An innocuous abbreviation of a debtor’s name on a UCC-1 financing statement can be fatal to perfection and leave the secured creditor with nothing more than an unsecured claim.
A financing statement that abbreviated part of the debtor’s legal name meant that the financing statement was “seriously misleading,” at least in Florida. Consequently, the security interest was not perfected, according to the Florida Supreme Court and the Eleventh Circuit.
The facts were simple. The debtor’s legal name in the certificate of incorporation on file with the Florida Secretary of State showed “1944 Beach Boulevard LLC.” A lender intending to have a lien on all assets filed a UCC-1 financing statement showing the debtor’s name as “1944 Beach Blvd. LLC.” That is, the financing statement abbreviated “Boulevard” to read “Blvd.”
The abbreviation was innocuous, right? The security interest was perfected, wasn’t it?
Answer: No. The abbreviation was “seriously misleading,” according to the Florida Supreme Court, but that’s not how the bankruptcy and district courts saw it.
In bankruptcy court, the trustee utilized the power of a hypothetical judicial lien creditor under Section 544(a) to file a complaint to avoid the security interest, contending it was not perfected because the name was abbreviated. The trustee and the secured creditor filed cross motions for summary judgment.
The two lower courts believed that the abbreviation fell under Florida’s so-called safe harbor that makes financing statements effective despite “minor errors or omission.” Believing the safe harbor to apply, they both held that the security interest was enforceable. On the second appeal, the Eleventh Circuit certified questions to the Florida Supreme Court to resolve novel issues of state law.
The state high court came back with an answer that the circuit court was not expecting, but the answer meant that the security interest was not perfected. So, the Eleventh Circuit reversed and remanded.
Here are the details:
Under the Florida statute, a UCC-1 financing statement that substantially complies with the requirements is effective, “even if it has minor errors or omissions, unless the errors or omissions make the financing statement seriously misleading.” That provision is called the safe harbor.
The next provision says that a financing statement is “seriously misleading” if it does not show the debtor’s precise legal name. This is known as the “zero tolerance rule.”
For the appeal, the critical provision was in the next section: A financing statement is not “seriously misleading” if a search would disclose the financing statement, using the debtor’s correct name and “the filing office’s standard search logic, if any.” [Emphasis added.]
The Florida Supreme Court tackled the question of defining “standard search logic” and deciding whether the Florida filing office used one. The Florida court explained that the recording statute does not define “standard search logic,” but UCC Article 9 does, and it governs security interests.
Basically, a standard search logic is one that produces a set of unambiguous identification hits.
Rather than spitting out unambiguous identification hits, the search in Florida returned a list of 20 similar names, beginning with the name that most closely matches the name searched. The precise name of the debtor was on a different page. The Florida court said that a search that turns up so many imprecise hits is not a standard search logic.
Holding that the Florida filing office does not use a standard search logic, the state high court held that the zero-tolerance rule meant that a financing statement must use the debtor’s precise legal name, or else the security interest will not be perfected.
With the safe harbor inapplicable, the Florida Supreme Court held that the zero-tolerance rule meant that the debtor was not sufficiently identified, the financing statement was “seriously misleading,” and the security interest was not perfected.
Because the Florida high court answered the certified question by saying that the security interest was not perfected, the Eleventh Circuit reversed and remanded.
Observation
Lenders in Florida must be racing to find and correct financing statements where debtors’ names were abbreviated or were not the precise legal names. And maybe debtors are lining up to file bankruptcy before correct financing statements are filed.
If anyone knows about other states with similar recording rules, please let this writer know.
An innocuous abbreviation of a debtor’s name on a UCC-1 financing statement can be fatal to perfection and leave the secured creditor with nothing more than an unsecured claim.
A financing statement that abbreviated part of the debtor’s legal name meant that the financing statement was “seriously misleading,” at least in Florida. Consequently, the security interest was not perfected, according to the Florida Supreme Court and the Eleventh Circuit.