UCC Funding Statements and Debtor Name Errors: Litigation Continues

Section 9 of the Uniform Commercial Code, enacted in all fifty states plus the District of Columbia with relatively few variations, sets out, among other things, the rules to be followed when obtaining security over personal property as collateral. of a loan. The basic principle of Article 9 is that if the lender follows the rules, it should be protected against third parties, including other creditors or a trustee in bankruptcy, who seek to challenge the lender’s security or the priority of safety.

It has been more than twenty years since a revision of Article 9 placed the burden on the lender (the “Secure partin the jargon of Article 9) to correctly identify the legal name of the party granting the security right (the “Debtor”) on financing statements, the publicly filed document that notifies the world that the secured party has obtained a security interest in the personal property of the debtor identified in the financing statement. For debtors such as corporations, LLCs, and other entities created by filing documents with a state government office, obtaining the correct legal name is easy; request the state government office to provide a certified copy of the documents of incorporation and all other filed amendments and to use the most recent name contained in such certified documents. A minor error in identifying the Debtor on the financing statement could have catastrophic results for the Secured Creditor.

Yet, more than twenty years later, disputes arising from this fairly simple rule persist. The most recent dispute went all the way to the United States Court of Appeals for the 11and Circuit. The relevant facts of In Re NRP Lease Holdings, LLC2021 Westlaw 5865378 (11and Cir. December 10, 2021), are simple. Live Oak Banking Company (“living oak”) made two loans to 1944 Beach Boulevard, LLC (“beach boulevard”) and its affiliates, secured by all movable property of Beach Boulevard and its affiliates. Beach Boulevard is a limited liability company organized in Florida. Live Oak has filed two UCC-1 financing statements with the Florida Secured Transaction Registry (the “Registration”) each of which had listed the Beach Boulevard name as “1944 Beach Blvd., LLC”. The loans remained outstanding as of December 5, 2019, the day Beach Boulevard and its affiliates filed for Chapter 11 bankruptcy. with the Florida Secretary of State.[1]

Here’s the problem: if the abbreviation of the word “Boulevard” is “Blvd”. is “grossly misleading”, thereby rendering the financing state ineffective and leaving Live Oak as an unperfected secured creditor, or instead Live Oak was protected by the safe harbor rule found in the Florida version of the UCC Rule 9-506. The safe harbor rule provides that if the funding status containing the incorrect name still appears when a search is performed using the correct legal name and the jurisdiction’s standard search logic, the incorrect funding status will not will not be considered “grossly misleading”. Beach Boulevard filed adversarial proceedings against Live Oak alleging that the use of “Blvd.” was “seriously misleading” and therefore Live Oak’s safety would be flawed. Live Oak responded and filed affirmative defenses asserting safe harbor rule protection. The parties filed counterclaims for summary judgment. The bankruptcy court denied Beach Boulevard’s motion and granted Live Oak’s motion. In granting Live Oak’s petition, the bankruptcy court determined that Live Oak had a perfect security interest despite the default in the financing statement because the financing statement appeared in search but not on the first page of results. . The district court upheld. Beach Boulevard then appealed. Since there is a split in the courts of the State of Florida regarding the application of the safe harbor provision of state law in the context of search results received using the registry’s standard search logic on similar facts in two different cases, the 11and Circuit certified three questions to the Florida Supreme Court to settle Florida’s Safe Harbor Enforcement Act in the context of the search process used the Florida Registry and deferred its decision until the Court Supreme Court of Florida has had an opportunity to consider the matters certified.

Not all states use the same search logic. Therefore, the same fact pattern may not be resolved in the same way in searches conducted in two different states. The certified questions and the final result in Leased assets may be specific to Florida if no other state uses similar search logic. But that’s not the point. The point here is that this litigation did not need to happen.

The drafters of the 1998 revision of section 9 intended to place the burden squarely on the secured party to correctly identify the debtor’s legal name and to relieve the searcher of the burden of having to search under several name variations. Safe Harbor was created to deal with minor errors that are not “seriously misleading”. To be clear, however, there is little or no reason for a secured creditor to give a court the opportunity to decide whether minor errors meet the safe harbor test under the standard search logic of any jurisdiction.

To avoid the time, effort, and expense of unnecessary litigation in situations where a secured party may already be facing a loss on their loan, a secured party may want to spend a few dollars upfront to obtain organizational documents. of an entity and carefully review the debtor’s name on the financing statement against the correct legal name on the organizational documents (more than one pair of eyes is recommended) before filing the financing statement.