Due diligence has always been a routine and essential part of the process of pursuing lending opportunities. However, in today’s volatile economic conditions, lenders are advised to take extra measures to protect themselves from losses.
To get a more accurate picture of the borrower’s repayment potential and to ensure that any collateral related to the loan is secured, there are a number of steps that lenders can take beyond routine due diligence. These additional steps help reveal hidden threats such as tax liens, judgments, pending litigation, and improperly indexed UCC financing statements. This 8-part blog series will focus on these and other measures that can help lenders avoid costly surprises.
TIP: Double check the accuracy of the debtor’s name when making UCC filings.
A UCC filing is only perfected if the filer gets the name right. The consequences of filing under the wrong name are illustrated in the case, In re: Tyringham Holdings, Inc. (United States Bankruptcy Court for the Eastern District of Virginia, Richmond Division).
The facts of the case were as follows. A secured party held a security interest in consigned inventory. The party attempted to perfect the interest by filing a financing statement with the Virginia State Corporation Commission. This financing statement listed the debtor’s name as “Tyringham Holdings.” The debtor was a Virginia corporation listed as “Tyringham Holdings, Inc.” on the public records of the Virginia State Corporation Commission.
The standard search logic of the Corporation Commission was such that an official UCC search certified by the State Corporation Commission revealed a search conducted under the name “Tyringham Holdings, Inc.,” but did not reveal the secured party’s financing statement under the name “Tyringham Holdings.”
Because the search using the correct name under the jurisdiction’s standard search logic did not disclose the financing statement, the court concluded that the financing statement was “seriously misleading.” The court ruled that the secured party’s security interest in the collateral was unperfected and the collateral could be sold free and clear of any lien held by the secured party.
As this case shows, it is important to determine the debtor’s correct name. One way to ensure that the correct name is being used is to conduct a corporate name verification search, and to order copies of a company’s Articles of Incorporation and any amendments thereto. (A similar step can be taken when the debtor is an LLC or other registered business organization.) This additional due diligence measure will help eliminate the risk of any errors by inaccurately entering the debtor’s name in the filing and help ensure the perfected status of a security interest.