Service Area: UCC Services

UCC Filings and Defaults & Remedies

Posted on December 4, 2017 by - UCC Financing Statements

UCC Filings Part 5 | Defaults & Remedies

Our final section in this series covers Default & Remedies under Article 9.

Review Part 1 | Introduction & Scope of Article 9, Part 2 | Conveying a Security Interest and Perfection & Priority under Article 9, Part 3 | Perfection of a Security Interest and Part 4 | Priority of a Security Interest

What is Default?

Your debtor defaults, or is in default, when they fail to fulfill the obligations identified in the Security Agreement. Default includes bankruptcy or insolvency of your debtor, debtor’s failure to pay debts when due, removal of collateral and failure to insure collateral.

What to do When Your Debtor Defaults

Option 1: Repossession

With the filing of a PMSI, you secure the right to peacefully repossess your goods, if so desired. The Secured Party can either repossess the goods on their own, or seek a judicial order.

9-609. SECURED PARTY’S RIGHT TO TAKE POSSESSION AFTER DEFAULT.

(a) [Possession; rendering equipment unusable; disposition on debtor’s premises.] After default, a secured party: (1) may take possession of the collateral; and (2) without removal, may render equipment unusable and dispose of collateral on a debtor’s premises under Section 9-610. (b) [Judicial and nonjudicial process.] A secured party may proceed under subsection (a): (1) pursuant to judicial process; or (2) without judicial process, if it proceeds without breach of the peace.

Option 2: Foreclosure

Under 9-610, the Secured Party may sell (or foreclose upon) the collateral. A foreclosure sale may be private or public, the Secured Party must ensure the sale is commercially reasonable, the Secured Party must provide the debtor with reasonable notice of the sale and the Secured Party must notify other secured parties with an interest in the collateral (for non-consumer transactions).

The proceeds from a foreclosure sale are applied in the following order: 1. Secured Party’s repossession and foreclosure sale expenses, 2. debt owed to the Secured Party, 3. debts owed to inferior secured parties, 4. remaining proceeds go to the debtor.

Debtor’s Remedies

The debtor can redeem his/her interest in collateral at any time before the debt is satisfied by strict foreclosure, the collateral is sold, or a binding contract for the sale of the collateral is entered. The debtor must pay full amount of the secured debt and any expenses the Secured Party reasonably incurred in dealing with the collateral.

Prior to disposition of the collateral, a court may order or restrain disposition if the Secured Party fails to comply with the UCC provisions governing default. After disposition, the Secured Party is liable for any damages resulting from his/her noncompliance with the default provisions.

9-625. REMEDIES FOR SECURED PARTY’S FAILURE TO COMPLY WITH ARTICLE.

(b) [Damages for noncompliance.] Subject to subsections (c), (d), and (f), a person is liable for damages in the amount of any loss caused by a failure to comply with this article. Loss caused by a failure to comply may include loss resulting from the debtor’s inability to obtain, or increased costs of, alternative financing.

If the Secured Party does not comply with the mandatory sale provision relating to consumer goods, the debtor may recover under the code or in conversion.

Key Points for the Secured Party to Remember Upon Debtor’s Default

– The term default is not defined under Article 9; the debtor and Secured Party are left to define events of default within their contract.

– The collateral may be repossessed.

– If desired, the Secured Party has the right to repossess without disturbing the peace. If the Secured Party is unable to peacefully repossess the collateral, legal steps may be necessary including a temporary restraining order or pursuing suit against the debtor.

– If the Secured Party does not want to repossess the collateral, the claim could be placed with an attorney to file suit, which could result in Judgment, allowing the garnishment of accounts and/or asset attachments.

– The disposition of collateral.

– After recovering personal property, exercise reasonable care of the property (i.e. clean & repair the collateral prior to sale).

– Act in a commercially reasonable manner.

– Consider disclaiming all express and implied warranties in the bill of sale delivered to the purchaser of collateral at the foreclosure sale.

– Properly notify all parties of the disposition and allow for sufficient time prior to the disposition.

– Satisfaction of the account.

– If permitted by contract, or applicable law, satisfy all costs and expenses of repossession and sale from the sale proceeds.

– If the sold collateral is consumer goods, provide the debtor and all other obligors with a calculation of any surplus or deficiency and an explanation of how the calculation was made.

– The Secured Party should consider accepting the collateral in full or partial satisfaction of the debt. Adhere to all technical statutory requirements when doing so.

UCCs & Priority of a Security Interest

Posted on November 13, 2017 by - UCC Financing Statements

UCC Filings Part 4 | Priority of a Security Interest

In part 4 of our secured transaction series, we’ll review Priority under Article 9.

Review Part 1 | Introduction & Scope of Article 9, Part 2 | Conveying a Security Interest and Perfection & Priority under Article 9 and Part 3 | Perfection of a Security Interest

Who Has Priority?

Generally, a creditor’s priority is based on whether the creditor has a perfected security interest, and priority dates from the time of filing or perfection, whichever is first.

If an interest in the same collateral exists, the creditor with the perfected security interest has priority over the creditor with the unperfected security interest. Further, the creditor with the unperfected security interest has priority over general unsecured creditors.

Exceptions to Priority Rules

Buyers of Goods

Ordinary Course of Business: If, in the ordinary course of business, a buyer purchases goods, the goods are free of a security interest (except for farm products).

Consumer Goods: If the buyer purchases consumer goods, the goods are free of a security interest if the buyer had no knowledge of a security interest, if the goods are purchased for value, the goods are primarily for the buyer’s personal use, and if the buyer purchases the goods prior to the filing of the Financing Statement by the Secured Party.

Buyers of Instruments and Chattel Paper

Buyers have priority over non-possessory interest in proceeds of non-inventory collateral if

  • value has been given to the collateral,
  • the buyer takes possession of instrument or chattel paper in the ordinary course of business, and
  • the buyer acts with knowledge of competing security interest.

PMSI: Equipment & Inventory

A perfected PMSI in Equipment or Inventory generally has priority over other security interests.

9-324. PRIORITY OF PURCHASE-MONEY SECURITY INTERESTS.

(a) [General rule: purchase-money priority.]

Except as otherwise provided in subsection (g), a perfected purchase-money security interest in goods other than inventory or livestock has priority over a conflicting security interest in the same goods, and, except as otherwise provided in Section 9-327, a perfected security interest in its identifiable proceeds also has priority, if the purchase-money security interest is perfected when the debtor receives possession of the collateral or within 20 days thereafter.

Ensure the PMSI is Perfected

To perfect a PMSI in Equipment, a Secured Party must have the debtor execute a security agreement containing the appropriate granting and authorization language and file a Financing Statement in the appropriate jurisdiction before or within 20 days after the debtor receives possession of the equipment.

To perfect a PMSI in Inventory, a Secured Party must have the debtor execute a security agreement containing the appropriate granting and authorization language, file a Financing Statement in the appropriate jurisdiction before the debtor receives possession of the inventory and notify existing holders of security interests of record in the same type of collateral that the Secured Party intends to take a PMSI in Inventory within five years before the debtor receives possession of the inventory.

What Happens with Security Interests in Fixtures vs. Real Estate Interests?

When one party has a security interest in real estate and another party has a security interest in a fixture to the real estate, the fixture filing has priority if the Financing Statement was filed before the mortgage is recorded. If the mortgage was recorded prior to the fixture filing, then the mortgage has priority.

UCCs & Perfection of a Security Interest

Posted on October 30, 2017 by - UCC Financing Statements

UCC Filings Part 3 | Perfection of a Security Interest

Part 3 of our secured transaction series provides an overview of Perfection under Article 9.

Review Part 1 | Introduction & Scope of Article 9 and Part 2 | Conveying a Security Interest under Article 9

What is Perfection of a Security Interest?

Perfection of a security interest is the process where the Secured Party gives notice of the security interest to third parties, which cannot occur prior to attachment.

The Financing Statement

The most common form of perfection is the filing of a Financing Statement. The Financing Statement must include the legal names and principal/headquarters address of the debtor and the Secured Party, identification of the collateral and the state organization number.

Generally, Financing Statements can be used for consumer goods, equipment, farm products, inventory, fixtures, general intangibles, accounts, and chattel paper.

A Financing Statement is effective for 5 years (10 years in Wyoming), and if a Continuation is not filed timely, the Financing Statement will lapse and the Security Interest will be extinguished.

Once the debtor fulfills the obligation, a Termination should be filed.

Where to File a Financing Statement

The Financing Statement is filed under the debtor’s name, and the debtor’s name should be as it appears on the public organic record.

Financing Statements, for land-related collateral, are generally filed in the real estate records of the county where the land is located.

The Secured Party must file a Financing Statement in the state in which the Debtor is located. The definition of location may vary based on whether the debtor is a registered or unregistered entity, an individual or foreign entity.

  • Registered Entities: including corporations, limited liability corporations and limited partnerships, are deemed to be “located” in the state in which they are incorporated or formed.
  • Unregistered Entities: primarily partnerships, are deemed to be “located” in the state in which the organization has its place of business, or if it has more than one place of business, its “chief executive office.”
  • Individuals are “located” in their primary state of residence, as indicated on the unexpired driver’s license.

Section 9-307 defines the debtor’s location.

9-307. LOCATION OF DEBTOR.

(b) [Debtor’s location: general rules.]

Except as otherwise provided in this section, the following rules determine a debtor’s location:

(1) A debtor who is an individual is located at the individual’s principal residence, as indicated on the unexpired driver’s license.

(2) A debtor that is an organization and has only one place of business is located at its place of business.

(3) A debtor that is an organization and has more than one place of business is located at its chief executive office.

If a foreign debtor is in a jurisdiction outside the United States, and the jurisdiction does not provide for a public filing system, the debtor is deemed to be “located” in the District of Columbia.

Conveying Security Interest via UCCs

Posted on October 16, 2017 by - UCC Financing Statements

UCC Filings Part 2 | Conveying a Security Interest under Article 9

If you missed part 1 of our series, check out the Introduction & Scope of Article 9.  In part 2 of our series on secured transactions, we’ll cover conveying a security interest under Article 9.

Conveying a Security Interest

UCC filings are a form of consensual security. This means your debtor must consent or agree to the filing of the UCC.

“Securing receivables via a UCC filing requires the debtor to sign a security agreement – which makes it consensual – the debtor is agreeing to the filing. This security agreement grants the creditor a security interest in the goods/services (as noted in the collateral description within the agreement) in the event the debtor defaults or files for bankruptcy protection. A properly perfected UCC filing benefits creditors that provide equipment, inventory and consigned goods.”

Attachment

A security interest attaches or forms once the creditor has established a security interest in the collateral. To create the security interest, the following requirements must be met:

  1. Secured Party and the debtor execute a Security Agreement,
  2. Secured Party gives value for the security interest, and
  3. Debtor has rights to the collateral

Security Agreement

Under Article 9-102, a Security Agreement is an authenticated agreement that creates or provides a security interest. The agreement must include the date, debtor’s legal name and address, authentication, granting clause, collateral description and default terms.

There are additional clauses which are commonly incorporated in a Security Agreement.

  • After-Acquired Property Clause: provides for a floating lien which will attach to specified property the debtor may acquire in the future.
  • Future Advance Clause: extends to future liabilities of the debtor to the Secured Party.
  • Acceleration Clause: may provide that the full amount of the debt will mature upon default.
  • Add-On Clause: failure to make payment on the goods purchased permits both current and prior contract items to be repossessed.

Rights & Duties of The Secured Party

The debtor and the Secured Party have an obligation to preserve the pledged collateral, when the collateral is in the possession of the Secured Party

9-207. RIGHTS AND DUTIES OF SECURED PARTY HAVING POSSESSION OR CONTROL OF COLLATERAL.

(a) [Duty of care when Secured Party in possession.]

Except as otherwise provided in subsection (d), a Secured Party shall use reasonable care in the custody and preservation of collateral in the Secured Party’s possession. In the case of chattel paper or an instrument, reasonable care includes taking necessary steps to preserve rights against prior parties unless otherwise agreed.

The debtor is responsible for the cost of reasonable expenses incurred for the preservation, use or custody of the collateral, as well as the costs of accidental loss or damage when the costs exceed the insurance coverage.

Except for money (which should be used to reduce the amount of the secured obligation or sent directly to the debtor), the Secured Party may keep any increase in collateral, must ensure the collateral remains identifiable and may use or operate the collateral if necessary to preserve the collateral.

Should the Secured Party fail to meet the imposed obligations, the Secured Party is liable for the loss.

When Space & Noise Impact UCC Filings

Posted on October 9, 2017 by - UCC Financing Statements

Double Bubble, Toil & Trouble: When Space & Noise Impact UCC Filings

As we prepare and review UCC filings, clients frequently ask us, “Does an extra space in my customer’s registered name really matter?” and “Does it matter whether I identify my customer as LLC if their registered name appears as L.L.C.?”

Two seemingly small issues, right? Wrong.

Article 9-102(71) clearly defines a registered organization and 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;

Recently, one creditor suffered the consequences of an inadvertently added space, after a noise word, in their debtor’s name, and the creditor’s security interest was unperfected.

Compliance with Article 9 & Seriously Misleading

As mentioned above, strict compliance with Article 9 of the Uniform Commercial Code is imperative. Failing to identify the debtor by its name as it appears on the public organic record could result in the filing being seriously misleading.

If it’s determined the Financing Statement is seriously misleading, the security interest can be deemed unperfected and priority can be lost.

What Makes the Name Seriously Misleading?

If a search for the Financing Statement, using the Standard Search Logic in the UCC filing office, fails to reveal the Financing Statement, the filing is considered seriously misleading, and thus, unperfected.

Standard Search Logic is the holy grail of determining whether a filing is seriously misleading. Search logic is created, determined & managed through an algorithm and varies by state filing office.

In 2015, International Association of Commercial Administrators (IACA) released the revised Model Administrative Rules, which include a specific section frequently referred to as “standard search logic.”

One standard search logic rule is 503.1.2: “No distinction is made between upper and lower case letters.” This means the debtor’s name could be entered as ABC COMPANY INC or ABC Company Inc, and both are acceptable.

Another rule addresses punctuation: 503.1.3 (b) “Punctuation marks and accents are disregarded. For the purposes of this rule, punctuation and accents include all characters other than the numerals 0 through 9 and the letters A through Z (in upper and lower case) of the English alphabet.”

IACA recognizes the general idea of “noise words”. Typically noise words include “and,” “the,” “inc” and “co.”  Although noise words are addressed in the Model Administrative Rules, the list of actual noise words are determined by the individual filing office.

503.1.3 (c) The following words and abbreviations at the end of an organization name that indicate the existence or nature of the organization are “disregarded” to the extent practicable as determined by the filing office’s programming of its UCC information management system:

[Insert the filing office’s own “Ending Noise Words” list here.]

This difference by jurisdiction could mean a filing is simultaneously properly perfected in Virginia and deemed seriously misleading in Wisconsin, based on the jurisdiction’s search logic.

Double Bubble, Toil & Trouble

In United States Securities and Exchange Commission V. ISC, Inc., Dist. Court, WD Wisconsin 2017, creditor Double Bubble, Ltd.’s security interest was unperfected because of a small error in the debtor’s name on the Financing Statement.

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.

An extra space after a typical noise word is a minor variance of the debtor’s name. Double Bubble argued that if the receiver had practiced reasonable diligence and altered its search, even to just “ISC,” Double Bubble’s UCC filing would have come up in the search.

The court agreed with Double Bubble’s argument in theory, but in practice the court held the filing was seriously misleading, therefore the filing was unperfected and Double Bubble’s creditor status was unsecured.

Text from the court’s opinion:

“The court has some sympathy for Double Bubble because the additional space would be easy to overlook, even if one were careful in filing the financing statement. And Double Bubble is correct that the receiver could have found its financing statement if he had used a different search, say a search simply for “ISC” with no punctuation or corporate designation. Double Bubble contends that such a search would have been “reasonably diligent.” But reasonable diligence is not the current standard.

“Seriously misleading” is a term of art with a statutorily defined meaning: a search “under the debtor’s correct name” must find the financing statement, otherwise it is seriously misleading. The fact that the DFI provides search “tips” and “hints” that might produce a broader set of results does not change the statutory standard. Double Bubble’s objection is overruled. Double Bubble will participate in phase II as an unsecured creditor.”

A Space at the End of a Noise Word, Really?

It may seem extreme. But, when it comes to perfection under Article 9, major or minor errors are still errors. And, unfortunately for Double Bubble, errors result in unperfected security interests.

Earlier I mentioned that standard search logic varies by state filing office. Double Bubble filed its UCC via Wisconsin Department of Financial Institutions (WDFI). And, the search logic WDFI uses does not account for errors such as an additional space.

Not the First, Certainly Not the Last

This isn’t the first time a creditor’s security interest has been invalidated because of “space.” In Receivables Purchasing Co., Inc. v. R & R Directional Drilling, L.L.C., the Georgia Court of Appeals determined the creditor did not have a security interest because the debtor’s name had an extra space listed.

The creditor added a space in the debtor’s name, listing it as “Net work Solutions, Inc.” The creditor requested the Georgia Superior Court Clerks Cooperative Authority (GSCCCA) perform a search:

“The GSCCCA did a certified search under the correct name Network Solutions, Inc. The Search did not reveal (debtor’s) financing statement, which…was filed incorrectly under Net work Solutions, Inc.”

I agree with the Receivables Purchasing Co. decision; after all, the space is right in the middle of the debtor’s name. And, while I don’t necessarily disagree with the Double Bubble decision, it has certainly raised questions and has forced me to reevaluate my understanding of the absolutes in Article 9.

Today’s Takeaway & NCS Best Practice

I expect the Double Bubble case will be referenced in future legal arguments on whether a Financing Statement is sufficient or deemed seriously misleading.

Obviously, compliance with Article 9 is critical. However, prior to this case, debtor names containing accidental additional spaces and/or noise words, did not necessarily leave a creditor’s security interest unperfected. But the decision in Double Bubble has reaffirmed the need for strict compliance with Article 9.

You must identify the debtor as it appears in the public organic record in compliance with Article 9-503. And as a best practice, if there are variations of a debtor’s name, include all name variations on the Financing Statement. Adding variations will increase the likelihood of the Financing Statement appearing in a search.

As always, carefully review the filing prior to recording and check for indexing errors once a filing has been recorded. You have opportunities to prevent, catch & correct mistakes!

Payment Bonds Can Be Conditional Too

Posted on September 15, 2017 by - In Other Commercial Credit News

Payment Bonds Can Be Conditional Too

Are you furnishing to a private Florida project where a payment bond has been issued? Then you should take a few minutes to review an article we shared this week, The Conditional Payment Bond Trap Facing Florida Subcontractors.

Types of Payment Bonds Available on Private Projects in Florida

First, a primer on the payment bonds available on a private, Florida project:

1 – The owner may require the general contractor to obtain a payment bond. If the payment bond is not properly recorded along with the Notice of Commencement, the payment bond would be a non-statutory payment bond.

2 – A conditional payment bond that is properly recorded along with the Notice of Commencement will be designated as such, and it will include the wording:

(§713.245) This bond only covers claims of subcontractors, sub-subcontractors, suppliers, and laborers to the extent the contractor has been paid for the labor, services, or materials provided by such persons. This bond does not preclude you from serving a notice to owner or filing a claim of lien on this project.

3 – An unconditional payment bond will prevent any liens from attaching to the property if the bond is properly recorded along with the Notice of Commencement. The unconditional bond will not include the conditional wording.

Conditional Payment Bonds Are Precarious

In the above article, author Ryan W. Owen, explains conditional payment bonds and their precarious nature. Owen advises that conditional payment bonds don’t provide the same protections as a standard payment bond.

“Conditional payment bonds do not provide owners or subcontractors with the same protections as standard payment bonds. The surety’s obligation under a conditional bond is only triggered when the owner pays the general contractor and the general contractor fails to pay its subcontractors.”

How can you avoid losing your bond claim rights? As a best practice, always serve the preliminary notice and bond claim upon all parties, and file the mechanic’s lien (when available). And, at the very least, read the terms of the bond!

“Florida subcontractors must carefully examine any bonds attached to a notice of commencement and remember to take all the appropriate steps necessary to protect their lien rights against the project and their claim against the bond when the bond is conditional.”

Owen’s article also includes a chart, which maps rights available if a standard payment bond, conditional payment bond or no bond is issued for a project. Included in the chart is whether a pay-when-paid clause is valid, and notice time frames for 1st and 2nd tier subcontractors and material suppliers.

UCC Introduction and Scope of Article 9

Posted on September 11, 2017 by - UCC Financing Statements

Part 1 | Introduction & Scope of Article 9

The importance of credit decisions and the need to utilize technical skills to protect receivables is receiving a significant increase in visibility and attention. Recognizing an opportunity to generate an increase in sales, while maintaining an acceptable level of risk, is the goal. Perfecting a lien (UCC-1) under Article 9 of the Uniform Commercial Code demonstrates utilization of such technical skills.

By examining specific examples where the use of Article 9 with marginal accounts applies, the opportunities to increase sales and profits can be better recognized.

As an example, an existing customer could be in a position where their account has fallen considerably past due. If the customer does not continue to receive merchandise, the leverage for payment is greatly reduced and a customer may be lost. An alternative might be to secure future transactions, thereby maintaining acceptable risk.

Other examples abound: the new customer who has favorable credit risk factors, but no track record; the very large existing customer who has interim financial statement weakness; the new operator taking over a business; or the growing customer who needs expanded credit lines to support their growth. The key ingredient underlining all opportunities to use security is sound judgment by the credit decision maker.

Introduction – The Security Interest

A security interest protects against the nonpayment of an obligation or nonperformance of a promise. Many creditors require their debtors to enter into a security agreement when credit is extended.

The debtor will provide specific personal property (i.e. collateral) as a security interest to the creditor. Then, in the event of debtor default, the creditor can use the collateral to recover payment. Typically, the collateral can be sold to reduce the debt. Then, any surplus proceeds belong to the debtor and, vice versa, any deficit is still an obligation of the debtor.

Under UCC Article 9, a security interest is an interest in personal property or fixtures which secures payment or performance of an obligation. A Purchase Money Security Interest (PMSI) applies to a seller of the collateral to secure the sales price or a person who gives value to enable the debtor to acquire the collateral.

The Scope of Article 9

Article 9 includes consensual security interests in personal property and fixtures.

What’s Included?

Included under the Article 9 umbrella are all forms of consignment and letter of credit payment rights that support the payment or performance of other collateral.

Software has also been added as a category. Software is a computer program and includes related supporting information. However, software embedded in goods and customarily viewed as part of the goods is treated as part of the goods and not software.

Also included are sales of account and chattel paper, including pledge, chattel mortgage, conditional sales, trust receipts, field warehousing and factor’s liens.

Article 9 applies to leases if the parties intend that the lease provide security.

What’s Not Included?

Article 9 does not apply to income tax liens, landlord’s liens, statutory liens (i.e. mechanic’s liens), wage assignments, interest in or liens on real property, or sales of securities.

What is Collateral?

According to Article 9, collateral is “property subject to a security interest or agricultural lien. The term includes: (A) proceeds to which a security interest attaches; (B) accounts, chattel paper, payment intangibles, and promissory notes that have been sold; and (C) goods that are the subject of a consignment.” – § 9-102. DEFINITIONS AND INDEX OF DEFINITIONS

Collateral can be either tangible or intangible. Some forms of tangible collateral are consumer goods, equipment, inventory and farm products. Some forms of intangible collateral are instruments which include any written evidence of the right to receive money, documents of title and receipts, chattel paper, accounts, general intangibles, healthcare receivables and supporting obligations.

Correctly Identify Your Customer on PPSAs in Ontario

Posted on August 14, 2017 by - UCC Financing Statements

It’s Important to Correctly Identify Your Customer on PPSAs in Ontario

Registering a PPSA in Ontario? Then you know the importance of correctly identifying your customer, drafting & executing a sound Security Agreement and registering the Financing Statement in the correct jurisdiction.

Today we are going to focus on identifying your customer, but I’m going to digress for just a moment to recap the recent changes to Ontario’s PPSA regarding jurisdiction.

Quick Digression

Within the last few years (2015), Ontario enacted its 2006 amendments to the PPSA. The 2006 amendments provided additional clarification on where the PPSA should be registered. Prior to the amendments, jurisdiction was determined based on the location of the debtor’s “chief executive office.” With the enactment of the amendments, jurisdiction was determined by entity type (i.e. if it’s a corporation, limited partnership or organization, the province/territory of organization is the jurisdiction).

“(3)(c) if the debtor is a corporation, a limited partnership or an organization and is incorporated, continued, amalgamated or otherwise organized under a law of a province or territory of Canada that requires the incorporation, continuance, amalgamation or organization to be disclosed in a public record, in that province or territory.”

OK, Back on Track | Your Customer’s Name: English & French

Properly identifying your customer is imperative. Under Article 9, you should identify your customer by the name as it appears on the public organic record. Well, what should you do if your Ontario customer has an English and French name? According to the PPSA, you should identify your debtor by its English and French names.

The Minister’s Order — Personal Property Security Act 1990, section 17 under Particulars of Content of Form, states debtors should be identified by both the English & French name.

17. Despite paragraph 2 of subsection 16 (4), if a corporation has an English form of name and a French form of name:

1.       the English form of the name shall be set out on the appropriate line for the name of a business debtor; and

2.       the French form of the name shall be set out on another appropriate line for the name of a business debtor

PPSA Registrations Against Corporate Debtors with English/French Names

Jeffrey Alpert, author of “PPSA Registrations Against Corporate Debtors with English/French Names,” recently explored a New Brunswick case. Despite jurisdiction not being Ontario, Alpert felt it provided secured parties a learning opportunity. And he warned that courts seem to have a “zero-tolerance” policy when it comes to debtor identification.

“This case serves as another warning that the Courts usually follow a “zero tolerance” policy when it comes to mistakes in registering against the name of a debtor under the PPSA.”

The very quick synopsis of the case: the creditor did not identify the debtor by the debtor’s name as it appeared on its Articles of Amendment or in the New Brunswick Corporate Affairs Registry Data Base. In fact, it was the omission of a hyphen within the debtor’s name that invalidated the creditor’s security interest.

Judge Stephenson, presiding over the case, is quoted as saying:

“I acknowledge this is a harsh outcome for the inadvertent admission of a dash in a financing statement. However, that outcome is mandated by the operation of Section 43(8) of the PPSA…It must be recognized that avoidance of these type of over-sights is the reason why post-registration confirmatory searches are conducted against debtor names as a matter of usual commercial practice, and included in closing books, to confirm that a search against the correct names will turn up the relevant registrations… Bottom line, the desire for efficiency and certainty, in a system where priority generally turns on time of registration, necessitates accuracy and precision, which in turn gives rises to the need for statutory provisions such as Section 43(8) to address the consequences of non-compliance with the prescribed registration requirements.”

Alpert’s recommendation to creditors?

“When a debtor is an incorporated company, the secured party must ensure that its registered financing statement shows the debtor’s name as required by the PPSA. After a secured party has registered its financing statement, it should also search against the debtor’s correct name, in order to make sure that its financing statement appears on the search.”

I couldn’t agree more — identify your customer via the proper public record and then perform a reflective search! Every. Time.

Need help with PPSAs? Contact NCS today!