Every lender needs to be aware of the detail and accuracy required in completing financing statements to ensure their security interest is properly perfected. In the case of a corporation, it means providing the name exactly as it appears in the Articles of Incorporation.
A lender may only exercise its rights to collateral if a borrower is in default on a loan. Given the recent economy, that’s unfortunately not a rare occurrence. U.S. Bankruptcy Court records show there were 1.4 million bankruptcy filings for the 2009 fiscal year ending Sept. 30, 2009. This is a 34.5% increase over the 2008 fiscal year, demonstrating it is increasingly important for a lender to take all steps possible to fully protect its positions.
While it is relatively easy to adequately provide for a security interest in collateral, the Uniform Commercial Code (UCC) filing procedure is sometimes complex and subject to human error at many stages in the process. Issues undermining the attachment, perfection and priority of security interests generally only become apparent once the loan is in default, often long after the loan has been granted.
The current economic situation, and the resulting increase in charge-offs and delinquency rates, now has many lenders scrambling to re-examine their policies and practices regarding protection of the collateral securing such loans. Ensuring the correct debtor name is sourced and filed on a UCC Financing Statement is the beginning part of that process.
Uniform Commercial Code — Revised Article 9
Assuming you are in the correct filing jurisdiction, UCC Revised Article (RA) 9 provides very specific guidance regarding the effectiveness of financing statements. According to the statute:
Recent Court Cases
Fairly recent court cases demonstrate the importance of debtor names on a UCC Financing Statement, and the risks and costs involved when a security interest is not perfected correctly. Specifically, these cases make it clear that a business entity’s name is a valuable differentiator.
One case involves a subtle variation on a name, and the second the omission of a reference of incorporation — both minor oversights that cost three lenders hundreds of thousands of dollars. Both present a compelling argument that all lenders should verify debtor names on financial statements using a thorough, effective and scalable methodology to support their asset and security claims.
CASE STUDY #1:
Wing Foods Inc. and CCF Leasing Co.
In 2008, CCF Leasing Co. (CCF) leased restaurant equipment to Wing Foods, Inc., based in Idaho. Following usual practices, it filed a UCC-1 financing statement with Idaho’s Secretary of State to perfect its interest. Unfortunately for CCF, it incorrectly listed the debtor’s name on the UCC-1 as “Wing Fine Food” instead of “Wing Foods, Inc.”
One year later, Wing Foods filed for Chapter 7 bankruptcy. Rather than allow CCF to make a claim on its assets, it argued that the misrepresentation on the UCC-1 meant it could avoid the leasing company’s security interest. Unfortunately for CCF, the courts agreed that the disparity of the name on the UCC-1 was enough to void the security interest.
CASE STUDY #2:
Tyringham Holdings Inc. and Suna Bros. Inc.
The negative consequences of filing under the wrong name are further illustrated in the case In re Tyringham Holdings, Inc. In this case, Suna Bros. Inc., a jeweler based in New York, NY, consigned 65 pieces of jewelry worth approximately $300,000 for resale to debtor Tyringham Holdings, Inc., a Virginia corporation.
Under Article 9, Suna’s interest in the consigned goods was a security interest that Suna sought to perfect by filing a UCC-1 financing statement with the Virginia state filing office. The debtor’s name, as contained in Virginia’s corporation records, was “Tyringham Holdings, Inc.” However, Suna’s financing statement listed the debtor’s name as “Tyringham Holdings” — omitting the “Inc.”
Tyringham later filed for Chapter 11 bankruptcy protection. In Tyringham’s bankruptcy case, other creditors tried to invalidate Suna’s claim, arguing that pursuant to Article 9, Suna’s filing was ‘’seriously misleading’’ and therefore did not perfect Suna’s lien against the goods.
Was Suna’s financing statement filed in Virginia sufficient to give it a perfected security interest in its collateral? Unfortunately for Suna, it was not. The search logic used by the Virginia filing office considered “Inc.” a significant word, and a search under the debtor’s proper name (with Inc.) did not turn up Suna’s actual, erroneous filing. Therefore, the bankruptcy court held that the financing statement was seriously misleading, the financing statement was deemed unperfected and Suna lost its security interest in its debtor’s collateral.
Lessons Learned
As each case study demonstrates, it is critically important to verify and reflect the debtor’s correct name when filing a financing statement. Although the result in all these cases were harsh for the creditors, they are also easy to avoid. Fortunately, there are safeguards and third parties that can assist throughout the lifecycle of every lien, so lenders, leasing firms and others may avoid similar outcomes and actually realize significant benefits at the same time.
To illustrate, what follows are the key areas that constitute a thorough, effective and scalable methodology in relation to asset and security claims:
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how is your UCC-1 filing protected from bankruptcy court?