Banks, credit unions, and seller-financers – at least those who wish to stay in business – focus on all manner of due diligence when analyzing the risks of extending credit. They request and review borrower and guarantor financials and run searches for real estate titles, Uniform Commercial Code (UCC) statements, lawsuits, and liens. All manner of i’s are dotted and t’s crossed in loan agreements, promissory notes, guarantees, mortgages, security agreements, and borrowing resolutions.
The lender’s searches indicate no prior mortgages, secured interests, or other liens, or such prior interests are subordinated or otherwise addressed to the lender’s satisfaction. Every loan document is then correctly executed by the authorized individuals, any mortgage is properly recorded, and the lender’s UCC-1 financing statement is filed in the appropriate state or locality.
What can go wrong now? The answer – plenty.
Perfecting Your Security Interest
It’s important to emphasize that a secured party’s security interest in certain collateral is not complete until that interest is perfected by filing a UCC financing statement in the applicable jurisdiction ahead of another creditor who may file with respect to the same collateral. Not only must the lender file first, but it must also do so with a financing statement that is not “seriously misleading” – close enough does not cut it.
The UCC drafters recognize that “minor errors or omissions” should not necessarily be fatal. For example, an incorrect address for the debtor or a typographical error concerning collateral likely will not impact the lender’s perfected interest. But a financing statement that fails to “sufficiently” provide the name of a debtor is seriously misleading and could result in the lender’s security interest falling subject to another creditor’s later filing that properly identifies the debtor.
Be Precise and Verify
Michigan law provides the proper means of identifying a debtor in a financing statement. For example, for Michigan corporations and limited liability companies, the name reflected in the financing statement should be the precise name for the entity reflected with the Michigan Department of Licensing & Regulatory Affairs. If the debtor is an individual, the financing statement must indicate the precise name reflected in the debtor’s unexpired driver’s license or state personal identification card.
The statute also addresses proper nomenclature in various identified circumstances. Never trust the name given to you by your borrower; always verify. It is not often that a borrower will intentionally mislead a lender; it could be that over time the borrower has simply strayed from its official entity name filed with the state, or in the case of individuals, that the debtor rarely goes by his or her legal name and has gotten used to going by a nickname.
A lender should not stop with the simple filing of its UCC financing statement and should make a practice of conducting a post-filing search to 1) confirm no intervening creditors have emerged following the search and prior to closing, and 2) verify that the creditor’s UCC filing appears when a search is conducted using the debtor’s proper name following the statutory requirements.
If during that post-filing search, the creditor’s financing statement is not found, the lender may still have an opportunity to remedy the matter before another creditor comes along with its own filing. If the filing does appear, even though the lender may have made an error, then it documents for the lender that the state’s search logic picked up the filing notwithstanding the error, and evidences for the lender in any contest with another creditor that the lender’s filing, although containing an error, was not seriously misleading and therefore not defective.
If you are a lender who needs assistance properly documenting the extension of credit, including the perfection of your security interest, please contact Kreis Enderle’s experienced counsel to assist you.