Florida UCC Filings Require Absolute Precision

When filing a financing statement to perfect a security interest in collateral, failing to satisfy the legal requirements of filing could result in an otherwise secured lender ending up with an unsecured loan. A recent case decided by the Florida Supreme Court highlights the importance of employing absolute precision in a debtor’s name on a financing statement.

Basic Secured Transaction Backdrop

It is a common scenario: a customer wants a loan to finance collateral and the lender wants a first lien in its collateral. If the lender cannot obtain, or does not wish to rely on, a purchase-money security interest, it obtains and verifies the debtor’s legal name and then runs a Uniform Commercial Code (UCC) search on that name in the applicable state’s Secretary of State’s records. This determines whether filing a financing statement will result in a first-priority security interest or whether other secured parties of record may claim a senior interest in the collateral. 

When the search result reveals no filings against the debtor covering the lender’s collateral, the lender can be certain that by filing a financing statement, it is acquiring a first-priority interest in its collateral. This is how Article 9 of the UCC is intended to work. 

The UCC also specifies how to determine the debtor’s correct “legal name,” and that is the name to be used in a financing statement filed to perfect a security interest against the debtor. Requiring the exact legal name provides commercial certainty to UCC filers (who need only ascertain the correct legal name and can disregard name variations and nicknames) and for UCC searchers (who need only search the records for the debtor’s correct legal name). 

However, this requirement can also lead to harsh results in cases of errors in the debtor’s name. As a safe harbor for such mistakes, the UCC provides that if a search of the debtor’s correct legal name, using the filing office’s “standard search logic, if any,” discloses a UCC filing against the debtor with an incorrect debtor name, the filing is not “seriously misleading” and the related security interest is perfected despite the incorrect name. 

But what happens when the search of the debtor’s correct legal name does not produce clear results? This was the problem presented in the case of In re: NRP Lease Holdings, LLC, et al., where the Florida Supreme Court answered the questions presented by the Eleventh Circuit Court of Appeals.

The NRP Case

Like so many UCC legal questions, this case arose from a bankruptcy. The bankrupt debtor was indebted to Live Oak Banking Company (“Live Oak”) on two U.S. Small Business Association (“SBA”) loans totaling $3 million, which Live Oak purportedly secured by filing blanket liens on all the debtor’s assets. The financing statements identified the debtor as “1944 Beach Blvd., LLC” instead of its correct legal name of “1944 Beach Boulevard, LLC” as listed in its Articles of Organization filed with the Florida Secretary of State. 

The debtor filed an adversary proceeding in bankruptcy alleging that the Live Oak UCC filings were “seriously misleading” pursuant to Florida’s version of UCC 9-506, and therefore unperfected, because they failed to sufficiently provide the name of the debtor. The lawsuit alleged that a search of the UCC records using the debtor’s legal name did not reveal the existence of the Live Oak UCC filings.

Seems easy enough under the bright-line standard detailed above, right? Simply run a UCC search using the debtor’s exact legal name. If the Live Oak UCC filings appear in the search, then they are properly perfected (even with an improper debtor name under the safe-harbor rule). If they do not appear the filings are seriously misleading, and the liens are unperfected. 

The Florida Twist

But there’s a twist. Florida has a unique UCC search function (the “Registry”) that reveals UCC filings by debtor name in a search result in alphabetical order—every UCC filing in the system. The search itself takes the searcher to 20 indexed filings in the alphabetical spot in which the search lands, with the debtor’s exact name at the top if it appears. The 20 prior alphabetical results are accessible by a pressing a “previous” tab and the 20 succeeding alphabetical results are accessible by pressing a “next” tab. 

This unique Florida search feature had created judicial confusion and led to questionable results. Previous cases on the issue have come to very different conclusions. One court concluded that a defective financing statement is not seriously misleading if a search of the Registry under the debtor’s correct legal name would produce the defective statement on the page preceding the initial search results using a “reasonable diligence” standard. In a second case, the court concluded that the only relevant page for the safe harbor is the initial search result page of the Registry indicating the first 20 results, expressly rejecting a “reasonableness” test under the text of the UCC. 

The bankruptcy court in NRP granted judgment to Live Oak, finding that its financing statements fell within the safe harbor because the search revealed the filings on the page immediately preceding the initial search result page. The court determined that it was “reasonable” to press the “previous” tab a single time to locate the UCC filings in question. 

On appeal, the Eleventh Circuit – noting that the UCC enables predictability, certainty and stability in commercial transactions – certified questions of Florida state law to the Florida Supreme Court. The Florida Supreme Court focused its inquiry on the zero-tolerance rule for failure to use the debtor’s correct legal name, and the exception to that rule found in the safe harbor, which requires use of the Registry’s standard search logic, “if any.” The Court noted that the Registry’s search function does not employ any search logic that yields “particular hits,” but rather, only directs the searcher to an alphabetical point in the entire index of filings. 

Determining that the Florida filing office does not currently use any standard search logic, the Court held that the zero-tolerance rule meant that a financing statement must use the debtor’s precisely correct legal name, or else the security interest is seriously misleading and therefore not perfected. The Eleventh Circuit subsequently reversed the bankruptcy court’s judgment in favor of Live Oak. 

In other words, there is currently no safe harbor in Florida UCC filings—making it particularly imperative to use precision in identifying and inputting a debtor’s correct legal name on a Florida UCC filing.