CT Lien Solutions Blog

Recent Texas case highlights importance of use of correct debtor name

CNH CAPITAL AMERICA LLC v. PROGRESO MATERIALS LTD, et al
(USDC – Southern District of Texas). October 25, 2012

Facts: This dispute arises out of the financing and two sales of some equipment--an Ahern Asphalt Plant and a Kawasaki Wheel Loader. CNH Capital America LLC (CNH) financed the purchase of both pieces of equipment by Progreso Materials, Ltd (Progreso). CNH contends that Progreso granted a security interest to CNH which CNH properly perfected.

Ultimately, the equipment was sold to Upper Valley Materials, LLC by Progreso. Upper Valley denies that CNH properly perfected a security interest in the equipment.

CNH seeks a declaration that Upper Valley's interest in the equipment is subordinate to CNH's security interest and CNH seeks to foreclose on the equipment.

As evidence of perfection, CNH presented a copy of the UCC-1 Financing Statement filed with the Texas Secretary of State showing Progreso as the debtor. On the financing statement, however, the letter “s” was omitted from the word “Materials” in the debtor name as listed.

At Issue: The Court first analyzed whether CNH had established that there was a security interest in the loader. Second, if there was a security interest in the loader, the Court would then determine whether CNH had established that it perfected that security interest. Finally, if the Court determined that there was an unperfected security interest in the loader, the Court would evaluate if CNH may, nevertheless, enforce its unperfected security interest against Upper Valley.

Decision: The Court decided that the UCC-1 Financing Statement did NOT perfect CNH’s interest in the equipment as the filing was deemed to be seriously misleading.

Correct Name of Debtor: Progreso Materials, Ltd.
Debtor Name on UCC-1: Progreso Material, Ltd.

A search of the Texas Secretary of State UCC database using the State’s search logic does not reveal CNH’s financing statement when the correct name is used. The Court reviewed the applicable portion of the Texas Administrative Code which establishes the standard search logic and was further persuaded that the omission of the "s" from “Materials” would have prevented a searcher using the standard search logic from discovering the financing statement if the searcher used Progreso's correct name.

The Court also went on to conclude that although CNH might prevail in enforcing its unperfected lien if Upper Valley (the Buyer) had actual knowledge of the lien, CNH did not demonstrate that it perfected a security interest in the loader or that Upper Valley had actual knowledge of the security interest. As such, CNH may not foreclose on the loader at this time.

In Re Ben Miller decision reversed!

August 17, 2012, has proven to be a historic day for secured lenders in Illinois!

First, on August 17, Illinois became the 29th state to adopt the 2010 amendments to UCC Revised Article 9!

On the same day, the US District Court for the Central District of Illinois reversed the oft-criticized decision in In Re Ben Miller, previously discussed on this blog. The US District Court’s decision is Case No. 12-CV-02052. The court held that neither Illinois law nor the UCC requires that the “legal name” be used on a financing statement. Because the Bankruptcy Court created an additional requirement of law where none exists, by mandating that lenders use the debtor’s “legal name” on the financing statement, and held that the name on the debtor’s birth certificate takes priority over his name on his other commonly-accepted documents in defining the debtor’s “legal name”, the court must reverse the USBC’s decision. The court also provides commentary regarding the use of the individual’s name as indicated on the Driver’s License, providing further support for the amendments to Article 9 that will become effective in Illinois on July 1, 2013.

‘Debtor name’ again – Surprising new court decision illustrates value of 2013 Article 9 amendments

If you’ve been following our blog over the past year, you’ve read a lot about the new amendments to the Article 9 that states are currently adopting. A recent court decision involving what constitutes a legal individual debtor name seems to illustrate why so many states are opting to provide more clarity by revising the language of Section 9-503 of the Uniform Commercial Code (UCC).

Contributed by Tim Hall, Director of Government Relations, CT Corporation

In Re Ben Miller and Debbie Ann Miller, Bankruptcy Case No. 10-92570, USBC – Central Dist. of Illinois (decided January 6, 2012)

Facts: State Bank of Arthur (SP) began a banking relationship with Bennie A. Miller and Debbie A. Miller (debtors) in 1995. When they opened personal bank accounts, the signature card was filled out and signed by the Millers as “Bennie A. Miller” and “Debbie A. Miller”. The relationship continued for many years, and various promissory notes and security agreements were signed by Mr. Miller using the name “Bennie A. Miller”. In January 1999, SP filed a blanket UCC financing statement identifying the debtors as “Bennie A. Miller” and “Debbie A. Miller”. In addition, the financing statement listed the Miller’s business trade name “d/b/a Power Plus”. The financing statement was timely continued in 2003 and 2008. In December 2010, the debtors filed for bankruptcy.

On June 17, 2011, the debtors filed an adversary proceeding to avoid the lien of the bank to the extent the financing statements incorrectly identified the legal name of Mr. Miller as “Bennie A. Miller”. There is no dispute the financing statement correctly identifies Mrs. Miller as “Debbie A. Miller”.

During trial, the following testimony and evidence was presented:

1. Mr. Miller testified that he has gone by the name of “Bennie Miller” for much of his life, and that is how he is generally known in the community.
2. Mr. Miller’s unexpired driver’s license and his Social Security card both list his name as “Bennie A. Miller”
3. Mr. Miller’s name is listed as “Bennie A. Miller” on the deed to the Miller’s residence, his Federal Income Tax returns, his credit card accounts and the bill of sale from the purchase of their business.

However, Mr. Miller’s Indiana birth certificate lists his name as “Ben Miller”. The parties agree that a UCC lien search conducted against the debtor name “Ben Miller”, using the Illinois Secretary of State’s standard search logic, does not disclose the bank’s financing statement listing the debtor name “Bennie A. Miller”.

Issue: It is the plaintiff’s position that, as a result of failing to use the debtor’s legal name of “Ben Miller”, the UCC-1 financing statement and continuations filed by the SP are insufficient to perfect the SP’s security interest in non-titled collateral owned by the debtors. There is no dispute that a UCC lien search for the debtor name “Debbie Miller” does disclose the SP’s financing statement, and the SP is therefore secured as to at least half of the assets in question.

Decision: Under the undisputed facts of this case, the Court finds that Mr. Miller’s legal name as indicated on his birth certificate is in fact “Ben Miller”. The evidence does not support the SP’s position that Mr. Miller has legally changed his name to “Bennie Miller”.

While the court recognizes that various states have amended the Uniform Commercial Code to address the situation presented here, those amendments have not been adopted in Illinois. Under the current status of the Illinois Uniform Commercial Code, this court must find that the SP’s use of the name “Bennie A. Miller” on its financing statement was “seriously misleading”.

How 2013 amendments to the UCC Article 9 would protect lenders in future similar scenarios

As you may be aware from previous blog posts, some states have recently adopted, and other states are now or will soon be considering, an amendment to Section 9-503 of the UCC that would provide more specific guidelines for secured parties. States have the option of choosing between “Alternative A” or “Alternative B” (or may choose to make no changes to this section of the state’s code).

“Alternative A,” or the “Only If” option, is stricter for filers, but more clear cut: if the debtor has a valid driver’s license in the state of filing, the secured party must file on the name contained on that license. This also makes the job of searches in these states much easier. If Illinois had this law in place at the time of the above decision, the SP’s filing would have been deemed to be under the correct and legal name. Use of the name “Bennie A. Miller” would not have been seriously misleading because the filing would have been uncovered by an appropriate search according to the jurisdictional law and search conventions.

“Alternative B” or the “Safe Harbor” approach is more lenient for the secured party, in that it may file on the name contained on the driver’s license, but it also allows for other individual names to be used, such as the surname and first personal name. Because a variety of names will be sufficient under this law, a searcher must conduct a more expansive search to ensure that all name variations are covered, but the filer is protected for a greater array of names. If Illinois had this law in place at the time of the above decision, it still would have been protected for using the name “Bennie A. Miller” as this would have been one of the names protected by law.

New court decision supports secured party in unauthorized terminations

If you read our post back in October about the Roswell court decision and its implications on unauthorized filings, you’ll also be interested in a new decision that lies in conflict with Roswell—and thus is more in keeping with the intent of the UCC Article 9.

The AEG Liquidation Trust on behalf of American Equities Group, Inc. v. Toobro NY LCC, et al
Supreme Court of New York (New York County), June 24, 2011

Facts:  On November 6, 1996, AEG (plaintiff) and Ahava Dairy entered into a factoring agreement, whereby Ahava Dairy agreed to sell and AEG agreed to buy Ahava Dairy’s accounts receivables. For AEG’s protection, the owner of Ahava Dairy (Moshe Banayan) and Lewis County Dairy Corp personally guaranteed Ahava Dairy’s obligations under the factoring agreement. AEG perfected the security interests by filing UCC-1 financing statements on November 13, 1996. The financing statements have never lapsed.

As of December 31, 2000, AEG was owed over $8 million for charges to Ahava Dairy’s account under the factoring agreement. AEG demanded payment, but no payments were made. On April 17, 2001, AEG commenced an adversary proceeding against Ahava Dairy, Lewis and Banayan in the SDNY Bankruptcy Court (the case was subsequently transferred to the USDC for the Southern District of New York).

On February 7, 2002, an “unknown party” without authorization and without the knowledge of AEG, filed UCC-3 termination statements purporting to terminate AEG’s security interests in substantially all of the assets of Ahava Dairy and Lewis. The termination statements indicated that Ahava Dairy and Lewis were the filers. In addition, plaintiff alleges that between 2000 and 2007, Banayan began creating various corporate entities and sham transfers of property and assets in order to escape the financial obligations of Ahava Dairy and Lewis.

In 2005, Signature Bank became a creditor of the SDNY Defendants, and filed UCC-1 financing statements to document liens supporting Signature Bank’s claims. On July 28, 2006, AEG discovered the unauthorized filing of the termination statements and filed Correction Statements stating the termination statements were unauthorized.

On March 11, 2008, the NY Supreme Court granted Signature Bank’s motion for summary judgment against Ahava, Lewis, Banayan and other defendants in the amount of $9,338,103. On June 18, 2008, Signature Bank sent a “Notice of Secured Party Sale” to various secured parties. On June 25, 2008, AEG’s counsel sent a letter to Signature Bank’s counsel indicating advising that AEG was a creditor of Ahava Dairy pursuant to the 1996 UCC-1 filings, and that AEG had priority over Signature’s claims. On July 9, 2008, Signature Bank conducted a secured party sale of the assets of the Ahava Judgment Debtors (with proceeds being placed into escrow per Bankruptcy Court order). The successful bidder was an entity wholly-owned by Signature Bank, who later sold the assets to Toobro NY. Toobro failed to pay AEG according to the terms of the Purchase Agreement, resulting in the court issuing a final judgment for AEG in the amount of $3.5 million.

AEG seeks to recover from all defendants, premised upon several different theories of liability. For the purposes of this blog post, we will limit our discussion to AEG’s contention that it maintains an uninterrupted first priority security interest in defendant’s assets despite a series of transfers and the filing of UCC-3 termination statements.

Discussion: Defendants argue that AEG’s security interests in the assets of Ahava and Lewis were discharged as a result of the July 9, 2008, secured party sale. However, Section 9-617 of the Uniform Commercial Code provides that only subordinate security interests are discharged. Defendants failed to show that AEG’s security interests are subordinate to those of Signature Bank.

The filing of the UCC-3 termination statements on February 7, 2002, does not change the result. AEG as the secured party did not authorize the filing of the termination statements (per section 9-509(d)(1)). Thus, the termination statements were ineffective, and the financing statements to which they related did not cease to be effective under 9-513.

In a footnote, the court thereafter specifically declines to follow the SD New York Court in Roswell Capital Partners, LLC v. Alternative Construction Technologies. The full footnote is copied below:

1 Defendants do not articulate an alternative analysis on the effect of the termination statements filed in this case. The court's research identified only one New York case applying a contrary analysis to the one adopted here. In Roswell Capital Partners LLC v Alternative Construction Technologies, the SDNY Court, applying the Florida version of the UCC, reasoned as follows: "even if the termination statement was not authorized by [the secured party] it nevertheless extinguished any perfected security interest [that party] had in the Collateral. Following this termination, Plaintiffs perfected their security interest in the Collateral by filing UCC-1 financing statements with the Florida Secretary of State . . . . This gave Plaintiffs a perfected security interest in the Collateral senior to whatever security interest [the prior secured creditor] may have still had at that point." See 2010 U.S. Dist. LEXIS 90695, (SDNY 2010).

The cases cited by the SDNY court in support of this analysis trace back to out-of-state cases citing and interpreting earlier versions of Article 9. With respect to policy, the SDNY court stated that "[t]he UCC . . . places the burden of monitoring for potentially erroneous UCC-3 filings on existing creditors, who are aware of the true state of affairs as to their security interests, rather than potential creditors who will not be in a position to know whether a termination statement was authorized or not." The termination statement form promoted by the UCC does not support this policy analysis. See UCC § 9-521(b). Under rubric 9, the form requires that the filer identify either the secured party authorizing the termination statement, or if the termination is unauthorized, the name of the debtor authorizing the termination. As an example, in this case, the debtors, Ahava Dairy and Lewis were named as the filers.

Further, the analysis runs against the "notice filing" system adopted by the UCC. See UCC § 9-502, cmt. 2. Under this system, "[w]hat is required to be filed is not, as under pre-UCC chattel mortgage and conditional sales acts, the security agreement itself, but only a simple record providing a limited amount of information (financing statement). . . . The notice itself indicates merely that a person may have a security interest in the collateral indicated. Further inquiry from the parties concerned will be necessary to disclose the complete state of affairs. Section 9-210 provides a statutory procedure under which the secured party, at the debtor's request, may be required to make disclosure." [emphasis supplied] Id.

In Roswell Capital, the SDNY court considered but distinguished the "notice filing" comment of UCC § 9-502 stating that it "refer[s] only to financing statements,' and not to termination statements." See 2010 U.S. Dist. LEXIS 90695, * 24, n. 14. This distinction is inconsistent with the definitions of "financing statement" and "termination statement" under Article 9. See UCC § § 9-102(39), (79). "Financing statement' means a record or records composed of an initial financing statement and any filed record relating to the initial financing statement." [emphasis supplied] UCC § 9-102(39). "Termination statement' means an amendment of a financing statement which:(A) identifies, by its file number, the initial financing statement to which it relates; and (B) indicates either that it is a termination statement or that the identified financing statement is no longer effective." [emphasis supplied] UCC § 9-102(79). Since a termination statement is a record "relating to the initial financing statement," it is part of a "financing statement" as this term is defined by the UCC. See UCC § 9-102(39). Consequently, the "notice filing" comment of UCC § 9-502 applies to termination statements. For these reasons, the court declines to follow the SDNY Court's analysis in Roswell Capital.

Recent court case supports secured parties in unauthorized terminations

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.

Unauthorized UCC filings! – Part 6: Roswell Capital Partners LLC v. Alternative Construction Technologies

Contributed by Tim Hall, Managing Attorney, CT Corporation

To conclude our series on unauthorized UCC filings, we’d like to once again examine the recent Roswell Capital Partners case from the New York District Court. Several portions of the court’s decision conflict with the Article 9 statute, and create some additional risks for lenders. To review the case summary, refer back to our original blog post on the case.

To help identify these risks, this post will briefly summarize portions of the court’s decision and the relevant Article 9 treatment, followed by some thoughts on how it affects lenders.

Roswell Decision States: The provisions of Article 9 that reference a secured party’s obligation to conduct further inquiry apply only to “financing statements”, not to terminations.
Article 9: Defines a “financing statement” as “a record or records composed of an initial financing statement and any filed record relating to the filed financing statement.”
Effect: The court incorrectly interpreted Article 9. As it relates to filing and searching UCC records, a lender should always interpret the definition of a “financing statement” broadly. The drafters generally used the term “initial financing statement” when the intent was to limit the application to the initial UCC-1 filing. A party reviewing UCC records should always review the entire record and conduct further inquiry as necessary.

Roswell Decision States: “Even if the termination statement was not authorized by [the secured party of record], it nonetheless extinguished any perfected security interest [the secured party] had in the collateral.”
Article 9: Section 9-509(d) addresses the filing of UCC-3 amendments other than those adding collateral or debtor names, such as terminations. This section provides that “a person may file an amendment…only if the secured party of record authorizes the filing”.
Effect: Again, the court misinterpreted Article 9. Obviously, the drafters of Article 9 did not intend for arbitrary and unauthorized filings, such as those commonly filed by prisoners or “straw man” filers, to destroy a perfected security interest. This is particularly true when the unauthorized filing is a termination, as terminating a perfected interest has significant consequences. A searcher should always follow up on any filed records to determine the legal effectiveness of the record, and a lender should never assume that authority exists merely because a record was filed in the UCC Index.

Roswell Decision States: “The UCC therefore places the burden of monitoring for potentially erroneous UCC-3 filings on existing creditors, who are aware of the true state of affairs as to their security interests, rather than potential creditors who will not be in a position know whether a termination statement was authorized or not.”
Article 9: While Article 9 does contain some provisions that require a secured party to “monitor” the debtor, such as knowing when the debtor changes its name or location, there is nothing in Article 9 that places a burden on an existing secured party to monitor its filed financing statements.
Effect: It is hard to understand the court’s logic in requiring a secured party to monitor the UCC records in order to uncover an unauthorized filing, as the court previously stated that an unauthorized filing is effective anyway, and there isn’t anything a secured party can do if it identifies such a record.

However, there are some steps a secured party can take if an unauthorized filing (e.g., termination) is made:

• Discontinue funding, and freeze any further extensions of credit, until the situation is resolved.
• File a Correction Statement (Information Statement) UCC-5 explaining the situation.
• File a new UCC-1 as a precautionary measure and continue to file against the existing UCC record.
• To the extent 9-625 and other non-UCC law allows, take action against the unauthorized filer.

This concludes our series on unauthorized UCC filings! We hope you found this series to be informative and helpful. Please feel free to reach out to us with any questions you may have. Use the comments field below, or send us an email.

Tim Hall has been with CT Corporation for more than 14 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 11 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.

Three new court decisions set forth surprising—and contradictory—obligations for secured parties: Part 3 – Deere & Company v. New Holland Rochester

In the conclusion of our three-part series on recent Article 9-related court decisions, we discuss the final case: Deere & Company v. New Holland Rochester.

Don’t hesitate to share your thoughts on the decisions by publishing a comment after the post.

Contributed by Tim Hall, Managing Attorney, CT Corporation

Deere & Company v. New Holland Rochester, (Court of Appeals – Indiana) October 12, 2010

Facts: In 2008, Deere & Company and Travis Hostetler entered into two separate contracts regarding the purchase of farm equipment. Two UCC-1 financing statements were filed in relation to these transactions.

In October 2008, Hostetler entered into a transaction with New Holland, which included New Holland procuring several pieces of farm equipment as a trade. Prior to taking the equipment, Hostetler conducted a UCC search and found that Deere had a first priority perfected security interest in the equipment. However, New Holland did not contact Deere to ascertain the status of the liens. Instead, it questioned Hostetler, who told New Holland that the liens had been satisfied, and contacted Farmers Bank, which informed New Holland that the debt to Deere had been satisfied.

However, that information was incorrect. The liens had not been satisfied, and in 2009 Hostetler defaulted in its payment obligations. Deere then filed a complaint against Hostetler and New Holland to recover its goods. The trial court ruled against Deere, who subsequently filed an appeal to gain possession of the collateral.

The Court Decision: It is undisputed that New Holland had notice of Deere’s liens before completing the transaction with Hostetler. In addition, it asserted that it believed that Deere’s liens had been satisfied, regardless that it never contacted Deere to confirm that fact, and instead relied upon the statements made by others.

The court found that it is unreasonable to rely on the statements of third parties, or the debtor, about the current status of security interests. Specifically, Hostetler seemingly had every reason to be untruthful—and New Holland acknowledges that it was aware that clients often misrepresent the status of liens on equipment offered in trade.

It  is our opinion that there is simply no excuse for New Holland’s failure to contact Deere directly. It could not be clearer that it is reasonably probable that Deere is entitled to possession, use, and disposition of the property, pending final disposition of the claims of the parties.

Discussion

The court’s decision is consistent with the intent of Article 9, by emphasizing that the purpose of the UCC index is to provide notice to creditors, and provide sufficient information to allow a subsequent creditor to contact the prior secured party to inquire as to the current status of the transaction.

Thanks for reading through to the conclusion of our series! As always, any comments and questions can be directed via e-mail to CT Lien Solutions, or posted as a comment to the blog.

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.

Three new court decisions set forth surprising—and contradictory—obligations for secured parties: Part 2 – In Re: Charles Clifford McGee

Welcome back to our three-part series on three recent court decisions that have an impact on secured parties in relation to “notice filings.” Today’s post covers the second of the three, In Re: Charles Clifford McGee.

Don’t forget to tell us what you think about the case law by publishing a comment after the post.

Contributed by Tim Hall, Managing Attorney, CT Corporation

In Re: Charles Clifford McGee, (USBC – Northern Dist. of Indiana), Sept. 9, 2010

Facts: In 2001, debtor Charles Clifford McGee borrowed money from Sky Bank and gave it a security interest in the debtor's business assets. The financing statement named US Bank as the secured party, rather than Sky Bank. Several months later, Sky Bank assigned the loan to Sky Financial Securitization Corp IV. After several subsequent assignments, the loan was eventually assigned to US Bank five months after the initial UCC-1 filing.

At Issue: If the financing statement lists a bank which was not originally a party to the loan, and the assignment did not take place before the financing statement was recorded, is the lien properly perfected?

The Court Decision: Although the financing statement reflecting US Bank as the secured party was filed prior to the transfer of the security interest, once it obtained that interest it was and remains perfected. This is not a “floating lien”, rather a simple assignment of a debt and the lien that secured it.

According to the court, the financing statement must contain the name of the debtor and the name of the secured party or its representative, and must describe the collateral subject to the security agreement. These simple requirements comport with the “notice filing” concept embodied in Article 9 of the UCC, indicating that the notice indicates the secured party that filed it may have a security interest in the collateral.

The court also cites previous court decisions consistent with this policy, and confirms that the purpose of the filing statute is to enable the public to know whether personal property is encumbered. The identification of the secured creditor on the financing statement provides interested parties with a starting point to get more information, and financing statements only serve to make certain collateral as potentially subject to a claim.

Discussion

The court offers a contradictory view to that espoused in the Roswell decision, by emphasizing that the UCC index is merely intended to provide general notice, and that searchers will determine the significance and effectiveness of filed records.

Check back tomorrow for the conclusion of the series. Please direct any questions to CT Lien Solutions, or post a comment in the field provided.

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.

Three new court decisions set forth surprising—and contradictory—obligations for secured parties: Part 1 – Roswell Capital Partners LLC v. Alternative Construction Technologies

Recently, three court cases were published that set forth somewhat contradictory obligations for secured parties. The first case, Roswell Capital Partners LLC v. Alternative Construction Technologies, contradicts both policy and statutory language of Article 9 of the UCC, while creating obligations for secured parties not intended by the statute. The second and third cases, In Re: Charles Clifford McGee, and Deere & Company v. New Holland, are more consistent with the Article 9 policy of “notice filing”.

Over the next three days, we will provide the facts, decisions and implications of these three cases. We think you’ll be surprised by the potential repercussions allowed by Roswell, and the inconsistencies demonstrated by looking at the three cases holistically.

Contributed by Tim Hall, Managing Attorney, CT Corporation

Roswell Capital Partners LLC v. Alternative Construction Technologies (USDC – Southern District of NY). September 1, 2010

Facts: While the facts in Roswell are numerous, the following is a brief summation: JMB Associates provided financing to Alternative Construction Technologies (ACT) via a convertible promissory note dated June 1, 2006. The promissory note contained a provision stating JMB filed a UCC-1 against the assets of ACT, and “ACT shall be required to seek the endorsement of JMB Associates prior to the removal of the UCC-1 upon payment”.

In 2007 and 2008, Roswell Capital provided ACT with two rounds of funding totaling over $6 million. Roswell conditionally expressed it would hold a senior secured priority interest in all of ACT’s assets and the collateral would be free and clear of any liens and encumbrances. On July 2, 2007, ACT filed termination statements against JMB’s financing statements. Three days later, Roswell Capital filed a UCC-1 to perfect its security interest.

JMB disputed the validity of the UCC-3 termination statements, as ACT had not complied with the conditions of the promissory note.

At Issue: Was the UCC-3 termination filed by Roswell ineffective, as it did not authorize the debtor to act, and the promissory note specifically required that debtor “seek the endorsement of” JMB Associates prior to the removal of the UCC-1 upon payment?

The Court Decision: The court held that the termination of the financing statement, even if mistaken, releases the creditor’s lien on the property. Further, potential creditors must be able to rely on termination statements filed in the public record, even if they were filed in error and without authorization. In other words, even if the termination statement was not authorized by JMB, it nonetheless extinguished any perfected security interest it had in the collateral.

According to the court, if an unauthorized termination statement is filed, a secured party may seek damages for the extent of its loss under 9-625. Thus, the only remedy afforded JMB under the statute is to bring suit against the debtor for an unauthorized termination statement. When the firm argued that the UCC has adopted a “notice filing” system which contemplates further inquiry into the scope of the security agreement, which thus would require subsequent secured parties to investigate the filing of the UCC termination statement, the court rejected the argument. The court stated it based its reasoning on the fact that RA9 refers only to “financing statements” and not to termination statements.

In addition, the court stated that “The UCC places a burden on monitoring potentially erroneous UCC-3 filings on existing creditors who are aware of the true state of affairs as to their security interests, rather than potential creditors who will not be in a position to know whether a termination statement was authorized or not”.

Our Analysis

The first incorrect analysis by the court is its misunderstanding of the term “financing statement”. A financing statement is by definition (9-102) “a record or records composed of the initial financing statement and any filed record relating to the initial financing statement”. Thus, the term “financing statement” includes the initial UCC-1 and all subsequently filed records such as attachments, UCC-3 filings, UCC-5 filings, etc.

One of the key concepts under RA9 is that of “authorization to file”, and the fact that an unauthorized UCC filing has no legal effect (primarily found in sections 9-509 and 9-510). 9-509(d) allows a party to file a termination statement only when authorized by the secured party, and under limited circumstances by the debtor as provided in 9-513(c). 9-513(c) allows a debtor-authorized termination only if the secured party has failed to file a termination within 20 days after receiving an authenticated demand from the debtor. As neither of these circumstances existed in this case, the termination statement filed by ACT was clearly ineffective.

The court further errs by ignoring JMB’s position that the UCC adopted a “notice filing” system. Clearly, the intent of the drafters was to adopt a “notice filing” system, and various sections of RA9 contemplate that a party searching the UCC index should NOT rely upon that information without further inquiry.

The court provides no logical basis for its assertion that “the UCC places a burden on monitoring potentially erroneous UCC-3 filings on existing creditors”, nor does the court point to any statutory authority to support such a declaration. The court’s position is also inconsistent with the rest of its opinion. If a secured party were to follow the court’s recommendation and monitor for potentially erroneous UCC-3 filings, the remainder of the opinion indicates that there is nothing a secured party can do if a erroneous/fraudulent UCC-3 filing is uncovered. The filing is nonetheless terminated, and the existing creditor is still unsecured.

What do you think of the court’s decision? Use the “Comments” function of this post to start your own discussions, and check back tomorrow for details on In Re: Charles Clifford McGee.

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.

What's in a name? Often the difference between millions or being empty-handed.

In the July/August edition of the commercial finance publication ABF Journal, CT Lien Solutions' Richard Fifield was featured as a contributing author, with his article "What's in a Name?"

The article demonstrates the importance of debtor name verification when perfecting a security interest. The main point? The smallest inaccuracy in a name often yields an unperfected interest—and thus a loss of claim to the collateral.

Included in the article are two case studies that illustrate how a subtle variation on a name, and in another instance an omission of a reference of incorporation, cost three lenders hundreds of thousands of dollars.

Read the article in its entirety at the link above to learn how to safeguard against a similar situation. Feel free to direct any questions via email to CT Lien Solutions.