Assignment 5
Perfection: Filing System Issues
and Perfection by Filing
Reference: Understanding Chapters
4, 5.01, 5.02, 5.03, 5.04, 5.05, 9.02,
9.03, and 16.04[B][1]
Problem 1
• Myers owes Putnam County Bank $500K
– Collateral: (1) Honda Valkyrie motorcycle; (2)
Ducati motorcycle; (3) Andy Warhol painting
– Bank filed UCC-1 (financing statement)
covering the motorcycles and the painting
• Myers defaulted, sold Valkyrie to Mitchell
– Bank wants to repossess the collateral. Can it
do so?
Assignment 5: Points of Emphasis
• Why does perfection matter?
• In what filing system(s) must a secured party
give notice of its lien/security interest?
• How does the UCC’s filing system and search
process work?
• What are the consequences for a creditor if
there are errors in a financing statement?
“Ostensible Ownership” Problem
• Nonpossessory SIs (such as Bank’s SI in
Myers’s motorcycles and painting in Problem
1) create an “ostensible ownership” problem
– Bank has a valid SI in the motorcycles, BUT
– Myers (in possession of motorcycles) appears to
have full ownership rights
– This could mislead third parties (buyers like
Mitchell, or other creditors) who are unaware of
Bank’s SI
1
Perfection
• Perfection is the act of making a SI
enforceable against 3rd parties
• An act of perfection establishes the priority
of a SI relative to the rights of other
creditors or buyers of the collateral
• Perfection typically requires secured party
to cure the “ostensible ownership” problem
(so that the SI is no longer a “secret” lien)
Perfection by Notification in the
Public Records
• A secured party can sometimes perfect by
taking possession of the collateral, but this is
usually impractical
• The preferable approach is to have a secured
party give notice by placing evidence of its
claim in a public record (where 3rd parties can
search and discover it)
Perfection by Filing
• Under Article 9, the default method to perfect a
SI is to file a financing statement [UCC-1]
naming the debtor and describing the collateral
• Filing is required [§ 9-310(a)], unless
– (1) Article 9 does not apply; or
– (2) Article 9 allows another method of perfection
[§ 9-310(b)]
• § 9-521(a) specifies the form for a UCC-1
2
Myers
123 Oak Street
Gary
Columbia
MO 65203
“Ordinary” Collateral
Putnam County Bank
5 Main Street
Putnam
MO 68999
2013 Honda Valkyrie motorcycle
2012 Ducati Monster 1200 motorcycle
Andy Warhol painting, “Ho Chi Minh”
• For most forms of tangible collateral, there are
no public records that confirm “ownership”
– Possession is “best evidence” of ownership
– For them, perfection by UCC-1 filing suffices
• For some forms of collateral, the government
does certify ownership, as with titled vehicles
– For these forms of collateral, perfection must occur
within the title certification system (where persons
would be looking for relevant title information)
Titled Vehicles
• Each state issues title certificates for vehicles that
provide government certification of ownership claims
– Covered in ALL states: cars, trucks, motorcycles (but
NOT tractors or farm machinery)
– Covered in some states (but not all): boats, ATVs
• A secured party must perfect a SI in a titled vehicle by
complying w/ state’s certificate of title act [§ 9-311(b)]
– This means the secured party must apply to the
appropriate governmental titling agency to have its SI
“noted” on the title certificate
• Generally, filing a UCC-1 does not perfect a SI in a
titled vehicle [§ 9-311(a)(2)]
Problem 1: Result
• Painting is ordinary (nontitled) goods, so Bank’s
filing of UCC-1 financing statement was sufficient to
perfect Bank’s SI in the painting [§§ 9-308(a), 9310(a)]
• Because motorcycles are titled goods, however,
Bank’s UCC-1 filings were ineffective [§ 9-311(b)];
thus, Bank’s SI in the bikes was unperfected (no act
of perfection had occurred) [§ 9-308(a)]
• What’s the consequence of this for the Bank?
3
Which Statement Is True?
A. Bank can sell the Ducati, and
can repo the Valkyrie from Mitchell
B. Bank can’t sell the Ducati, and
can’t repo the Valkyrie
C. Bank can sell the Ducati, but it
cannot repo the Valkyrie
Problem 1 Result
• Even though Bank has not yet perfected its SI
in the Ducati, it can still repossess it from
Myers and sell it based on Myers’s default
– Upon attachment, security interest is enforceable
against the debtor, whether or not it is perfected [§
9-201(a)]
• Perfection is irrelevant as between Bank and
Myers; only attachment matters
Problem 1 Result
• Bank cannot repossess the Valkyrie from
Mitchell, assuming that Mitchell didn’t know
of Bank’s SI in the bike
– Rule: a buyer who pays value and takes
possession of collateral, w/out knowledge of a SI
and before that SI is perfected, takes free of that
SI [§ 9-317(b)]
– If Bank had perfected its SI before Mitchell bought
the bike, Mitchell would’ve taken the bike subject
to Bank’s SI [§§ 9-201(a), 9-315(a)(1)]
• What if Myers filed a bankruptcy petition?
Does that change your analysis?
– Bankruptcy law gives the “trustee” the status of a
“lien creditor” under state law [BC § 544(a)]
– Lien creditor takes priority over unperfected
security interests [§ 9-317(a)(2)]
– Thus, Bank would no longer be able to sell the
Ducati; instead, Myers’s bankruptcy trustee could
set aside (“void”) Bank’s SI and could recover
possession of the Ducati [§§ 544(a), 542(a)]
4
Where Does Secured Party Perfect?
• There is no unitary national system for perfecting
liens and security interests
• Each state has its own filing/perfection systems
• Thus, you must first determine what jurisdiction’s
law governs perfection of a SI; this determines
– The jurisdiction in which a creditor must file to perfect
– The jurisdiction where 3d parties would search for
filing information
Problem 2
• First Bank plans to extend a $5 million line of
credit to Royce-Rolls Motors, Inc.
– Royce-Rolls will operate two dealerships: one in
E. St. Louis, IL and one in St. Louis, MO
– Repayment of the line of credit is to be secured by
a SI in all of the vehicles on both sales lots
• How, and where, would you perfect the SI in the
vehicles on these two sales lots?
Titled Vehicles: Exception
• While a debtor holds motor vehicles for sale or
lease, the § 9-311(b) exclusion does not apply [§
9-311(d)]
• Thus, for cars that are “inventory” in the hands of
Royce-Rolls Motors, First Bank would perfect by
filing a UCC-1 covering “inventory”
– Rationale: Debtor only holds the cars temporarily
– Getting a COT for each car in name of Royce-Rolls
Motors is unwarranted expense when buyers will have
to get new COT when cars are sold
• So where does First Bank file a UCC-1?
• For regular “goods,” perfection of a SI is
governed by the law of the state where the
Debtor is located [§ 9-301(1)], not where
collateral is located!
– As an corporation, Royce-Rolls Motors is
“located” in its state of organization [§ 9-307(e)],
even if it doesn’t carry on business activity there
– If Royce-Rolls Motors, Inc. is organized under
Delaware law (as many corporations are), First Bank
would have to file a UCC-1 in Delaware to perfect the
SI (even if the car lots were in Illinois and Missouri)
5
• Problem 2: Royce-Rolls Motors, Inc. is a
“registered organization” [§ 9-102(a)(71)]
Perfection: Registered Organizations
• Why use the Debtor’s state of organization rather
than the state where Debtor does business, or where
the collateral is physically located?
– Predictability and efficiency
– Debtor can do business in multiple states, and can move
collateral from state to state, but the Debtor’s state of
organization remains constant, and can be readily
confirmed in the public records (making it easier for
creditors to search and file)
• Once First Bank determines the appropriate state
(DE), you perfect in that state by filing in that
state’s central filing office [§ 9-501(a)(2)]
– E.g., in DE, this is the Division of Corporations
– In MO, this would be the Secretary of State
• Exception: if the collateral is land-related (e.g.,
growing timber or fixtures), the secured party
would instead file the UCC-1 in the local
(county) recorder of deeds office [§ 9-501(a)(1)]
• It is formed under the law of a single state by the filing of a
“public organic record” [§ 9-102(a)(68)]
– Available to public for inspection, confirms formation,
existence, and identity of registered organization
• If Royce-Rolls Motors, Inc. is organized under
Delaware law:
• § 9-301(1): perfection of SI in the inventory will be
governed by state of debtor’s location
• § 9-307(e): registered organization is located in
state where it is organized
• First Bank would have to file UCC-1 in Delaware
• Assume First Bank files a UCC-1 covering all of
the inventory of Royce-Rolls Motors, Inc., in the
correct filing office in Delaware
• Is that sufficient to perfect First Bank’s SI in
ALL of the Debtor’s vehicles?
– Some vehicles may not be “inventory”
– E.g., “loaner” vehicles (used by customers) or
shuttle vans (used by the service department)
– These would be “equipment”— in which case
they’re covered by the state certificate of title
statute; SI in each such vehicle must be perfected
by having lien noted on title certificate for vehicle!
6
Choice of Law: Titled Goods
• Perfection of a SI in a titled good is governed
by “local law of the jurisdiction under whose
certificate of title the goods are covered” [§ 9303(c)]
• If the shuttle van is already covered by a title
certificate issued by MO, First Bank could
apply to MO (Dept. of Revenue) to have its
lien noted on the title certificate for the van
– In MO, perfection occurs at time application + fee
are delivered [RSMo. § 301.600(2)]
“Due Diligence” and Search
• When considering a secured loan, lender typically
wants assurance that it will have a first priority
security interest in the intended collateral
• Thus, lender must review records in the appropriate
filing office(s) to determine whether other creditors
have already made filings against the debtor that
cover the intended collateral
– Filings are indexed in debtor’s name to facilitate search
• What if a car is on the lot
for sale, but it is also
used as a “loaner”?
Problem 2
– “Belt and suspenders”
approach, i.e., First Bank
could both (1) file a UCC1 against “inventory,” and
(2) have its lien noted on
the title certificates for
that vehicle (to be safe)
Searching and Search Requests
• UCC-1s are indexed under debtor’s name, so that
searchers can search w/out filing officer’s help
• However, searcher can also make an official
“search request” of the filing officer [§ 9-523(c)]
– Filing officer must provide certified copies of all UCC1s on file against the debtor, w/in 2 business days of
receiving the search request [§ 9-523(e)] (fee charged)
– Search results provides evidentiary proof of those
filings a search would have revealed
7
Problem 3
• The CLE you’re watching gives “Four Steps to
Assure Perfection and Priority.” They are:
– (1) Search the UCC records to confirm no prior filings
exist against the debtor covering the intended collateral
– (2) If the search comes up clean, then file a UCC-1
covering the intended collateral
– (3) Then have the debtor sign the security agreement (if
the debtor hasn’t done so already)
– (4) Then, you can disburse the loan proceeds to the
debtor and be assured of first priority
• Is this appropriate advice?
• During this “gap,” a filed
UCC-1 is effective to perfect
a SI, but a searcher wouldn’t
be able to find it!
– During this time, a filed
UCC-1 is said to be “in the
basket”
• Note: filing officer has up to
2 business days to index a
filed financing statement! [§
9-519(h)]
Indexing
Delays and
“The Basket”
Indexing
Delays and
“The Basket”
• There can be a gap between
when a UCC-1 (1) is filed by a
secured party and (2) is actually
“indexed” by the filing officer
– Filing = tender of financing
statement + filing fee [§ 9-516(a)]
– Authorized UCC-1 is effective
upon filing [§ 9-510(a)]
– But, filing officer must “index”
the filing to make it discoverable
by searcher [§ 9-519(a)]
Creditor Y’s “Nightmare” Scenario
Creditor X files
financing
statement
Creditor Y files
financing
statement
Creditor Y gets “clean”
search report
Tuesday
10am
Wednesday
1pm
Wednesday
2pm
Filing officer
indexes Creditor
X’s financing
statement
Thursday
8am
8
• The correct sequence for Lender: (1) file a UCC-1
first; (2) wait until filing officer has indexed it; (3)
THEN search for other filings
– Filing will “stake out” Lender’s priority vs. other
creditors as of time of filing [§ 9-322(a)(1)]
– If search reveals another creditor made a prior
filing, Lender can decide not to make the loan
– If Lender’s search reveals only Lender’s own filed
UCC-1 (and no other filings), then Lender can
reasonably expect to have first priority against the
collateral
Technology
• Most filing offices now authorize electronic
filing (e-filing) of UCC-1s
• An e-filed UCC-1 can be automatically and
instantaneously indexed (eliminating the
“gap” problem)
– Until e-filing becomes universal, however, the
gap problem remains
Problem 4
• Bank plans to extend $100,000 line of
credit to Billiards on Broadway
– Intended collateral: all inventory, equipment,
and accounts of debtor, including afteracquired
• Bank prepares UCC-1 as described in
Problem 4. Is this sufficient?
9
Billiards on Broadway
514 E. Broadway
34-2765185
Columbia
MO 65201
Putnam
XX 21940
Corporation Missouri
Putnam County Bank
5 Broadway
All of the Debtor’s inventory, equipment,
presently owned and after-acquired
• Problem: UCC-1 does not reflect the debtor’s correct
name
– UCC-1 must be filed under the debtor’s legal name [§ 9502(a)(1)]
– For a registered organization, debtor’s name is the name
that appears on the public organic records in the debtor’s
state of organization [§ 9-503(a)(1)]
– Billiards on Broadway is a “fictitious name” or a “trade
name”; its real legal name is Broadway Supply Company
[as confirmed w/ Mo. Sec. of State records]
– UCC-1 that contains only the debtor’s trade name is not
sufficient [§ 9-503(c)]
§ 9-502(a) [Sufficiency of financing statement.] Subject to
subsection (b), a financing statement is sufficient only if it:
(1) provides the name of the debtor;
(2) provides the name of the secured party or a representative of
the secured party; and
(3) indicates the collateral covered by the financing statement.
§ 9-503(a) [Sufficiency of debtor’s name.] A financing
statement sufficiently provides the name of the debtor:
(1) … if the debtor 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 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 ….
§ 9-503(c) [Debtor’s trade name insufficient.] A financing
statement that provides only the debtor’s trade name does not
sufficiently provide the name of the debtor.
• Why shouldn’t “Billiards
on Broadway” be a
sufficient name, if that’s
the name the debtor uses
in carrying on business?
Trade
Names
– Certainty; business could
have numerous trade
names, but can have only
1 legal name
10
Problem 4
• Prudent prior creditors would have filed a
UCC-1 using the name “Broadway Supply
Company”
• Thus, Bank must search using that name
– A search under Billiards on Broadway would come
up “clean” (no filings)
– But, a search under “Broadway Supply Company
would reveal a prior UCC-1 filing, covering the
same collateral!
• For nontitled goods, state of debtor’s location
controls question of perfection [§ 9-301(1)]
• If debtor is an individual rather than a “registered
organization,” individual debtor is deemed to be
located in the state where debtor’s principal
residence is located [§ 9-307(b)(1)]
• Thus, is Charley a resident of Missouri?
– If so, NF filed in the correct state
– If not, NF filed in the wrong state, and its UCC-1 would
not be effective
• Neighborly Finance took a
security interest in the
plumbing tools of Charley
Graham (who has now filed
for bankruptcy)
Problem 5
– Assume NF filed in Missouri,
using the name “Charley
Graham”
• Did NF properly perfect its
SI in the plumbing tools?
• What if Charley had a
home in Illinois and a home
in Missouri?
Problem 5
– Q: Which is his “principal”
residence?
– If court decides that was IL,
filing in MO ineffective
– To “hedge,” NF could have
filed UCC-1s in both states
11
• Suppose that Charley’s
only residence is in MO
• Was the MO UCC-1 filing
(under the name “Charley
Graham”) sufficient to
perfect NF’s SI in the
plumbing tools? Why or
why not?
Problem 5
§ 9-502(a) [Sufficiency of financing statement.] Subject to
subsection (b), a financing statement is sufficient only if it:
(1) provides the name of the debtor;
(2) provides the name of the secured party or a representative
of the secured party; and
(3) indicates the collateral covered by the financing statement.
§ 9-503(a) [Sufficiency of debtor’s name.] A financing
statement sufficiently provides the name of the debtor:
(4) … 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. [ALTERNATIVE A: THE “ONLY IF” RULE]
Individual Names
• Problem: There is no “public organic
record” [§ 9-102(a)(68)] which provides a
definitive legal name for individuals
– Contrast to registered organizations, where
public organic record establishes their legal
name (regardless of how they may hold
themselves out to the public, i.e., trade name)
• If Charley has an active MO driver’s license
in the name “Charles B. Graham,” that’s the
name that the UCC-1 has to use to be
clearly sufficient to satisfy § 9-502(a)(1)
– NF’s filing (“Charley Graham”) doesn’t meet
that standard, wouldn’t be sufficient on its face
• If no active driver’s license, then does the
UCC-1 include his “surname and first
personal name”? [Charles? Charley?]
12
Case Uncertainty: Individual Names
• Kinderknecht case (Kansas) is a good example of
confusion in this regard
• Deere took SI in two farm implements belonging to
debtor whose birth name was Terrance Joseph
Kinderknecht, but who went by “Terry”
• Deere filed UCC-1 identifying the debtor as “Terry J.
Kinderknecht”
• When Kinderknecht filed bankruptcy, the court held
that the trustee could avoid Deere’s SI [BC §
544(a)(1)], b/c the UCC-1 didn’t use the debtor’s
name, and Deere was thus unperfected!
• Assume Charley is a resident of
MO, so MO law governs
perfection, and that name on his
driver’s license is “Charles B.
Graham”
• Is NF’s UCC-1 filing under
name “Charley Graham” a
seriously misleading error (i.e.,
NF’s SI is unperfected), or is it a
“minor error, not seriously
misleading” (i.e., UCC-1
perfected NF’s SI)?
Problem 5
§ 9-506. Effect of Errors or Omissions
(a) A financing statement substantially satisfying the
requirements of this part is effective, even if it has minor
errors or omissions, unless the errors or omissions make the
financing statement seriously misleading.
(b) Except as otherwise provided in subsection (c), a
financing statement that fails sufficiently to provide the name
of the debtor in accordance with Section 9-503(a) is seriously
misleading.
(c) 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 9-503(a), the name provided does
not make the financing statement seriously misleading.
• In a paper-based system, NF’s filing under
“Charley Graham” would likely be held a minor
error
• Rationale: a prudent searcher would have found
it in a search of paper records
– While the searcher might have noted the
difference between “Charles” and “Charley,” the
searcher might have noticed the similarity in the
debtor’s addresses and would’ve investigated
further (i.e., the error didn’t compromise the
ability of filing to give meaningful notice)
13
• It depends on the filing office’s search logic (at
least with electronic-only searching)
– Would a search under the name “Charles B.
Graham” reveal a UCC-1 filed under the name
“Charley Graham”?
– If so (if system returns “close” matches), the error
is not seriously misleading [§§ 9-506(a), (c)], and
NF’s SI would be perfected
– If not (if system returns only “exact” matches), the
error is seriously misleading, so NF’s SI would be
unperfected [§ 9-506(b), (c)]
Search Logic Dilemma
• Should the filing system be set
up to return “close” matches
(i.e., any filing with the last
name “Graham” and the first
initial “C” or the first two
letters “Ch”)
• Or should it return only exact
matches?
IACA Search Logic
Search Logic Dilemma
• Note: Flexibility has a cost for searchers: if
search logic returns close matches, searches
will produce more “false positives” (i.e.,
filings vs. other debtors with the last name
“Graham”)
– Searchers must investigate and exclude “false
positives,” so the looser the search logic, the
greater the potential search costs
•
•
•
•
•
•
Does not distinguish case
Disregards punctuation and accents
Ignores “Corp.,” “Co.,” “Inc.,” etc.
Ignores “the” at beginning of a name
Ignores spaces
Treats an initial as = first or middle name
beginning with that letter
• Treats no middle name = all middle names
14
Financing Statement: Required
Information for Sufficiency
• § 9-502(a): to be sufficient to perfect a
security interest, UCC-1 must contain:
– The debtor’s name
– The secured party’s name (or the name of a
representative of the secured party), and
– A description of the collateral covered by the
financing statement
• Why let the filing officer
reject a filing that contains
no address for the debtor, if
a UCC-1 doesn’t need that
information to be sufficient
to perfect under § 9502(a)?
– Idea: § 9-516(b) information
“assists searchers in weeding
out ‘false positives,’” [§ 9520 comment 3]
Filing Officer
Rejection
... and “Additional” Information
• Filing officer can (and must) reject a financing
statement if it does not include the following items of
“additional” information [§§ 9-520(a), 9-516(b)],
which are:
– Debtor’s mailing address [§ 9-516(b)(5)(A)]
– Secured party’s mailing address [§ 9-516(b)(4)]
– Whether debtor is an individual or an organization [§ 9516(b)(5)(B)]
• Properly rejected filing is not “filed” [§ 9-516(b)]
Trustee’s Avoiding Powers
• Bankruptcy Code gives bankruptcy trustee the
power to avoid any interests that could’ve been
avoided by a judgment lien creditor [§ 544(a)(1)]
• U.C.C. § 9-317(a): a “lien creditor” has priority
over an unperfected SI
• Thus, in bankruptcy, trustee can avoid (invalidate)
any unperfected SIs in debtor’s property
15
• Filed UCC-1 fails to provide
an address for Putnam
County Bank (secured party)
• Debtor (ABC, Inc.) later files
bankruptcy. Can Trustee
invalidate Bank’s SI?
– No; if financing statement
includes name of debtor and
secured party, describes
collateral, and is filed, it is
effective to perfect SI [§§ 9502(a), 9-520(c)]
Problem 7(a)
A. Yes
B. No
§ 9-520(c) [When filed financing statement
effective.] A filed financing statement satisfying
Section 9-502(a) and (b) is effective, even if the
filing office is required to refuse to accept it for
filing under subsection (a). However, Section 9338 applies to a filed financing statement
providing information described in Section 9516(b)(5) which is incorrect at the time the
financing statement is filed.
Omission of § 9-516(b) Information
• If information required by § 9-516(b) (e.g., address
of secured party) is omitted, then filing officer
MUST reject the filing [§ 9-520(a)]
• However, if filing officer accepts it anyway (even
though it should’ve been rejected), the UCC-1 is
sufficient to perfect a SI if it complies with § 9502(a) (e.g., it includes names of parties and
description of collateral) [§ 9-520(c)]
• UCC-1 has an incorrect
address for bankrupt Debtor
Joseph Louis Thompson
• Can Trustee invalidate
Bank’s SI in the collateral?
– No; if UCC-1 includes
name of debtor and
secured party, describes
collateral, and is filed, it is
effective to perfect SI [§ 9520(c)]
Problem 7(b)
A. Yes
B. No
16
§ 9-338. Priority of Security Interest ... Perfected by Filed
Financing Statement Providing Certain Incorrect Information.
If a security interest ... is perfected by a filed financing
statement providing information described in Section 9516(b)(5) which is incorrect at the time the financing statement
is filed:
(1) the security interest ... is subordinate to a conflicting
perfected security interest in the collateral to the extent that the
holder of the conflicting security interest gives value in
reasonable reliance upon the incorrect information; and
(2) a purchaser, other than a secured party, of the
collateral takes free of the security interest ... to the extent that,
in reasonable reliance upon the incorrect information, the
purchaser gives value and ... receives delivery of the collateral.
• Error in debtor’s address can actually compromise
the filing system’s operation
– Searcher looking at the UCC-1 might conclude
(wrongly), based on bad address, that the UCC-1 in
question covered a different Joseph Louis Thompson
• § 9-338 would protect a “purchaser” who gave
value in reasonable reliance upon the incorrect §
9-516(b) information [§ 9-520(c)]
• But, the bankruptcy trustee is a “lien creditor” [§
9-102(a)(52)], not a “purchaser” protected by § 9338
Problem 7: Mistakes in Filed UCC-1
Problem 7: Mistakes in Filed UCC-1
• Omitted address (secured party or debtor)?
• Mistake in debtor’s address?
– Does not defeat effectiveness (UCC-1 sufficient
if it contains § 9-502(a) info — name of debtor,
name of secured party, description of collateral)
– UCC-1 with missing address should be rejected
[§ 9-520(a)], but is nevertheless effective if
wrongly accepted [§ 9-520(c)]
– May defeat effectiveness vs. certain 3d parties
– If mistake reasonably could have, and actually did,
mislead a third party into (a) buying the collateral
or (b) taking a SI in it, that UCC-1 is not effective
against the third party [§ 9-338]
– Mistake doesn’t affect effectiveness of UCC-1 as
against lien creditors [§ 9-520(c)]
17
• Security agreement:
Bank’s collateral is “all
equipment and accounts,
including after-acquired”
equipment
• UCC-1: collateral is
“equipment and accounts”
• Can the Trustee invalidate
Bank’s SI under BC §
544(a)?
• UCC-1 filed by Bank lists
the collateral as “all
equipment and furniture
located at 2001 Broadway,
Putnam”
– Security agreement:
collateral is “all equipment
and furniture located at
251 First Avenue, Putnam”
• Can Trustee invalidate
Bank’s SI?
Problem 7(c)
• In Problem 7(c), the collateral description is
sufficient
– UCC-1 sufficiently describes the collateral if it
includes a description that satisfies § 9-108 [§
9-504(1)]
– A generic description by UCC type “reasonably
identifies” the collateral [§ 9-108(b)(3)]
– UCC-1 covering “equipment” is effective to
cover “after-acquired” equipment, even if
“after-acquired” isn’t expressly mentioned in
the UCC-1 [§ 9-502 cmt. 2]
Problem 7(d)
• In Problem 7(d), Trustee can invalidate Bank’s SI
in the collateral, b/c it is unperfected
– Collateral description is “necessary” [§ 9-502(a)]
– Error in description of collateral renders financing
statement seriously misleading [§ 9-506(a)]
– 3d party searcher would conclude that if Bank had a
SI in equipment and furniture at the First Avenue
location, it was not perfected by this UCC-1
– Bank’s SI is thus unperfected
– Compare: “all Debtor’s equipment” (no location
mentioned)
18
• UCC-1 description: “all of
the debtor’s assets”
Problem 7(e)
– Collateral: a particular
computer system
• Is this UCC-1 sufficient?
– “Clean” search isn’t 100%
assurance of priority
– Secured party that filed a
misindexed UCC-1 has
priority over secured party
who got a “clean” search
Problem 7(f)
– No; to be sufficient, UCC-1
must contain description of
collateral [§ 9-502(a)]
– Trustee can avoid Bank’s SI
– Yes; UCC-1 sufficiently
describes the collateral if it
covers “all of the debtor’s
personal property [§ 9504(2)]; “super-generic”
description is OK in a
financing statement
• Filed but misindexed or
unindexed UCC-1 is effective
[§ 9-517]. What does this
mean for prospective
buyers/lenders?
• UCC-1 contains no collateral
description at all (actual
collateral = Debtor’s equipment,
inventory, and accounts)
• Is Bank’s SI perfected?
• Can Bank argue this a “minor”
error that isn’t “seriously
misleading”?
Misindexed
Filings
• Should this risk be placed on
filers, or searchers?
– Rationale for § 9-517: filer
shouldn’t be responsible for
mistakes of filing officer
– Filers are arguably better
positioned than searchers to
avoid this risk (check back)
– True electronic-only filing
could eliminate this risk (but
not here yet)
Misindexed
Filings
19