Avoiding Pitfalls in Article 9 Financing Statements

A recent opinion by the United States Court of Appeals for the Eleventh Circuit highlights the importance of obtaining and including a borrower’s correct name in the Form UCC-1 to be filed in the Virginia State Corporation Commission and other jurisdictions with statutory provisions similar to that of Virginia.

In the case of 1944 Beach Boulevard, LLC v. Live Oak Banking Company, 2022 U.S. App. LEXIS 27330, the Court found that the Uniform Commercial Code financing statements filed by Live Oak with the Florida Secretary of State was “seriously misleading” because Live Oak listing the Debtor’s Name as “1944 Beach Blvd., LLC”, using the common abbreviation of “Boulevard” rather than the full legal name of the Debtor listed in its articles of incorporation filed with the Florida Secretary of State.  The use of the abbreviation “Blvd”, was “seriously misleading.” because those statements did not sufficiently provide the name of Debtor in accordance with the applicable Florida statute and would not result in identifying the financing statement filed by Live Oak in a search using the borrower’s full name.  For that reason, the Court found that the filed Uniform Commercial Code financing statement was ineffective to perfect the security interest of Live Oak in the Debtor’s assets under Florida law.

The Eleventh Circuit’s decision is consistent with the holding in a 2006 opinion by the United States Bankruptcy Court for the Eastern District of Virginia, 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).  There, the Court held that in Virginia (i) Section 8.9A-503(a) of the Code of Virginia (the “Virginia Code”) specifies the sufficiency of the debtor’s name to be “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,” and (ii) as provided by Virginia Code Section 8.9A-506(b), with the exception provided in subsection (c), a financing statement that fails sufficiently to provide the name of the debtor in accordance with Virginia Code Section 8.9A-503(a), is “seriously misleading”.

Consistent with Virginia Code Section 8.9A-506, the State Corporation Commission has promulgated Rule 5VAC5-30-70, Search requests and reports.  For the preparer of a Form UCC-1 financing statement for filing with the Virginia State Corporation Commission, it bears reading.  Of particular importance is section (B)(1) of the rule, which provides in part that “[a] search request will be processed using the exact name provided by the requestor.”  Taken together, the two court decisions cited above, the provisions of Title 8.9A of the Code of Virginia, and Rule 5VAC5-30-70 require more that the simply ministerial task of completing Form UCC-1.  For example, if the preparer of a search for all Form UCC-1 financing statement filings uses “Mtn.” for the word “Mountain” in the borrower’s name, the search by the State Corporation Commission will not search for the borrower’s name in the records of the State Corporation Commission.

Why is this diligence important?  A properly prepared and filed Form UCC-1 financing statement protects the lender against all future parties asserting a superior lien against the property of the borrower listed in the Form UCC-1 financing statement.[1]  This is especially important in the context of a borrower’s filing of a petition in bankruptcy. Section 544(a) of the United States Bankruptcy Code (11 U.S.C. §101, et seq.) provides that the trustee (which can mean either a trustee appointed in a case or, in a case under Chapter 11 of the United States Bankruptcy Code, the debtor) has, as of the commencement of the case, the rights and powers of a creditor that extends credit to the debtor at the time of the commencement of the case, and that obtains at that time a judgment on all the property, or an unsatisfied execution against the creditor.  With these powers, the trustee (or the debtor in a Chapter 11 case) will have priority over any lien not properly perfected and may avoid any such lien.  In plain terms, this means the holder of a lien not properly perfected is likely to be treated in the bankruptcy case of their borrower as not having a lien at all.

This diligence is also important in the loan approval process. The identification of all security interests in the collateral in which the borrower will grant a security interest to the lender insures that the lender will have the collateral it expects to secure the repayment of the loan being made.  Careful preparation of a Form UCC-11 Information Request begins with the confirmation of the exact name of the entity to be named as the Debtor, which can be obtained by a search of the appropriate state agency in which corporate filings are made and maintained, and is completed when the preparer can confirm that the name on the completed Form UCC-11 is identical to the name of the entity as shown in the records of the State Corporation Commission or similar governmental entity in the state in which the filing is to be made.

Lenders who carefully take the steps to identify the full correct name of their borrower and precisely use that name in searching for previously perfected security interests in the collateral that will secure their loan and in perfecting their security interest in that collateral will avoid the fate of the unfortunate lenders in the two cases described in this article.

[1] In some circumstances, the filing of a Form UCC-1 is not the proper manner of perfection of a security interest or is not the only method of perfection of a security interest.  For example, perfection of a security interest in a motor vehicle must be perfected by the placement of lender’s name on the Certificate of Title issued by a state’s division of motor vehicles.  In some instances, a lien may be perfected by possession of the property by the lender.  The reader should consult with counsel for the appropriate method of perfection.

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These articles are provided for general informational purposes only and are marketing publications of Gentry Locke. They do not constitute legal advice or a legal opinion on any specific facts or circumstances. You are urged to consult your own lawyer concerning your situation and specific legal questions you may have.