Source: https://www.carmodymacdonald.com/beware-of-the-extra-space
Timestamp: 2020-06-05 02:23:32
Document Index: 450082675

Matched Legal Cases: ['§ 9', '§ 9', '§ 9', '§ 9', '§ 9', '§ 9', '§ 9']

Beware of the Extra Space: Court Rules UCC-1 Financing Statement Ineffective for Minor Punctuation Error | Carmody MacDonald | St. Louis, MO Law Firm | Business Services | Individual Services | Litigation Services
Case Background: United States SEC v. ISC, Inc.
The creditor, Double Bubble, Ltd. (Creditor), took a security interest in the assets of the debtor, ISC, Inc. (Debtor), and filed a UCC-1 with the Wisconsin Department of Financial Institutions (DFI) to perfect its security interest. In 2016, after a judgment was filed against the Debtor in an enforcement proceeding filed by the SEC, a federal court appointed a receiver for the Debtor and an asset sale was initiated.
Despite the Creditor having filed a UCC-1 to perfect its security interest in the Debtor’s assets, the receiver classified the Creditor as an unsecured creditor in its proposed distribution plan because a search of the Debtor’s name in the DFI’s records did not locate the Creditor’s UCC-1. The failure to locate the UCC-1 was due to the fact that the Creditor erroneously included an extra space in the Debtor’s name on its UCC-1, listing the Debtor as “ISC, Inc .” instead of “ISC, Inc.”
The Relevant Uniform Commercial Code (UCC) Sections
UCC § 9-506(a) provides in part that:
a financing statement is effective “even if it has minor errors or omissions unless the errors or omissions make the financing statement seriously misleading.”
UCC § 9-506(b) provides in part that:
a “financing statement that fails to sufficiently provide the name of the debtor is seriously misleading.”
UCC § 9-506(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, discloses a financing statement with the debtor’s incorrect name, then the name provided [on the UCC-1] does not make the financing statement seriously misleading.” (emphasis added)
The Court’s Decision Summarized
The court identified the UCC’s escape hatch (UCC § 9-506(c)) for the debtor’s name if there is an error in the UCC-1 and although many filing offices disregard spaces in their standard search logic, UCC § 9-506(c) did not help the Creditor in this case. Due to the search logic that the DFI uses, the extra space in the Debtor’s name prevented the UCC-1 from appearing in the search results using the Debtor’s correct legal name. As a result, the court found the UCC-1 to be “seriously misleading” and thus ineffective to perfect the Creditor’s security interest.
The decision by the UCC to adopt UCC § 9-506(c) in 2000 to implement particular search logic by filing offices will continue to play a very significant role in determining the outcome of challenges to lien perfection. Each system’s search logic should always find UCC-1s when the debtor’s correct legal name is used, and sometimes will still find a UCC-1 filed against a debtor even if the UCC-1 contains an error in the debtor’s legal name. Because of the UCC § 9-506(c) escape hatch, such UCC-1s will still be effective to perfect a creditor’s lien so long as the UCC-1 is found in a search for the debtor’s correct legal name.
However, this case is a warning to carefully review all UCC-1s prior to filing. Despite the UCC escape hatch, it is critical to confirm the accuracy of the debtor’s name, debtor’s address, and the correct filing office since some states’ systems, like the DFI, will not find a UCC-1 with even a tiny mistake in the debtor’s name.
I’m a creditor and unsure about the accuracy of my UCC-1. What should I do?
If you are a creditor and unsure about the accuracy of your UCC-1 or the appropriate office to file your UCC-1, consider consulting an experienced lending attorney. He or she can either prepare or review your UCC-1 before filing to confirm that upon filing it will be effective to perfect your security interest in your debtor’s assets.
The case is United States SEC v. ISC, Inc., 2017 WL 3736796 (W.D. Wisc. Aug. 30, 2017).
Kelly J. Iffrig is a member of the transactional practice group and concentrates her practice in banking and finance law, business law, emerging businesses, and real estate law. She represents a wide array of business and individual clients, with an emphasis on commercial, real estate and lending transactions; formation of business entities; mergers and acquisitions; real estate development and leasing; and copyright and trademark registration and licensing.
This column is for informational purposes only. Nothing herein should be treated as legal advice or as creating an attorney-client relationship.