Service Area: UCC Services

Bankruptcy Proof of Claim Is Late

Posted on May 9, 2022 by - Credit Risk Management, In Other Commercial Credit News

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“Judge, My Bankruptcy Proof of Claim is Late, But I Have a Good Reason!”

And What’s the Reason? “Um, I Forgot My Password.”

We’ve discussed bankruptcy proofs of claim before and the importance of filing them timely (i.e., don’t miss the bar date!). And when this case crossed my desk, I couldn’t help but share it with you. Why? Because it’s a $53 million example of the bankruptcy courts not messing around. When the bar date is set, you’d better have a darn good excuse for missing it, because a deadline is a deadline – you miss it, you lose it. What’s a good excuse? Well, I’ll give you a hint, waiting until the last minute and forgetting your password is not a good excuse, as one attorney discovered.

Briefly, What Is a Bankruptcy Proof of Claim?

A proof of claim is a document filed within the bankruptcy court that alerts the court, debtor, Trustee, and other interested parties that a creditor wishes to register a claim against the assets of the bankruptcy estate. This document is important because it provides proof that the claim is valid and owed and it notifies the Trustee of the creditor’s claim as well as to what class the claim should be associated.

The Bar Date is a Deadline, Don’t Miss It

The Case: In re U-Haul Co. of W. Va., 2:21-bk-20140 (Bankr. S.D.W. Va. Dec. 10, 2021)

Quick Backstory: About 10 years prior to the bankruptcy filing, there was a class action lawsuit against U-Haul. The Ferrell Class (the class action claimant) was comprised of over 320,000 claimants and sought over $53 million in compensation from the lawsuit.

Fast Forward to Bankruptcy Case: U-Haul Co. of W. Va. filed for bankruptcy protection June 2021. On July 23, 2021, the Clerk of Court set the bar date for August 25, 2021 (So, all parties with claims had a little over a month to file their claim.)

A separate order was entered to allow the Ferrell Class to file claims on behalf of the entire class – which makes sense — what a pain it would be to deal with 320,000+ individual claims. When the court entered the order for the Ferrell Class to file its claim, it included the following:

“The deadline for the Class Claims is August 25, 2021 at 11:59 p.m. The Class Claims must be actually received by the Clerk of the Court on or before that date and time, or such claims shall be forever barred.”

The order also included the various ways to submit the claims: file electronically, in person, via mail, etc.

Claim is Late, Debtor Wants the Claim Barred: OK, I’m going to paraphrase here, but essentially the attorney filing the claim on behalf of the Ferrell Class sat down at his computer late in the day on August 25. He goes to log in to PACER (court electronic filing system) to file the claim, but he can’t remember the login information. I picture someone saying “Uh, the dog ate my homework” but circa 2021/2022 with “Um, Judge, I can’t remember my password.” Because it’s after business hours, there is no one to help him reset his online access, AND since he waited till the last minute, he scrambled to try and do the next best thing… email?

According to the court opinion, the attorney “emailed the Ferrell Class Claim to all counsel in the case one hour and twenty-six minutes late and filed the claim nine hours and 45 minutes late upon obtaining the correct filing credentials.”

The court was not amused. I’m picturing a student being scolded by a teacher – “You’ve had ample time. You’ve done this correctly before. I don’t understand what the problem is.” Of course, the court wasn’t quite so casual or crass, and heard the attorney out.

But It’s an Honest Excusable Mistake: Ultimately, the debtor wanted the Ferrell Claim barred because it was late. The attorney for the Ferrell Class argued that “technical difficulties” (i.e., I can’t remember my password) made it impossible for him to file his claim, and the claim should be allowed as timely under the “excusable neglect” standard.

I will save you from the cringeworthy efforts and excuses (though you can click here to read it in the opinion) and summarize: the attorney pleaded with the court to not punish the class for the missteps of the attorney.

Alas, the court determined the attorney’s neglect was inexcusable. “The reason for the delay in filing was entirely within the control of counsel to the Ferrell Class… the Ferrell Class had ample notice of the Bar Date as well as the dire consequences that would result from missing the deadline.” 

Oh boy, here it comes:

“This failure to plan and allot necessary time to file the proof of claim was not due to any “technical difficulties” as the Ferrell Class asserts. The Ferrell Class does not allege that the late filing was caused by any defect of the CM/ECF system. It is no excuse that the Clerk’s office was closed when counsel attempted to file the claim after business hours on the night it was due. Counsel had over a month to file the claim, during which he could have contacted the Clerk’s office during business hours at his convenience. The deadline was missed in this case due to a careless disregard for the Bar Date, applicable Bankruptcy Rules, and the explicit terms of the Bar Date Order. Compliance with the deadline (or not) was entirely within the control of counsel to the Ferrell Class, and the failure to comply under these circumstances is inexcusable.”

What’s the saying?

“A lack of planning on your part does not constitute an emergency on my part.”

Yeah… it fits.

This is a painful – $53M painful – lesson in missed deadlines.

Creditor in a Bankruptcy? Always Remember

  • Be on Time: Too often, creditors miss the bar date to file. Today’s case in point!
  • Know your Claim: Include all amounts owed for all accounts and affiliates.
  • Secured or Unsecured: Know whether you are a secured creditor and file properly. (Note, a creditor can have a secured & unsecured claim in the same bankruptcy.)

Need Help? NCS can assist in filing your bankruptcy proof of claim, contact us today!

Four Reasons We Love UCC Filings

Posted on February 14, 2022 by - UCC Financing Statements

Here Are 4 Reasons We Love UCC Filings

We LOVE UCC filings and here are four reasons why you should love them too!

  1. Security: If you could protect your accounts receivable, inventory, or equipment, would you be willing to offer larger credit lines to your customers? After all, larger credit lines mean you can sell more and even more competitively than others in your industry! UCCs provide you with the security you need to seize opportunities and to reach more accounts you may have previously passed on due to thin credit history.
  1. Inexpensive: UCCs are inexpensive and require little long-term maintenance, easily saving you thousands in the event of customer default or bankruptcy. Plus, there is NO COST to your customer! Filing a UCC doesn’t require anything other than your customer’s signature and it will not negatively impact their credit.
  1. Available: What’s a better reason than “Because you can!”? As a creditor, you have the right to protect your interests. So why risk it? Take this opportunity to exercise your right to recover funds (or inventory/equipment) if your customer fails to pay you.
  1. Common: Come on, everyone’s doing it! It’s true, businesses throughout the country file UCCs to ensure they are in the best possible position to get paid. Don’t think your competitors are? Think again – run a search on your customers and you will likely see the UCCs filed by your competitors.

OK, how about one more reason?

Smart: Securing your receivable is smart business. Plain and simple. In business, goods and services are rendered for payment; you have every right to ensure you are paid. UCCs were created to promote commerce and to protect creditors like you.

Use UCCs and you are certain to love them as much as we do!

Remember

  • UCCs are a common business practice.
  • UCCs will not impair your customer’s credit rating.
  • In bankruptcy, secured creditors have priority and are paid before unsecured creditors.
  • In the event of default, a properly perfected security interest (i.e., your UCC filing) provides you the right to repossess your goods or equipment.
  • UCCs promote sales opportunities by providing security when selling to marginal accounts.

Let NCS be your UCC filing expert! Contact us today to learn more.

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.

Bankruptcy Proof of Claim: What if It’s Late?

Posted on January 3, 2022 by - Credit Risk Management

What Happens to Your Claim if Your Bankruptcy Proof of Claim is Late?

Bankruptcy proofs of claim are your key to ensuring the Trustee is aware of funds owed to you by the bankrupt party. And, just like filing UCCs or mechanic’s liens, there are deadlines in play for proofs of claim. What happens to your claim if your proof of claim is filed late? A Bankruptcy Court in North Carolina recently decided one creditor was not entitled to distribution of funds, because its proof of claim reached the court one day after the bar date.

The Bankruptcy Proof of Claim

A proof of claim is a document filed within the bankruptcy court that alerts the court, debtor, Trustee, and other interested parties that a creditor wishes to register a claim against the assets of the bankruptcy estate. This document is important because it provides proof that the claim is valid and owed, and notifies the Trustee of the creditor’s claim as well as to what class the claim should be associated.

The U.S. Bankruptcy Court’s official form includes fields for various pieces of information, such as creditor name and location, the amount of the claim, the basis of the claim, whether the claim is secured, if the claim is based on a lease, and whether the claim is subject to right of setoff.

The Bar Date

The bar date is a deadline by which all creditors must file their proof of claims within the bankruptcy court. It is critical that the proof of claim is filed correctly and timely, whether it’s secured or unsecured, to ensure creditors’ rights are preserved and to maximize any possible distribution.

A Day Late Means Your Hanging Out with the General Unsecured Creditors

In the bankruptcy case of North Carolina New Schools, Inc., the bar date was set for September 13, 2016. One creditor, WorkSmart, Inc., mailed its proof of claim around September 7, 2016, and its claim was received by the court September 14, 2016. One day after the bar date. The bankruptcy Trustee filed an objection to avoid the creditor’s claim, arguing the creditor failed to file its claim timely. The creditor filed a response, claiming a “…’mailbox presumption’ creates a rebuttable presumption that the Claim was received in the ordinary course of business.”

A mailbox presumption? Yeah, I didn’t know what it was either. According to the court “The mailbox presumption is a common law evidentiary principle that permits a party to prove receipt of a document that has been mailed.” Essentially, the creditor argued that because the document was allegedly mailed timely, it should be considered received timely. And although I initially chuckled at the word “common” it is apparently a popular topic. The court went on to explain that courts are split, and there isn’t a definitive answer as to whether the mailbox presumption should apply in the mailing of a proof of claim.

Unfortunately for this creditor, the court decided there is a difference between service of a document and the filing of a document (we just talked about this in another post), and it is the creditor’s responsibility to ensure the document is filed by the deadline.

“…applying the mailbox presumption to the mailing of a proof of claim would complicate, bring uncertainty, and cause undue delay to the bankruptcy claims process. Setting a bright-line rule for the filing of claims is vital to the timely administration of a chapter 7 case. Creditors, with minimal expense or inconvenience, can ensure that a proof of claim is received by the clerk’s office before the deadline by filing their claims electronically or directly at the clerk’s office counter, using some form of priority or overnight mail, or calling the clerk’s office to verify the receipt of the claim.”

And just like that, the creditor’s claim for $169,569 was not entitled to distribution, because it was filed a day late.

The Bankruptcy Proof of Claim Lesson

Make sure your proof of claim is received by the bar date. Navigating a proof of claim? Contact us today and let our experts help you!

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.

Security Interest Survives Crazy Collateral Transfers

Posted on October 25, 2021 by - UCC Financing Statements

Bank’s Security Interest Survives Crazy Collateral Transfers; UCC Filing for the Win

It’s a great day to read about a UCC success story! The secured creditor’s UCC filing allowed it to maintain its secured position, despite the collateral being transferred from the debtor’s company to a related company owned by the same debtor. I’ll forewarn you; this case is a little crazy and convoluted, but the takeaway is strong. A security interest, via UCC filing, survives if you properly perfect it.

The Case: IN RE K&L TRAILER LEASING, INC., Bankr. Court, ED TN 2021

I mentioned this case is a bit convoluted. Before we dive in, let’s map out the key players and facts.

  • The Secured Creditor: Greeneville Federal Bank (GFB)
  • The Collateral for the Security Interest: Certain Trailers and Lease and Sales Proceeds
  • The Debtor: K&L Sales & Leasing, Inc. (Sales)
  • The Debtor’s Other ½ of a Company: K&L Trailer Leasing, Inc. (Leasing)
  • Other Creditors: other parties who claim a security interest in the transferred inventory and have filed claims in the Debtors’ bankruptcy cases. (This includes defendant FirstBank, a creditor of Leasing.)

OK, let me explain the debtor’s ½ company. K&L Sales & Leasing, Inc. (Sales) is GFB’s debtor, and is owned 100% by Kris Fellhoelter. Kris also has 50% ownership in K&L Trailer Leasing, Inc. (Leasing); the other 50% is owned by Kris’ parents (Marvin and Linda). Kris is the president of both companies, and according to the court summary, both companies “share other officers, and employees, some of whose salaries were paid by Sales.”

It Started with a $2.5M Loan, Secured by a UCC

GFB loaned Sales $2.5M and GFB perfected its security interest by filing a blanket UCC with the Tennessee Secretary of State. As mentioned above, the collateral included “certain trailers and lease and sale proceeds.” As necessary, GFB continued its security interest by filing Continuations. “At all pertinent times, Sales was engaged in the sale of ‘big rig trailers’ so that GFB’s filing of the UCC-1 perfected its blanket inventory lien on all used trailers owned by Sales.”

Cash Disappeared and Things Got a Bit Questionable

In theory, and in albeit questionable business practices, Leasing would buy trailers from Sales to lease to its customers. “The transfers of trailers from Sales to Leasing ‘ordinarily occurred only after [Leasing] had a potential third party willing to lease that trailer.’” One of the first, but minor-ish, questionable business practices was Kris insisting on being the one to enter these sales transactions in the records for both companies – despite having a CFO that manages the books.

The real questionable behaviors started just before Sales and Leasing both filed for bankruptcy. Here’s a snippet from the court opinion:

“During May 2020, the month before Sales and Leasing filed their bankruptcy petitions, Sales transferred trailers that were subject to GFB’s inventory lien to Kris and Marvin at a rate that was more than twenty times the historical average monthly volume of such transfers, with such transfers in May 2020 exceeding $2 million in value. Transfers by Sales to Leasing, Kris, and Marvin in June (at the end of which the bankruptcy petitions were filed) also far exceeded the previous monthly average for such transfers. Sales’ records for ‘virtually all of the transfers’ from Sales to Leasing or Marvin reflect that Kris was the salesperson. For many of the trailers transferred from Sales to Leasing, Kris, and Marvin in May and June of 2020, the CFO ‘could find no evidence of any funding.’”

So, just before Sales files for bankruptcy protection, it transfers collateral (secured by GFB’s UCC!) to Leasing, and unsurprisingly Sales doesn’t pay GFB.

Know what this sounds like? Well, I’ll tell you what it doesn’t sound like: transfers to a buyer in the ordinary course of business.

Bankruptcy Trustee Tries to Avoid GFB’s Security Interest

GFB argued it was owed the proceeds from these transfers because the transfers didn’t occur in the ordinary course of business and remained protected by its UCC. The Bankruptcy Trustee (Trustee) claimed GFB’s “security interest was interrupted” when Sales transferred goods to Leasing, and that these transfers happened in the ordinary course of business.

Why does that matter?

Well, if the transfers occurred during the ordinary course of business, the Bankruptcy Trustee could avoid GFB’s security interest. In addition to the Trustee’s efforts to avoid GFB’s lien, FirstBank (a creditor of Leasing) joined the fight for funds. FirstBank argued GFB’s security interest was subordinate to FirstBank’s because GFB’s interest ended once goods transferred from Sales to Leasing.

Ultimately, the Trustee and FirstBank arguments relied on these transfers occurring during the ordinary course of business. It was up to GFB to prove the transfers happened outside the ordinary course of business.

GFB Proves It and Wins It; The Security Interest Survives

First, GFB defeated FirstBank’s argument. The court determined, if FirstBank had done its due diligence and run a UCC search, it would have uncovered GFB’s security interest in the trailers in Leasing’s possession.

“Had such would-be creditor of Leasing inquired into how Leasing came into ownership of the trailers, the creditor would have discovered that the trailers were transferred from Sales. That knowledge would then have led the creditor to search the UCC filing office in Tennessee for liens against Sales’ inventory, only to discover the inventory lien of GFB. The discovery of GFB’s lien against Sales’ inventory then would have led to an inquiry into whether the transfer by Sales to Leasing was either (a) approved by GFB or (h) a sale in the ordinary course under section 47-2-403(2) because those are the only two ways that GFB’s perfected security interest in the inventory of Sales could have been lost by Sales’ transfer to Leasing of the inventory on which GFB had a perfected security interest.”

Next, GFB defeated the Trustee. When relying on “ordinary course of business” failed the first time, the Trustee claimed it was within its “strong arm power” (see Bankruptcy Code 11 U.S.C. § 544(a)(3)) to avoid GFB’s security interest. And that’s where the argument failed a second time.

“…under Tennessee law as discussed above, unless the trailers at issue were transferred by Sales to Leasing as a buyer in the ordinary course or with GFB’s permission, GFB’s perfected security interest in those trailers continued in the hands of Leasing, and nothing about § 544(a)(1) or (2) allows the Trustee to overcome GFB’s prior perfected security interest.”

GFB’s security interest survives and its secured creditor status remains in tact.

Never underestimate the power of a properly perfected security interest. Your UCC filing is the leverage and protection you need to ensure recovery of your receivable.

Is the Lien Consensual or Statutory?

Posted on August 30, 2021 by - Mechanic's Liens & Bond Claims, Preliminary Notices & Construction Credit, UCC Financing Statements

What’s the Difference between Consensual and Statutory Liens?

In commercial credit, creditors have an opportunity to secure accounts receivable by establishing their right to certain collateral. Then, in the event the debtor fails to pay, the creditor can leverage the collateral for payment. Depending on the goods or services provided, the collateral may be personal property or real property, and both could be secured by a lien. There are two types of liens creditors may use: consensual or statutory. The primary difference between consensual and statutory liens is that one requires consent and the other arises automatically from law or statute.

UCC Filings Are Consensual Liens

A properly perfected UCC filing benefits creditors that provide equipment, inventory, and consigned goods. To perfect the security interest the debtor must execute a Security Agreement. This Security Agreement grants the creditor a security interest in the goods/services, as noted in the collateral description within the agreement, in the event the debtor defaults or files for bankruptcy protection.

The key for consent lies within the text of the Security Agreement. The Security Agreement should include a granting clause, whereby the debtor grants the creditor a security interest in the debtor’s collateral. In other words, when your customer signs a Security Agreement, they are saying it is OK for you to proceed with filing a UCC (lien) to secure your rights to the described collateral. Your customer is providing you with consent.

Please note, if your Security Agreement does not include a granting clause, it isn’t a Security Agreement. Having your customer sign an agreement that is missing a granting clause means your customer isn’t providing consent for you to file the UCC on the collateral.

The granting clause does not need to be fancy or embellished with extraneous words or phrases. An example of a granting clause is: “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.”

Mechanic’s Liens Are Statutory Liens

If a creditor is furnishing materials or services to the improvement of real property, the creditor may be entitled to a mechanic’s lien. The mechanic’s lien process does not require the debtor’s approval or consent, because it is a matter of law or statute. Each state’s statute may vary, but they generally permit the filing of a mechanic’s lien on the real property in the event the creditor isn’t paid. Hence, statutory lien.

Although it does not require your customer’s permission, there may be prerequisites to filing a mechanic’s lien. The most common prerequisite? Timely serving a preliminary notice upon parties within the ladder of supply. In fact, 33 states have a statutory preliminary notice that should be served prior to filing a mechanic’s lien on a private project.

It’s also imperative you carefully monitor the statutory deadlines. Statute will dictate when the notice and/or mechanic’s lien must be filed and failing to comply with statute could invalidate your lien. You certainly wouldn’t want to jeopardize your payment security.

Different, But Equally Beneficial

There are strict rules when filing a UCC or mechanic’s lien, as they are different types of processes with their own idiosyncrasies. But both processes can assist creditors with securing payment or recovery – in some cases, creditors can take advantage of UCCs and mechanic’s liens at the same time for the same debtor. Bonus? NCS specializes in both & is ready to assist you!

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.