Service Area: UCC Services

What a Difference a Name Makes: Omission of “Inc.” Left Security Interest Unperfected

Posted on June 30, 2014 by - UCC Financing Statements

What a Difference a Name Makes: Omission of “Inc.” Left Security Interest Unperfected

The proper spelling of a debtor’s name on UCC Financing Statement is currently one of the most fervently litigated UCC issues. The UCC Article 9 registry system is designed to permit creditors to make a security agreement public by filing a UCC Financing Statement. UCCs are indexed by the name of the debtor to facilitate the ability of creditors to search and identify pre-existing security interests.

Even Minor Spelling Differences Matter

Even minor spelling differences in a debtor’s name can result in a creditor’s security interest being unperfected.  The case of Tyringham Holdings, Inc. vs Suna Bros Inc., heard in the United States Bankruptcy Court for the Eastern District of Virginia, demonstrates the impact of something as simple as omitting “Inc.” from the debtor’s name in a UCC filing.

Tyringham Holdings, Inc. (Tyringham) entered into a consignment agreement to hold items of jewelry for Suna Bros. Inc. (Suna). Suna filed a UCC to perfect a security interest in the jewelry in the amount of $310,925.

The financing statement filed by Suna listed the debtor’s name as “Tyringham Holdings.”  The debtor’s actual name, per the corporate certificate was “Tyringham Holdings, Inc.”  Evidence submitted in the case revealed that a UCC search, certified by the State Corporation Commission for Virginia, did not yield the UCC Financing Statement under the name “Tyringham Holdings.”

The court noted the name of a corporate debtor that is listed on a UCC must match the name of the corporation on the public record of the jurisdiction where it was organized. However, the court also conceded that minor errors and omissions in the name do not necessarily mean that a security interest is unperfected.

Substantial compliance with the requirements of a UCC Financing Statement can be sufficient, provided that the name of the debtor in the UCC is not “seriously misleading.”  The court cited similar cases in other jurisdictions that found a debtor’s name is seriously misleading if the standard search logic in the UCC filing office fails to reveal the Financing Statement when conducting a search using the name.

What about Standard Search Logic?

Suna contended that several searches, by private search companies, using the name “Tyringham Holdings” did produce the UCC filing. However, the court rejected this argument because the relevant search is the one conducted using the UCC filing office’s standard search logic.

Suna also contended that the State Corporation Commission’s search logic was faulty because it did not filter out “Inc.” as a “noise word.”  A noise word includes terms like “an,” “the” and other words that are filtered out when searches are conducted.

The court rejected this argument because the filing office’s standard logic did not consider “Inc.” a noise word. Rather, the standard search logic used by the State Corporation Commission specified that “incorporated” be abbreviated to “Inc.”

Ultimately, the court found that the name was seriously misleading which entitled the debtor to sell the collateral unencumbered by a security interest. Although the court acknowledged that application of the filing office’s standard search logic could result in a minor error preventing perfection of a security interest, the court also reasoned that creditors do not face a significant burden by being forced to use the correct name on UCC filings.

Best Practice

Always always ALWAYS review the public organic record for your debtor. Not only will you confirm the company’s corporate legal name, you will also confirm whether or not the company is in good standing with the state.

Collateral Description in UCC Filings: a Case from Tennessee

Posted on June 17, 2014 by - UCC Financing Statements

Collateral Description in UCC Filings: a Case from Tennessee

A recent case decided by the Sixth Circuit Court of Appeals, 1st Source Bank v. Wilson Bank and Trust et al., 2013 WL 5942056 (No. 13-5088), provides an example of the importance of properly describing collateral in a UCC filing to perfect a security interest. In the case, the key issue was whether or not the language describing specific heavy machinery and “all proceeds thereof” was sufficient to include the debtor’s accounts and accounts receivable.

What Was Included in the Collateral Description?

In 2004, 1st Source Bank arranged for the lease or sale of certain equipment to K & K Trucking and J.E.A. Leasing (Debtors), which was subject to a security interest that was described in the UCC filing according to the above language.

The terms “accounts” and “accounts receivable” were not included in the description of the collateral. Subsequent to the 1st Source Bank UCC filing, the Debtors entered into financing contracts with a number of other banks.

These other banks, in turn, filed UCCs which specifically included “all accounts receivable now outstanding or hereafter arising” as part of the collateral description.

When the debtor defaulted on the financing arrangements, these banks took control of the collateral, including the accounts receivable.  1st Source Bank objected based on its claimed priority security interest.

What Did the Court Say?

The issue before the court was whether the language referring to “all proceeds thereof” was sufficient to put future creditors on notice that 1st Source Bank held a security interest in “accounts” and/or “accounts receivable.”

Generally, the legal standard for description of collateral in a UCC filing is that it “reasonably identify what is described.”  Courts have interpreted this as meaning that it must be sufficient to create a reason to inquire further about the existence of a security interest in the collateral.

The court addressed the argument that “all proceeds thereof” in the UCC was sufficient to encompass “accounts” and “accounts receivable.” The court noted that Chapter 9 of the Tennessee Uniform Commercial Code (UCC) defines “accounts” separately.

The court determined that the term “proceeds” must refer to something different or the use of the term “accounts” would become superfluous.  The court also relied on the commentary to Article 9 that indicated the term “proceeds” was not to be construed particularly broadly, so it did not make sense to have it include all monies generated by the equipment.

Consequently, 1st Source Bank’s security interest was not perfected with respect to accounts and accounts receivable, providing the other banks a priority status even though their filings were recorded after 1st Source Bank.

Getting It “Just Right” Can Be a Challenge

Because the collateral that underlies a security interest is the key protection afforded to creditors in the case of debtor default or bankruptcy, collateral must be properly described in UCC filings.  The description must be sufficient, to provide notice to prospective creditors of the property encumbered by a prior security interest.

On the other hand, the description should not be so specific and narrow that key forms of collateral are not encompassed within the description in the UCC Financing Statement.  A creditor with a senior security interest can forfeit a priority position when the UCC collateral description is defective.

The Importance of Monitoring Debtor Name Changes under UCC Section 9-507(c)

Posted on May 28, 2014 by - UCC Financing Statements

The Importance of Monitoring Debtor Name Changes under UCC Section 9-507(c)

If a name change by a debtor makes a filed financial statement “seriously misleading,” UCC Section 9-507(c) states the financing statement will only be effective for collateral acquired prior to the name change or within four months following the change.

This rule applies even if the creditor has not received actual or constructive notice of the name change from the debtor.

A creditor can prevent a UCC from becoming unperfected on collateral acquired beyond this four month window by filing an amendment to the financing statement with the new business name of the debtor.

The Case

Gugino v. Wells Fargo Bank Northwest (In re Lifestyle Home Furnishings, LLC), demonstrates the consequences of failing to monitor a debtor’s name change.  In Gugino v. Wells Fargo Bank Northwest, Wells Fargo Bank Northwest (“Wells Fargo”) provided a secured loan to Factory Direct LLC (“Factory”) and to perfect its security interest, Wells Fargo filed a UCC-1 Financing Statement.

On May 7, 2007, approximately three and a half years after the filing of the UCC to perfect Wells Fargo’s security interest, Factory changed its name to “Lifestyle Home Furnishings, LLC.”  Factory did not provide notice of any kind to Wells Fargo and because Wells Fargo was unaware of the name change, it failed to amend its financing statement.

Thirteen months after the name change, Factory filed for Chapter 7 bankruptcy protection. The trustee (Gugino) challenged Wells Fargo’s security interest in an adversary proceeding.  The trustee contended that the security interest was unperfected for collateral acquired more than four months after the name change, because the name in the UCC filing was “seriously misleading”.

The court granted the trustee’s motion for summary judgment allowing the trustee to avoid Wells Fargo’s security interest.

The information included in a UCC Financing Statement may change, even after a security interest has been properly perfected, and depending on the nature of the information that changes, a creditor may need to take action to further protect its security interest.

Best Practice

Creditors need to exercise diligence in monitoring debtors for changes of their name and address, not only to maintain a security interest, but because it is imperative to consistently evaluate your risks when extending credit.

You Schwinn Some, You Lose Some: File a UCC, Even if It is Temporarily Secured by Possession

Posted on May 13, 2014 by - UCC Financing Statements

You Schwinn Some, You Lose Some: File a UCC, Even if It is Temporarily Secured by Possession

A security interest may be perfected by taking possession of the property that constitutes the collateral; however, this type of security interest is only intended to be short-term.

A case involving Schwinn Cycling and Fitness, Inc.*, is a great example of why you should file a UCC even if your security interest is temporarily secured by possession.

Expeditors International of Washington, Inc. (“Expeditors”), the creditor in this case, shipped goods for Schwinn Cycling and Fitness, Inc. (“Schwinn”), the debtor.

The agreement between the parties indicated that Expeditors had a security interest in all of Schwinn’s property in creditor’s possession, custody and control.

A Few Important Facts

  • Within 20 days prior to Schwinn’s bankruptcy filing, Expeditors had some of Schwinn’s property in its possession & the property was then provided to Schwinn during this same 20 day window.
  • Expeditors did not file a UCC Financing Statement within the 20 days of transferring the collateral to Schwinn.

The Contention

Expeditors contended it had a security interest perfected by possession prior to Schwinn’s bankruptcy petition, so the security interest remained perfected during the pendency of the bankruptcy.

The bankruptcy trustee contended the security interest became unperfected because Expeditors did not file a UCC Financing Statement, making the security interest avoidable in bankruptcy.

The court agreed that under the version of the Uniform Commercial Code in Colorado, where the case arose, Expeditors continued to have a temporarily perfected security interest in the collateral, for twenty days after transferring the collateral back to Schwinn.

However, the court also agreed that after the twenty day window the security interest became unperfected because no financing statement was filed.

Expeditors argued the temporary perfection of its security interest extended indefinitely, because Schwinn filed for bankruptcy during the twenty day window, so the automatic stay froze priority upon initiation of insolvency proceedings.

However, the court indicated that this type of short-term perfection was not intended to continue throughout the duration of a bankruptcy proceeding, which could last for years.

The court distinguished prior cases that involved a bankruptcy filing during the twenty day window. In those cases a UCC had been filed, therefore subsequent creditors could not claim to have been misled by “secret security interest”.

The Best Practice

Generally, a UCC Financing Statement that meets the requirements should always be filed.  The most effective way to protect a security interest is to have UCC professionals prepare a financing statement and comply with other perfection procedures.