January’s “unauthorized filings” five-part series proved to be among our readers’ choice for most popular blog content. A recent court case further advances this hot topic. Our Managing Attorney Tim Hall outlines the key issues below.
Contributed by Tim Hall, Managing Attorney, CT Corporation
Official Committee of Unsecured Creditors, v. City National Bank, USDC – Northern District of California (May 13, 2011)
Facts: City National Bank (CNB) held a security interest in nearly all of Debtor’s personal property as security for a revolving line of credit. CNB filed a financing statement with the California Secretary of State (SoS) to perfect this interest. In January 2009, Debtor sold two entities, Westgate Housing Associates, LP (Westgate) and Greenery Housing Associates, LP (Greenery). At the time of the sale, CNB held a security interest in Westgate and Greenery, and in exchange for a share of the sale proceeds, agreed to amend the UCC-1 financing statement to release its interest in them.
On January 8, 2009, CNB submitted two UCC-3 Amendments to the escrow agent, First American Title (First American). The two UCC-3 Amendments contained a check mark in Box 8 indicating an “Amendment (Collateral Change)” in addition to a detailed description of the collateral CNB was releasing (the interests in Westgate and Greenery). Box 2 of each UCC-3 Amendment (indicating a termination), was not checked. CNB forwarded the two filings to First American with the following instructions “City National Bank hereby releases all of its right, title and interest in [Westgate and Greenery] and authorizes the filing of appropriate amendments to the UCC Financing Statements…”.
On January 28, 2009, First American filed the UCC-3 Amendments with the California SoS—with check marks in Box 2 (termination), in addition to the checkmarks in Box 8 (Amendment [Collateral Change]). CNB discovered the error, and on February 6, 2009, filed two additional UCC-3 Amendments stating CNB had not authorized the termination of its security interests other than its interests in Westgate and Greenery.
On March 5, 2009, Debtor declared bankruptcy. In April 2009, the bankruptcy court authorized Debtor to sell certain assets and remit 87.5% of the proceeds to CNB. On May 5, 2009, the Committee of Unsecured Creditors (Committee) objected to the sale, asserting that CNB’s entire interest in Debtor’s property had been terminated in January 2009, based upon the UCC-3 Amendment filings remitted by First American Title.
Issue One: Committee argued that CNB gave First American broad authorization to file “any appropriate amendments” to CNB’s UCC-1 financing statement, and consequently First American was acting as CNB’s agent in all matters relating to CNB’s security interests in Debtor’s property.
Court: It is well established that a principal is bound by the acts of an agent acting within the scope of the agent’s authority. The California Commercial Code defines the scope of an agent’s authority with respect to filing a financing statement. Under 9-509, a “person may file an amendment other than an amendment that adds collateral covered by financing statement or an amendment that adds a debtor to a financing statement only if…the secured party authorizes the filing.” Further, 9-510(b) provides “a filed record is effective only to the extent that it was filed by a person that may file it under section 9-509”.
The instructions from CNB to First American are reasonably construed to mean that the only “appropriate amendments” authorized by CBN were amendments that relinquished CNB’s interests in the two properties identified. The filing of a UCC-3 that would completely terminate CNB’s interest in the remainder of Debtor’s property was not within the scope of the limited authority CNB granted to First American. Thus, CNB is not bound by First American’s filing of the UCC-3 Amendments with Box 2 checked.
Issue Two: The Committee further contends that, even if First American was not expressly authorized to file a UCC-3 Amendment terminating CNB’s interest in the entirety of Debtor’s property, CNB should be bound by First American’s mistakes or modifications.
Court: The filing of a UCC-3 Amendment altered to terminate CNB’s entire security interest is not a mere violation of the principal’s instructions regarding the manner in which that authority should by exercised, but rather, it is a complete departure from the agent’s authority. First American’s authorization as an escrow agent was limited to the filing of amendments relinquishing CNB’s interests in Westgate and Greenery only.
Issue Three: The Committee contends that the UCC-3 Amendments should be considered “seriously misleading”. According to the Committee, the UCC-3 Amendments as filed by First American would lead a potential creditor to believe there was no prior encumbrance on the collateral.
Court: The test for whether an error is “seriously misleading” is “whether it would indicate to an interested third party the possible existence of prior encumbrances on the collateral” (citing to the 1974 case In Re Munger). Here, each of the two UCC-3 Amendments contained, on its face, inconsistent statements. The placing of the check marks in Box 8 and Box 2, as well as detailed information in the former, constituted discrepancies of sufficient significance to alert potential creditors of a prior encumbrance on Debtor’s interests. In sum, the UCC-3 Amendments were confusing, but they were not seriously misleading.
Conclusion: The UCC-3 Amendments filed by First American are effective as partial releases, but did not terminate the entire UCC-1 financing statement and the remaining interests of CNB.
Tim Hall has been with CT Corporation for more than 13 years. He spent his first three years as a Team Leader for a UCC Service team, and has been with the Government Relations Team for the past ten years. He is a graduate of The Ohio State University and the Northern Illinois University College of Law, and is a frequent speaker on Article 9 of the UCC.
