Keeping track of the changes to state UCC laws is important for businesses that borrow, for lenders, and for the lawyers who advise both debtors and creditors. But it can be hard to do for busy individuals with so much else on their plates.
To help all interested parties keep up, CT has compiled some of the significant UCC legislative and case law developments we have tracked and reported for you in Legislative and Regulatory Updates during 2022.
Arizona
House Bill 2645, effective September 23, 2022, increases from a class 1 misdemeanor to a class 3 felony, the penalty for a person who causes an unauthorized UCC secured transaction record to be filed and who knows that the record is unauthorized or contains a material misstatement or false claim.
California
Carmel Financing, LLC v. Schoenmann, CA No. 3:21-cv-07387, decided August 23, 2022. The U.S. District Court, Northern District of California held that the debtor’s bankruptcy trustee could avoid the lender’s security interest in insurance proceeds paid to the debtor. The court noted that California law requires that a security interest in insurance proceeds can be perfected only by giving written notice of the security interest to the insurer. In this case there was a written communication asking that the lender be added to the policy but there was no explicit notice that the lender had a security interest in the proceeds.
Connecticut
In re Brainard, 2022 Bankr. LEXIS 2232, decided August 12, 2022. The U.S. Bankruptcy Court, District of Connecticut, held that the plaintiff law firm did not have a perfected security interest in the collateral described in its UCC-1 as a distribution from a pension plan to the alleged debtor, a former client. The court noted that when a creditor presents a UCC-1 to establish a valid and enforceable security interest, there must be some further documentation corroborative of the debtor's intent to pledge collateral. Here there was a lack of evidence that the former client authorized the filing of the UCC-1 identifying the pension funds as collateral. Therefore, no security agreement was created. Furthermore, even if the court had concluded a security interest attached, it was unperfected. At the time of the UCC-1 filing, the collateral as described no longer existed, the funds had already been distributed, transferred to two different financial institutions, and, in part, spent.
Florida
1944 Beach Boulevard, LLC v. Live Oak Banking Company, No. SC21-1717, decided August 25, 2022. The Florida Supreme Court addressed the following question regarding the filing of financing statements with the Florida Secured Transaction Registry (Registry) — “is the filing office’s use of a standard search logic necessary to trigger the safe harbor protection of Sec. 679.5061(3)”. The court held that it is necessary. The court also held that the Registry does not employ a standard search logic. Therefore, the safe harbor does not apply and any financing statement that fails to correctly name the debtor is misleading and therefore ineffective.
In this case, the debtor LLC’s correct name includes the word “Boulevard”. However, the bank’s financing statements used the abbreviation “Blvd.” instead. A search of the Registry did not bring up the bank’s financing statements on the initial page of 20 results generated by the Registry. However, it did appear on the preceding page, which could be accessed by navigating backward using the “Previous” tab. The Bankruptcy Court held that the financing statements fell within the safe harbor and were effective. The District Court affirmed. The Eleventh Circuit certified questions to the Florida Supreme Court concerning the proper scope of the search under the safe harbor provision. However, the court found it unnecessary to answer those questions because the safe harbor does not apply.
The court noted that Sec. 679.5061(3) provides for a safe harbor that applies when a financing statement that fails to correctly name the debtor is disclosed by a search of records under the debtor’s correct name “using the filing office’s standard search logic, if any”. The court noted that within the industry the filing office’s “standard search logic” means a procedure that identifies a set of financing statements on file that constitutes a hit for the search. It must identify which financing statements are a hit and which are not a hit. However, the Registry does not do that. It returns a list of the 20 names that most closely fit and also allows the user to navigate backward and forward, thereby giving the user access to every name in the Registry.
According to the court, the definition of standard search logic requires the search to identify specific hits. The search offered by the Registry, returning the entire index, is not standard search logic. Furthermore, Sec. 679.5061 conditions the safe harbor’s application on the ability to search using a standard search logic. Therefore, the filers are left with the zero-tolerance rule of 679.5061(2), which requires the filer to correctly name the debtor.
Idaho
House Bill 583, effective July 1, 2022, enacts the Digital Assets Act, which among other things, classifies digital assets as general intangibles and digital securities as investment property and provides for perfection by control and possession.
Indiana
House Bill 1092, effective July 1, 2022, deletes a provision of Article 9 of the state’s UCC law that required the secured party to send a copy of a financing statement to the debtor within 30 days of filing.
Senate Bill 351, effective July 1, 2022, adds a new chapter to the state UCC law governing transactions in controllable electronic records and amends the chapter concerning secured transactions to provide for perfection of security interests in controllable electronic records by control or filing a financing statement.
