Filing a UCC to Perfect Your Security Interest

Filing a UCC to Perfect Your Security Interest? No Security Exists if the Debtor’s Name is Wrong

Yes, that’s right. It’s yet another case of an unperfected security interest because the creditor failed to comply with Article § 9-503.

In a fight for priority, a creditor claimed “…[T]hey have ‘valid, enforceable, properly-perfected, unavoidable prepetition liens…’” which is senior to the bank’s UCC for debtor-in-possession (DIP) financing.

Unfortunately, the creditor did not have a ‘valid, enforceable, properly-perfected, unavoidable prepetition lien’ because the creditor did not list the debtor’s name on the Financing Statement as the name appears on the public organic record.

The Case: Fishback Nursery, Inc. v. PNC Bank, NA, Dist. Court, ND Texas 2017

The debtor, BFN Operations LLC (BFN) also known as Zelenka Farms, filed for bankruptcy protection. PNC Bank NA (PNC) had a security interest in substantially all BFN’s assets and perfected its security interest by filing a UCC. Fishback Nursery Inc. and Surface Nursery Inc. (collectively “Nurseries”) furnished various agricultural products to BFN, and Nurseries also filed UCCs.

Nurseries filed three UCCs, one in each state where they sold products to BFN: Oregon, Michigan & Tennessee. On all three UCCs, Nurseries identified BFN as “BFN Operations, LLC abn Zelenka Farms.” Unfortunately for Nurseries, the addition of “abn Zelenka Farms” rendered their security interests unperfected. BFN’s name, in the public organic record, is “BFN Operations, LLC” and does not include “abn Zelenka Farms.

Not Saved by the Savings Clause

According to the court opinion, Michigan & Tennessee both offer a “savings clause.” The Michigan “savings clause” can be found under MCL 440.9506(3):

“If a search of the records of the filing office under the debtor’s correct name, using the filing office’s standard search logic, if any, would disclose a financing statement that fails sufficiently to provide the name of the debtor in accordance with section 9503(1), the name provided does not make the financing statement seriously misleading.“

Here’s an example of a search in Michigan. PNC would have processed a UCC search by the entity’s correct name, “BFN Operations, LLC” – that search would provide the following results:

A search for the name Nurseries used on their UCC’s, “BFN Operations, LLC abn Zelenka Farms” provides these results:

If you look closely, you will see the File Numbers in both images are different; 6 different UCCs. The search run by PNC, on the debtor’s correct name, does not reveal the filings by Nurseries; Nurseries’ UCCs would only appear in a search of “BFN Operations, LLC abn Zelenka Farms.”

Some may argue that Nurseries’ UCCs should have appeared, because the debtor’s name begins with “BFN Operations, LLC” but as you can see, a UCC search does not operate as a keyword search. If it were a keyword search, it would pick up any/all variations of the entity’s name.

Seriously Misleading, Security Interest Unperfected

Because the UCCs did not comply with Article 9, Nurseries’ security interest was unperfected. Obviously, with an unperfected security interest comes the “parting prize” of unsecured creditor status. PNC properly perfected its security interest; thus, PNC is a secured creditor and its UCC takes priority.

Best Practice: PUBLIC. ORGANIC. RECORD.

Always, always, ALWAYS correctly identify your debtor, in compliance with Article 9, on the UCC Financing Statement. We see issues like this time & time again – avoidable errors that eliminate a creditor’s security. Article 9 sets out specific parameters, and to perfect a security interest, you must comply with each requirement.

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