The Court seemed to hold that the wrongfully filed termination statement was effective to terminate the financing statement, even though it was an authorized filing.  This is an incorrect interpretation of Article 9 of the Uniform Commercial Code.  If a secured party is not authorized to file a termination statement, then the termination statement does not effectively terminate the security interest. If you have questions about financing statements, please contact a Bamberger attorney.

Author: Laura A. Scott (bio)
Phone: 812.452.3557
email: lscott@bamberger.com

Frequently, these terms and conditions are set forth very clearly and are specifically understood by the parties, such as in a traditional contract arrangement where all of the terms are spelled out on a single document signed by both parties.  Sometimes, however, what forms that contract is not as apparent.  A purchase order may not just specify the nature of the product ordered, along with the time and place for delivery, and so forth, but it may contain a large number of other terms.  These terms may be printed on the reverse of the purchase order or other sales form and be only a few lines defining a narrow aspect of the transaction.  Sometimes, however, these terms and conditions can contain column after column of fine print that will control the transaction unless somehow negated by other paperwork.  Sometimes the purchase order only notes that the sale is made subject to the terms and conditions as set forth at a particular page on the company’s website.  In that case, the effect of that reference to a website is that all of the terms and conditions set forth on that website are imported into the contract as fully as if they were set out in the paperwork.  If this is the case, in signing a purchase order or accepting goods under a purchase order, a party may be agreeing to page after page of detailed terms when all that was offered was a link or reference to a website.

Another place in which terms and conditions can be imposed upon a transaction (often much to the surprise of a purchaser) is on or in conjunction with credit applications.  When a purchasing entity sets up a trade account with a vendor, it is not uncommon for that vendor to have a credit agreement in which the new customer sets forth credit references, is advised of the payment requirements for the vendor, and the like.  But what is also often provided and quickly glossed over by the purchasing agent, is a provision in that credit agreement that says that the company’s standard terms and conditions in effect at the time of any sale will control all transactions. 

These terms and conditions may require a party to pay attorney’s fees for any dispute, may impose an interest rate for late payments much higher than expected, may contain a complete disclaimer of warranties, and in other cases severe limitations on damages that may be recovered against the vendor in the case of a defective product or severely limit the time and circumstances within which returns can be made.  As long as the business relationship is good, the parties may never resort to these fine print items, but be assured that at the first sign of trouble one side or the other will be pointing to its fine print items. 

Just as these terms and conditions can be a trap for the unwary, so they can be an opportunity.  Building these terms into your transaction paperwork may save a lot of dispute down the road when some issue arises.  When opposite sides of the transaction have different terms and conditions (such as when a purchaser issues a purchase order stating one set of conditions and the vendor issues a confirmation that contains other terms and conditions), paperwork battles can take place, and these can ultimately be resolved.  But the time to resolve them is at the time of the transaction, not later when the dispute arises.  Be sure to review your paperwork now to find out if you are missing an opportunity to define the terms and conditions of transactions you are a part of, and always read every credit application, purchase order, sale confirmation, and other document very carefully and do not allow any of your staff to just routinely sign anything that looks innocent.  Fine print is serious business.

Author: Frederick R. Folz (bio)
Phone: 812.452.3504
email: ffolz@bamberger.com

1. Individual Debtor Name on Financing Statements.  Problems have arisen in the past when trying to determine the “correct” name of an individual debtor to place on the financing statement.  The individual’s name on a birth certificate  may vary from the driver’s license, and the problem can be further compounded if the debtor is known by a different name than is reflected on either of the foregoing documents.  The proposed revisions provide two alternatives for determining the “correct” name of an individual debtor on a financing statement. 

Alternative A provides that if the debtor holds a driver’s license that has not expired, issued by the state where the financing statement is to be filed, then the name of the debtor that must be provided on the financing statement is the name of the debtor as it appears on the driver’s license.  If the debtor does not hold a driver’s license issued in the state in which the financing statement will be filed, then either of the following names of the debtor would be sufficient: (i) the individual name of the debtor as under current Article 9; or (ii) the debtor’s surname and first personal name.

Alternative B provides that any of the following names for the debtor would be sufficient on the financing statement: (i) the debtor’s name as shown on a driver’s license, if the debtor holds an unexpired driver’s license issued by the state; (ii) the individual name of the debtor as under current Article 9; or (iii) the debtor’s surname and first personal name.

It would be up to the financing statement filer to determine the proper surname and first personal name for the debtor to fill in on the financing statement.  If this is not obvious, then the first approach is to use additional debtor names on the financing statement to cover all variations.  In addition, the approach for using the driver’s license will require banks to note the expiration date of the current driver’s license.  If the driver’s license is not renewed timely, and the debtor must apply for a new license, the debtor’s name may change on a subsequent version of the driver’s license.  A creditor would then have four months to change their financing statement to reflect the current name of the debtor.  Creditors will also need to be aware of any other debtor name changes, such as changes due to marriage or divorce.  Again, the creditor would have four months from the date of the name change in order to correct the name on the financing statement.

2. Name of Registered Organization.  The proposed changes to Article 9 now clarify that the correct name for an organization is the name shown  on the document filed with the state to form or organize the registered organization.  Typically, this will be the articles.  If the debtor organization’s name is inconsistent within the articles, then the creditor must rely on the part of the articles where it designates the debtor organization’s name.  This proposed amendment clarifies prior confusion when the name listed in the articles did not match the name of the organization as shown in the Secretary of State’s database.

3. Name of Trust on Financing Statements.  If collateral is held in a trust that is not a registered organization, the name to be provided on the financing statement must be the name of the trust itself, or, if the trust has no name, the name of the settlor.  The proposed revision to Article 9 now includes that in the case of collateral held in a testamentary trust without a name, the name of the testator should be provided.  The amendments also require that a financing statement must provide in a separate part of the financing statement that the collateral is held in trust.  If the name of the settlor or testator is provided as the debtor’s name, the financing statement must provide in a separate part of the financing statement sufficient information to distinguish the trust from other trusts of the same settlor or testator, for example the date of the trust agreement.

4. Rejections.  The filing office will no longer be permitted to reject a financing statement that fails to provide the type of organization of the debtor, the jurisdiction of organization, or the organization identification number of the debtor or a statement the debtor has none.

5. Correction Statements.  The term “correction statement” under current Article 9 has been changed to the term “information statement.”  The proposed Amendments now provide that an information statement may be filed by a secured party of record who believes that an amendment or other record relating to the financing statement of the secured party of record was filed by a person not entitled to do so.  Under current Article 9, a correction statement may only be filed by a debtor.

6. New Forms.  There is a new form of financing statement that has been updated to reflect the changes in the proposed amendments.

7. Sales of Collateral On-line.  The proposed changes to Article 9 now explicitly provide that  public or private disposition of collateral may be conducted over the internet.  If the disposition over the internet is a public disposition, a notification complies with the proposed amendments to Article 9 if it states the time when the disposition is to begin and the electronic location of the disposition, such as the URL.  This will comply with the requirement that the notification state the time and place of the public disposition.

These changes are not yet in effect in any state, but creditors should be aware of what will be coming.  For questions on the proposed revisions to Article 9, please contact Laura Scott or Lori Young.

Author: Laura A. Scott (bio)
Phone: 812.452.3557
email: lscott@bamberger.com

While no state has yet adopted the amendments to UCC Article 9, it is reasonable to expect that some, if not all, of these changes will be approved and implemented by the various states reasonably soon.  The most important changes in UCC Article 9 involves how to state the debtor’s name in a financing statement.  Also, a new form of UCC financing statement is on the horizon.  Stay tuned for future blog posts for more information on these anticipated changes to UCC Article 9.

Author: Laura A. Scott (bio)
Phone: 812.452.3557
email: lscott@bamberger.com

A vehicle is being held in inventory if it is being held for sale or for lease.  If a vehicle constitutes inventory, the only method for properly perfecting a security interest in the vehicle is filing a financing statement. 

However, the buyer of a vehicle held in inventory takes free and clear of the lien of the inventory lender as long as the buyer is buying in the ordinary course of business and does not have actual knowledge that the sale violates a provision of the dealer’s financing arrangement. 

The Indiana Court of Appeals recently faced this situation and reaffirmed this rule.  In the particular case before the Court, the buyer of the vehicle had knowledge that there was a financing arrangement in place.  However, the Court quickly pointed out that knowledge that the financing was in place was not the same as knowing that there was a prohibition contained in the financing documents against selling the vehicle.  Accordingly, the buyer was able to drive off into the sunset without the lien of the financing lender attaching. 

This case also reminds us that taking possession of titles, while maybe having some practical significance, does absolutely no good to perfect a security interest of a lender in motor vehicle inventory.  The only method of perfection, as noted before, is the filing of a financing statement.  This does not protect you, however, from sales to end users.  In that event, floor plan financing checks by bank employees are the only realistic protection to making sure that the vehicles are still on the lot and that the lender’s position is not being diluted.

Author: Terry G. Farmer (bio)
Phone: 812.452.3543
Email: tfarmer@bamberger.com

Generally, this determination turns in large part on what the contract says about the disposition of the equipment at the end of the lease term.  If the leased equipment must be returned to the lessor, it is generally a true lease.  In that event, the lessor would win.  However, if the debtor has a right to keep the equipment, then a further analysis has to be made of those rights.  Generally speaking, if only nominal consideration has to be paid by the debtor, the transaction was viewed as a secured transaction.  If the lessor has not properly perfected its interest as a secured transaction, then the blanket security interest holder would win. 

In this case, the buyout was in excess of $78,000.00.  At first blush, this would appear to be more than nominal consideration.  However, the calculation has to go further.  This amount has to be reduced by the lessee’s reasonably predictable cost of performing under the lease if the buyout is not exercised.  Under the terms of this particular lease, a very heavy piece of equipment had to be returned to the lessor at considerable expense to the lessee.  Also, if the buyout was not exercised, there were additional lease payments that were owed.  All of this reduced the consideration to be paid to something just short of $16,000.00.  While the blanket secured creditor had good arguments to reduce the amount of consideration paid, the court still held that the amount of the buyout was sufficient to support a finding that the consideration was not nominal.  Thus, the lessor (who probably considered himself quite lucky) was able to beat the blanket secured creditor because it was able to prove that its arrangement was a true lease.

Equipment lessors need not, however, take the risk on this analysis.  The Uniform Commercial Code allows lessors to file financing statements in order to protect themselves in the event a court would rule against them on this “true lease” analysis.  In that particular instance, this lessor could have won simply by filing a financing statement and thus having a perfected purchase money security interest.  While it was a good day for the lessor, the controversy could have avoided by more careful documentation.

Author: Terry G. Farmer (bio)
Phone: 812.452.3543
Email: tfarmer@bamberger.com

The difficulty with this requirement is that the creditor has the burden of proving that it complied with this requirement in the event that a question arises.  There is no requirement that the financing statement delivered be a file-marked copy of the financing statement.  To comply with this requirement, the creditor should include a document to be executed by the debtor at closing acknowledging receipt of a copy of the financing statement.  The Indiana statute is silent on whether the debtor can waive its right to receive a copy of the financing statement and security agreement. 

In the event that such a waiver is enforceable, financial institutions should consider including such a waiver provision in its security agreements used in Indiana so that a financial institution can attempt to assert the waiver as a defense in the event that the signed acknowledgement is lost or inadvertently not obtained. However, financial institutions should not rely on any waiver language, and should continue to obtain signed acknowledgements from the debtors.

Author: Laura A. Scott (bio)
Phone: 812.452.3557
email: lscott@bamberger.com

Although other methods of perfection exist, the best way to perfect a pledge of a membership interest in an LLC is to file a UCC financing statement.  The financing statement should list the owner of the membership interest as the debtor and the description of collateral should describe the membership interest pledged. 

This method of perfection is different than the method of perfection used to perfect a pledge of stock in a corporation, and lenders should be cautious to use the correct method of perfection depending on whether the pledged collateral is an ownership interest in an LLC or an ownership interest in a corporation.

Author: Laura A. Scott (bio)
Phone: 812.452.3557
email: lscott@bamberger.com

If the financing statement is not filed (or a lien is not noted on a motor vehicle title) within that time frame, what would otherwise be a protected transaction may now be attacked by the trustee and the bank may lose its lien rights.  Likewise, the Uniform Commercial Code requires perfection of the purchase money security interest within the same time frame in order for the transaction priority to relate back to the date that the security interest attached.

Author: Laura A. Scott (bio)
Phone: 812.452.3557
email: lscott@bamberger.com

There are three elements that must exist for marshalling to apply: (1) the senior creditor and junior creditor must be creditors of the same debtor; (2) there must be two funds that belong to the debtor; (3) only one of the creditors can have the right to resort to both funds. 

This concept does not come out of the Uniform Commercial Code; it is an equitable principal that courts may apply. 

Author: Lori Young (bio)
Phone: 812.452.3560
email: lyoung@bamberger.com