Pub. 9 2014-2015 Issue 5

January | February 2015 13 Extraordinary Service for Extraordinary Members. For more information, contact Tom Roubidoux at Kutak Rock LLP at (402) 346-6000 or thomas.roubidoux@ kutakrock.com. Roubidoux concentrates his practice in the areas of bankruptcy, workout and surveillance matters, and secured transactions under the Uniform Commercial Code. His primary focus is on lender-side financing in both the commercial and public finance marketplaces, from traditional lending transactions to more complex financing arrangements including asset securitizations and structured finance. that would render the financing statement “seriously mis- leading” under the general rule stated in UCC § 9-506(b). In applying the statutory exception to the general rule found under UCC § 9-506(c) (what the District Court referred to as the “escape hatch”), Host America fared no better, in that a search conducted under the debtor’s correct name, using Utah’s standard search logic, did not disclose Host America’s UCC-1 financing statement. Accordingly, Host America’s initial UCC-1 financing statement was “seriously mislead- ing” as filed, could not be saved under the “escape hatch” of § 9-506(c), and was therefore ineffective to perfect Host America’s security interest against the later-in-time creditor, Coastline. Turning Back to UCC Searches Obtaining a UCC search in connection with a loan origina- tion is fundamental. In the case of registered organizations, the lender is presented with a choice between requesting a search using the debtor’s name exactly as it appears on the public record or requesting an “expanded” search that, at least in theory, should capture filings that were made using variations of the debtor’s true name. It has probably been said on more than one occasion that, qualitatively speaking, an expanded search is a “better” search. This is probably true, at least to a degree. From an underwriting perspective, the broader net cast by the expanded searchmay provide a clearer picture of a prospective borrower’s finances by disclosing existing UCC filings relating to the borrower that might not otherwise appear in a search using only the exact name of the debtor. More importantly, the expanded search is needed to disclose other liens, most significantly federal tax liens, that are not held to the same standards found in UCC §§ 9-503 and -506, as far as identifying the debtor by its true name in order to satisfy perfection requirements. 6 However, what the expanded search does not do is conclusively identify only those filings that would be effective under the more stringent requirements dictated by the UCC, i.e., filings returned by a search conducted under the debtor’s true name using the filing office’s standard search logic. Over time, filing offices can and do modify their standard search logic, which may result in the search logic becoming more, or even less, discriminating than the standard search logic that preceded it. Interestingly, such was the case inHost America, although it did not affect the outcome in the case. Sometime after the filing of the Host America UCC-1, the Utah filing office did in fact modify its standard search logic to disregard punctuation in a debtor’s name. As a result, by the time litigation ensued between Host America and Coastline, a search under the debtor’s true name would have disclosed the Host America UCC-1, notwithstanding the omission of the periods in the debtor’s name. In other words, Utah’s change in its UCC standard search logic operated as a formof UCC alchemy and instantly rendered as effective a financing statement that, up to that point, had been “seriously mislead- ing” and therefore ineffective to perfect a security interest. Only after Host America and Coastline provided the District Court with “extensive information” about Utah’s search logic and “multiple declarations” from the director of the Utah Division of Corporations and Commercial Code could the District Court conclude that at no time prior to Coastline’s perfection would Host America’s filing have been disclosed in a search under the debtor’s correct name that applied the then-prevailing standard search logic. Thus, the effective- ness of Host America’s UCC-1 related back only to the date of the search logic modification and not back to the date of the original filing. The District Court’s description suggests a process that was esoteric, expensive, and very likely avoid- able had Coastline simply been able to produce a certified UCC search, conducted at the time Coastline perfected its lien, using only the debtor’s true name and the filing office’s standard search logic. 7 Such a search is relatively inexpen- sive, especially when ordered in an abbreviated format (e.g., a listing of the relevant filings on record, but not including copies of the actual filings themselves) as a companion to the more comprehensive expanded search (which would typically include copies of the actual filings). Therefore, even though a searcher may typically order an expanded search, ordering the narrower, more discriminating search and putting it in the loan file, might be a worthwhile consideration.  6 See, e.g., 26 U.S.C. § 6323(f)(3) (providing that perfection of a federal tax lien on the form prescribed by the Secretary of the Treasury is “valid notwithstanding any other provision of law regard- ing the form or content of a notice of lien”); and 26 C.F.R. § 301.6323(f)-1(d)(2)(2012) (requiring that the tax lien notice, using IRS Form 668, must “identify the taxpayer, the tax liability giving rise to the lien, and the date the assessment arose.”). See also In re Spearing Tool and Manufacturing Co., 412 F.3d 653, 656 (6th Cir. 2005) (holding that the Form 668 notice, although not returned in a UCC search applying the filing office’s standard search logic using the debtor’s true name, was prior to a later perfected security where a “reasonable and diligent search” under variations of the debtor’s name would have discovered the IRS Form 668 notice.). In re Crystal Cascades Civil, LLC, 398 B.R. 23, 35 (Bankr. D. Nev. 2008) (holding that notice of an IRS tax lien was not effective where it would not be disclosed by a “reasonable search conducted by a nonprofessional searcher . . . ”). 7 Coastline can be forgiven. As stated in n.2, supra, Coastline was a judgment lien creditor and not a secured party in the UCC sense, so obtaining a UCC search of the debtor (expanded or oth- erwise) would be of little or no value for Coastline’s purposes. However, when the statement is more properly read as “a secured party standing in the same shoes as Coastline,” it makes more sense. It would seem likely that the resources that both Coastline and Host America expended in proving up the nuances of UCC search logic, relevant timelines, and the modifications made by the Utah filing office were significant.