CT Lien Solutions Blog

Revised matrix - State-by-state breakdown of new UCC Article 9 legislation

The last several months have seen a flurry of legislation, as more and more states introduce new amendments to Article 9 of the Uniform Commercial Code. Click here to download our latest state-by-state breakdown.

To view the status of each bill on the state legislature website, click on the hyperlink embedded in the Bill #. To get a better understanding of what is addressed in each section of the code, click on the hyperlinks in the code section titles in the matrix header row. (For example, clicking on "9-503: Name of Debtor and Secured Party" in the header row of the matrix will take you to a previous blog post which describes the difference between Alt A and Alt B).

We will periodically keep you updated as the legislation continues to change, so check back into the blog frequently.

*For more information about the various provisions of the model act, visit the “Legislation and Judgments” category of this blog.

Tax Lien Simplification Act proposed in U.S. Senate

U.S. Senator Carl Levin proposed a bill this month that, if adopted, would make searching for federal tax liens easier—and free. The Tax Lien Simplification Act would create a free, publically accessible electronic registry for federal tax liens, substituting the current paper filing system.

For more details on the bill, click here.

Revised matrix - State-by-state breakdown of new UCC Article 9 legislation

We have revised our reference matrix of the state-by-state breakdown of the new Article 9 legislation, to account for the enactment of Rhode Island Senate Bill 520, Rhode Island House Bill 5573 and Connecticut House Bill 6274.

The Rhode Island legislation is uniform to the new model act* across the board, with “Alternative A” adopted for 9-503. Connecticut is also uniform, but no reference is made to forms in 9-521 and, more importantly, the state has adopted "Alternative B" for 9-503--making it one of only two states so far to do so (the other being Washington state).

Choice of Alternative B means that Connecticut will allow for a “safe harbor” in individual debtor names. If an individual debtor has a CT driver’s license, the financing statement is sufficient if it uses the name found therein. However, unlike Alternative A, it also allows for other individual names to be used, such as the surname and first personal name.

What does this mean in a practical sense? Well, searchers beware in Connecticut and Washington. Under Alternative B, a variety of debtor names will be sufficient, so searchers will need to conduct a more expansive search to ensure that all possible name variations are uncovered.

Download the revised matrix here. To view the status of each bill on the state legislature website, click on the hyperlink embedded in the Bill #. To get a better understanding of what is addressed in each section of the code, click on the hyperlinks in the code section titles in the matrix header row. (For example, clicking on "9-503: Name of Debtor and Secured Party" in the header row of the matrix will take you to a previous blog post which describes the difference between Alt A and Alt B).

We will periodically keep you updated as the legislation continues to change, so check back into the blog frequently.

*For more information about the various provisions of the model act, visit the “Legislation and Judgments” category of this blog.

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.

Revised matrix - State-by-state breakdown of new UCC Article 9 legislation

We have revised our reference matrix of the state-by-state breakdown of the new Article 9 legislation, to account for the enactment of Nevada Assembly Bill 109.

The Nevada legislation is uniform across the board, with “Alternative A” adopted for 9-503.

Download the revised matrix here. To view the status of each bill on the state legislature website, click on the hyperlink embedded in the Bill #. To get a better understanding of what is addressed in each section of the code, click on the hyperlinks in the code section titles in the matrix header row. (For example, clicking on "9-503: Name of Debtor and Secured Party" in the header row of the matrix will take you to a previous blog post which describes the difference between Alt A and Alt B).

We will periodically keep you updated as the legislation continues to change, so check back into the blog frequently.

Revised matrix - State-by-state breakdown of new UCC Article 9 legislation

We have revised our reference matrix of the state-by-state breakdown of the new Article 9 legislation, to account for the enactments of Texas Senate Bill 782 and Minnesota Senate Bill 194.

The newly enacted legislation in both Texas and Minnesota closely mirrors the language of the model act, with a few minor exceptions.

In relation to individual debtor names under section 9-503, Texas has adopted a slightly amended version of Alternative A. However, the practical effect is the same despite the slightly amended statutory language. In addition, Texas did not adopt the proposed changes to section 9-516, which provides that a financing statement may be rejected if the organizational information is missing. So, when filing financing statements in Texas, a secured party filing on a debtor organization must still include information on an organization’s type and jurisdiction of organization, or the organizational ID number of the debtor.

Minnesota’s enacted legislation is simpler. The legislation is uniform to the new model act in all instances, with “Alternative A” adopted for 9-503.

Download the revised matrix here. To view the status of each bill on the state legislature website, click on the hyperlink embedded in the Bill #. To get a better understanding of what is addressed in each section of the code, click on the hyperlinks in the code section titles in the matrix header row. (For example, clicking on "9-503: Name of Debtor and Secured Party" in the header row of the matrix will take you to a previous blog post which describes the difference between Alt A and Alt B).

We will periodically keep you updated as the legislation continues to change, so check back into the blog frequently.

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.

New legislation affects filing in North Dakota

We’ve got an update on new legislation affecting filing in North Dakota. However, don’t confuse this with the flurry of legislative activity we’re seeing with states adopting NCCUSL’s proposed amendments to the UCC Article 9! This piece of legislation is not an amendment to the Article 9. However, if you are filing UCCs in ND, you’ll want to read on.

On April 26, 2011, the Governor of North Dakota signed into law Senate Bill 2249. The bill removes several of the non-uniform filing requirements that exist in North Dakota regarding social security numbers and federal tax identification numbers on financing statements.

North Dakota’s current law requires that a social security number or federal tax identification number be included on any financing statements filed under Article 9 of the UCC or the Food Security Act. In addition, current law authorizes the filing office to reject any financing statements that do not contain these numbers.

Under the new law, effective January 1, 2012, both of these provisions have been deleted. As a result, parties filing UCC financing statements after this date will no longer be required to provide this information.

Revised matrix - State-by-state breakdown of new UCC Article 9 legislation

We have revised our reference matrix of the state-by-state breakdown of the new Article 9 legislation, to account for Indiana's enactment of new amendments. We have also added hyperlinks to the code section titles in the matrix header row. To get a better understanding of what is changing in each section of the code, click on these hyperlinks to be routed to previous blog posts providing more detail. (For example, clicking on "9-503: Name of Debtor and Secured Party" in the header row of the matrix will take you to a previous post which describes the difference between Alt A and Alt B).

Download the revised matrix here. To view the status of each bill on the state legislature website, click on the hyperlink embedded in the Bill #.

We will periodically keep you updated as the legislation continues to change, so check back into the blog frequently.

IN fourth state to enact new UCC Article 9 laws

On April 20, the Governor of Indiana signed into law IN HB 1321, making Indiana the fourth state to enact new UCC Article 9 amendments. Like Nebraska and North Dakota, Indiana has adopted Alternative A for 9-503, so searchers can breathe a sigh of relief—if the individual has an IN driver’s license or state ID, that’s the name you will need to search under beginning July 1, 2013.

Lenders filing in Indiana, Nebraska and North Dakota, since you know that as of July 1, 2013, your filings for individual debtors must be made under the name contained on the state driver’s license or ID of the individual, it’s not too soon to start conforming.