Search Results for: seriously misleading

Accurately Indexed UCC Filing

Posted on January 5, 2015 by - UCC Financing Statements

Accurately Indexed UCC Filing: Conduct a Reflective Search After Every UCC Filing

Obtaining a reflective search is the best practice to make sure the UCC Financing Statement or UCC change statement has been indexed accurately.

What is a Reflective UCC Search?

A reflective UCC search confirms that a UCC filing was recorded. The reflective search returns a jurisdictional report by debtor name reflecting all UCC filings through the date of your recorded UCC filing. This search also lists previous secured creditors by filing date to help determine your filing position. In 2001, Revised Article 9 changed the requirements of the debtor name and implemented standard search logic.

What is the Debtor Name?

Section 9-503(a) describes the debtor name as either:

  1. A registered organization, of which the name is as indicated on the public record of the debtor’s jurisdiction of organization; or
  2. An individual, which several states describe as the name on a birth certificate or driver’s license.

Article 9-506(b) clearly states “a financing statement that fails sufficiently to provide the name of the debtor in accordance with Section 9-503(a) is seriously misleading.” Not following the rules for a correct debtor name will affect whether the UCC filing is found using the state’s standard search logic.

What is Standard Search Logic?

In 2001, standardized search logic rules were developed by the International Association of Commercial Administrators (IACA). IACA is the professional association for government administrators of business organizations and secured transaction record systems. Each state formed its own search logic rules based on IACA’s rules. The strict search logic intentionally left no margin for error or variances of the debtor name.

How are Filings Recorded?

A filing is recorded according to the law of a particular filing state. Options include XML, internet manual entry, fax or mail. Many states still have manual processes that can lead to errors by either the submitting party or the filing officer. Such errors can jeopardize the security.

Additionally, each state has its own rules to record names and index filings. Your filing is indexed in accordance with the particular method used in the recording state. This means the filing party must know the nuances of each state’s filing system in order to search the filings properly. For example, punctuation can be extremely important in one state and of little importance in another. Other ways states have adopted different rules include:

  • Punctuation
  • Apostrophes
  • The ampersand (&)
  • How to treat the word “the”
  • Spaces
  • Individual names

Can a Reflective Search Help Confirm the Accuracy of a UCC Filing?

When done properly, a reflective search can confirm the accuracy of a UCC filing. It can assure:

  • No errors in debtor name were made by the recording entity.
  • The filing was recorded in accordance with a particular state’s methods and format.
  • Change statements are indexed to the proper original filing.

Are you sure your debtor name is indexed correctly?

Unless you are familiar with these processes in all 50 states, assistance is recommended.

Debtor Name Errors in UCC Filings

Posted on November 12, 2014 by - UCC Financing Statements

The Impact of Debtor Name Errors in UCC Financing Statements

Perfection of a security interest involves drafting and executing a sound security agreement, properly filing a UCC Financing Statement and ensuring the filing complies with Article 9 of the Uniform Commercial Code.  When preparing a UCC filing, minor deviations in the name of the debtor can prevent a security interest from being perfected.  Creditors may assume it is enough to simply conduct an online search to determine the correct spelling of a debtor’s legal name. However Article 9-503 (a) states that for a registered entity one must obtain the organic public record.  Minor discrepancies coupled with strict state search logic can add up to a costly mistake.

Unperfected Security Interest

Let’s take a look at a few cases where the creditor failed to perfect their security interest, because searches conducted using the jurisdiction’s search logic did not reveal their UCC filing.

Jurisdiction: Nebraska
Case: 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
Verdict: The Court of Appeals for the Eighth Circuit affirmed the bankruptcy court’s ruling that the bank’s financing statement was “insufficient due to the addition of d/b/a” as part of the debtor’s name.

The bank listed the debtor’s name on the UCC filing with both the debtor’s public record and the d/b/a names.  The debtor’s name was EDM Corporation and its d/b/a was EDM Equipment.  The bank used a non-standard-form financing statement and listed the debtor as “EDM Corporation d/b/a EDM Equipment.”  Subsequently, two separate lenders failed to turn up the financing statement when conducting UCC searches.  The court noted that the standard-form financing statement expressly indicated not to include a d/b/a or other extraneous information in the field for the debtor’s name.  The court emphasized the importance of putting in the exact public record name of the debtor – no more and no less.

Jurisdiction:  Idaho
Case: Wing Foods, Inc., Debtor. Bankruptcy Estate of Wing Foods, Inc., by and through its Chapter 7 Trustee, Gary L. Rainsdon Plaintiff, vs. CCF Leasing Company and B S & R Equipment Company, Defendants.
Verdict:  The court determined the UCC Financing Statement was “fatally flawed” and as a result, the debtor was permitted to avoid the creditor’s security interest.

The creditor, CCF Leasing Company, leased equipment to Wing Foods, Inc. The creditor took steps to perfect a security interest by filing the UCC; unfortunately, the financing statement listed the debtor’s name as “Wing Fine Food.” The court found that the difference in the name was seriously misleading because a UCC search, using the jurisdiction’s search logic, would not have revealed the financing statement.  Because the filing was seriously misleading, the court ruled that Wing Foods, Inc. was able to avoid CCF Leasing Company’s security interest in its Chapter 7 bankruptcy.

Jurisdiction: Texas
Case: In re JIM ROSS TIRES, INC.; dba HTC Tire Pro; dba HTC Tires & Automotive Centers, Debtor(s).
Verdict: The court found the listing of the debtor’s name “seriously misleading” because the search logic used for UCC searches in the state would not have revealed the financing statement.

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.”

Jurisdiction: Georgia
Case: Receivables Purchasing Co., Inc. v. R&R Directional Drilling, L.L.C.
Verdict: The appeals court affirmed the trial court, which determined the creditor did not have a security interest, because the financing statement was seriously misleading.

The creditor in this case simply added a space in the name of the debtor 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.”

Avoid this UCC Filing Mistake

While some creditors attempt to search online for a debtor’s business name, minor alterations to the name or the inclusion of a d/b/a could be fatal to the filing.  We recommend you obtain the debtor’s corporate legal name from the Articles of Incorporation filed with the state and monitoring the entity’s name for any subsequent changes. In addition to confirming your debtor’s corporate legal name, it is important understand the search logic used in the state because including a space where one does not belong or changing “and” to “&” in the debtor’s name may be enough to render a UCC filing ineffective.

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.

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.

Top 5 Rookie Mistakes with Your UCC Security Agreement

Posted on June 28, 2023 by - UCC Financing Statements

Don’t Make These Top 5 Rookie Mistakes with Your UCC Security Agreement

The accuracy of your Security Agreement can make or break your properly perfected security interest. Compliance with Article 9 of the Uniform Commercial Code must be precise. Don’t fall victim to these rookie Security Agreement mistakes.

Note, today’s post focuses on the Security Agreement, but typically the information within the Security Agreement is the information that appears on the Financing Statement – at least it should be. It’s imperative for both the Security Agreement and the Financing Statement to be compliant.

Rookie Mistake #1: Getting the Debtor’s Name Wrong

I’m going to spend a bit more time on this mistake because it is, without question, the number one mistake made by secured parties: incorrectly identifying the debtor. UCC Article 9-503 specifically states if the debtor is a registered organization, the debtor’s name must be identified as it appears on the public organic record.

“…[i]f the debtor is a registered organization… 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…”

This means, list your customer’s name EXACTLY as it appears on the public organic record. If you pull Articles of Incorporation, and your customer’s name ends in “Incorporated” instead of “Inc.” then spell out Incorporated. Technically, Inc. is a noise word, but in one current case, the security interest was unperfected because of errors in the noise word. Be wary of spaces, punctuation and noise words – these seemingly small nuances are causing big problems for secured parties.

If the debtor is an individual, creditors must first look to the state’s legislation to determine whether to follow “Alternative A” or “Alternative B.” Most states enacted Alternative A, which states the debtor’s name should be listed exactly as it appears on the unexpired driver’s license.

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 recently we have reviewed several cases in which a seemingly tiny mistake has left a creditor’s security interest unperfected. Don’t get caught in the complacency trap!

Popular question “What should I do if my customer’s name changes?” Article 9 – 507(c) provides a 4-month window to amend a filing for a debtor name change that may be considered “seriously misleading.” If the change in your customer’s name makes the filed Financing 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.

As a best practice, we recommend amending your UCC filing if your customer’s name changes. There may be situations where an amendment is not “required,” but it’s a risk to not amend. If you are unsure whether you want to amend your filing, I would recommend you determine whether the name change renders your filing as seriously misleading.

Rookie Mistake #2: Failing to Include the Granting Clause

Security interests under Article 9 are consensual. This means your customer must agree to grant you rights to the collateral. If your Security Agreement does not include a granting clause, it isn’t a Security Agreement.  The granting clause does not need to be fancy, embellished with extraneous words or phrases.

Here’s an example of a granting clause “In consideration for the extension of credit, Debtor hereby grants a security interest in and assigns to the Secured Party the Collateral described in paragraph II below to secure payment and performance of all debts, liabilities and obligations of Debtor of any kind whenever and however incurred to Secured Party.”

Rookie Mistake #3: Not Clearly Identifying Collateral

Crafting a clear collateral description that isn’t too specific or too vague can be challenging. Article 9 clearly states a “supergeneric” description is insufficient. In other words, to simply identify the collateral as “all the debtor’s assets” or “all the debtor’s personal property” is unreasonable. OK, so what is reasonable? Article 9-108(b) provides the following “examples of reasonable identification”

Except as otherwise provided in subsection (d), a description of collateral reasonably identifies the collateral if it identifies the collateral by:

(1) specific listing;

(2) category;

(3) except as otherwise provided in subsection (e), a type of collateral defined in [the Uniform Commercial Code];

(4) quantity;

(5) computational or allocational formula or procedure; or

(6) except as otherwise provided in subsection (c), any other method, if the identity of the collateral is objectively determinable.

You can review some of our posts on collateral here.

Rookie Mistake #4: Missing Dates & Authorized Signatures

I list these two together because generally, when we sign documents (any documents), we sign and date. The same should apply for the Security Agreement: sign and date. Like peanut butter & jelly: sign and date. Have I repeated enough? Sign and date.

It’s vital the document be signed by a person authorized to grant the security interest. Make sure the individual signing the document has been authorized by the company to sign.

Rookie Mistake #5: Neglecting to Reference Governing Law

This is easy to overlook, especially when it can amount to a brief sentence buried within the pages of a document.

“This security agreement will be governed by the laws of _________ (state).”

Mistakes Eliminate Security

Mistakes happen, and they come at a cost. Article 9 leaves virtually no room for error and one slight misstep can leave you with an unperfected security interest and sitting in a sea of unsecured creditors. Carefully draft, review & re-review your documents to ensure you avoid these rookie mistakes.

*Editor’s Note: This content was originally published in November 2018. It has since been updated and revised for statute changes effective 2023.

Safe Harbor Might Save One Creditor’s UCC Filing

Posted on January 24, 2022 by - UCC Financing Statements

Hazardous Intersection of Seriously Misleading, Article 9-503(a), Due Diligence, and Safe Harbor; The Fate of One Creditor’s UCC Filing

In Florida, a lender’s UCC filings technically identified the debtor incorrectly, but the Court of Appeals couldn’t determine whether the lender holds a secured interest. Now, the fate of the UCC filings are stuck at the intersection of Seriously Misleading, Article 9-503(a), Due Diligence, and Safe Harbor, while the Court of Appeals waits on a Supreme Court decision. The price tag? A cool $3,000,000.

Before we recap this case, let’s review each section of this sticky intersection.

What is Article 9-503(a)?

Article 9-503(a) is the section of the Uniform Commercial Code that 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
  • Individual: 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.
    • 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.

What is Seriously Misleading?

Article 9-506(b) clearly states “a financing statement that fails sufficiently to provide the name of the debtor in accordance with Section 9-503(a) is seriously misleading.” Listing your debtor’s name incorrectly on the filing can affect whether the UCC filing is found using the state’s standard search logic.

What is Safe Harbor?

Even if there are minor errors or omissions on your UCC filing, you may still have a valid filing. How? Safe Harbor. 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 the International Association of Commercial Administrators developed standard search logic rules, “standard search logic” is actually dictated by the filing office (not really standard, right?).

What is Due Diligence?

If a party takes reasonable steps to uncover any existing security interests (i.e., reasonably performs UCC searches in the filing offices to confirm whether a UCC has been filed on certain collateral), then they have performed due diligence. The key is “reasonable.” When working with UCC filings, I like to think of reasonable as sufficient, a sufficient search.

A Red Light at the Intersection and the Validity of One Creditor’s Security Interest

Here are the case highlights and general chain of events:

  • Jurisdiction: Florida
  • Creditor: Live Oak Banking Company (Live Oak) loaned the debtor $30,000,000
  • Debtor: 1944 Beach Boulevard, LLC (Beach Boulevard) operates a family entertainment center, Adventure Landing
  • UCC Filings: Live Oak filed two UCCs on all assets of Beach Boulevard. On its UCC Financing Statements, Live Oak identified Beach Boulevard as “1944 Beach Blvd., LLC”
  • Bankruptcy & Avoidance: Beach Boulevard filed bankruptcy (Chapter 11) and later filed a complaint to avoid Live Oak’s UCCs because Live Oak abbreviated Beach Boulevard’s name on the Financing Statements.

“Beach Boulevard asserted that Live Oak’s UCC-1 financing statements were ‘seriously misleading’ and therefore unperfected, and that Beach Boulevard could use its power as a hypothetical lien creditor to avoid Live Oak’s lien on its assets. The sole basis for Beach Boulevard’s claim is that the financing statements failed to sufficiently ‘provide the name of the debtor,’ as required by Florida law, because they abbreviated ‘Boulevard’ to ‘Blvd.’ Beach Boulevard claimed that, because of this mistake, a search of the Registry under its correct legal name, ‘1944 Beach Boulevard, LLC,’ did not reveal the existence of Live Oak’s asserted liens.”

  • Minor Error: Live Oak claimed its abbreviation of Boulevard to Blvd. was a minor error and doesn’t unperfect its security interest.

According to the court opinion, Live Oak argued its UCC was perfected because its UCC did appear in the filing office’s search results IF the searcher had navigated to the “previous” page of results. (This filing office displays 20 search results at a time, and the searcher can navigate to the previous or next pages to see additional results. Live Oak’s UCC appeared on the previous page, so, if the filing office displayed 40 results per page, Live Oak’s UCC would have appeared.)

  • Two Cases: In 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.”

“The existing case law contains two competing interpretations of what “search” means for purposes of the section 679.5061(3) safe harbor. Under one interpretation, the Florida Legislature adopted a bright line rule—if a financing statement with the debtor’s incorrect name does not appear on the initial page of twenty names, it has not been disclosed in the search and is therefore ineffective. Under the other interpretation, which the court in this case followed, the Florida Legislature created a flexible standard under which a financing statement with the debtor’s incorrect name is effective as long as it is within a reasonable number of pages from the initial page of twenty names.”

OK, so, if the Court of Appeals follows the first case, then Live Oak’s security interest is unperfected and avoidable. But, if the Court of Appeals follows the second case, then burden is on the searcher and Live Oak’s security interest is perfected and not avoidable.

It comes down to one thing, and it’s the one thing the Court of Appeals couldn’t answer: What is Reasonable?

Is it reasonable for a searcher to click to the “previous” or “next” page of search results? I mean, after all, the filing office only displays 20 results at a time and Live Oak’s UCC is within the top 40 results. Or is it reasonable for the searcher to rely solely on the first page of search results? Because, Article 9 is clear, you must list the party’s name exactly as it appears on the public organic record, and Live Oak didn’t do that.

Defining reasonable is harder that I thought. In fact, even the Court of Appeals wasn’t comfortable with defining reasonable. So, the Court of Appeals has asked the Supreme Court to answer these 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 to 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?

Once the Supreme Court considers and answers the Court of Appeals’ questions, the Court of Appeals will issue a decision on Live Oak’s security interest. Until then… well, might I be so bold as to encourage you to strictly adhere to Article 9 guidelines?

Always. Always. Always, list your customer’s name on the UCC Financing Statement as their name appears on the public organic record. And when in doubt, seek a legal opinion.

What Is a UCC-3 Filing and Why Should You File One?

Posted on November 29, 2021 by - UCC Financing Statements

What Is a UCC-3 Filing and Why Should You File One?

Have you filed a UCC-1 to secure your interest in certain collateral? Well, if you have and you need to continue, amend, assign, or terminate your UCC filing, you will file a UCC-3. You may have already guessed, but today’s post is all about the UCC-3, including its magical powers. OK, it may not be magical per se, but it is certainly powerful and shouldn’t be ignored.

UCC-1, UCC-3, UCC-5, UCC-11

It may seem like an odd numbering system, but each form is important in its own right. A UCC-1 is the initial Financing Statement and is filed to provide notice to other creditors of your security interest. Typically, when we talk about perfecting your security interest or filing a UCC, we are usually referring to a UCC-1 or your initial filing.

Let’s skip the UCC-3 for now and jump ahead to the UCC-5 and the UCC-11. A UCC-5 is an information statement you file when you believe an existing record is inaccurate or was wrongfully filed. In compliance with Article §9-518, this statement should include reference to the original filing (the filing with the alleged errors). It should indicate it is an information statement and it should identify what you believe to be inaccurate in the original filing. It’s important to note, this filing does not amend any information – you will need to file the UCC-3 if you need to amend info.

The UCC-11 is an information request to determine whether there are other secured parties, whether specific collateral is already secured by a UCC, and to determine a creditor’s priority.

Bouncing back to the UCC-3.

A UCC-3 Wears Many Hats

It’s true, a UCC-3 is used to continue your existing filing, amend your existing filing, terminate your existing filing, or assign your interest to another secured party.

Continuation

A UCC is effective for 5 years. If you need to extend the filing, you will file a UCC-3 Continuation within 6 months before the expiration date of the existing filing. Once the continuation has been filed, your UCC is effective for another 5 years. If you don’t file your continuation timely, your UCC will become ineffective.

How often should you continue a filing? It depends on what you are providing as the creditor. If you are a lender, and your customer’s loan period is longer than 5 years, you would need to file continuations every 5 years until the loan is paid off/closed, to maintain your security. If you are a distributor of goods, and your customer operates on a revolving line of credit with you, you should file a continuation every 5 years as your relationship continues.

I’m going to repeat what I just said moments ago: if you do not file a continuation timely, your existing UCC will become ineffective. And, as we’ve discussed on our blog before, you can’t revive your security interest; you will lose your place in line.

Amendment

Ah, UCC Amendments, let me count the ways! Why would you need to amend your UCC? The most common reasons to amend a filing include a change in your customer’s name or address, a change in your company’s name or address, or a change in the collateral.

The most common, and arguably most critical, reason to amend your filing is if your customer’s name or address changes. We talk about this a lot, because not only is it vital to your security interest, it’s also one that consistently stymies creditors. Article §9-507(c) clearly states you have a 4-month window to amend your filing for a debtor name change to maintain your priority. If you fail to timely amend your filing, your filing will be considered seriously misleading, and your security interest will be unperfected. Remember, names matter in UCCs, after all, a search by name is how parties identify whether a security interest already exists on certain collateral.

I mentioned you may want to amend a filing if your company’s name or address changes, and while this is not dictated by Article 9, it is a best practice. I recommend amending the filing to alleviate delays or missed notifications about a debtor’s bankruptcy. For example, let’s say your customer files for bankruptcy. The bankruptcy trustee will go through public records (i.e., UCC filings) to ensure notifications of the bankruptcy – including the mega important bar date info – are mailed to all parties. If your address is wrong and the mail is either delayed or returned, you could miss the bar date. Yes, you could likely argue you missed the bar date because you didn’t receive timely notification, but the court may say “Hey, not my problem, you should have maintained the public record.” Is it worth the hassle?

If there is a change in the collateral, you will need to amend your filing. Other creditors are relying on the information you provide to determine whether an interest already exists on certain collateral. If your Financing Statement doesn’t correctly identify the collateral, other creditors can assume there is collateral available for them to use as security – keep it current, don’t let that happen.

Assignment

If you need to assign or transfer all or some of your rights to the collateral to another secured party, you will file an Assignment.

9-514 Assignment of Powers of Secured Party of Record

(b) [Assignment of filed financing statement.]

Except as otherwise provided in subsection (c), a secured party of record may assign of record all or part of its power to authorize an amendment to a financing statement by filing in the filing office an amendment of the financing statement which:

(1) identifies, by its file number, the initial financing statement to which it relates;

(2) provides the name of the assignor; and

(3) provides the name and mailing address of the assignee.

Assignments occur frequently with banks, as one bank transfers its security to another bank.

Termination

Seems fitting to end today’s post with Terminations. The filing of a termination ceases the effectiveness of the original UCC. Typically, terminations are filed at the end of the relationship when monies have been paid and/or collateral returned. As an example, your bank filed a UCC when you signed for your car loan; once your car loan is paid off, the bank terminates their UCC, which frees up the collateral (i.e., your car).

Use caution when terminating filings because you can’t un-terminate them. If you need a billion dollar warning, check out How JP Morgan Chase Bank’s Billion Dollar Mistake Can Make You a Better Credit Manager.

Compliance with UCC 9-503(a) when Filing UCC in Georgia

Posted on August 23, 2021 by - UCC Financing Statements

Filing a UCC in Georgia? Make Sure You Correctly Identify the Debtor because Georgia Takes “Seriously Misleading” Seriously.

Compliance with UCC 9-503(a) must be one of the easiest and most challenging aspects of perfecting security interests. A contradiction, right? Under Article 9, a debtor should be identified on the UCC as its name appears on the public organic record (organization) or unexpired driver’s license (individual) – it’s that easy. And yet, following the Article 9 requirement has proven time and again to be quite a challenge for creditors when filing UCCs. And most courts, like the U.S. Bankruptcy Court in Georgia, are no nonsense when it comes to properly perfecting a security interest.

What is Compliance with UCC 9-503(a)?

In compliance with UCC 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.

Summary of IN RE Bryant, Bankr. Court, MD Georgia 2021

The debtor, Darren Eugene Bryant (Bryant), filed for bankruptcy protection. The creditor, Regions Bank (Regions), filed a Proof of Claim for $2,515,673.21, which included both funds secured by a UCC filing and unsecured funds. The bankruptcy trustee argued Regions’ UCC was seriously misleading (thus unperfected) because Regions failed to correctly identify Bryant on the UCC.

  • Bryant’s unexpired driver’s license identified him as: Darren Eugene Bryant
  • Regions’ UCC Financing Statement identified Bryant as: Darren E Bryant or Darren E. Bryant

You see where this is going, right? This is from the court opinion:

“The financing statement must include the name of the debtor, the name of the secured party or a representative of the secured party, describe the collateral covered by the financing statement, and state the maturity date of the security obligation or state that the obligation is not subject to a maturity date. The name on the financing statement sufficiently identifies a debtor ‘if the debtor is an individual to whom this state has issued a driver’s license that has not expired, only if the financing statement provides the name of the individual which is indicated on the driver’s license[.]’”

Yep, Regions failed to comply with UCC 9-503(a).

“The Trustee argues that the Debtor’s name as listed on [Regions’] financing statements does not comply with O.C.G.A § 11-9-503(a)(4). This Court agrees. The statute requires that, for the financing statement to be effective, the name must ‘provide the name of the individual which is indicated on the driver’s license.’”

But, But, But… No, Buts, The Instructions Are Clear

In rendering its decision, the court points to the standard filing form provided by GSCCCA, stating “The UCC-1 form specifically notes that any part of Debtor’s name should not be abbreviated. While [Regions] attempted to argue that the abbreviation of the Debtor’s name still matched the Debtor’s driver’s license, [Regions] abbreviated the Debtor’s name from the name on the driver’s license despite the explicit instructions to the contrary. Therefore, the name on the financing statement does not match the Debtor’s name on the Debtor’s driver’s license, [Regions] financing statement does not comply with O.C.G.A § 11-9-503(a)(4).”

Here’s the Debtor’s Name section of the Financing Statement:

Debtor Section of UCC

Here’s the instructions for the form (highlight added):

Instructions for Debtor Section of UCC

Would It Appear in the Search?

You’re familiar with the phrase “grasping at straws,” yes? Well, in true straw-grasping-fashion, Regions tried one more argument. Regions argued if a search was done without the middle name and/or middle initial, its UCC filing would have appeared. But, the court disagreed, because in theory the searcher would be searching by the name as it appears on the driver’s license.

“A third party searching for a lien on potentially encumbered property relies on the system created by the Georgia Superior Court Clerks’ Cooperative Authority, the ‘GSCCCA,’ to produce results. Whether using the exact search or the stem search, the Georgia UCC Search logic description states, “[w]hen searching for an individual, [the Debtor’s] last name and first name are required, [the Debtor’s] middle name is optional.’ Georgia Superior Court Clerks’ Cooperative Authority, UCC NAME SEARCH LOGIC. Therefore, a proper search done by the guidelines set by the GSCCCA could include a debtor’s middle name. Liens that would not be disclosed by a search that includes a debtor’s middle name would not be perfected. In this case, a third-party searcher optionally could include the Debtor’s middle name, Eugene, when searching for encumbered property, which would not disclose [Regions’] lien. Because a search for “Darren Eugene Bryant”, a correct search according to the guidelines set by the GSCCCA for liens on the Debtor’s property, would not have disclosed [Regions’] lien, [Regions’] financing statement would qualify as seriously misleading under § 11-9-506(c).”

It’s an expensive lesson to learn. Always, always, always identify the individual debtor by the name that appears on their unexpired driver’s license.