the month of July, out of 477 filings, 62 filings had errors, which is a 13% error rate. These aren’t minor errors. These are errors in the entity’s legal name and address — errors that would deem the filing seriously misleading.

Fortunately for our clients, part of our internal process includes reviewing every filing once it has been recorded and indexed. In the event we discover errors when we review the filings, we contact this third party and request it be corrected. The third party may be annoyed when we point out their mistakes, but we are doing our job to ensure our clients’ UCC Financing Statements are indexed correctly.

Just Because You Can, Doesn’t Mean You Should

Yes, recording a filing may seem simple, but not everything is as it seems. If you choose to file your own UCC Financing Statements, you should always review the filing once it has been recorded and indexed. Don’t ever assume that the Secretary of State, or in this case a company hired by the state, has indexed it correctly.

Have a review process in place, or better yet, rely on our experts to handle your UCC filings for you!

Filing UCCs: Tips for Secured Parties

UCC Filings: Top Tips for Secured Parties Facing Possible Debtor Name Change

As all secured creditors know, maintaining perfection of their security interests under UCC Article 9 is essential to ensuring priority over other claimants. Unfortunately, there is a common event that can quickly eliminate the perfection of a security interest: a debtor name change. Article 9-507(c) of the UCC provides the secured party with a four month window to amend a UCC filing if the debtor’s name changes:

(c) [Change in debtor’s name.]

If the name that a filed financing statement provides for a debtor becomes insufficient as the name of the debtor under Section 9-503(a) so that the financing statement becomes seriously misleading under Section 9-506:

1. the financing statement is effective to perfect a security interest in collateral acquired by the debtor before, or within four months after, the filed financing statement becomes seriously misleading; and

2. the financing statement is not effective to perfect a security interest in collateral acquired by the debtor more than four months after the filed financing statement becomes seriously misleading, unless an amendment to the financing statement which renders the financing statement not seriously misleading is filed within four months after the financing statement became seriously misleading.

We’ve previously discussed the importance of monitoring your customers for changes in their name as well as for changes with their status with the Secretary of State. Today we have some tips for you!

Tips for Secured Parties Facing Possible Debtor Name Changes

The following tips are courtesy of Ms. Mary Cowan, NCS President and Professor Margit Livingston, DePaul University College of Law, and were originally featured in  Debtor Name Changes Under Article 9: The Importance of Keeping Financing Statements Current and Accurate.

  • Tip #1: Incentivize
    Incentivize your debtor to keep you informed. In the security agreement, the debtor should agree to inform you of any planned name changes and/or relocations [specify number of days] in advance. Failure to do so should constitute default, allowing the security party to call in the debt.
  • Tip #2: Examine Payments
    Examine the payments made by the debtor. If the debtor has been sending payment checks that reflect a certain name or address and that information changes, you should immediately contact the debtor for clarification.
  • Tip #3: Monitor Corporate Status
    Every three months check the state corporate registry where your debtor is listed. A change of name or status will be indicated on the registry.
  • Tip #4: Stop Credit
    Do not advance additional funds to the debtor beyond the original credit limit amount without verifying the debtor’s current name, address and business form.

It’s a Challenge

We recognize that keeping track of debtor name changes can be challenging, but it is worth the effort: loss of a perfected status is a prospect that no secured party wants to face!

Top 5 Mistakes in Security Agreements

UCC Filings: Top 5 Mistakes in Security Agreements

In an earlier post we discussed the art of drafting a perfect security agreement and today we’d like to discuss the common mistakes in security agreements.

1. Incorrectly Identifying the Debtor

How difficult is it to identify the debtor aka your customer – significantly more difficult than it should be. The greatest obstacle with identifying your customer is ensuring you have the correct spelling of their corporate legal name – not their DBA or trade name. Leaving off “Inc.” or “The” can deem a filing seriously misleading & subsequently unenforceable.

Always review the Articles of Incorporation to confirm your debtor’s name.

2. Omitting Debtor’s Address

Remember, omitting information is just as fatal as listing the information incorrectly. Make sure you correctly identify and list the corporate address of your debtor.

3. Date, Date, Date

Don’t lose rights because you forget to list the date or you list the wrong date. In a recent case the lender lost its secured position (on $1,100,000.00) because the Security Agreement was dated December 13th and the Promissory Note was dated December 15th. Due to the discrepancy the court held that there was no perfected security interest.

Don’t go it alone!

A best practice in drafting security agreements (or any document for that matter) is to have someone else review the document. In grade school we had proofreading buddies – just because we aren’t in grade school anymore, doesn’t mean we should stop taking advantage of another set of eyes.

4. Authorized Signatures

First, make sure the agreement is signed. Second, make sure the person signing the document is permitted to sign the document. Because a security agreement is part of a consensual process, it’s imperative that the parties signing the document are authorized to do so.

5. Don’t Forget the Granting Clause

The granting clause actually grants the security interest, so do yourself a favor and confirm it is written into the agreement! In fact, without the granting clause, the security agreement isn’t actually a security agreement.

When in doubt, seek a legal opinion.

Request a review of your security agreement to ensure the necessary parts are in place & accurate. Drafting a security agreement does not have to be difficult, but it does need to be perfect – that’s why it’s called a “perfected security interest” when you become a secured creditor. Don’t lose your security because you didn’t perfect the security agreement.