Now UCC It – Now You Don’t!
I thought that the enactment of revised article-9 of the Uniform Commercial Code would put an end to faulty debtor names and make the job of searching for UCC filings an easier task. The revised commercial code established the ‘standard search logic’ of a jurisdiction as the ‘litmus test’ to ensure that a filer got the name correct, I think we all believed the issue of debtor names on financing statements had been settled once and for all.
Wrong! Since the adoption of the revised code and recent interpretation of the code issues are emerging. We will discuss some of these issues we can control and some we have absolutely no control over and how we can mitigate our risk when filing UCC financing statements.
The International Association of Commercial Administrators, IACA, is a group whose membership is composed of Secretary of State officials responsible for the indexing and administering UCC filings and the standard search logic to locate those filings in the index. At the IACA conference in May 2007 a discussion in the secured transaction section erupted over two issues that are at the core of determining if a debtor names meets the requirement for “not seriously misleading.” The first issue is how to index foreign text characters and the second issue was search logic.
Foreign text characters (accents, umlauts, etc.) are a concern with the filing offices (and filers) as these foreign characters cannot be typed on a US Keyboard and as a result there is no agreement as to how these characters should be entered into the index. Although at first this may appear to be a minor issue, however, the indexing of the name has a direct effect on whether or not that name can be located when a search of the index is conducted. Examples of how this would affect the search can be demonstrated with the name E’LAN. Depending on the state’s computer system, E’LAN may be indexed as ELAN or ‘ELAN or E’LAN. Since it is not possible to put the accent mark over top of the “e” as it exists in the native country.
There is no consensus among the states as to how foreign characters should be indexed, and as a result up to three separate searches may be required to yield results when searched. The second issue that was debated at
IACA should cause concern for anyone who conducts UCC searches or performs UCC filings. The membership of IACA, State officials responsible for indexing, did not feel notice was required when changes were made to the search logic.
As you know, search logic has a direct effect on whether a filing is considered “seriously misleading” and therefore effective or non-effective. Remember, If a filing is located by the state’s standard search logic, that filing is not seriously misleading and would perfect a security interest.
Would a change in search logic affect a filing previously performed? Absolutely! If a change is made to the search logic subsequent searches may not yield the same result as the search in your file (assuming that you conducted a search to reflect to verify the the standard search logic captured your filing.) More damaging is filings that were
not located when you granted a loan that could suddenly prime your UCC as now they are located! Another possibility is that the filing you made and verified as not “seriously misleading” is suddenly ineffective because it is no longer located by the state’s search logic.
Courts have repeatedly found that, “Little more is asked of a secured creditor than to accurately record the debtor’s name, and according to the statute failure to perform this action clearly dooms the perfected status of a security interest.” In re Tyringham Holdings, Inc., 354 B.R. 363 VA (2006). We as searchers and filers have no control over the search logic and whether states choose to change to it without our notice.
Massachusetts recently (2010) caused a stir in the UCC filing world when they announced that they are considering enacting a change to their search logic whereby only the exact name provided on the search request would be searched and therefore only exact matches would be returned. Although some may concern this great news, remember that in one case, spacing rendered a filing ineffective.
In Host Am. Corp v. Costline Fin. Inc., 2006 U.S. Dist. Lexis 35727 (D. Utah May 30, 2006) the debtors name was K.W.M. a filing was made under the name KWM, and then later corrected to K. W. M. because the state of Utah’s search logic did not exclude spacing when a search of the debtor name was conducted using the actual name of the debtor K.W.M. the financing statement under K. W. M. was not located and therefore ineffective to perfect a security interest. So although an exact name standard may seem like a great idea, in practice it could have very severe consequences!
Another concern that you should have centers around Federal Tax Liens filed in the same index as UCC’s. Unlike financing statements that must adhere to the sections of the code surrounding debtor names and the standard search logic test to verify if the filing is effective, Federal Tax Liens do not need to meet these requirements. Therefore searchers that only conduct searches at the filing offices relying solely on the certified search do so at their own peril.
Since the Internal Revenue Service is not bound by naming conventions that filers of UCC must abide by, an uncertified search is the only type of UCC search that could possibly locate similar named debtors and therefore provide you the “lay of the land” to determine if conflicting security interests exist. These hidden filings lay in wait behind a certified search, bound by the standard search logic, and failure to conduct the uncertified search will blindside you to their existence in the index. Don’t think this can happen to you? Review the (in Re: Spearing Tool 2005 case WL 1430501 (6th Cir. 2005).
What can you do to reduce potential loss, protect you security interest? Searchers can do a couple of things to help guard against these issues. Uncertified searches with broad search logic are your first defense in determining what other filings to consider when determining potential priority. Remember search logic can change and your only defense against fluid search logic is to adopt an “exact name standard.” Finally, key all debtor names exactly as they appear on the organic documents on which you relied for the debtor name so that if a search logic change occurs at least your filing is indexed exactly as the name appears on the documents that formed the organization.