MODERNDUE DILIGENCE SIGNPOSTSCURRENT LAW & BEST PRACTICES

PRESENTED BY

DAN LIAS, ESQ.

Agenda – Signposts

• Organic Public Record

• Individual Names

• Your Terminated---GM CASE

• Prefiling gets a definition

• Extension of 4 month rule

• Trust

• Modern Checklists

Road to Perfection…

• Organic public record rules the land

– It starts here

“Public Organic Record” means a record that is available to the public that is available for inspection and that is:

(A) a record consisting of the record initially filed with or issued by a State or the United States to form or organize an organization and any record filed with or issued by the State or United States which amends or restates the original record.

Going Green!

• What Is This Organic Public Record?

A Check List Must---You must rely on the MOST RECENT CHARTER DOCUMENT which in most corporate matters is either the Articles of Incorporation or Articles of Organization. (Client providing original documents is NOT the same).

Relying on any other type of state document is NOT the equivalent to the Charter Documents---Certificates of Good Standing or Name Listing from State’s Website can not be relied upon due to their status as compiled data (not Organic).

Potholes Along The Way

• Building On This Organic Concept: Common slip ups EVERYONE seems to make----

– And vs. &

– Making it plural

– DBA, FKA,

– Punctuation – spaces, commas, dashes

– Numbers – spelled out, roman numerals, etc.

– Corp ending or noise words?

Case In Point: CNH CAPITAL AMERICA LLC v. PROGRESSO MATERIALS LTD, et al

• CNH Capital America and Debtor Progresso Materials, Ltd. Entered into security agreements regarding equipment.

• CNH filed in Texas its UCC 1 documents using the name Progresso Material, Ltd.

• In dispute that followed court determined that filing was “Seriously Misleading” since this filing did not comport with Texas’s version of search logic. The missing “s”.

• Remember not every state has the “same” search logic.

Case Law - Trade Names

• In Re EDM Corp (Neb Bankruptcy Appellate Panel 2010)

• Three secured creditors with loans in excess of 4.5 million

• First secured creditor files UCC1 using EDM Corporation d/b/a EDM Equipment as name. EDM Corporation is the filed name with Secretary of State.

• Second and third secured creditors did search under EDM Corporation and did not locate prior filing. Money was loaned.

In Re EDM Corp (cont.)

• Bankruptcy court ruled that since second and third could not locate filing it was “seriously misleading”.

• Bankruptcy appellate panel held that inclusion of trade name resulted in a statement that did not sufficiently provide name of debtor.

• Court interpreted 9-502 and 503 to require EXACT legal name to appear in the name field of the financing statement. Trade names can be added in other sections.

• Not enough that the correct name is located “somewhere in a string of words listed as the debtor’s name”

Case Law – Debtor Name of Organization

• Alvo Grain and Feed, Inc. USBC-Nebraska 2009

• Correct name: Alvo Grain and Feed, Inc.

• Filed name: Alvo Grain & Feed, Inc.

• Search using Nebraska search logic both online and written did not disclose “&” filing.

• Decision: Filing was “Seriously Misleading” and thus not valid since search logic did not disclose it.

• This is true even as Court noted Debtor interchanged the “&” with and in their own documents.

Case Law – Debtor Name of Organization

Alvo Grain and Feed, Inc. (cont.)

Quote from Judge:

“I feel it is important to note that while I am compelled to make that decision, it is not any easy one to make…the law no longer considers whether a reasonably diligent searcher would have found the financing statements.”

The Individual Name Changes Under 9-307

Getting The Name Right!

Individual Names – Statute/Forms

• 9-307(a)(4)(A)If the debtor has a name, only if it provides the individual name of the debtor.

• UCC-1 Form Instructions:

1. Enter Debtor’s exact full legal name

2. Enter individual debtor’s

– family name (surname) in Last Name box,

– first given name in First Name box, and

– all additional given names in middle name box.

NCCUSL – 2013 Changes

Alternative A (“only if” option)

•If debtor is an individual to whom this State has issued a [drivers license], only if it provides the name…indicated on the [drivers license].

•[if no drivers license] only if it provides the individual name of the debtor or the surname and first personal name of the debtor.

•Under this approach the use of another variation of the name does not get you much UNLESS that state’s search logic picks up the variation.

•Better option for searchers

NCCUSL – 2013 Changes

Alternative B (“Safe Harbor” option)

Equal treatment for:

• Individual name of debtor

• Provides the surname and first personal name of the debtor

• Provides the name on the driver’s license

• Would be perfected even if Court found another variation of the “correct name”

• Helps filer, but not searcher

Official Comment Re Individual Debtor Names

Important Concepts

• Driver’s license issued “in this state”

• Name change due to license expiration

• Cultural norms may vary – components of name are provided on new UCC form (e.g. surname, etc.)

• Refer to prior case law re individual names if RA9 policies are protected

• When in doubt, file against multiple names!

Individual Name Case

• In Re Ben Miller and Debbie Ann Miller, (USBC- Ctrl. Illinois 2012)

• 1995 Bank enters into relationship with both debtors

• Name on signature card: Bennie A Miller and Debbie A. Miller

• In 1999 Bank filed a blanket UCC using Bennie A Miller in filing

• The UCC was timely renewed twice and included d/b/a Power Plus

• 2010 Bankruptcy was filed

• At trial: Debtor testified he was known as Bennie A Miller, Illinois Driver’s License and SSN card listed Bennie A. Miller and income tax filed and deeds recorded as Bennie A. Miller

• Court relied on Debtor’s Indiana birth certificate name Ben Miller and voided bank’s security interest towards debtor Bennie A. Miller.

Motors Liquidation / GM / CHASE Case

Rubber Meets The Road - GM

General Motors Bankruptcy Case• Facts:– GM in BK – reorganizing it’s debt structure – FI’s are willing partners (not that

they have better options)– GM’s counsel prepares UCC-3 documents• Two Loans that will be terminated (after repayment) BUT three terminations are

prepared– GM’s counsel does NOT catch the error-sends off• Documents are sent to FI’s counsel who responds by email “looks good”• Matter goes through a closing where all parties are present including Bank’s general

counsel. Loan values: 300 Million and 1.5 Billion• The third termination is NEVER caught

– The third Termination is filed and an entire umbrella loan for $1.5 billion is exposed.

Rubber Meets The Road – GM/Motors Liquidation

General Motors Bankruptcy Case

• Goes to court on multiple ground including “excusable neglect” and “lack of authority” to terminate

• Lower Courts go different way – Heads to Delaware Supreme Court

Question: Is it enough that the secured lender reviewed and knowingly approved a UCC-3 Termination or must the secured lending intend to termination the

particular security interest that is listed on the UCC-3?

Holding: The code, 9-509, has no “knowledge of effect” requirement therefore a party need not understand nor intend the effect. System would be inefficient if there is a

requirement of “subjective” knowledge

In Re: GM/Motors Liquidation

• Definition of Agent Authority is EXAPANDED:

• Per UCC § 9-509(d)(1), a termination statement is effective only if “the secured party authorizes the filing.

• Regardless of whether or not the secured party INTENDED the termination-they are bound by act of agent (law firm).

• Authority is created by a principal’s manifestation to an agent that, as reasonably understood by the agent, expresses the principal’s assent that the agent take action on the principal’s behalf.

Rubber Meets The Road – GM (cont.)

General Motors Bankruptcy Case

• Parties have the burden that ensuring Termination statements are properly filed

– With no objections raised authorization was granted by action/inaction of secured party (FI)

Meaning…

THE SECURED PARTY IS THE MASTER OF ITS OWN TERMINATION STATEMENT!

Rubber Meets The Road—GM-Motors Liquidation

• Possible fallout?: The reliance parties may reasonably place upon UCC-3 termination statements increases. It follows that the ruling reduces the costs to new lenders (or other secured parties) for relying upon UCC-3 termination statements as they file UCC-1s to perfect their new interests in the same collateral. The lower costs should benefit both future lenders and future borrowers. The opinion raises the costs of preparing UCC-3s, but probably only slightly, because preparers of UCC-3s should have command of all relevant facts, and are reasonably expected to be more precise and meticulous.

• The Second Circuit’s decision in this case illustrates the importance of a detailed review of draft termination statements by lenders prior to filing as well as the importance of the Creditors’ Committee’s post-petition review of secured liens which can reveal errors or issues with the liens or their perfection.

Rubber Meets The Road – GM (cont.)

• Okay…Now What?

– Case does NOT make the stand that a secured party is ALWAYS bound by the goofs of others

• More questions remain:

– Who has authority?

– How far does that authority go?

– What documents does the firm have?

• Who has the authority to see them?

UCC Pre-Filing Clarifications

Section 9-322Priorities Among Conflicting Security Interests

• Addition to Official Comment to Section 9-322 to clarify “notice filing” concept and pre filing.

• Example: SP files UCC-1 prior to obtaining authorization from debtor. Debtor later authorizes the filing, at which time the UCC-1 becomes effective. For priority purposes, the time of the unauthorized filing is the “time of filing” for purposes of priority under 9-322.

Between a Rock and an Oak: Recent Case Law

• Oak Rock Financial, LLC, Debtor (Chapter 11 United States Bankruptcy Court for the Easter Dist. of New York)– 2001, July 19th – Agreement is entered into between debtor and secured party (IDB)

Security agreement that included “all proceeds and products thereof” clause– July 21, 2001 a Financing Statement is filed– May 2006 – Changes occur – a new lender is added

A new entity is created as administrative agent for the group of lenders Filings occur including an assignment to new entity is filed

– May 2011 - Amendments are filed – Agent included– October 2012 – Financing Statement is filed with agent

After company fails - True participants hold equitable title to the underlying loans and receivables

Rights perfected automatically under 9-309(3) with no need of financing statements

Between a Rock and an Oak (cont.)

Q. – Does the Agent have a perfected prior lien?Court HOLDS – DATE OF FILING CONTROLS!

1. A security interest is perfected if attached and all applicable requirements have been satisfied

a. The FS need only “enough information to notify a reader that the creditor MAY claim an interest”

2. A third party must conduct a “reasonable inquiry” into the status of the collateral3. Parties can file a FS even before credit/assets are extended (grant security)

a. In this case – Five years between FS and grant4. Even if parties use proceeds from new agreements to satisfy older obligations the first filing

date controls for priority purposes

From the Court: One of the MOST IMPORTANT roles the UCC plays is facilitating the efficient procession of commerce by permitting parties to rely in good faith on the

plain terms of AUTHORIZED public filings(case came after GM Bankruptcy)

•Debtors Location

•Change to the 4 Month Rule

Changes To 9-316

Old Section 9-316: Continued Perfection of Security Interest Following Change in Governing Law

• 9-316 protects security interests that are perfected prior to the location change.

• Protection is limited to collateral in existence on the date of the debtor’s change in location, and provides a four month grace period.

• Security Interests in collateral acquired after the change of location (e.g. inventory, after-acquired collateral, etc.) are not perfected until a filing is made in the new location.

New Section 9-316

• Provides that security interests in collateral acquired by the debtor after the change in location will be perfected for four months, and remain perfected if the SP files a financing statement in the new location within the four month period.

New 9-316: Example

• ABC Inc. is NY Corporation.

• SP files UCC-1 in NY against existing and after-acquired inventory.

• ABC Inc. reincorporates in DE. Shortly thereafter, ABC Inc. acquires additional inventory. Because ABC Inc. is in DE, DE’s law governs perfection of the inventory.

• Under DE law, SP’s financing statement is effective to perfect SP’s security interest in inventory that ABC Inc. acquires within four months of the location change.

Filer vs. Searcher and the 120 Day Rule

In Re Lifestyle Home Furnishings, LLC., (USBC-Idaho 2010)

• November 2003 Bank Filed UCC-1 covering “all inventory, accounts, equipment and general intangibles” on Factory Direct, LLC

• May 7, 2007 Factory Direct LLC amended its articles so name read “Lifestyle Home Furnishings, LLC”

• 2007 Bank did not file any additional UCC documents or file any type of amendments to “Lifestyle Home Furnishings, LLC”

• 2008 Lifestyle files Chapter 7 Bankruptcy

• Holding: Defendants financing statement was not effective to perfect its security interest in any collateral acquired by debtor on or after September 8, 2007.

Filer vs. Searcher (cont.)

• Rational of Court: Per 9-506, the use of the name other than the precise legal name renders the financing statement “seriously misleading” unless a search under the correct name would produce the prior financing statement. The name change on May 7, 2007 made the prior filing seriously misleading.

In Re Lifestyle Home Furnishings

• The bank had four months within to rectify the situation in order to be perfected to collateral acquired by Debtor more than four months after the change in name. Therefore, the cutoff date of September 8, 2007.

• ****Issue preserved for trial is whether Debtor disclosed name change to bank. Bank claims they did not. Factors included debtor company still calling itself by old name and having that name on its checking accounts.

Trust Updates

Debtors/Trusts

•Types of trusts:

1. Statutory

2. Massachusetts Business

3. Common

• If Trust is a Registered Organization you MUST enter the debtor name as it appears on the public organic record for all UCC-1 filings

• If Non-Registered then the name MUST be the name of trust or settlor/testator (If trust does not have a name)

— Testator has been added in the 2013 Revision

Debtors/Trusts (cont.)

•For Non-Registered Trusts

— Amendments require you MUST include a statement “collateral held in trust” in a separate part of the UCC document.

— This replaces the current phrasing under Article 9 to the debtor being the trust or trustee which confused people since under most state law the debtor would be the trustee.

— If name of settlor/testator is provided as debtor’s name, the filer MUST provide in a separate part of the UCC document sufficient information to distinguish the trust from others the settlor/testator may have an interest in.

This separate section requirement is aimed at limiting the risk that a secured party would provide such information in the debtor’s name block on the financing UCC

document.

THUS - CHECKLIST ONEGet The Full Story!

• Former names, alias, nicknames, DBAs, Tax Returns, Credit Reports

– Litigation or tax liens could be filed against any variation of a name

• Tax returns on William Moore but what about Billy or Bill?

• Get the driver licenses for all individuals

– Forget the DMV – the name on the license is what controls (Biggest pain-point for 2013)

– Don’t expect Financial Institutions to provide data.

• Locations of old offices or property owned or leased

– Litigation and tax liens could be hiding there

CHECKLIST TWOLiens In Other Shapes And Sizes

• The economic downturn has lead to an increase in non-consensual Liens

– They commonly take the form of:

• State and Federal Tax

• Judgment Liens

• Mechanics Liens• In Many Cases These Types Of Liens Can Take Priority

All of these are governed outside UCC law - meaning they can be filed on variations of the debtor’s name! Such as DBAs, FKAs, nicknames

and even misspellings!

CHECKLIST THREE Future Liabilities – Where To Look?

• Search for pending litigation

Remember not just “exact” name

– Volume of litigation can lead to viability questions

Slip and falls for a retail debtor?

– Catch judgment liens before they are attached

– Flip side – is your debtor about to win a big case?

Plaintiff search can tip you off to positive outcomes

Thank You For Attending!

MODERNDUE DILIGENCE SIGNPOSTSCURRENT LAW & BEST PRACTICES

PRESENTED BY

DAN LIAS, ESQ.