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Article 9 of the Uniform Commercial Code, adopted 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 a security interest in personal property collateral to secure a loan. The basic premise of Article 9 is that if the lender follows the rules, it should be protected against third parties, including other creditors or a bankruptcy trustee, who would seek to challenge the lender’s security interest or the priority of the security interest.

It’s been more than twenty years since a revision to Article 9 placed the burden on the lender (the “Secured Party” in Article 9 parlance) to correctly identify the legal name of the party granting the security interest (the “Debtor”) on financing statements, the publicly filed document that provides notice to 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, limited liability companies and other entities that are created by filing documents with a state governmental office, obtaining the correct legal name is easy; request the state governmental office to provide a certified copy of the creation documents and all other filed amendments and use the most recent name contained in those certified documents.  A minor error in the identification of the Debtor on the financing statement could lead to catastrophic results for the Secured Creditor.

Yet more than twenty years on, litigation arising from this fairly simple rule continues. The most recent dispute made it all the way to the US Court of Appeals for the 11th Circuit.   The relevant facts of In Re NRP Lease Holdings, LLC, 2021 Westlaw 5865378 (11th Cir. Dec. 10, 2021), are simple.  Live Oak Banking Company (“Live Oak”) made two loans to 1944 Beach Boulevard, LLC (“Beach Boulevard”) and its affiliates, secured by all of the personal property assets of Beach Boulevard and its affiliates. Beach Boulevard is limited liability company organized in Florida.  Live Oak filed two UCC-1 financing statements with the Florida Secured Transaction Registry (the “Registry”) each of which had listed the name of Beach Boulevard as “1944 Beach Blvd., LLC”.  The loans remained unpaid as of December 5, 2019, the day that Beach Boulevard and its affiliates filed Chapter 11 bankruptcy petitions.   The correct legal name of Beach Boulevard is “1944 Beach Boulevard, LLC” per the articles of organization on file with the Florida Secretary of State.[1]

Here is the issue: whether abbreviating the word “Boulevard” as “Blvd.” is “seriously misleading” thereby rendering the financing statement ineffective and leaving Live Oak as an unperfected secured creditor, or instead, was Live Oak protected by the safe harbor rule found in Florida’s version of UCC Article 9-506.  The safe harbor rule provides that if the financing statement 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 financing statement will not be deemed “seriously misleading”.   Beach Boulevard filed an adversary proceeding against Live Oak alleging that the use of “Blvd.” was “seriously misleading” and therefore, Live Oak’s security interest would be unperfected.  Live Oak answered and filed affirmative defenses asserting the protection of the safe harbor rule.  The parties filed cross-motions for summary judgment.  The Bankruptcy Court denied Beach Boulevard’s motion and granted Live Oak’s motion.  In granting Live Oak’s motion, the Bankruptcy Court determined that Live Oak had a perfected security interest notwithstanding the defect in the financing statement because the financing statement appeared in the search albeit not on the first page of the results.  The District Court affirmed.  Beach Boulevard then appealed.  Because there is a split between Florida state courts regarding the application of the state law safe harbor provision in the context of search results received using the Registry’s standard search logic on similar facts in two different cases, the 11th Circuit certified three questions to the Florida Supreme Court to settle Florida law on the application of safe harbor in the context of the search process utilized Florida’s Registry and deferred its decision until the Florida Supreme Court had the opportunity to consider the certified questions.

Not all states utilize the same search logic. Therefore, the same fact pattern may not be resolved the same way in searches conducted in two different states.  The certified questions and the ultimate outcome in Lease Holdings may be Florida specific if no other state uses a similar search logic.  But that is beside the point. The point here is that this litigation did not need to happen.

The drafters of the 1998 revision to Article 9 intended to place the burden squarely on the Secured Party to correctly identify the legal name of the Debtor and relieved the searcher of the burden of having to search under multiple name variations.  The safe harbor was created to address minor errors that are not “seriously misleading”.  To be clear, however, there is little or no reason for a secured creditor to create the opportunity for a court to adjudicate whether minor errors meet the safe harbor test under any jurisdiction’s standard search logic.

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

[1]See, In re C.W. Mining Co., 488 B.R. 715 (D. Utah 2013) (affirming a decision of the Bankruptcy Court which found UCCs to be seriously misleading when a search of the correct name, “C. W. Mining Company”, using the jurisdiction’s standard search logic, failing to find filed financing statements identifying the Debtor as “C W Mining Company” and “CW Mining Company”).  See also, In re EDM Corp., 431 B.R. 459 (BAP 8th Cir. 2010) (affirming a decision of the Bankruptcy Court which found a UCC filing to be seriously misleading when a search of the correct name, “EDM Corporation”, using the jurisdiction’s standard search logic, failed to find a filed financing statement identifying the Debtor as “EDM Corporation d/b/a/ EDM Equipment” ); In re Jim Ross Tires, Inc., 379 B.R. 670 (Bankr. S.D. Texas 2007) (Chapter 7 Trustee prevailed on objection to proof of claims filed by two creditors when the court found that two financing statements were seriously misleading; search of correct name, “Jim Ross Tires, Inc.” failed to find to find filed financing statements identifying the Debtor as “Jim Ross Tires, Inc. dba HTC Tires and Automotive Centers” and “Jim Ross Tire Inc.”).