a man pondering ucc financing statements
ComplianceFinanceApril 07, 2021

Bank suffers $4.5 million loss due to error in financing statement

By: Michael Weissman, Of Counsel at Levin Ginsburg

A simple, easily avoided error in a financing statement caused a bank to suffer a multi-million dollar loss of collateral in In re EDM Corporation, 431 B.R. 459 (BAP 8th Cir. 2010).

The case facts

EDM Corporation, a Nebraska corporation, sold and leased emergency vehicles. It was commonly known as EDM Equipment but had never registered that trade name.

Hastings State Bank loaned EDM more than $4.5 million, securing the debt with a security interest in EDM’s assets. A UCC financing statement was filed with the Nebraska Secretary of State’s office on June 10, 2003, identifying the debtor as “EDM CORPORATION D/B/A EDM EQUIPMENT.”

On December 20, 2005, Tier One Bank granted a $3.0 million line of credit to EDM and filed a UCC financing statement in Nebraska. Prior to granting the line of credit, Tier One conducted three UCC searches. None of them disclosed Hastings’ UCC filing.

On November 21, 2007, Huntington National Bank granted a $250,000 line of credit to EDM and filed a UCC financing statement in Nebraska. It, too, conducted a UCC search. The search disclosed Tier One’s UCC filing but not Hastings’ filing. Tier One and Huntington negotiated and executed an intercreditor agreement that settled their respective priority positions in the assets of EDM. There was no indication that either Tier One or Huntington had any knowledge of Hastings’ UCC filing.

As fate would have it, EDM filed for Chapter 7 bankruptcy relief on April 10, 2008. That brought conflicting claims of priority in EDM’s assets that Hastings sought to resolve by initiating an adversary proceeding. Although it was the first of the three banks to file a UCC financing statement, the court ruled that Hastings lost its priority position to the other banks because its financing statement was seriously misleading.  

How did the court rule?

The court pointed to the provisions of the UCC that call for the name on a filed UCC financing statement for a corporation (a corporation is a “registered organization”) to be the name shown on the public records of the corporation’s state of organization. It also pointed out that a UCC financing statement that contains only the debtor’s trade name does not satisfy the requirements of the UCC.

The court also said EDM could not avail itself of the UCC safe harbor (that an erroneous UCC filing that can be found through a search under the debtor’s correct name, makes the erroneous filing valid) because the UCC searches conducted by both Tier One and Huntington using EDM’s correct name failed to disclose Hasting’s filing.

Making a particularly poignant point, the court noted that although both Tier One and Huntington knew the debtor did business as EDM Equipment, each of them filed financing statements using  EDM’s correct corporate name. The implication was clear:  if the other secured creditors could get it right, why couldn’t Hastings.

What’s the point?

This case amply demonstrates the need for expertise when preparing and filing financing statements. An error of this nature may not have occurred if the filing was processed through an experienced service provider. Filers must adhere to the cardinal rule of the UCC: the debtor’s exact name must be used, nothing more, nothing less. 

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This piece is authored by Michael Weissman, Of Counsel at Levin Ginsburg

Michael L. Weissman is an attorney in Chicago who has served as Executive Vice President and General Counsel of a banking group, as an adjunct professor at a law school, as a FINRA arbitrator, as an educational trainer in the United States and overseas, as chairman of a leading legal educational organization in Illinois, and as an expert witness in commercial lending cases. Weissman is a winner of the 2018 Addis Hull Award of the Illinois Institute for Continuing Legal Education for speaking, writing, and governance. He serves as a consultant to Wolters Kluwer Lien Solutions and The Risk Management Association.