Section 9 of the Uniform Commercial Code, adopted in the 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 movable property as security for ‘a loan. The basic principle of section 9 is that if the lender follows the rules, he must be protected from third parties, including other creditors or a trustee in bankruptcy, who would seek to challenge the security of the lender or the priority of the lender. safety.
It has been more than twenty years since a revision of section 9 placed the burden on the lender (the “Secure part“In the jargon of Article 9) to correctly identify the legal name of the party granting the security interest (the”Debtorâ) On financing statements, the publicly filed document that notifies the world that the secured party has secured a security interest in the debtor’s personal property identified in the financing statement. For debtors such as corporations, limited liability companies and other entities formed by filing documents with a state government office, it is easy to get the correct legal name; request the state government office to provide a certified copy of the creation documents and any other amendments filed and to use the most recent name contained in those certified documents. A minor error in identifying the debtor on the financing statement could lead to catastrophic results for the secured creditor.
Yet more than twenty years later, disputes over this fairly simple rule continue. The most recent dispute made it to the United States Court of Appeals for the 11e Circuit. The relevant facts of In Re NRP Lease Holdings, LLC, 2021 Westlaw 5865378 (11e Cir. December 10, 2021), are simple. Live Oak Banking Company (“Living oak“) granted two loans to 1944 Beach Boulevard, LLC (“Beach Boulevard) And its affiliates, secured by all personal property of Beach Boulevard and its affiliates. Beach Boulevard is a limited liability company organized in Florida. Live Oak has filed two UCC-1 funding statements with the Florida Secured Transaction Registry (the “Registration“” Each of which had entered the Beach Boulevard name as “1944 Beach Blvd., LLC”. The loans remained unpaid as of December 5, 2019, when Beach Boulevard and its affiliates filed for Chapter 11 bankruptcy. The correct legal name for Beach Boulevard is “1944 Beach Boulevard, LLC” according to the Articles of Association. organization filed with the Florida Secretary of State.
Here’s the problem: is the word “Boulevard” abbreviated as “Blvd”. is “seriously misleading” thus rendering the funding statement ineffective and leaving Live Oak as an imperfect secured creditor, or rather, Live Oak was protected by the safe harbor rule found in Florida’s version of section 9 -506 from UCC. The Safe Harbor rule provides that if the funding report 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 report will not be found. will not be considered “seriously misleading”. Beach Boulevard has filed adversarial proceedings against Live Oak, alleging that the use of “Blvd”. was “seriously misleading” and, therefore, the safety of Live Oak would not be perfect. Live Oak responded and filed affirmative defenses claiming the safe harbor rule was protected. The parties filed counterclaims for summary judgment. The bankruptcy court dismissed Beach Boulevard’s petition and allowed Live Oak’s petition. In granting Live Oak’s petition, the bankruptcy court determined that Live Oak had perfect security interest despite the default on the funding statement because the funding statement was in the search, but not on the first page results. The district court confirmed. Beach Boulevard then appealed. Since there is a division among 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 standard search logic of the register on similar facts in two different cases, the 11e Circuit certified three questions to the Florida Supreme Court to resolve Florida’s safe harbor law in the context of the search process, used the Florida registry and deferred its decision until the Florida Supreme Court had the opportunity to consider the certified questions.
Not all states use the same search logic. Therefore, the same pattern of facts may not be resolved in the same way in research conducted in two different states. The certified questions and the final result in Rented 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 take place.
The drafters of the 1998 revision of Article 9 intended to place the onus squarely on the secured party of correctly identifying the legal name of the debtor and relieved the researcher of the burden of having to search under several name variations. The Safe Harbor was created to correct 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 ability 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 up front to obtain organizational documents for a loan. entity 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) before filing the financing statement.