Search Results for: seriously misleading

Secretary of State Errors and Your Security Interest

Posted on June 18, 2018 by - UCC Financing Statements

Do You File UCCs? What Happens to a Security Interest When the Secretary of State Makes an Error?

Compliance with Article 9 of the Uniform Commercial Code is critical to perfect your security interest. But, what happens if you comply with Article 9 and take the proper steps to perfect your security interest, only to have the Secretary of State incorrectly index your filing? Errors and mistakes happen.

“The Secretary of State does make mistakes occasionally…and either the searcher or the filer must suffer the consequences in priority based upon those mistakes.”

Read today’s post to learn more about indexing errors and how Article 9 protects creditors when the recording office makes a mistake.

The Bankruptcy Case of The Feed Store, LLC

The Feed Store, LLC (Debtor) obtained a loan from Peoples Bank, N.A. (Bank) and in consideration of the loan, the parties executed a promissory note and security agreement. Within the security agreement, Debtor granted Bank a security interest in “all inventory, chattel paper, accounts, equipment and general intangibles, together with all proceeds, accessions, additions, replacements and substitutions related thereto.”

April 23, 2012, Bank filed a UCC-1 with the West Virginia Secretary of State (WV SOS) to perfect its security interest. Unfortunately, WV SOS incorrectly indexed Bank’s UCC filing, by assigning the same instrument number to two different documents, one of which was Bank’s UCC filing.

The indexing error went unnoticed until March 14, 2017, when WV SOS entered a statement that it issued one instrument number to two different filings and would issue a new instrument number for Bank’s filing. Then, April 12, 2017, Bank filed a continuation, within the 5 year period.

Meanwhile, in December 2016, Debtor filed for bankruptcy protection under Chapter 7.

In March 2017, the bankruptcy trustee filed a complaint, alleging Bank’s security interest was seriously misleading, because the filing did not appear in a search via WV SOS database. Further, the trustee argued the constitutionality of “West Virginia Code § 46-9-517, which ‘imposes the risk of filing-office error on those who search the files rather than on those who file.’”

Someone Has to “Suffer the Consequences”

According to the court opinion, “The Trustee alleges that the effect of West Virginia Code § 46-9-517 deprives him, as a judicial lien creditor, of priority over Peoples Bank’s lien without constitutionally-sufficient notice…” I won’t dwell on the constitutionality of the law, but as the legal opinion states someone must “suffer the consequences.” In other words, someone wins & someone loses.

In this case, the filing did not appear in the search, because WV SOS incorrectly indexed the filing, not because Bank failed to properly complete its filing. It would, of course, have been different if Bank incorrectly identified Debtor on its Financing Statement.

Mistakes & errors exist, and fortunately Article § 9-517 accounts for indexing errors: “The failure of the filing office to index a record correctly does not affect the effectiveness of the filed record.”

Although the trustee doesn’t believe it should suffer for the indexing errors of WV SOS, the court was not persuaded by trustee’s argument that it be the filer’s responsibility to catch these errors.

The court stated that based on trustee’s logic, filers would have to routinely run searches on their various filings, and “Even if the filer maintained their statement with diligence, a searcher may obtain a windfall if it were to look for prior liens at a time when the filer’s financing statement was mis-indexed and before the filer caught the mistake and corrected it.”

Article 9 is designed to protect creditors who take proper steps to perfect a security interest.

Bank is the Winner & Reflective Searches Are a Best Practice

Ultimately, Bank complied with the requirements of Article 9 and its security interest remained properly perfected, much to Trustee’s dismay.

As a best practice, creditors should always conduct a reflective search after filing a UCC. It’s easy for mistakes to occur, and if caught early, the mistakes can be corrected, potentially alleviating disputes such as today’s case.

What is a reflective UCC search? “A reflective UCC search confirms that a UCC filing was recorded. The reflective search returns a jurisdictional report by debtor name reflecting all UCC filings through the date of your recorded UCC filing. This search also lists previous secured creditors by filing date to help determine your filing position.” – Conduct a Reflective Search After Every UCC Filing

Filing a UCC to Perfect Your Security Interest

Posted on March 5, 2018 by - UCC Financing Statements

Filing a UCC to Perfect Your Security Interest? No Security Exists if the Debtor’s Name is Wrong

Yes, that’s right. It’s yet another case of an unperfected security interest because the creditor failed to comply with Article § 9-503.

In a fight for priority, a creditor claimed “…[T]hey have ‘valid, enforceable, properly-perfected, unavoidable prepetition liens…’” which is senior to the bank’s UCC for debtor-in-possession (DIP) financing.

Unfortunately, the creditor did not have a ‘valid, enforceable, properly-perfected, unavoidable prepetition lien’ because the creditor did not list the debtor’s name on the Financing Statement as the name appears on the public organic record.

The Case: Fishback Nursery, Inc. v. PNC Bank, NA, Dist. Court, ND Texas 2017

The debtor, BFN Operations LLC (BFN) also known as Zelenka Farms, filed for bankruptcy protection. PNC Bank NA (PNC) had a security interest in substantially all BFN’s assets and perfected its security interest by filing a UCC. Fishback Nursery Inc. and Surface Nursery Inc. (collectively “Nurseries”) furnished various agricultural products to BFN, and Nurseries also filed UCCs.

Nurseries filed three UCCs, one in each state where they sold products to BFN: Oregon, Michigan & Tennessee. On all three UCCs, Nurseries identified BFN as “BFN Operations, LLC abn Zelenka Farms.” Unfortunately for Nurseries, the addition of “abn Zelenka Farms” rendered their security interests unperfected. BFN’s name, in the public organic record, is “BFN Operations, LLC” and does not include “abn Zelenka Farms.

Not Saved by the Savings Clause

According to the court opinion, Michigan & Tennessee both offer a “savings clause.” The Michigan “savings clause” can be found under MCL 440.9506(3):

“If 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 section 9503(1), the name provided does not make the financing statement seriously misleading.“

Here’s an example of a search in Michigan. PNC would have processed a UCC search by the entity’s correct name, “BFN Operations, LLC” – that search would provide the following results:

A search for the name Nurseries used on their UCC’s, “BFN Operations, LLC abn Zelenka Farms” provides these results:

If you look closely, you will see the File Numbers in both images are different; 6 different UCCs. The search run by PNC, on the debtor’s correct name, does not reveal the filings by Nurseries; Nurseries’ UCCs would only appear in a search of “BFN Operations, LLC abn Zelenka Farms.”

Some may argue that Nurseries’ UCCs should have appeared, because the debtor’s name begins with “BFN Operations, LLC” but as you can see, a UCC search does not operate as a keyword search. If it were a keyword search, it would pick up any/all variations of the entity’s name.

Seriously Misleading, Security Interest Unperfected

Because the UCCs did not comply with Article 9, Nurseries’ security interest was unperfected. Obviously, with an unperfected security interest comes the “parting prize” of unsecured creditor status. PNC properly perfected its security interest; thus, PNC is a secured creditor and its UCC takes priority.

Best Practice: PUBLIC. ORGANIC. RECORD.

Always, always, ALWAYS correctly identify your debtor, in compliance with Article 9, on the UCC Financing Statement. We see issues like this time & time again – avoidable errors that eliminate a creditor’s security. Article 9 sets out specific parameters, and to perfect a security interest, you must comply with each requirement.

Compliance with UCC Article 9-503 and Alternative “A”

Posted on February 19, 2018 by - UCC Financing Statements

Filing a UCC on an Individual? Make Sure You Comply with UCC Article 9-503

To Determine Whether One Creditor Correctly Identified the Individual on the UCC Filing, a Bankruptcy Court Had to Venture into Uncharted UCC Article 9 Territory

Filing a UCC on an individual? It is critical that you comply with Article § 9-503(a): The Financing Statement must list the debtor’s name as it appears on the debtor’s unexpired driver’s license.

Let me repeat: The Financing Statement must list the debtor’s name as it appears on the debtor’s unexpired driver’s license.

But what happens if the printed name on the driver’s license is different than the individual’s signature on the driver’s license? Technically, both names (the printed & signed) appear on the license – which is correct?

Until now, no one has questioned whether the name shown in the signature or the printed name on the driver’s license should appear on the Financing Statement.  This is uncharted territory under UCC Article 9.

Of course, we’ve encountered cases where the name on the Financing Statement and driver’s license don’t match, but these differences are typically due to spelling errors. Errors such as a misspelled last name: the name on the driver’s license is ”Susan Walker” vs. the name on the Financing Statement is ”Susan Wakler”. We’ve even encountered a case where the name on the driver’s license was misspelled, and the courts determined the misspelling should have been reflected on the Financing Statement.

But an argument that compliance with Article § 9-503 is achieved when using the driver’s license signature vs. the printed name? Definitely a new layer of complexity.

In a recent bankruptcy case, one Georgia court determined the printed name on the unexpired driver’s license is the name that should appear on the UCC Financing Statement, leaving one creditor’s security interest unperfected.

The Case | Bank Lends Money, Debtor Files for Bankruptcy Protection

In 2015, Kenneth R. Pierce (Pierce) obtained an $18,000 loan from Farm Bureau Bank (Bank) and the proceeds of the loan were used to purchase farming equipment, a fertilizer spreader. Bank and Pierce executed a security agreement and Bank filed a UCC to perfect its security interest.

In 2017, Pierce filed for Chapter 12 bankruptcy protection. Subsequently, Bank timely filed a proof of claim for the balance owed of $14,459.81 and attached a copy of their UCC-1 to the proof of claim.

On the UCC filing, Bank identified Pierce as “Kenneth Pierce;” however, Pierce’s name on his unexpired driver’s license was “Kenneth Ray Pierce.” Pierce filed an objection with the Bankruptcy Court, claiming Bank’s security interest was unperfected, because Bank incorrectly identified Pierce on the UCC filing.

Quick Refresher on “Alternative A”

Before we get into the Court’s review of the case, let’s do a quick review of Alternative A under the 2010 UCC Amendments.

In compliance with § 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.

The Bankruptcy Court’s Review | Technically Two Names Appear on the Individual’s Driver’s License

Technically two names appear on Pierce’s driver’s license, at least that is Bank’s primary argument. See, the printed name on his driver’s license is “Kenneth Ray Pierce” though Pierce’s signature reads “Kenneth Pierce.” Bank argued that Article § 9-503(a) doesn’t specify whether the identifying name must be the name that is typed on the driver’s license.

“But as Farm Bureau Bank points out, there are two names “indicated on the driver’s license”: “Kenneth Ray Pierce” (typed) and “Kenneth Pierce” (signed). Farm Bureau Bank argues that O.C.G.A. § 11-9-503(a)(4) is not limited to the name typed on the driver’s license, but rather that it includes the name signed by the Debtor, and thus its Financing Statement does provide the (signed) name of the Debtor.”

Georgia is an Alternative A state, and in the plain text of the law, Bank isn’t necessarily wrong; it does not specify whether the printed name or signed name is the name to be listed on the Financing Statement:

9-503. NAME OF DEBTOR AND SECURED PARTY.

(a) [Sufficiency of debtor’s name.]

[Alternative A]

(4) subject to subsection (g), 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];

(5) if the debtor is an individual to whom paragraph (4) does not apply, only if the financing statement provides the individual name of the debtor or the surname and first personal name of the debtor;

Thus, it becomes the Court’s duty to determine whether the error on the Financing Statement is seriously misleading, or if Bank’s security interest is perfected because it substantially complied with the law.

The Bankruptcy Court’s Review | Webster’s Dictionary, Case Law & Basic Compliance with the Law

Courts weigh a variety of factors when deciding a case, often relying on previous legal decisions for guidance, the “plain language of the law” and even Webster’s dictionary.

The Court thought perhaps the answer would lie within the definition of “indicate” as it appears in “indicated on the driver’s license.”

“Turning to Webster’s Third New International Dictionary 1150 (1981) the following are among the definitions provided for the word “indicate”: “to point out or point to or toward with more or less exactness,” to “show or make known with a fair degree of certainty,” and to “reveal in a fairly clear way.” These definitions do not help the Court determine which of two names is “indicated” on the Debtor’s driver’s license. Indeed, the presence of two different names on the driver’s license is precisely the opposite of exactness, certainty, and clarity.”

I now understand the saying “clear as mud.”

The Court also reviewed various Georgia cases. Unfortunately, most of the cases did not address the exact issue in this case. The Court then turned to other jurisdictions’ case law, and one Nebraska bankruptcy case shed some light, though the case was decided prior to the 2010 Amendments and does not wholly apply to the case at hand.

“In Genoa Nat’l Bank v. Southwest Implement, Inc. (In re Borden), the debtor was identified by his legal name “Michael Ray Borden” or by “Michael R. Borden” on his driver’s license and on other legal documents. 353 B.R. 886, 887-88 (Bankr. D. Neb. 2006). However, the debtor often signed legal documents by his nickname, “Mike Borden.” Id. The court held that financing statements identifying the debtor as “Mike Borden” were seriously misleading. Id. at 892. In re Borden suggests that the name typed on legal documents trumps the name signed by the debtor.”

OK, What about Standard Search Logic?

The second argument Bank lodged was that the UCC would appear in a search based on Georgia’s standard search logic. But, under that argument, the search would have been done using Pierce’s name on his driver’s license – “Kenneth Ray Pierce.” And, a search for “Kenneth Ray Pierce” would not have uncovered the filing for “Kenneth Pierce.”

As a side note, a search of Georgia’s UCC Index can be done with a partial name. Yes, Bank should have searched by the individual’s name as it appears on the driver’s license, however, a partial search of “Pierce, KE” revealed the UCC:

Seriously Misleading, Unsecured Status

On its Financing Statement, Bank failed to identify its debtor in compliance with § 9-503. Failing to correctly identify its debtor meant the UCC filing would not be uncovered in a search. The Court declared Bank’s UCC as seriously misleading, bumping Bank to unsecured creditor status.

Always Obtain a Copy of the Driver’s License

At NCS, our UCC experts continually stress the importance of the driver’s license, yet nearly 30% of creditors fail to comply with Article 9 requirements. I know, you are tasked with a lot and it’s easy to overlook or neglect the driver’s license. But the name on the driver’s license, the printed name, is vital for a perfected security interest.

This case is another example of a creditor losing its secured status because of an avoidable error. Don’t jeopardize your perfected security interest; obtain a copy of the unexpired driver’s license as a part of your credit application process. Every. Time.

When Space & Noise Impact UCC Filings

Posted on October 9, 2017 by - UCC Financing Statements

Double Bubble, Toil & Trouble: When Space & Noise Impact UCC Filings

As we prepare and review UCC filings, clients frequently ask us, “Does an extra space in my customer’s registered name really matter?” and “Does it matter whether I identify my customer as LLC if their registered name appears as L.L.C.?”

Two seemingly small issues, right? Wrong.

Article 9-102(71) clearly defines a registered organization and Article 9-503(1) clearly states the debtor’s name must be identified as it appears on the public organic record.

A financing statement sufficiently provides the name of the debtor:

(1)… 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;

Recently, one creditor suffered the consequences of an inadvertently added space, after a noise word, in their debtor’s name, and the creditor’s security interest was unperfected.

Compliance with Article 9 & Seriously Misleading

As mentioned above, strict compliance with Article 9 of the Uniform Commercial Code is imperative. Failing to identify the debtor by its name as it appears on the public organic record could result in the filing being seriously misleading.

If it’s determined the Financing Statement is seriously misleading, the security interest can be deemed unperfected and priority can be lost.

What Makes the Name Seriously Misleading?

If a search for the Financing Statement, using the Standard Search Logic in the UCC filing office, fails to reveal the Financing Statement, the filing is considered seriously misleading, and thus, unperfected.

Standard Search Logic is the holy grail of determining whether a filing is seriously misleading. Search logic is created, determined & managed through an algorithm and varies by state filing office.

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

One standard search logic rule is 503.1.2: “No distinction is made between upper and lower case letters.” This means 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 the individual filing office.

503.1.3 (c) The following words and abbreviations at the end of an organization name that indicate the existence or nature of the organization are “disregarded” to the extent practicable as determined by the filing office’s programming of its UCC information management system:

[Insert the filing office’s own “Ending Noise Words” list here.]

This difference by jurisdiction could mean a filing is simultaneously properly perfected in Virginia and deemed seriously misleading in Wisconsin, based on the jurisdiction’s search logic.

Double Bubble, Toil & Trouble

In United States Securities and Exchange Commission V. ISC, Inc., Dist. Court, WD Wisconsin 2017, creditor Double Bubble, Ltd.’s security interest was unperfected because of a small error in the debtor’s name on the Financing Statement.

Double Bubble, Ltd. (Double Bubble) filed a UCC to secure credit extended to ISC, Inc. (ISC). On the Financing Statement, Bubble identified ISC as “ISC, Inc .” At first glance, it appears correct, but close review reveals there is an extra space between the “c” and the “.” in “Inc.”

According to the court opinion, the receiver assigned to ISC, Inc. identified Double Bubble as an unsecured creditor because Double Bubble’s UCC did not appear in the receiver’s UCC search. The receiver searched for filings by “ISC, Inc.” which is ISC’s name as it appears on the public organic record.

An extra space after a typical noise word is a minor variance of the debtor’s name. Double Bubble argued that if the receiver had practiced reasonable diligence and altered its search, even to just “ISC,” Double Bubble’s UCC filing would have come up in the search.

The court agreed with Double Bubble’s argument in theory, but in practice the court held the filing was seriously misleading, therefore the filing was unperfected and Double Bubble’s creditor status was unsecured.

Text from the court’s opinion:

“The court has some sympathy for Double Bubble because the additional space would be easy to overlook, even if one were careful in filing the financing statement. And Double Bubble is correct that the receiver could have found its financing statement if he had used a different search, say a search simply for “ISC” with no punctuation or corporate designation. Double Bubble contends that such a search would have been “reasonably diligent.” But reasonable diligence is not the current standard.

“Seriously misleading” is a term of art with a statutorily defined meaning: a search “under the debtor’s correct name” must find the financing statement, otherwise it is seriously misleading. The fact that the DFI provides search “tips” and “hints” that might produce a broader set of results does not change the statutory standard. Double Bubble’s objection is overruled. Double Bubble will participate in phase II as an unsecured creditor.”

A Space at the End of a Noise Word, Really?

It may seem extreme. But, when it comes to perfection under Article 9, major or minor errors are still errors. And, unfortunately for Double Bubble, errors result in unperfected security interests.

Earlier I mentioned that standard search logic varies by state filing office. Double Bubble filed its UCC via Wisconsin Department of Financial Institutions (WDFI). And, the search logic WDFI uses does not account for errors such as an additional space.

Not the First, Certainly Not the Last

This isn’t the first time a creditor’s security interest has been invalidated because of “space.” In Receivables Purchasing Co., Inc. v. R & R Directional Drilling, L.L.C., the Georgia Court of Appeals determined the creditor did not have a security interest because the debtor’s name had an extra space listed.

The creditor added a space in the debtor’s name, listing it as “Net work Solutions, Inc.” The creditor requested the Georgia Superior Court Clerks Cooperative Authority (GSCCCA) perform a search:

“The GSCCCA did a certified search under the correct name Network Solutions, Inc. The Search did not reveal (debtor’s) financing statement, which…was filed incorrectly under Net work Solutions, Inc.”

I agree with the Receivables Purchasing Co. decision; after all, the space is right in the middle of the debtor’s name. And, while I don’t necessarily disagree with the Double Bubble decision, it has certainly raised questions and has forced me to reevaluate my understanding of the absolutes in Article 9.

Today’s Takeaway & NCS Best Practice

I expect the Double Bubble case will be referenced in future legal arguments on whether a Financing Statement is sufficient or deemed seriously misleading.

Obviously, compliance with Article 9 is critical. However, prior to this case, debtor names containing accidental additional spaces and/or noise words, did not necessarily leave a creditor’s security interest unperfected. But the decision in Double Bubble has reaffirmed the need for strict compliance with Article 9.

You must identify the debtor as it appears in the public organic record in compliance with Article 9-503. And as a best practice, if there are variations of a debtor’s name, include all name variations on the Financing Statement. Adding variations will increase the likelihood of the Financing Statement appearing in a search.

As always, carefully review the filing prior to recording and check for indexing errors once a filing has been recorded. You have opportunities to prevent, catch & correct mistakes!