Who Knew the Memo Field of a Check Could Impact the Priority of a UCC Filing?
In a recent bankruptcy case, creditors are provided with yet one more example of why it’s important to conduct reflective searches on all UCC filings.
In Davis Trust Co. v. Citizens Bank of W. Va., Inc., the court held that the UCC filing, which was incorrectly indexed by the filing office, took priority over a subsequent filing by another creditor. This was great news for the creditor whose filing was mis-indexed, but not so great news for subsequent creditors that followed the rules of search and notify.
Bruce A. Wilson, author of A Mis-Indexed UCC-1 Financing Statement Remains Valid and Prior to a Subsequent Filing, reviewed this case and agreed with the bankruptcy court’s decision to grant priority to Citizens Bank (i.e. the creditor whose UCC filing was “mis-indexed’).
The court determined that Citizens Bank’s UCC filing was properly completed & submitted to the Secretary of State, giving it priority over another creditor’s subsequent filing. But how did the court determine that an incorrectly indexed filing gets priority? Because Citizens Bank used the memo field on their check for filing fees.
No really, the memo field. OK, it wasn’t just the memo field — here’s the court’s response (emphasis added):
“The final UCC-1 financing statement deserving consideration is the 2008 Financing Statement. Citizens submitted this financing statement by mail to the [SOS]. There is no dispute as to whether this was a proper medium of delivery. It is also undisputed that the 2008 Financing Statement provided the names of the debtor and the secured party and indicated the collateral covered by the financing statement. Thus, the 2008 Financing Statement was properly filed so long as it was also accompanied by a sufficient filing fee. In this case, Citizens submitted two UCC-1s, one relating to the Debtor and another relating to DSTS, Inc., and tendered one $10 check. As the filing fee for a UCC-1 is $10, it is clear that Citizens did not submit sufficient funds to cover both financing statements. However, Citizens designated the single check for the Debtor’s filing fee by writing ‘Recording Fee Reckart Equipment Company’ on the memo line of the check. Thus, Citizens satisfied all of the necessary filing requirements such that the 2008 Financing Statement is effective as of the filing date even if the [SOS] refused to accept the record. W. Va. Code § 46-9-516(d). Moreover, because Article 9 provides that the ‘failure of the filing office to index a record correctly does not affect the effectiveness of the filed record,’ the 2008 Financing Statement is effective if the [SOS] accepted and improperly indexed the record. W. Va. Code § 46-9-516.”
As you can imagine, Davis Trust (the subsequent creditor), was less than thrilled, as they followed the UCC rules. They conducted a search, prior to filing their UCC, to ensure all parties were notified and Citizens Bank’s UCC was a no-show. Davis Trust is in the process of legal action against the Secretary of State for negligence.
According to Wilson, the bankruptcy court can’t make decisions on Davis Trust’s negligence claim, but the court did offer its opinion to the district court, essentially recommending a trial to determine whether the Secretary of State was to blame. (The court even took the time to reference the responsibilities of the Secretary of State under Article 9.)
Wilson offers creditors the same advice NCS offers creditors — run a reflective search!
“A post-filing UCC search could be performed by UCC filers to verify the proper filing and indexing of a UCC filing. Although UCC filers often obtain copies of file-stamped financing statements, a file-stamped copy may not reflect how the filing is indexed in the records of the filing office and whether it is indexed under the correct debtor name. Despite the holding in the Davis Trust v. Citizens Bank case in favor of the UCC filer, a post-filing search could avoid potential priority contests with other creditors, additional scrutiny that such a contest could bring on the propriety of a UCC filing, legal fees related to any such dispute and potential pressure to settle for less than the recovery would otherwise be under a proper filing.”
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