Search Results for: seriously misleading

UCC 9-503(a) and a Creditor’s Security Interest

Posted on June 21, 2021 by - UCC Financing Statements

UCC 9-503(a), Its Frenemy 9-506, and the Fate of One Creditor’s Security Interest

In a recent Chapter 12 bankruptcy case, two creditors competed for interest in a piece of farm equipment: a 7215R Tractor. On the UCC Financing Statements, one creditor listed the debtor’s name as it appeared on the unexpired driver’s license, the other creditor did not. Welcome to today’s edition of “The Tractors & Tribulations of UCC 9-503.”

What’s in a Name under UCC 9-503(a)?

Article 9 has clear rules. A big one, and the one that is often flubbed, is compliance with UCC 9-503(a). You must correctly list the debtor’s name on the Financing Statement; whether it is a registered entity or an individual. Article 9 says if it is a Registered Entity, then list the name on the Financing Statement as it appears in the public organic record. If it is an individual, it will be Alternative A or B. Under 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. And under 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.

Fail to comply with UCC 9-503(a)? Then be prepared to meet 9-503’s frenemy: UCC Article 9-506(b). That’s right, “Seriously Misleading.”

According to UCC Article 9-506(b), a Financing Statement is seriously misleading if a search for the debtor’s legal name does not reveal the filing.

9-506 EFFECT OF ERRORS OR OMISSIONS

(b) [Financing statement seriously misleading.]

Except as otherwise provided in subsection (c), a financing statement that fails sufficiently to provide the name of the debtor in accordance with Section 9-503(a) is seriously misleading.

The Case of Wilson Jerry Wynn aka Jerry W Wynn

The case, IN RE WYNN, Bankr. Court, MD Georgia 2021, is an all too familiar instance of failing to correctly identify an individual debtor on a UCC Financing Statement.

In 2013, the debtor Wilson Jerry Wynn (Wynn) entered into a security agreement with Deere & Company (Deere) for the purchase of a 7215R tractor. Deere, in turn, filed a UCC and listed the debtor’s name as “Jerry W Wynn.” Deere later filed an amendment in 2015 and listed the debtor as “Wilson Jerry Wynn.”

In 2014, Wynn entered into an agreement with AgGeorgia Farm Credit, ACA (AgGeorgia) for a loan. The collateral was farm equipment and expressly included the 7215R tractor.  According to the court opinion, at the time the loan/agreement was executed, Wynn provided documentation to AgGeorgia which indicated Deere had a UCC filed on the tractor. AgGeorgia filed a UCC and listed the debtor’s name as “Wilson Jerry Wynn.”

Key: from 2011 to 2016, Wynn possessed an unexpired Georgia driver’s license, which identified him as “Wilson Jerry Wynn.”

In 2017, Wynn filed for Chapter 12 and ultimately, AgGeorgia filed a complaint to determine the validity of Deere’s security interest.

The Court Considered

Here’s an excerpt from the court opinion:

“Georgia law requires… for a financing statement to be effective, it must include the debtor’s name… if the Debtor has a Georgia driver’s license, the financing statement should list the Debtor’s name as listed on the driver’s license. According to Georgia law, however,

[i]f a search of the records of the filing office under the debtor’s correct name, using the filing office’s standard search logic, if any, would disclose a financing statement that fails sufficiently to provide the name of the debtor in accordance with subsection (a) of Code Section 11-9-503, the name provided does not make the financing statement seriously misleading.

O.C.G.A § 11-9-506(c). Deere listed the Debtor’s name on its original financing statement as “Jerry W. Wynn,” but the Debtor’s name as listed on his driver’s license was Wilson Jerry Wynn… Although Deere listed the Debtor’s name incorrectly on its initial financing statement, if Deere’s financing statement would appear in a search of the Debtor’s correct name, the financing statement would still have priority over subsequent correctly filed financing statements, including AgGeorgia’s.”

So, the question becomes: Would Deere’s Financing Statement appear in a search using Wynn’s correct name?

Turns out, Deere and AgGeorgia performed two different search types. AgGeorgia performed an exact name search and Deere performed a certified search. The court clarified the difference between a certified search and an exact name search.

“A certified search… adds a second step beyond the exact name search to cross-reference the file numbers of amended financing statements and returns them in addition to the original financing statements; the results of a certified search include more results than the exact name search would have disclosed.”

Seems Deere’s search was more thorough, which is good, right? Well, it may have been more thorough, but it is not the standard search logic used in Georgia. Georgia has two standard search logics: exact search and stem search.

The exact name search would not have revealed Deere’s original 2013 UCC, though it would have revealed the 2015 amendment. Unfortunately for Deere, AgGeorgia properly perfected its security interest in 2014, giving AgGeorgia priority over Deere.

But Wait, AgGeorgia Knew about Deere’s Interest in the Tractor

Earlier I mentioned Wynn provided AgGeorgia with documentation about Deere’s interest in the tractor. Deere argued it has priority, because AgGeorgia knew about Deere’s interest. But the argument was futile. “This Court finds that, under Georgia law, actual notice does not affect the priority of liens and the first to perfect rule governs, giving AgGeorgia’s lien on the Tractor priority over Deere’s.”

AgGeorgia wins.

Can You Revive a UCC Filing?

Posted on February 22, 2021 by - UCC Financing Statements

Revive a UCC Filing

Can Your UCC Filing be Revived if You Knowingly Let It Become Unperfected?

Can a UCC be “revived” if you knowingly fail to timely file an amendment for a debtor’s name change? Minnesota Bankruptcy Court says no. Today’s post reviews an ongoing case of an unperfected security interest & the persistent unsecured creditor lobbying for secured status.

Short on time? Here’s a quick synopsis from the court decision:

“When Unger Meat Company became Rancher’s Legacy Meat Co. in May 2014, Ratcliff had four months within which to correct his UCC-1 Financing Statement to reflect this change. When he failed to do so, by operation of the plain language of the UCC, as adopted in Minnesota, his lien became unperfected in September 2014. Although Ratcliff could have re-perfected his interest at any time by filing a new UCC-1 Financing Statement, he failed to do that as well. Instead, he filed two UCC-3 statements — a Continuation Statement in November 2015 and an Amendment to that Continuation Statement in January 2019. Basic rules of statutory construction prevent these documents — even when taken together as a whole — from serving as a substitute for the UCC-1 Financing Statement required to re-perfect the interest. Therefore, when this chapter 11 case was filed in September 2019, Ratcliff’s interests were unperfected; he had the status of an unsecured creditor. As such, he is not entitled to adequate protection payments or relief from the automatic stay, and his liens can be avoided for the benefit of the broader bankruptcy estate.”

The Tale of the Unperfected UCC Filing

In 2010, James Ratcliff (Ratcliff) & Joseph Unger started Unger Meat Company (UMC). Ratcliff purchased the building to be used by UMC and leased the building to UMC. Ratcliff and UMC entered into a Security Agreement, which granted Ratcliff a security interest in “all of the Debtor’s equipment, including but not limited to the equipment described on Exhibit “1” hereto, inventory, lease agreement, accounts receivable, furniture and fixtures, whether now owned or hereafter acquired, together with all proceeds and products thereof and replacements therefor.” In 2010, Ratcliff filed a UCC-1 to perfect the security interest and later filed a UCC-3 (amendment) in early 2011.

Early 2014, after UMC had spent years losing money, Ratcliff and the other original owners agreed to sell the company to SSJR, LLC. A new purchase agreement was executed, and the agreement identified SSJR, LLC as the sole purchaser of Ratcliff’s shares in UMC. After the sale was finalized, SSJR, LLC amended the Articles of Incorporation for UMC, changing the company name to Rancher’s Legacy Meat Company (RLMC).

Although Ratcliff was aware of the company name change, he did not file an amendment and four months after the name change, his security interest became unperfected. Remember, Article 9-507(c)? Article 9-507(c) provides a 4-month window to amend the filing for a debtor name change that may be considered seriously misleading. Guess what? A search on “Rancher’s Legacy Meat Company” is not going to reveal a UCC filed on “Unger Meat Company.” You know what that means: seriously misleading.

In 2015, 5 years after Ratcliff originally filed his UCC-1, he filed a continuation. Two problems with this continuation? Well, the first is he no longer had a perfected security interest because he didn’t amend his filing when the debtor name changed. The second problem is that even if Ratcliff had properly filed an amendment, he filed this continuation on the wrong debtor name; he filed the continuation listing the name as UMC, not RLMC.

Fast Forward to an Amendment with the Correct Name

Fast forward to 2019, nearly 10 years from the original filing and 5 years from the time he should have amended his filing with the correct debtor name, and 1 year from the alleged continuation filing, Ratcliff filed another amendment and this time he listed the debtor’s name as “Ranger’s Legacy Meat Co.” What is this, three wrongs make a right? I don’t think so.

Of course, we wouldn’t be talking about this case if there wasn’t a tipping point. That tipping point came at the end of 2019, when RLMC filed for bankruptcy protection. Ratcliff, by all accounts, was identified as an unsecured creditor, which he vehemently disagreed with. He told the court that although he didn’t amend it for the debtor name change, “his filings subsequent to that date “revived” the lapse of perfection and operated to “re-perfect” the Financing Statement.”

Yeah, that’s not how this works. You can’t revive your UCC; it’s not like the UCC passed out and you can wave smelling salts under its proverbial nose. When you know your security interest has become unperfected, because you failed to amend the filing timely, that’s it, game over.

The court supported “game over” when it referenced 9-515 of Minnesota’s UCC statute:

336.9-515 DURATION AND EFFECTIVENESS OF FINANCING STATEMENT; EFFECT OF LAPSED FINANCING STATEMENT.

(c) Lapse and continuation of Financing Statement. The effectiveness of a filed Financing Statement lapses on the expiration of the period of its effectiveness unless before the lapse a Continuation Statement is filed pursuant to subsection (d). Upon lapse, a Financing Statement ceases to be effective and any security interest or agricultural lien that was perfected by the Financing Statement becomes unperfected, unless the security interest is perfected otherwise. If the security interest or agricultural lien becomes unperfected upon lapse, it is deemed never to have been perfected as against a purchaser of the collateral for value.

Ratcliff persisted with his argument further by claiming the actions he did take were to “connect the dots” from his original UCC filed in 2010 to the amendment filed in 2019. The court didn’t buy it: “Just because Ratcliff ‘eventually’ got around to attempting to connect the disjointed and ineffective ‘dots’ he had filed does not mean that he was able to revive his interests or that either of his UCC-3 filings was effective.”

filing with commentary

Relentless-Ratcliff (my new nickname for him) leveraged any argument he could come up with, and one by one the court shut him down.

“Ratcliff’s interpretation of the UCC does not create a harmonious result. Instead, under his theory, a creditor could re-perfect a lapsed security interest by simply filing a Continuation Statement — and a “seriously misleading” one, at that — at essentially any time, as long as it later filed an Amendment to that statement. This would fly directly in the face of the clear directive of Minn. Stat. § 336.9-507(c)(2).  Why include directions about a timeframe within which an Amendment to a “seriously misleading” filing statement must be filed if it could, in fact, be filed at any time?”

Sorry Relentless-Ratcliff, your security interest is avoidable. However, being that he is relentless, he is appealing the decision handed down by the Minnesota Bankruptcy Court.

And, since the above decision was handed down, Ratcliff has won a motion for stay on the sale of all assets of debtor.

“…[T]his Court concludes that Ratcliff met his burden to show that the sale should be halted while he seeks to reverse his unsecured status on appeal and grants Ratcliff’s motion to stay pending appeal so long as he posts a supersedeas bond.”

Guess we’ll have to wait and see what happens in the next episode of “Relentless-Ratcliff and His Rogue Security Interest.”

Kansas UCC Filing & the Wrong Debtor Name: It’s a BIG Deal

Posted on April 20, 2020 by - UCC Financing Statements

Did You List the Debtor’s Name Incorrectly on Your Kansas UCC Filing? Because, the Accuracy of the Debtor’s Name Is a BIG Deal

Filing UCCs may seem simple. I often hear folks say “Meh, it’s no big deal. I just gotta fill in the blanks.” But those folks are wrong. The details of UCC filings are absolutely a BIG deal – the details are the difference between being a secured creditor and an unsecured creditor. The details are the difference in recovering hundreds of thousands and collecting pennies, or worse. One creditor learned a hard lesson with their Kansas UCC filing, when they failed to heed the accuracy warning: the difference is in the details.

The Case of Dewey Dennis Preston or D. Dennis Preston or Dennis Preston?

CNH Industrial Capital of America, LLC (CNH) entered into two Retail Installment Sale and Security Agreements with Dewey Dennis Preston (Preston) for the finance of farm equipment. CNH filed two UCCs, and on each of the UCCs CNH listed Preston’s name as Preston D.Dennis (with a period & no space between D. and Dennis). According to the court opinion, CNH listed Preston in the surname box and D.Dennis in the first personal name box.

Let me back up a second & give you a bit of information on Preston’s name. His full legal name is Dewey Dennis Preston, but he goes by D. Dennis Preston (a period after D and a space between D. & Dennis). Preston’s Kansas driver’s license lists his name as Preston D Dennis (no period after D and a space between D & Dennis).

Kansas UCC 9-503 specifically states the UCC sufficiently identifies the debtor if the name on the UCC is as it appears on the unexpired driver’s license: “if the debtor is an individual to whom this state has issued a driver’s license or identification card that has not expired, only if the financing statement provides the name of the individual which is indicated on the driver’s license or identification card.”

CNH argued its security interest is valid, however, CNH did not list the debtor’s name on the Kansas UCC exactly as it appears on the individual’s unexpired driver’s license:

Court Says: “…the Court finds that under Article 9 of the Kansas Uniform Commercial Code, which requires the use of Debtor’s name on financing statements as stated on his driver’s license, CNH’s security interest in untitled personal property is unperfected and therefor CNH’s claim is properly treated as unsecured in Debtor’s proposed plan.” Ouch!

The court furthered “Both of CNH’s financing statements state Debtor’s name as “Preston D.Dennis.” “Preston” is in the box for Surname, and “D.Dennis” is in the box for First Personal Name. The “Additional name(s)/initial(s)” box is blank. Because Debtor’s name stated on his driver’s license is “Preston D Dennis,” without a period and with a space, Article 9 of the Kansas Uniform Commercial Code regarding financing statements requires the conclusion that CNH’s financing statements were was “seriously misleading,” and not saved from that fate by the “safe harbor.” CNH’s financing statements are therefore ineffective.

Remember UCC 9-503(a)?

You must correctly identify and list the debtor’s name on the Financing Statement in compliance with UCC 9-503(a). Whether it 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.

It’s straightforward. If it is an individual, review their driver’s license and list their name on the Financing Statement exactly as it appears on the unexpired driver’s license.

Compliance is King with Kansas UCC

Use caution when identifying your customer on the UCC filing, whether it is an organization or an individual. If it’s an individual, carefully list their name exactly as it appears on their unexpired driver’s license.

Commercial Credit Management Tips for UCCs

Posted on January 27, 2020 by - Credit Risk Management, UCC Financing Statements

10 Tips for Commercial Credit Management of UCC Filings

It’s part two of our three-part series of Commercial Credit Management Tips from NCS. Previously we provided favorite tips for Collections, today let’s review UCCs.

Commercial Credit Management Tips for UCCs

Tip #1: Timely File Your UCCs

You should always file your UCC-1 before you ship goods to your customer. As soon as you have the signed Security Agreement, file your UCC to ensure you’re a secured creditor. To properly perfect your security interest, you must understand the different types of UCC filings and the respective filing deadlines. Failure to meet deadline requirements may jeopardize your position as a secured creditor.

  • PMSI in Equipment (US Filing)– the UCC-1 must be filed no later than 20 days from the date your customer receives the equipment.
  • PMSI in Equipment (Canadian filing)– the PPSA must be filed no later than 15 days from the date your customer receives the equipment.
  • The definition of “receipt” is hotly contested in courts; to be most conservative, NCS calculates based on the date you first shipped equipment to your customer.
  • PMSI in Inventory or Consignment– the UCC-1 must be filed, a reflective UCC search performed, and notification letters should be sent and received prior to shipping inventory to your customer. Shipping inventory before you’ve completed these steps may result in an unsecured status.
  • Blanket– the UCC-1 should be filed prior to shipping goods to your customer.

 Tip #2: The Proper Time to Terminate a UCC Filing

When should you terminate the original UCC Financing Statement? Section 9-513 of the Uniform Commercial Code states that a secured party must terminate a UCC filing within 20 days of a request from the debtor if any of the following exist:

  • There is no obligation secured by the collateral and no indication there will be a future obligation
  • The financing statement covered consigned goods that are no longer in the debtor’s possession
  • The debtor never authorized the filing of the original financing statement

Otherwise, the UCC filing will remain active until the 5-year lapse date. This can cause financial complications between the debtor and their bank. NCS Tip: Terminate your UCC filings in a timely manner.

Tip #3: Understand the Difference Between A Corporate Certificate and Articles of Incorporation

The UCC 2010 Amendment changes to Article 9 regarding the debtor name state that when filing a UCC on a registered organization, you must review the “public organic record” (i.e. Articles of Incorporation) to verify the entity legal name including any amendments and reinstatements.

The state’s public record (Corporate Certificate) is a representation of the public organic record that has been data entered. This is insufficient because there can be clerical errors in the name that could deem the UCC filing seriously misleading and may leave you unsecured.

Tip #4: Monitor for Name Changes

Are you aware that if your customer changes their name you must amend your UCC Filing or your security is jeopardized? Section 9-507 (c) of the UCC tells us that we have 4 months to amend our UCC filing when the debtor name changes. If not amended, the UCC filing is not effective to perfect a security interest in collateral acquired by the debtor before or within four months after the change. Make sure your Security Agreement requires the debtor to advise you of any changes to name, address, or organizational structure. It is the secured party’s responsibility to ensure the UCC filing is updated and contains the correct information. Best practice is to monitor your customer for change.

Tip #5: Maintain Priority in Inventory

When continuing a Purchase Money Security Interest in inventory filing, be aware of the requirement to re-notify the previously secured creditors. Section 9-324 of the Uniform Commercial Code outlines the requirements to establish priority in inventory. It states that the secured party must send notification to the holders of any conflicting security interests, and that the holders of these conflicting security interests receive the notification within five years before the debtor receives possession of the inventory. This means in order to maintain priority upon continuation, all previously secured parties will again need to be notified. Failing to do so will jeopardize your priority position in your goods. NCS Tip: Make sure you are searching and notifying when you continue your PMSI UCC Filings

Tip #6: Protect Your Inventory with Warehouse Filings

Are you storing your inventory in a third-party warehouse? If so, you should file a UCC-1 Financing Statement to publicly announce your ownership. Under Article 7 of The Uniform Commercial Code, the warehouseman may have a lien against your inventory. If the warehouseman’s business were to fail, their bank may unknowingly liquidate your inventory. Filing a UCC-1 Financing Statement will let everyone know who the inventory belongs to and keep your interest safe.

Tip #7: When Selling Under Consignment, Review the Secured Transaction Provisions

If you are selling under consignment you may want to review the secured transaction provisions. Consignment falls under Revised Article 9. In order to have priority rights over a previous secured interest, the consignor must now comply with the same rules that apply to a Purchase Money Security Interest in inventory. Meaning, if you are selling under consignment, you must get a consignment agreement signed; file a financing statement; and search and notify all previously secured creditors. If you do not, you risk losing your inventory to previously secured creditors.

Tip #8: When should I file a Fixture Filing?

A fixture is defined as goods that have become so related to real property that an interest in them arises under real property law (Article 9-102[41]). A few examples are gas/fuel pumps, ovens, and external signs. If your UCC Security Agreement calls out “fixtures,” you should consider filing a UCC Fixture. The Fixture filing will be filed at the county level against the real estate and will appear on a title search. This will alert potential buyers/sellers that the debt needs to be paid before the title of the property can be transferred.

Tip #9: Conduct A Reflective Search After Every UCC Filing

Often, we take for granted when a UCC is instantly recorded online that all is well. BUT how do you know your filing will appear in a UCC-11 search? Each Secretary of State office has their own software to house UCC filings that sometimes can be unreliable or outdated. The only way to determine if your UCC filing is indexed correctly is to conduct a Reflective Search. If that Reflective Search does not display the filing, you have a problem.

Tip #10: UCC and Default

If your customer has defaulted on payment(s) and you have filed a Purchase-Money-Security-Interest UCC, you need to determine whether you would like your equipment/inventory (aka goods) back.

  • If you do not want your goods back, you can place your claim with an attorney to file suit. By filing suit, you may receive Judgment, which allows you to garnish accounts and/or attach to assets.
  • If you do want your goods back, and your customer has the goods, you have the right to repossess without disturbing the peace.

If you are unable to peacefully repossess the inventory/equipment, you could take legal action by filing a temporary restraining order or by filing suit against your debtor.

Filing a UCC on an Individual? List the Name as It Appears on the Unexpired Driver’s License

Posted on September 9, 2019 by - UCC Financing Statements

If You Are Filing a UCC on an Individual, You Should List the Individual’s Name as It Appears on Their Unexpired Driver’s License

Until a Court Case Drops and Mucks It All Up

I can’t begin to tell you the number of times I have said or written some variation of “… when filing a UCC, always list the individual’s name as it appears on the unexpired driver’s license …” I’m certain if you run a query via the NCS blog for “9-503(a)” you will find oodles of information. I’ve said it oodles of times, because it’s true; it’s right there in UCC Article 9! It’s true, until a court case drops and mucks it all up.

UCC 9-503(a)… I Feel Like a Broken Record

Correctly identify and list the debtor’s name on the Financing Statement in compliance with UCC 9-503(a). Whether it is a registered entity or an individual, Article 9 lays it out:

  • 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.

It’s straightforward. If it is an individual, review their driver’s license and list their name on the Financing Statement exactly as it appears on the unexpired driver’s license. Should I repeat one more time? List the debtor’s name exactly as it appears on the unexpired driver’s license. I do sound like a broken record… do folks still play records?

The Court Case That Mucked It Up

I’ll do my best to break this down –

  • The Jurisdiction: Wisconsin
  • The Debtor: Jeffrey Ossmann
  • The Arguing Secured Parties with an Interest in Same Collateral: Northside Elevator, Inc. and Bremer Bank

2014

Jeffrey Ossmann (Ossmann), a farmer, obtained two loans from Bremer Bank (Bank). In turn, Ossmann and Bank executed a security agreement and Bank filed a UCC. On the Financing Statement, Bank identified Ossmann as “Jeffrey A. Ossmann” which was the name on Ossmann’s unexpired license.

2016

In 2016, Ossmann was issued a new license. The name on the new license was “Jeffrey Alan Ossmann“.

Time Out! Under ordinary circumstances, what should Bank do right now (if it was 2016 and within four months of the name change)? Yes, Bank should file an amendment and list the debtor’s name as “Jeffrey Alan Ossmann.” Good! Back to the timeline.

2017

Northside Elevator, Inc. (Northside) had been selling seed and fertilizer to Ossmann. When Ossmann was unable to pay the balance, an agreement was executed and Northside filed a UCC. On the Financing Statement, Northside identified Ossmann as “Jeffrey Alan Ossmann” which was the name on Ossmann’s unexpired license.

2018

Northside claimed its security interest took priority over Bank’s because Bank’s Financing Statement did not correctly list Ossmann’s name as it appeared on Ossmann’s unexpired license. (“Jeffrey Alan Ossmann” for those still with me.)

The Blah-Blahs

As with many court proceedings there is a great deal of information, but only small bits are of interest to me; this is what I call the blah-blahs. The case goes on to review the various bits of Ossmann failing to pay, descriptions of the collateral, the legalities of Northside appealing the Circuit Court’s ruling in favor of the bank, and the relevant bits of Article 9: correctly identifying the debtor, what is seriously misleading, standard search logic and what constitutes minor errors/omissions.

Standard Search Logic, Not So Standard?

Northside claims that Bank’s security interest is unperfected, because a search on “Jeffrey Alan Ossmann” (Ossmann’s license name when Northside filed its UCC) did not reveal Bank’s UCC filing.

“Northside asserts that the name ‘Jeffrey A. Ossmann’ on Bremer Bank’s financing statement renders the statement seriously misleading, under WIS. STAT. § 409.506(3), because a search of DFI records using the name ‘Jeffrey Alan Ossmann’ did not reveal Bremer Bank’s financing statement.”

Clearly, the tricky business with the search is due to the variance of middle name vs. middle initial. To offer clarity, the court explained the search logic.

“(1) NAME SEARCHED. A search request shall set forth the full correct name of a debtor or the name variant desired to be searched and specify whether the debtor is an individual or an organization. The full name of an individual shall consist of a first name, a middle name or initial, and a last name, although a search request may be submitted with no middle name or initial and, if only a single name is presented, it shall be treated as a last name… A search request shall be processed using the name in the exact form it is submitted.”

OK, this makes sense. Northside did a search by the debtor’s full correct name: Jeffrey Alan Ossmann. Bank’s filing did not appear in the search result, which would make Bank’s Financing Statement seriously misleading / unperfected. So, what’s the problem? According to the court, Northside didn’t use a logical search.

“Section DFI-CCS 5.04(1)(e) provides: ‘For first and middle names of individuals, initials shall be treated as the logical equivalent of all names that begin with the initials, and no middle name or initial shall be equated with all middle names and initials.'”

Huh?

Essentially, a search for “Jeffrey A Ossmann” should display all Jeffrey Ossmanns with either a middle name beginning with “A” or the middle initial “A.” In theory, a search for “Jeffrey A Ossmann” would display results for Jeffrey Armstrong Ossmann, Jeffrey Awesome Ossmann, Jeffrey A. Ossmann, etc. So, the court is saying, if Northside had simply searched by “Jeffrey A Ossmann” it would have seen Bank’s existing UCC filing.

In fact, the court stated the following –

“A searcher who fails to take advantage of the DFI’s search logic cannot later complain that a financing statement is seriously misleading if that statement would have been disclosed if the searcher had availed himself or herself of the search logic.”

** Screeching Record Noise Plays Here **

“We conclude that, because a search of the name ‘Jeffrey Alan Ossmann,’ using the DFI’s search logic, and any permissible name variations permitted by that logic, would have disclosed Bremer Bank’s financing statement, that statement is not seriously misleading.”

Wait, What? Why? What?

I’m going to say it: I don’t agree with the court in this case. I understand the court’s reasoning, in that I understand the usefulness of a vague search (“Jeffrey A Ossmann”). But I don’t understand how Northside can comply with Article 9 and then get burned for doing so. Northside identified the individual by the unexpired license and searched the records by the same name. Northside complied with Article 9.

There’s a Lesson Here

Despite my frustration with the court in this case, there is a useful lesson here. When searching, take the extra minute to search a logical variation of the name. What’s considered logical? Well, that’s for another post, but in this case if there is a middle name, try a quick search using just the middle initial and not the full middle name.

When Your Collateral Description Sufficiently Complies with Article 9

Posted on May 17, 2019 by - In Other Commercial Credit News, UCC Financing Statements

Collateral Descriptions Are Tricky! It’s Hard to be Specific without Being Too Specific. Does Your UCC Sufficiently Comply with Article 9?

We know strict compliance with Article 9 is vital in perfecting your security interest. Collateral descriptions can be a tricky business; don’t be too specific or too vague. Fortunately for one creditor, a bankruptcy judge deemed its collateral description as “sufficient”, even though it included a specific address.

What Makes a Collateral Description Sufficient?

According to Article 9-108, a collateral description is “sufficient” if it reasonably identifies the collateral. Whether the collateral is identified by specific listing, category, quantity, or “computational or allocational formula,” it doesn’t have to be perfect, if it’s enough to put other creditors on notice.

“What? It doesn’t have to be perfect?”

Gosh, it’s tough when speaking in terms of perfection. So, I’m calling on author Francis Buckley, Jr. to help me out –

“Fortunately, the policy behind the law governing secured transactions under the UCC explains financing statements are meant to simply provide notice of the transaction and give enough information to subsequent potential creditors that the debtor’s property may be covered by a prior creditor’s security interest. Essentially, a financing statement is meant to provide a starting point in a subsequent creditor’s due diligence process, not the conclusion.”

Oooooh, I like that! “…a financing statement is meant to provide a starting point in a subsequent creditor’s due diligence process, not the conclusion.”

Yes, ideally your Financing Statement should be perfect. But mistakes do happen and while some mistakes are costly, others are forgiven, as is the case in the 8760 Service Group case.

In 8760 Service Group, the secured creditor added what Buckley referred to as an “address restricter,” essentially adding the address to its collateral description:

“All Accounts Receivable, Inventory, equipment and all business assets, located at 1803 W. Main Street, Sedalia, MO 65301.”

A subsequent creditor argued the inclusion of an address left the Financing Statement seriously misleading and the security interest unperfected. But Judge Dow disagreed with the subsequent creditor. According to Judge Dow the “UCC does not require a perfect collateral description… only an ‘indication’ of such coverage…”

Here’s an excerpt from Francis Buckley Jr.’s It May Be Foul, But There Is No Harm: Not All Mistakes Have Dire Consequences Under UCC Article 9:

“In an interesting twist, Judge Dow found that the existence of an ambiguity in the collateral description of the financing statement did not prejudice the prior-filed creditor, but instead provided sufficient notice to the subsequent-filed creditor to impose a duty of further inquiry into the nature of the secured transaction covered under the financing statement. Judge Dow pointed out that the court does not employ traditional means of statutory construction in analyzing an ambiguous financing statement because the court does not proceed to interpret the language. Instead, the court inquires whether the financing statement sufficiently describes the collateral such that ‘the subsequent creditor should have been on notice to inquire further into the collateral.’”

Best Practice? Take Your Time & Draft Carefully

Frequently I see collateral descriptions that tend to be a bit more general: “…in all payment intangibles, accounts, accounts receivable owed to ABC Company…” (Unless, of course, it is related to a specific piece of equipment where serial numbers come into play.)

My advice is be careful when drafting the collateral description. Understand that if you include an address, it may be deemed as seriously misleading. Not to mention the potential catastrophe: what if there is no collateral at that address?! If you do include an address, keep tabs on your customer – make sure they don’t move the collateral to another location.

Customer’s Name Change Could Jeopardize Your Security Interest

Posted on September 17, 2018 by - Credit Risk Management, UCC Financing Statements

Be Careful, Your Security Interest May Be in Jeopardy if Your Customer’s Name Changes

The accuracy of critical data within your UCC Financing Statement can make or break your security interest. Unfortunately, one critical piece of data can change quickly and even worse, it can easily go unnoticed: a change in your customer’s name.

Names change, it happens.

Perhaps your customer is an individual and has recently married or divorced, or maybe your customer has opted to change its corporation’s name based on brand recognition. Whatever the reason, names change and if you have filed a UCC to properly perfect your security interest, you may need to take swift action to ensure your security interest remains perfected.

First, What Does Article § 9-503 Address

Article § 9-503 provides guidance on how to correctly identify your customer within the UCC Financing Statement.

In compliance with § 9-503, if your customer is a registered entity, your customer’s name must appear on the UCC exactly as it appears in the public organic record.

If your customer is an individual, first determine whether the state has implemented 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.

Most states implemented Alternative A, which means your customer’s name must appear on the UCC exactly as it appears on his/her unexpired driver’s license.

OK, What Happens if My Customer’s Name Changes?

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.

What is Seriously Misleading?

According to § 9-506 (b), a Financing Statement that “fails sufficiently to provide the name of the debtor in accordance with Section § 9-503 (a) is seriously misleading.” OK, succinct yet vague. How would you know whether the UCC sufficiently identifies your customer? Three words: Standard. Search. Logic.

“Standard Search Logic” is the holy grail of determining whether a filing is seriously misleading. Search logic is created, determined & managed through an algorithm – not entirely unlike a typical Google search, although a Google search is very flexible and the parameters for this search logic are narrower.

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

One rule for standard search logic is 503.1.2 “No distinction is made between upper and lower case letters.” This means that 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 each individual filing office. This difference by jurisdiction could mean that a filing that would not be seriously misleading in Virginia may be seriously misleading in Georgia, based on the individual search logics.

Like I said, risky. Which is why it may be in your best interest to set a standard business practice to amend a filing any time you encounter a customer name change.

You’ve Got 4 Months

Article 9 – 507(c) provides a 4 month window to amend the 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.

This rule applies even if the you have not received actual or constructive notice of the name change from your customer. You can prevent a UCC from becoming unperfected on collateral acquired beyond this 4 month window by filing an amendment to the Financing Statement with the new business name of your customer.

How Will I Know if The Name Has Changed?

Of course, there is the issue of knowing when your customer’s name changes. In a perfect world, your customer would notify you of name and address changes, but we certainly don’t live in a perfect world. NCS offers corporate monitoring and driver’s license monitoring, which provide alerts when there are changes in your customer’s name.

Prefer to manage it on your own? Create a schedule to periodically check the Secretary of State where your customer is registered or obtain a copy of the current driver’s license and review the information on incoming payments: bonus, the check may have the new name AND the new address.

UCC Filing Collateral Descriptions and Interpreting “And All”

Posted on July 9, 2018 by - UCC Financing Statements

UCC Filing Collateral Descriptions and Interpreting “And All” – With a Dab of Fixture Filings

The U.S. Bankruptcy Court in Missouri recently determined a creditor’s priority in collateral at one address and priority in a blast booth installed on another property, based on the creditor’s properly perfected security interest. Bonus? The Court also reviewed whether a blast booth meets the 3 parameters of a fixture.

Parties Involved & a Bit of Background

To make it a bit easier to understand a somewhat confusing case, here’s a breakdown of the parties involved:

  • Primary Lender: Bancorpsouth Banc (BB)
  • Debtor 1: 8760 Service Group, LLC (8760), sole managing member is Buck Barnes
  • Debtor 2: Pelham Property, LLC (Pelham), sole managing member is 8760
  • Surety issued performance & payment bonds to 8760: Hudson Insurance Company (Hudson)
  • Bankruptcy Trustee (Trustee)

BB was the primary lender for debtors 8760 and Pelham. According to the Court, Pelham was the obligor on the loan from BB, and 8760 was the guarantor. In consideration for the loan, debtors granted BB a security interest in inventory, equipment and A/R. BB filed a UCC to perfect its security interest. The initial UCC was filed in 2014, and a subsequent amendment was filed in 2015.

Hudson issued a performance & payment bond for 8760, and as collateral for the bonds, 8760 granted a security interest in its inventory, equipment and A/R. Hudson filed a UCC to perfect its security interest in 2017.

Both creditors, BB in 2015 & Hudson in 2017, were granted a security interest in the debtor’s inventory, equipment and A/R. So, who has priority? Based simply on “first in time, first in right,” BB would have priority. However, if BB’s collateral description makes its UCC seriously misleading, Hudson jumps to the front of the line.

BB’s Collateral Description, too Vague?

The primary issue was whether BB’s collateral description was sufficient, or if its UCC was seriously misleading. Hudson, 8760 and Pelham argued that because BB’s collateral description included a street address, it was restricted to only collateral located at that address.

Collateral Description from 2015 UCC:

“All Accounts Receivable, Inventory, equipment and all business assets, located at 1803 W. Main Street, Sedalia, MO 65301.”

and included an additional page with:

“the above collateral, whether now owned or hereafter acquired, together with all supporting obligations, proceeds, products, software, accessories and accessions, including, but not limited to the items listed…”

 As you can see, the collateral description includes a street address. What you may not see, and I admittedly did not see initially, is the collateral description can be interpreted one of two ways, depending on how you understand the words “and” and “all.”

Hudson argued the collateral description was limited to A/R, inventory, equipment and business assets ONLY located at 1803 W. Main Street.

Whereas, BB argued the collateral description included ALL accounts receivable, inventory, equipment AND ALL business assets located 1803 W. Main Street.

Fortunately for BB, the court was persuaded by its argument. BB’s collateral description should have prompted Hudson to further investigate, when Hudson went to file its UCC 2 years after BB.

“The ‘and’ in the collateral description between ‘[a]ll Accounts Receivable, Inventory, equipment’ and ‘all business assets, located at 1803 W. Main Street, Sedalia, MO 65301’ could at least have given Hudson an indication that all assets were covered by a prior lien and cause it to inquire into the collateral description contained in the security agreement.”

The result? BB has priority.

“Thus, [BB’s] collateral description in the financing statement was not seriously misleading and was sufficient to put Hudson on notice that it should inquire into the extent of [BB’s] lien. Because [BB] indisputably filed prior to Hudson, it holds a first priority security interest in 8760’s non-office equipment and inventory.”

Blast Booth Bonus: is it a Fixture?

8760/Pelham’s assets included a blast booth. Hudson argued the booth should be considered equipment and not a fixture. While the argument is moot because BB has already been granted priority in all assets, the court did review whether the booth is equipment or fixture.

In its opinion, the court cites the 3 requirements, set forth by Missouri Supreme Court, an item must meet to be deemed a fixture: annexation, adaption, and intent of the annexor.

The court advised an item is annexed if it is, in some way, physically attached to the real property. Adaptation exists, if the building was designed specifically to accommodate the item or if the “alleged fixture was necessary for the particular use to which the premises are devoted.” And lastly, intent of the annexor, is whether the intention existed for the item to become an integral part of the real property.

“[T]he Blast Booth was bolted into the concrete floor of the 5105 Pelham Drive building and the building was specifically designed to incorporate the Blast Booth by installing special trenches for augers in the concrete floor. He testified that if the Blast Booth was removed the trenches would have to be covered or filled with concrete and the bolts would have to be cut off flush with the floor and driven down into the concrete floor to repair the area where the Blast Booth was located. Further, he testified that when Debtors installed the Blast Booth in the building he did not intend for the Blast Booth to ever be removed.”

Therefore, the blast booth met the parameters: it was affixed to the property, the building was built to accommodate it, there was no intention for it to be removed.

Blasting Booth = Fixture

Note: This case was rather interesting, and it wasn’t limited to the items discussed above. You can read the full text here: IN RE 8760 SERVICE GROUP, LLC, Bankr. Court, WD Missouri 2018