Sep. 6, 2022

SECURED LENDERS AND SECURED VENDORS BEWARE

By Charles M. Tatelbaum

Since the mid-1960s, lenders, and vendors in Florida have been able to perfect security interests in personal property collateral in order to help insure repayment of debt. Under the Uniform Commercial Code (UCC), which is contained in Chapters 671 through 679 of the Florida Statutes, three actions need to occur in order for a security interest to be perfected – (1) an agreement in writing creating the security interest (the security agreement), (2) consideration passing between the parties, and (3) in most situations, the filing of a financing statement (UCC-1 form) with the Florida Secured Transactions Registry. The security interest is perfected when the last of the three items occur.

Unlike with a real estate mortgage, the terms of the security agreement control with respect to the lien created by the transaction, and the filing of the financing statement is necessary in order to place all other prospective creditors and interested parties on notice of the existence of the security interest. 

In most states, the search engine logic utilized by the State’s Secretary of State or similar agency that accepts the recording of the financing statements and provides a public index allows one searching the index to be able to locate a financing statement where the debtor’s name is not precisely and exactly stated, but is reasonably close to being accurate.  Section 679.5061 of the Florida Statutes, similar to a provision in the UCC in other states, provides a safe harbor for slightly inaccurate names of debtors on financing statements. That section provides that the safe harbor applies when a financing statement that fails to correctly name the debtor is disclosed by “a search of the records of the filing office under the debtor's correct name, using the filing office's standard search logic, if any.”

In the recent Florida Supreme Court case of 1944 Beach Boulevard, LLC, Appellant, V. Live Oak Banking Company decided on August 25, 2022, the Florida Supreme Court, in answering the question certified to it by the United States Court of Appeals for the Eleventh Circuit held that “because Florida's filing office, the Florida Secured Transaction Registry, does not employ a ‘standard search logic', [the Court held that] the safe harbor cannot apply, which means that a financing statement that fails to correctly name the debtor as required by Florida law is “seriously misleading” and therefore ineffective.” 

This ruling is extremely significant for lenders and vendors that utilize secured transactions in order to perfect liens and security interests. The Supreme Court’s ruling makes it clear that even a slight error in listing the name of the debtor/borrower on the UCC-1 financing statement may create a lack of perfection and invalidity of the security interest/lien in the event of a bankruptcy, insolvency or challenge by another creditor.

In our legal practice, too often we have seen clients and friends that file UCC-1 financing statements utilizing tradenames or fictitious names for the debtor when recording the financing statements, which, under this ruling, could invalidate the security interest. Additionally, unless the secured creditor undertakes a search of the corporate or other records of Florida in order to determine the exact name of the debtor/borrower, the lender/creditor runs the risk of making an error that could have catastrophic consequences.

The creditors’ rights, real estate lending, and commercial lending practice groups at Tripp Scott are available to assist clients and friends in establishing procedures and safeguards to make sure that financing statements are complete and accurate.

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