Secured Creditor Slips to Unsecured Creditor Status & Loses Over $50,000
Late last fall, we reviewed a pivotal case in Wisconsin. A creditor’s security interest was unperfected because the debtor’s name on the UCC Financing Statement included (unintentionally) an extra space.
Double Bubble, Ltd. (Double Bubble) filed a UCC to secure credit extended to ISC, Inc. (ISC). On the Financing Statement, Bubble identified ISC as “ISC, Inc .” At first glance, it appears correct, but close review reveals there is an extra space between the “c” and the “.” in “Inc.”
According to the court opinion, the receiver assigned to ISC, Inc. identified Double Bubble as an unsecured creditor because Double Bubble’s UCC did not appear in the receiver’s UCC search. The receiver searched for filings by “ISC, Inc.” which is ISC’s name as it appears on the public organic record.
Turns Out, a Space is Worth 33% of $169,437.72
At the time of the court’s decision, the differences in the recovery percentages for secured vs. unsecured creditors were unknown. However, a recent article, Wisconsin Federal Court Holds That Creditor Who Inadvertently Included Extra Space in Debtor’s Name in UCC Financing Statement Was Unsecured, is reporting that secured creditors are to recover 100% of their claims, while unsecured creditors are to recover only 66%.
For the creditor Double Bubble, this means recovery of approximately $113,000 vs. the balance owed of $169,437.72.
“[c]reditor was deemed an unsecured creditor who could only be paid 66% of its $169,437.72 claim under the receiver’s plan. The creditor filed an objection, arguing that it properly perfected its security interest and, as a secured creditor, was entitled to 100% of its claim under the plan. The Court denied the creditor’s request.”
Strict Compliance with Article 9
Strict compliance with Article 9 is imperative. Article 9-503(1) clearly states the debtor’s name must be identified as it appears on the public organic record.
A financing statement sufficiently provides the name of the debtor:
(1)… 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;
As a best practice, follow the peer review and/or buddy system. In other words, have a colleague carefully review the prepared filing prior to recording and check for indexing errors once a filing has been recorded.