Failure of a Search to Disclose a Financing Statement Did Not Render That Financing Statement Seriously Misleading as a Matter of Law: Regions Bank v. Official Comm. of Unsecured Creditors (In re Camtech Precision Mfg., Inc.)

Failure of a Search to Disclose a Financing Statement Did Not Render That Financing Statement Seriously Misleading as a Matter of Law: Regions Bank v. Official Comm. of Unsecured Creditors (In re Camtech Precision Mfg., Inc.)

CASE OVERVIEW

In Regions Bank v. Official Comm. of Unsecured Creditors (In re Camtech Precision Mfg., Inc.), 471 B.R. 293 (S.D. Fla. 2012) [an enhanced version of this opinion is available to lexis.com subscribers], the District Court for the Southern District of Florida discussed the appropriate interpretation of Section 9-506(c) of Revised Article 9. Section 9-502 states the requirements for a legally sufficient financing statement. Admittedly, a "legally sufficient" financing statement is not, per se, effective to perfect a security interest. However, according to Section 9-506(a), a legally sufficient financing statement is effective unless it is "seriously misleading." Section 9-506(c) further provides that a financing statement is not seriously misleading if a search of the official files, using the debtor's correct name and the filing office's standard search logic, would disclose it. Section 9-506(c) does not say that a financing statement is seriously misleading when an appropriate search does not disclose it. Such an interpretation would rewrite Section 9-506(c). Moreover, it would make a filed financing statement ineffective, even if the misfiling was a product of filing office mistake, thus nullifying Section 9-517. Therefore, the district court in Regions Bank found that the bankruptcy court misinterpreted the "seriously misleading" standard. This misinterpretation led it to the incorrect conclusion that failure of a search, using the debtor's correct name and the filing office's standard search logic, to disclose a financing statement renders the financing statement seriously misleading as a matter of law.

CASE ANNOTATION

Summary judgment was improper when: 1) three affiliated debtors, Camtech, R&J, and Avstar, petitioned for bankruptcy relief; 2) their bankruptcy cases were jointly administered; 3) Camtech was a New York corporation; 4) R&J and Avstar were Florida corporations; 5) a bank ("Bank"), a creditor of the debtors, filed financing statements ("UCC-1s") in New York and Florida; 6) both states use the same UCC-1 form; 7) Box 1 of the form asks the filer to identify the "debtor"; 8) Box 2 of the form asks the filer to identify an "additional debtor"; 9) both boxes instruct filers to "INSERT ONLY ONE DEBTOR NAME"; 10) Bank listed "R&J" in Box 1; 11) Bank listed a non-debtor affiliated entity in Box 2; 12) each UCC-1 contained a plain paper attachment listing Camtech and Avstar as additional debtors; 13) the face of the UCC-1 forms did not refer to the attachment containing the additional debtor names; 14) the creditors' committee sought to avoid Bank's interest in Camtech's and Avstar's assets; 15) Bank and the creditors' committee stipulated that a search under Camtech or Avstar in the New York or Florida files would not reveal Bank's financing statements; 16) Bank asserted filing office error as an affirmative defense; 17) the committee did not present any evidence to overcome Bank's affirmative defense; 18) no one testified about filing office practices or procedures regarding financing statements submitted with plain paper attachments listing additional debtors; and 19) the bankruptcy court concluded, as a matter of law, that the financing statements were seriously misleading as to Camtech and Avstar. Bank's failure to use approved forms did not, as a matter of law, render the financing statements seriously misleading. Nor was it proper to conclude, as a matter of law, that the failure to list the debtors in the debtor box on the UCC-1 made the financing statements seriously misleading. The bankruptcy court misinterpreted the Code's definition of "seriously misleading."

To begin with, neither New York nor Florida requires a specific form for listing additional debtors on a financing statement. Both states statutorily empower their Secretary of State to create approved forms. Moreover, New York expressly protects filers who use such state-created forms. Official Comment 2 to Florida's Section Rev. 9-521 suggests Florida also protects such filers. That Official Comment states that the filing office cannot reject a filing, based on form or format, if a filer uses a state-created form. However, neither state requires a filer to use state-created forms.

In addition, both states have enacted Section Rev. 9-502 of the Model Code. It establishes that a financing statement is sufficient if it provides the debtor's name, the secured creditor's name, and indicates the collateral covered. Both states have also enacted Section Rev. 9-503 of the Model Code. It says a financing statement is sufficient if it gives the name of the debtor as indicated in the public record of the debtor's jurisdiction of organization. The creditors' committee failed to introduce any evidence that Bank's financing statements did not satisfy Sections Rev. 9-502 and Rev. 9-503. Therefore, Bank's financing statements were "legally sufficient" for purposes of overcoming the creditors' committee's motion for summary judgment.

Admittedly, a "legally sufficient" financing statement is not, per se, effective to perfect a creditor's security interest. However, Section Rev. 9-506(a) provides that a substantially complying financing statement is effective, despite minor errors or omissions, "unless the errors or omissions make [it] seriously misleading." Thus, a "legally sufficient" financing statement is effective unless it is seriously misleading. According to Section Rev. 9-506(c), a financing statement is not seriously misleading if a search of the official files, using the debtor's correct name, would disclose it. Section Rev. 9-506(c) is not saying that a financing statement is seriously misleading when a search under the debtor's correct name does not disclose it. Such an interpretation rewrites Section Rev. 9-506(c). The New York and Florida legislatures did not intend to make the legal effectiveness of a financing statement turn on whether a search under the debtor's name would, or would not, reveal it. If that were their intention, the legislatures would have said a financing statement is seriously misleading if a search under the debtor's name would not reveal it. In addition, such a reading of Section Rev. 9-506(c) would make a filed financing statement ineffective, even if the misfiling were a product of a filing office mistake. This interpretation would nullify Section Rev. 9-517, which provides that the filing office's failure to correctly index a record does not impair the effectiveness of the record. As Official Comment 2 to Section Rev. 9-517 notes, Revised Article 9, like Former Article 9, imposes the risk of filing office error on those who search the files rather than on those who file. Thus, the bankruptcy court misinterpreted the "seriously misleading" standard. This misinterpretation led to its conclusion that the failure of a search to disclose Bank's financing statements meant they were seriously misleading as a matter of law. This conclusion was incorrect. The correct standard required additional findings of fact to make this determination. The factual record was insufficient to conclude, under the correct standard, that the financing statements were seriously misleading as a matter of law.

Additionally, the bankruptcy court ignored Bank's affirmative defense of filing office error or mis-indexing. The creditors' committee, as the moving party, was required to come forward with evidence to overcome this affirmative defense. It failed to do so. Bank, as the non-moving party, had no duty to come forward and demonstrate a material question of fact until the committee had met its burden. Thus, the record did not support a denial of Bank's affirmative defense.

The bankruptcy court further erred when it resolved other factual questions in favor of the committee, despite the lack of any record evidence to support its findings. For example, the bankruptcy court stated it would have reached a different conclusion had Bank submitted the additional debtor information using an approved standard form, or had the first page of the UCC-1 directed the reader's attention to the attached supplement. This factual finding refuted Bank's affirmative defense of indexing error. But, the committee never presented any evidence to overcome this defense. Therefore, no record evidence supported the bankruptcy court's finding.

Finally, the bankruptcy court, without record evidence, held that the New York filing office treated Bank's unapproved additional debtor attachment in accordance with New York Rule 143-1.4(c). That rule characterizes a non-approved attachment as one that is not "provided in the UCC document." Therefore, the filing office was not required to index the financing statements under the additional debtor names. Genuine questions of material fact existed. Accordingly, the bankruptcy court erred in granting the creditors' committee summary judgment. Sections Rev. 9-502, Rev. 9-506, and Rev. 9-517.

COMMENT

The bankruptcy court is not the only court to understand Section Rev. 9-506(c) to mean a financing statement is seriously misleading if a search under the debtor's name would not uncover it. See Wawel Sav. Bank v. Jersey Tractor Trailer Training Inc. (In re Jersey Tractor Trailer Training Inc.), 580 F.3d 147, 69 U.C.C. Rep. Serv. 2d 748 (3d. Cir. 2009) (Section Rev. 9-315, A37) (Section Rev. 9-330, A1) (Section Rev. 9-331, A4) (holding that a financing statement is seriously misleading as a matter of law unless a search of the filing office records would disclose the financing statement) [enhanced version]. Sections Rev. 9-502, Rev. 9-506, and Rev. 9-517.

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