Service Area: UCC Services

Perfecting Security Interests: Avoiding Improper Forms

Posted on September 19, 2022 by wpengine - UCC Financing Statements

A Seemingly Minor Error Cost One Creditor $4,153,137.79

When preparing documentation to perfect a UCC filing, the requirements may not be too complex, but you must strictly follow the requirements. Precise compliance with federal and state requirements is necessary to prevent a secured debt from being treated as unsecured during bankruptcy and to protect a secured creditor’s priority position.

You may only discover your UCC filing is unperfected when it is treated as unsecured debt during a bankruptcy. UCC perfection prior to a debtor filing bankruptcy is essential because of the bankruptcy trustee’s strong-arm powers under Section 544(a)(1) of Title 11. The debtor or trustee can avoid an obligation that is not perfected and treat it as an unsecured obligation.

Regions Bank – Should Have Done It Right

The case In Re Camtech Precision Mfg. Inc. v. Regions Bank, 443 B.R. 190 (2011) provides a concise example of how the incorrect use of forms, when perfecting a UCC, can have devastating consequences. The debtors in the jointly administered cases were R & J National Enterprises, Inc. (“R&J”), Avstar Fuel Systems, Inc. (“Avstar”) and Camtech Precision Manufacturing, Inc. (“Camtech”), collectively (“Debtors”).

Through a series of finance agreements, the Debtors owed Regions Bank (“Regions”) $4,153,137.79 at the time of the bankruptcy filing. Regions claimed it was protected by a security interest that had been properly perfected.

Although Florida had an approved addendum for listing additional debtors, the attorney who prepared the UCC filings provided an affidavit that he did not use the approved form. Instead, the attorney listed Camtech and Avstar on a separate attachment.

There was nothing noted in the additional debtor box of the UCC form referencing an attachment for additional debtor information. Because the approved addendum for additional debtors was not used and there was no indication on the UCC-1 form in the additional debtor box to review the attachment for other debtors, the court ruled that the security interests were, in fact, not perfected.

Consequences of Improperly Indicating Debtors on UCC Filings

Failure to indicate other debtors on the approved addendum or to reference them on the unapproved attachment meant the UCC filings were not indexed properly and therefore determined by the court to be “seriously misleading.” It was deemed that Regions failed to have perfected its security interest in the assets of Camtech and Avstar, relegating the bank’s status to that of an unsecured creditor.

Correct use of the approved form would have ensured that searches would have revealed the additional debtor names.

The Takeaway

Although few states still require the use of a “paper” form, this seemingly minor error cost Regions $4,153,137.79. This case illustrates how a subtle deviation from the appropriate procedures in perfecting a security interest can eliminate the protections provided by the security interest in collateral.

This type of mistake can be avoided simply by hiring experts to complete, review and file your UCC Financing Statements. NCS has the industry’s greatest UCC experts – contact us today!

*Originally published April 2014, updated September 2022.

UCC Filings: Does DBA Matter?

Posted on August 22, 2022 by wpengine - UCC Financing Statements

Does “d/b/a” Really Make a Difference in UCC Filings?

One of the most common — and most preventable — mistakes creditors make when creating a security interest via a UCC filing, is inaccurately or incorrectly identifying their customer on the Financing Statement.

Errors in identifying your customer may include the wrong legal name, spelling and spacing errors or omissions. Seemingly trivial deviations in the name of the debtor can prevent a security interest from being perfected.

When these errors occur, the filing may be deemed “seriously misleading.” What constitutes “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.

Correctly Identify Debtor

You may assume it is enough to simply conduct an online search to determine the correct spelling of your customer’s legal name. However, UCC Article 9-503 (a) states that the registered entity’s name will be the name as it is found in the organic public record.

§ 9-503. NAME OF DEBTOR AND SECURED PARTY.
(a) [Sufficiency of debtor’s name.]
A financing statement sufficiently provides the name of the debtor:
(1) except as otherwise provided in paragraph (3), if the debtor is a registered organization, or the collateral is held in a trust that is a registered organization, only if the financing statement provides the name that is stated to be the registered organization’s name on the public organic record of most recently filed with or issued or enacted by the registered organization’s jurisdiction of organization which purports to state, amend, or restate the registered organization’s name

Here’s an Example

Let’s say your customer is commonly known as, “Z & Y, Inc. d/b/a ABC Company.” However, when you review the organic public record you see your customer’s name is “Z & Y, Inc.” The name you should list on the Financing Statement is “Z & Y, Inc.” (no d/b/a), just as it appears on the organic public record.

To that end, the answer to the question “Does d/b/a really make a difference in UCC filings?” is “Yes, it certainly does.”

Real Life: “Insufficient due to the addition of d/b/a”

In Nebraska, the case of EDM Corporation, doing business as EDM Equipment, doing business as NOVI, LLC, Debtor Hastings State Bank, Plaintiff-Appellant v. Thomas D. Stalnaker, Chapter 7 Trustee of EDM Corporation, went before the Court of Appeals in 2010 (pre-2010 Amendments).

The court affirmed the bankruptcy court’s ruling that the creditor’s Financing Statement was “insufficient due to the addition of d/b/a” as part of the debtor’s name. When the creditor identified its debtor on the UCC filing they listed both the debtor’s public record name and the debtor’s d/b/a name. Ultimately, when subsequent UCC searches were done, the creditor’s Financing Statement was not revealed, because the name on corporate record was simply “EDM Corporation.”

“…it is clear from the language of the statute itself that § 9-503 requires that, as to registered organizations, the debtor’s name (as listed in the name field on the form) must be “the name of the debtor indicated on the public record of the debtor’s jurisdiction of organization.”[19] Viewed with § 9-503(b)(1), which provides that “[a] financing statement that provides the name of the debtor in accordance with subsection (a) is not rendered ineffective by the absence of… a trade name or other name of the debtor,” and § 9-503(c), which provides that “[a] financing statement that provides only the debtor’s trade name does not sufficiently provide the name of the debtor,” we interpret the comment to mean that trade or other names may be added as other or additional names on a financing statement, but not in place of, or as part of, the debtor’s organizational name.”

(Today, one could argue it is possible that the creditor would maintain their security interest, if the public organic record identified the debtor as “EDM Corporation d/b/a EDM Equipment”.)

A similar case in Texas also determined the d/b/a was too much: JIM ROSS TIRES, INC.; dba HTC Tire Pro; dba HTC Tires & Automotive Centers, Debtor(s). On the UCC Financing Statement, the creditor listed the debtor by including both the debtor’s legal name and d/b/a – “Jim Ross Tires Inc. DBA HTC Tires and Automotive.”

The creditor argued their security interest was perfected, because their filing could be located using a “non-standard wild card search.” Unfortunately for the creditor, the court did not agree with their argument.

“Accordingly, the Court finds that the Financing Statements are ineffective to grant security interests in Debtor’s collateral. Although this result is harsh, the Court must examine the result in the context of claims between competing creditors.”

Since the hearing of these two cases, standard search logic and wild card searches have been streamlined, minimizing human error. Although there have been improvements, it is vital to your security interest that the Financing Statement lists your customer’s name as it appears in the public organic record.

Importance of Writing Effective UCC Collateral Descriptions

Posted on July 18, 2022 by wpengine - UCC Financing Statements

Avoid Being Too Specific or Too Vague in UCC Descriptions of Collateral

The Case: IN RE PROVIDERX OF GRAPEVINE, LLC – BANKR. COURT, ND TEXAS, 2013.

A UCC Financing Statement must provide the name of the creditor, the name of the debtor and the description of property serving as collateral. The following case involved the description of collateral in a UCC-1 Financing Statement which expressly covered “patent applications.”

The court determined that this language did not cover other intellectual property (“IP”) of the debtor, which is unfortunate because intellectual property often constitutes a company’s most valuable asset.

In ProvideRX, CERx (“Creditor”) and PM (“Debtor”) entered into a number of loan agreements and security agreements related to a principal loan amount of $8.92 million.

One of the security agreements executed between the parties was a Patent Application Security Agreement that included a description of collateral in language nearly identical to that in the Creditor’s UCC filing. However, the UCC filing did not contain the broader phrase “IP assets” that was contained in the loan documents.

What Did the Court Say?

Although the court acknowledged that the description of collateral must be more precise in a security agreement than a UCC Financing Statement, it still found the UCC collateral description inadequate to cover intellectual property other than patents.

The court noted that the description of collateral in a UCC filing only needs to put a prospective creditor on notice so that prospective creditors have reason to inquire further about existing security interests.

“…The primary issue remaining before this Court is whether the language in the loan and security documents entered into by and among the various parties was sufficient to grant CERx a security interest in all of PM’s intellectual property assets owned immediately prior to a December 13, 2012 foreclosure sale (collectively, the “IP Assets”). For the reasons detailed below, this Court concludes that (1) the loan documents are unambiguous and, as a matter of law, PM did grant CERx a security interest in all of its IP Assets; (2) although CERx’s security interest attached to PM’s IP Assets, the collateral description contained in the UCC-1 financing statement filed by CERx with the Texas Secretary of State was insufficient to perfect CERx’s security interest in PM’s IP Assets, other than the Patent Applications (defined on p. 17); (3) pursuant to its Notice of Disposition of Collateral, CERx only foreclosed upon PM’s Patent Applications; (4) thus, as of its bankruptcy petition date, PM held title to all of its IP Assets, other than the foreclosed-upon Patent Applications, subject to CERx’s unperfected security interest; and (5) because CERx failed to perfects its non-Patent Application security interests, such interests were unperfected when PM filed its bankruptcy case and are subject to avoidance pursuant to 11 U.S.C. § 544(a)(1)…”

The Decision

The court found that the language of the financing statement was insufficient and pointed out that the UCC Financing Statement specifically mentioned patent rights but failed to mention other forms of intellectual property like trademarks, source codes, copyrights and other IP related assets.

Because of this failure (to include a broad category like “IP asset” or to list specific types of IP assets), the court concluded that creditors reviewing the financing statement would assume that the debtor had not given a security interest in its IP assets beyond those related to patents.

The language describing collateral must be specific enough to put creditors on notice of the need to inquire further while being general enough not to omit property that is contemplated as collateral but not expressly enumerated. A delicate balance indeed!

Protect Your Purchase Money Security Interest in Goods

Posted on June 27, 2022 by wpengine - UCC Financing Statements

What is a Purchase Money Security Interest (PMSI)?

Section 9-103 of the UCC defines a PMSI as a security interest in goods that are collateral for an obligation that arises in connection with the sale of the goods. When the required steps are met a PMSI can give a creditor a first or priority security interest in the goods even if other secured parties hold prior perfected security interests in the same collateral.

How Does the Creditor Stay Compliant with PMSI Requirements?

Article 9-324 (b) outlines the requirements for a secured party to obtain a PMSI in inventory:

the purchase-money security interest is perfected when the debtor receives possession of the inventory;
the purchase-money secured party sends an authenticated notification to the holder of the conflicting security interest;
the holder of the conflicting security interest receives the notification within five years before the debtor receives possession of the inventory; and
the notification states that the person sending the notification has or expects to acquire a purchase-money security interest in inventory of the debtor and describes the inventory.

An Example of How a Secured Party Can Lose Priority

Secured parties must strictly comply with the Article 9 PMSI requirements. This process is an exception to the “first to file” priority rule. Let’s use the case of T. Gluck & Co., Inc. v. Craig Drake Mfg., Inc., 2013 N.Y. Misc. LEXIS 2384 (N.Y. Sup. Ct. June 4, 2013) to demonstrate how a secured party can lose priority if it does not comply with the requirements.

Craig Drake Mfg., Inc. (the “Debtor”), a jewelry manufacturer, entered into a revolving credit agreement in 1989 with a lender that later sold the loan and security interest to Sovereign Bank (collectively, the “Bank”).

The revolving credit agreement granted the Bank a security interest in the current and future accounts and inventory.

On July 27, 1989, the Bank perfected its security interest in the Debtor’s assets by filing a financing statement. The bank protected its security interest in 1994, 1999, 2004 and 2009 by filing continuation statements.

T. Gluck & Co. (“Gluck”) contracted to supply diamonds to the Debtor on consignment in 1997. Gluck sent a notice to the Bank later in 1997 to protect its interest in the consigned goods and filed a financing statement soon after.

12 years later in 2009, the Debtor retained a firm to manage a going-out-of-business sale. The sale lasted several months with most of the proceeds going to the bank. Gluck was not paid for a portion of the goods consigned to the Debtor.

Gluck then brought a lawsuit against the Bank at the end of 2009, alleging that it held the priority interest in the consigned goods. The bank disputed Gluck’s allegations. The court determined that under the UCC, Gluck’s interest in the consigned goods was a PMSI in inventory. Gluck had to prove it complied with the PMSI requirements to have the priority interest in the goods.

Gluck originally sent The Bank a PMSI notice in 1997. Unfortunately for Gluck, they never sent another notice of its claimed security interest in the consigned goods.

The court concluded that the PMSI notice expired in 2002 and was never re-sent and Gluck was not entitled to PMSI priority. The general rule of “first to file”, “first in line” would be applied. The Bank had first priority because it was the first to file in 1989.

Lesson Learned: Always re-send a PMSI notice.

Steps to Comply with Article 9 PMSI Requirements

It is very important, as we learned in the case above, that a secured party that claims a PMSI in inventory must re-send the authenticated notification every five years. The general priority rules state that failure to resend a notice renders the secured party’s security interest subordinate to prior perfected security interests.

The best practice is for the secured party to resend its PMSI notices prior to the time it continues the financing statement every 5 years to avoid the result found in the case of T. Gluck & Co., Inc. v. Craig Drake Mfg., Inc.

Have you successfully perfected your Purchase Money Security Interest? NCS is here to help!

Bankruptcy Proof of Claim Is Late

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

“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 wpengine - 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!

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.

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.

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.

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 wpengine - 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 wpengine - 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

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