JOURNAL
AMERICAN
BANKRUPTCY
INSTITUTE
Issues and Information for Today’s Busy Insolvency Professional
Trouble for Secured Creditors:
Avoiding the Traps of UCC §§9-503 and 9-506
Contributing Editor:
Deborah L. Thorne
Barnes & Thornburg LLP; Chicago
dthorne@btlaw.com
T
he revisions to Article 9 of the
Uniform Commercial Code
(UCC), codified in 2001 and 2002
by every state in the Union, the District of
Columbia and the territories, were meant
to simplify perfection of security interests,
as well as the search functions by which
third parties obtain notice of perfected
interests in the debtor’s personal property.
The interests of both filers of financing
statements and searchers were taken into
account in the 2001/2002 revisions. Filing
has been simplified, but the same is not
true for standard search logic used to
determine whether
perfection of a
security interest has
been
properly
accomplished.
Although the standard by which a financing statement is
rendered ineffective
by
an error that
Deborah L. Thorne
makes the financing
statement “seriously misleading” remains
the same as under prior Article 9 §§9-503
and 9-506, the standard search logic now
used has led to a large number of
“seriously misleading” financing
statements. Perfection is routinely
challenged in a number of ways in
bankruptcy cases: through claims
objections under §502, through avoidance
actions under §§544 and 547 and through
general challenges to the secured status of
a creditor, including denying stay relief.
This article examines several of the recent
cases, the method by which bankruptcy
courts are now resolving these disputes
and several methods by which secured
creditors can attempt to protect
About the Authors
Deborah Thorne is a partner in the
Chicago office of Barnes & Thornburg.
themselves from similar challenges.
Revised UCC §9-506
The primary purpose of revised UCC
§9-506 was to replace the former
reasonableness standard of old UCC §9402 with a straightforward standard based
on the computerized search logic of the
filing office. Previously, third parties
could search and the creditor was deemed
secured if the financing statement could
be found through a reasonable search. The
revision to Article 9 was “designed to
discourage the fanatical and impossibly
refined reading of statutory requirements
which courts occasionally have indulged
themselves.” In re John’s Bean Farm of
130
P.3d
57,
68
(Kan. 2006).
As a result, the post-revision case law
is well-settled that the burden is squarely
placed upon the creditor to correctly
identify the name of the debtor. The
majority of the cases decided in the last
several years, however, is unforgiving of
even minimal errors. See The Official
Committee of Unsecured Creditors for
Tyringham Holdings Inc. v. Suna Bros.
Inc. (In re Tyringham Holdings Inc.) 354
B.R. 363 (Bankr. E.D. Va. 2006). Armed
with this new power, trustees, debtors and
creditors’ committees are challenging the
perfection of secured creditors’ security
interests in an attempt to eliminate the
creditor’s secured status.
Consigned Interest in Jewelry
Eliminated
In the case of In re Tyringham
Holdings Inc., the committee filed a
complaint to determine the validity,
Lien on Me
Homestead Inc., 378 B.R. 385 (Bankr.
S.D. Fla. 2007).1 The intent was to make
it easy to search names, “to lessen the
amount of fact-intensive, case-by-case
determinations that plagued earlier
versions of the UCC, and to simplify the
filing system as a whole. The object of the
revisions was to shift the responsibility to
the filer by requiring the not-too-heavy
burden of using the legal name of the
debtor, thereby relieving the searcher from
conducting numerous searches using
every conceivable name variation of the
debtor.” Pankratz Implement Co. V.
Citizens Nat’l Bank, 281 Kan. 209, 227,
1 See also Margit Livingston,“A Rose by Any Other Name would Smell as
Sweet(or would it?),” Filing and Searching in Article 9’s Public Records,
2007 B.Y.U.L. Rev 111 (2007); John C. Murray, “Sufficiency of Debtor’s
Name for Valid U.C.C. Filings Under Revised Article 9”, The Practical
Real Estate Lawyer, May 2007.
priority or extent of a lien under a
consignment held by defendant Suna
Bros. The committee maintained that
Suna’s financing statement was seriously
misleading because it was not filed under
the correct name of the debtor. Suna held
a security interest in consigned jewelry
inventory worth $310,925 and had
attempted to perfect the security interest
by filing a financing statement with the
Virginia State Corporation Commission.
The financing statement listed the debtor’s
name as “Tyringham Holdings.” The
debtor, a Virginia corporation, was listed
as “Tyringham Holdings, Inc.” on the
public records of the Virginia State
Corporation Commission. An official
UCC search certified by the State
44 Canal Center Plaza, Suite 404 • Alexandria, VA 22314 • (703) 739-0800 • Fax (703) 739-1060 • www.abiworld.org
Corporation Commission revealed a
search conducted under the name
“Tyringham Holdings, Inc.” did not reveal
the Suna financing statement under the
name “Tyringham Holdings.”
Although Suna argued that the
Virgina State Corporation Commission’s
search logic was faulty because it did not
filter out “Inc.” as a noise word, the
Bankruptcy Court for the Eastern District
of Virgina did not consider “Inc.” a noise
word and held that the Suna financing
statement was seriously misleading and
insufficient to perfect Suna’s security
interest in the collateral. As a result,
Suna’s security interest in the jewelry was
deemed unperfected and was sold free and
clear of the consignment interest held by
Suna. Id. at 368.
Objections to Secured Claims
Sustained
Several cases have sustained trustees’
objections to secured claims based upon
perfection issues. In the case of In re Jim
Ross Tires Inc. d/b/a HTC Tires &
Automotive Centers, 379 B.R. 670 (Bankr.
S.D. Texas 2007), the trustee objected to
the proofs of claims filed by Am-Pac Tire
Dist. Inc. and Tradition Bank. The claims
asserted secured positions and relied upon
certain financing statements. Am-Pac
filed a 2002 financing statement listing
the debtor as “Jim Ross Tires, Inc. dba
HTC Tires & Automotive Centers.”
Tradition Bank filed a financing statement
under the name “Jim Ross Tire, Inc.” The
debtor’s name under its Texas
organization documents was Jim Ross
Tires, Inc. The trustee’s official search did
not reveal either the financing statements
filed by Am-Pac or Tradition Bank. The
bankruptcy court found that both
financing statements were seriously
misleading and insufficient. The court
held that the Texas indexing officer was
required simply to enter the name as
provided by the creditor. By entering the
debtor’s name and the d/b/a, the standard
search logic did not find the financing
statement filed by Am-Pac. Tradition
Bank’s financing statement was missing
only the “s” on the word “Tires,” but as a
result, its financing statement was not
revealed under the standard search logic.
Similarly, in the case of In re John’s
Bean Farm of Homestead Inc. 378 B.R.
385 (Bankr. S.D. Fla. 2007), the trustee
objected on a number of grounds to the
$120,000 secured portion of a creditor’s
claim and moved for summary judgment
2 See also John K. Pearson and J. Scott Pohl, “If the Name is Bubba,
You’d Better Spell It Right,” ABI Journal June 2006.
in favor of the trustee. The creditor’s
claim was based, in part, on the filing of
a UCC-1 financing statement with the
Florida Secured Transaction Registry in
2006, which identified the debtor as “John
Bean Farms, Inc.” instead of “John’s Bean
Farm of Homestead, Inc.” The creditor
argued that the financing statement was
not seriously misleading and therefore
was adequate to perfect his security
interest in the equipment securing the
loan. Although the court recognized that
certain errors on financing statements
might be entitled to a safe harbor, if the
error was relatively minor, the creditor’s
error in this case was seriously misleading
and not entitled to the safe harbor
provisions.
The court examined the Florida search
logic, which allows a name to be entered
in the Secured Transaction Registry. The
Registry provided 20 names for each
search and allowed the searcher to search
the previous name or succeeding name on
the alphabetical list. The court
recommended that reasonable searchers
search the immediately preceding and
succeeding names if there was not an
exact match of the debtor’s correct name.
The court also noted that third parties
were under no obligation to conduct an
exhaustive search. In this case, the
creditor’s financing statement under “John
Bean Farms, Inc.” was not revealed in the
listing of 20 names in the initial search
result under the debtor’s proper name,
“John’s Bean Farm of Homestead, Inc.”
The court held that there was no issue of
fact and that summary judgment was
proper in favor of the trustee, as the
financing statement was seriously
misleading. As a result, the creditor did
not hold a perfected secured claim.
Avoidance Actions Pursued
to Avoid “Unperfected”
Secured Liens
The case of In re Andrew Fuell and
Tanya Fuell, 2007 Bankr. LEXIS 4261
(Bankr. D. Idaho, Dec. 13, 2007),
illustrates the danger undertaken by
creditors receiving purchase money
security interests in personal property
from consumers. In the Fuell case, the
debtor granted NMTC Inc. a PMSI in
certain tools and equipment the debtor
needed to operate his business. The
creditor filed the PMSI under the name
“Andrew Fuel.” When Andrew and his
wife filed voluntary petitions under
chapter 7, the trustee ran an online UCC
lien search to locate all filings and did not
locate the PMSI under “Andrew Fuel.”
Several months after the chapter 7
petition, NMTC filed an amendment to its
financing statement correcting the
debtor’s name to “Andrew Fuell.”
Although the trustee later searched and
found the original and amended UCC
financing statements filed by NMTC, the
trustee argued that as of the date of the
petitions, the financing statement was
seriously misleading.
The court held that under Idaho law,
the creditor is required to use the
“debtor’s exact full legal name.” It noted
that the purpose of the filing of UCC
financing statements is to provide notice
to third parties of a creditor’s potential
interest in property owned by the debtors.
NMTC argued that although the debtor’s
name was misspelled in the original
financing statement, it listed his correct
Social Security number and address. The
trustee argued that neither the Social
Security number nor the address would
have disclosed the financing statement as
the statements are indexed by the debtor’s
name. Thus, NMTC was unable to prove
that its security interest was perfected and
was deemed unsecured.
In First Community Bank of East
Tennessee v. Jones, 2008 WL 925555
(Bankr. E.D. Tenn., April 4, 2008), crossmotions for summary judgment were filed
by the chapter 7 trustee and the bank. The
debtor had previously executed two
promissory notes in favor of the bank
evidencing loans totaling more than $1.5
million. In each case, the debtor executed
commercial security agreements, granting
the bank a security interest in certain of
the debtor’s real and personal property to
secure repayment of the loans. Both the
notes and the security agreement referred
to were executed by the debtor in its
assumed name, Silver Dollar Stores, LLC.
The bank also filed with the Tennessee
Secretary of State several UCC-1
financing statements listing the debtor as
Silver Dollar Stores, LLC., some of which
were filed within 90 days of the
involuntary petition filed against the
debtor in July 2006. Eleven months later,
the bank filed an adversary proceeding
against the trustee, seeking declaratory
judgment that its security interest in the
debtor’s personal property was superior
to that of the trustee’s. The trustee
counterclaimed, seeking to avoid as a
preference the bank’s filing of one of the
UCC-1 financing statements filed within
90 days of the petition.
The issue of whether financing
44 Canal Center Plaza, Suite 404 • Alexandria, VA 22314 • (703) 739-0800 • Fax (703) 739-1060 • www.abiworld.org
statements filed by the bank under the
registered, assumed name of the debtor,
“Silver Dollar Stores, LLC” was effective,
even though the organizational name of
the debtor was “Silver Dollar, LLC,” was
an issue of first impression in Tennessee.
Although the court concluded that
Tennessee law required the use of the
debtor’s organizational name, in this
instance the financing statement might not
be “seriously misleading” if a search of
the state records would produce the
financing statement using the assumed
name. In an extensive discussion of the
Tennessee search logic, the court found
that neither side had submitted evidence
that by using the Tennessee search logic,
the assumed-name financing statements
would be found. The court did note,
however, that in conducting its own
search and entering “Silver Dollar,” it had
found the assumed-name financing
statements. Thus, it held that an issue of
fact remained as to whether the official
search logic of Tennessee would reveal
the creditor’s UCC-1 form. Presumably,
if the assumed-name financing statement
was found using the official Tennessee
search logic, the bank’s interest would be
deemed secured and the avoidance action
dismissed.
How Should Secured Creditors
Protect against Perfection
Problems?
In each of the cases discussed above,
the creditors extended secured loans to
debtors and attempted to perfect under
various state statutes. Each found their
financing statements subsequently
challenged as “seriously misleading.”
Although the cases do not provide an
explanation of how the “mistakes”
occurred, there are ways creditors can
attempt to insure against future problems.
If the creditor is attempting to perfect
against an entity such as a corporation or
limited liability company, it should obtain
a certified copy of the entity’s
organization documents and any later
amendments. The financing statement
should reflect the same exact name as
found on the organizational documents
and any subsequent amendments. If the
certificate of good standing provides
another name, it would be prudent to file
a financing statement under that name as
well. A certificate of good standing
should not be relied upon independently,
however, as most states will defer to the
name on the organizational documents.
See The Practical Real Estate Lawyer,
May 2007 at 43. In addition, counsel
documenting secured loans would be
prudent to require borrower’s counsel’s
opinion letters to represent that the name
of the entity conveying the security
interest to the lender is the correct name
as shown in the organizational documents
and any amendments. The borrower
should also represent, as a part of its
representations and warranties in the loan
documents, that the name it is using to
execute the documents is its correct
organizational name under its state of
organization. The lender may also want
to test the UCC financing statement as
part of its closing documents to ensure
that the name on the financing statement
and its particular financing statement is
found under the state search logic.
Individual names present a greater
challenge.2 Prudent lenders, sellers on
consignment or those filing PMSIs
against consumer personality should seek
proof that the name given by the
borrower/buyer is the legal name of the
individual. Copies of official state
documents, such as driver’s licenses, birth
certificates or passports should be
required. Copies should be made of these
documents to demonstrate this due
diligence. If there is any doubt as to the
correct name of the individual, creditors
should file the UCC financing statements
under all of the possible names listed on
various records. Oversight by another
employee should double-check to
determine whether the name is properly
spelled to avoid future seriously
misleading issues.
In addition, certain title companies
and insurers are now offering Uniform
Commercial Code insurance policies that
might be attractive to lenders desiring to
reduce or eliminate exposure for mistakes
that may be considered “seriously
misleading.” Finally, it should be noted
that at least one state has recognized the
problems faced by secured creditors.
driver’s license or state identification.
Furthermore, the statute explicitly states
that use of only the debtor’s trade name
will not be sufficient.3 Section 9.506 of
the Texas amended statute states that
failure to list the debtor’s name as
required in §9.503 will be deemed
“seriously misleading.”
Several other states, including
Tennessee, Nebraska and Delaware, have
passed clarifying revisions to these
sections, but enactment has been delayed.
A committee has been appointed by the
American Law Institute (ALI) and the
Uniform Law Commission (ULC) to
identify specific amendments or
corrections to UCC Article 9 and report
back to both the ULC and the ALI. The
committee is weighing the interests of
both filers and searchers and the tension
between perfection and priority of secured
interests. The committee is currently
meeting and expects to appoint a drafting
committee to begin work in Fall 2008.
Tentative drafts will be considered by the
committee and may be submitted to the
entire Commission after the entire
committee consideration. Time will tell
whether a proposal for uniform changes
to Article 9 will be made by the ULC. n
Reprinted with permission from the ABI
Journal, Vol. XXVII, No. 5 June 2008.
The American Bankruptcy Institute is a
multi-disciplinary, nonpartisan organization
devoted to bankruptcy issues. ABI has more
than 11,500 members, representing all
facets of the insolvency field. For more
information, visit ABI World at
www.abiworld.org.
Revisions to §§9-503
and 9-506 Enacted in Texas,
Considered Elsewhere
Texas recently amended its Business
and Commerce Codes §§9.503 and 9.506
to clarify the “name of the debtor.” The
Texas statute now provides that if the
debtor is a registered organization, the
name will be that on its state
organizational documents that are filed as
of public record, including any
amendments. Also, if the debtor is an
individual, the name is that on his/her
3 Tex. Bus. & Com. Code §9.503 (2007).
44 Canal Center Plaza, Suite 404 • Alexandria, VA 22314 • (703) 739-0800 • Fax (703) 739-1060 • www.abiworld.org