The University of Chicago 9/17/2018 Class 18 Secured Transactions, Fall, 2017 Changes: Names - Entity Structure Randal C. Picker James Parker Hall Distinguished Service Professor of Law The Law School The University of Chicago Copyright © 2001-17 Randal C. Picker. All Rights Reserved.

9-507: Effect of certain events on effectiveness of financing statement (b) Information becoming seriously misleading. Except as otherwise provided in subsection (c) and Section 9-508, a financing statement is not rendered ineffective if, after the financing statement is filed, the information provided in the financing statement becomes seriously misleading under Section 9-506.

9-507(c) (c) Change in debtor’s name. If the name that a filed financing statement provides for a debtor becomes insufficient as the name of the debtor under Section 9-503(a) so that the financing statement becomes seriously misleading under Section 9-506: September 17, 2018

9-507(c) (1) the financing statement is effective to perfect a security interest in collateral acquired by the debtor before, or within four months after, the filed financing statement becomes seriously misleading; and September 17, 2018

9-507(c) (2) the financing statement is not effective to perfect a security interest in collateral acquired by the debtor more than four months after the filed financing statement becomes seriously misleading, unless an amendment to the financing statement which renders the financing statement not seriously misleading is filed within four months after the filed financing statement becomes seriously misleading.

Reading 9-507(c) For a Name Change that is Seriously Misleading under 9-506 Secured creditor continues to be perfected for all pre-change collateral and for that acquired within four months after the name change Not perfected for collateral acquired after the name change unless new FS filed within 4 months with appropriate name September 17, 2018

Recall 9-506(c) (c) Financing statement not seriously misleading. If a search of the records of the filing office under the debtor’s correct name, using the filing office’s standard search logic, if any, would disclose a financing statement that fails sufficiently to provide the name of the debtor in accordance with Section 9-503(a), the name provided does not make the financing statement seriously misleading.

M&T Trust Co. Core Facts Original Name of Debtor (from 1994): Patriot Electric, Inc. 2007 secured deal with M&T Nov. 2010 name change by Debtor: Patriot Electric and Mechanical, Inc. September 17, 2018

M&T Trust Co. Core Facts M&T files continuation statements in 2011 Patriot files under Chapter 11 on March 22, 2013 September 17, 2018

September 17, 2018

M&T Continuation Statement September 17, 2018 M&T Continuation Statement

M&T Continuation Statement September 17, 2018 M&T Continuation Statement

M&T Trust Co. Question Given the name change, is M&T unperfected to any extent such that its security interest can be avoided under the hypothetical lien creditor power of BC 544? September 17, 2018

Certified Questions Question 1 Is a financing statement that does not contain the debtor’s correct name and is not discoverable by searching for the debtor’s correct name within the filing office records by utilizing the Search Logic promulgated by SDAT, but is otherwise discoverable if a searcher of the filing office September 17, 2018

Certified Questions Question 1 records submits the correct beginning of the debtor’s name utilizing the Search Logic, seriously misleading within the meaning of 9-502(a)(1), 9-503(a)(1) and 9-506 of the Annotated Code of Maryland, Commercial Law Article? September 17, 2018

Certified Questions Question 2 How should the Search Logic instruction that requires a searcher to enter “as much or as little of the [debtor’s] name [as the searcher] is certain of” be construed in the case of Section 544(a)’s hypothetical lien creditor who is statutorily mandated to be “without knowledge”? September 17, 2018

September 17, 2018 Maryland SDAT

September 17, 2018 Maryland SDAT

“If the search name is an entity (corporation, trust, government agency, etc.): Enter as much or as little of the name that you are certain of, but what you enter must be the beginning of the name as it appears in this file. A partial name cannot be used unless it is the beginning of the name. Use only the standard 26 English letters and 10 Arabic numerals.” September 17, 2018 Maryland SDAT

“Case and punctuation are irrelevant “Case and punctuation are irrelevant. For example, MIDATLANTIC is the same as Mid-Atlantic, mid-atlantic and Mid!Atlantic. There are four special cases however:” September 17, 2018 Maryland SDAT

Case 1: The word “The” “The” will not be found at the beginning of a name. (Example: To find THE SMITH GROUP, enter smithgroup) If “THE” appears elsewhere in the name, either leave it out (to find STAN THE MAN GROUP, enter “stanmangroup”) or enter spaces before and after THE “stan the mangroup”) (To find BALTIMORE THERAPY GROUP, P.A., enter “baltimorether”) September 17, 2018 Maryland SDAT

Do not enter the word “AND” unless it is the beginning of the name. Case 2: The word “AND” Do not enter the word “AND” unless it is the beginning of the name. (Example: To find “AND DAVE SAID, INC” enter “anddaves”) (To find “THE BALTIMORE AND OHIO RAILROAD” enter “baltimoreohio”) (Entry of “baltimoreand” will find “BALTIMORE ANDULUSIA SHIPPING” but not “BALTIMORE AND OHIO RAILROAD”) September 17, 2018 Maryland SDAT

Case 3: Entity Tails Do not enter an entity tail (the statutory terms required in the names of certain entities like Co., LLC, Corporation, P.C., etc) if it ends the name. (Example: To find “The Smith Corp.”, enter “smith”. To find “The Smith Corporation Maryland, Inc.” you can enter as much as “smithcorporationmaryland”. If you add “i” or more at the end however it will not be found) September 17, 2018 Maryland SDAT

Case 4: One, two or three character searches If you enter only one, two or three characters the system will perform an exact name search rather than a wild card search. (Example 1: Entry of ab will find “THE A&B CORPORATION” but not “ABC INC” or “ABLE” or “A.B.L.E”. Example 2: Entry of abc will find “ABC Inc” but not “ABC Company, Inc.” or “ABC Stores” or “A.B.C.D.”. ) September 17, 2018 Maryland SDAT

Search Results Tip: Carefully review search results. The order of presentation of the results may not be what you expect because punctuation does not make a difference. For an example of this, search “transamer” in the UCC records and study the order in which the results are presented. September 17, 2018 Maryland SDAT

Maryland Instructions and 9-506(c) Clear Conflict Maryland has the uniform version of 9-506(c) That section focuses on a search in the debtor’s correct name Maryland seems to instruct searchers not to do that September 17, 2018

Maryland Instructions and 9-506(c) Different Than Search Logic Search logic takes the debtor’s correct name and slices and dices it pursuant to particular rules Maryland could implement the case, punctuation, “and” and entity tail rules through the search logic and do so consistent with the statute September 17, 2018

September 17, 2018 Search in Old Name

September 17, 2018 Search in Old Name

September 17, 2018 Search in New Name

September 17, 2018 Search in New Name

September 17, 2018 Search in Old Name

Search in Four Letter Stem: “part” September 17, 2018

Search in Four Letter Stem: “part” September 17, 2018

Search in Four Letter Stem: “part” September 17, 2018

6‑15: Incorporation of Sole Proprietorships 9/17/2018 6‑15: Incorporation of Sole Proprietorships Joe’s Place Joe’s Place, Inc. 2/28: Incorporation 2/1 SA: All Assets & AAP FS: Joe 3/1: $ SA: AA & AAP FS: JPI Finco Bank 3/1 Who has priority? September 17, 2018

6‑15: Answer Pre-Change Assets SI survives transfer under 9-315(a)(1) 9/17/2018 6‑15: Answer Pre-Change Assets SI survives transfer under 9-315(a)(1) FS remains effective under 9-507(a) Bank wins under 9-322(a)(1) September 17, 2018

6‑15: Answer Post-Change Assets 9/17/2018 6‑15: Answer Post-Change Assets Absent special rule, Bank has no SA with JPI, thus no way to get SI in JPI assets, except through 9-315 proceeds rules Revised Article 9 creates new special rules September 17, 2018

Debtor Definitions 9-102(a)(56) 9/17/2018 Debtor Definitions 9-102(a)(56) “New debtor” means a person that becomes bound as debtor under Section 9‑203(d) by a security agreement previously entered into by another person. September 17, 2018

Debtor Definitions 9-102(a)(60) 9/17/2018 Debtor Definitions 9-102(a)(60) “Original debtor” means a person that, as debtor, entered into a security agreement to which a new debtor has become bound under Section 9‑203(d). September 17, 2018

9/17/2018 9-203(d) (d) [When person becomes bound by another person’s security agreement.] A person becomes bound as debtor by a security agreement entered into by another person if, by operation of law other than this article or by contract: (1) the security agreement becomes effective to create a security interest in the person’s property; or September 17, 2018

9/17/2018 9-203(d) (2) the person becomes generally obligated for the obligations of the other person, including the obligation secured under the security agreement, and acquires or succeeds to all or substantially all of the assets of the other person. September 17, 2018

9-203(e) (e) [Effect of new debtor becoming bound.] 9/17/2018 9-203(e) (e) [Effect of new debtor becoming bound.] If a new debtor becomes bound as debtor by a security agreement entered into by another person: (1) the agreement satisfies subsection (b)(3) with respect to existing or after-acquired property of the new debtor to the extent the property is described in the agreement; and September 17, 2018

9/17/2018 9-203(e) (2) another agreement is not necessary to make a security interest in the property enforceable. September 17, 2018

What Does This Mean? Attachment of the SI Is this SI Perfected? 9/17/2018 What Does This Mean? Attachment of the SI In 6-15, if 9-203(d) is satisfied, Bank will have a SI in the new assets acquired by JPI as original collateral This is independent of any proceeds interest that Bank might claim Is this SI Perfected? This is 9-508 and 9-507

9-508 (a) [Financing statement naming original debtor.] 9/17/2018 9-508 (a) [Financing statement naming original debtor.] Except as otherwise provided in this section, a filed financing statement naming an original debtor is effective to perfect a security interest in collateral in which a new debtor has or acquires rights to the extent that the financing statement would have been effective had the original debtor acquired rights in the collateral.

9-508 (b) [Financing statement becoming seriously misleading.] 9/17/2018 9-508 (b) [Financing statement becoming seriously misleading.] If the difference between the name of the original debtor and that of the new debtor causes a filed financing statement that is effective under subsection (a) to be seriously misleading under Section 9‑506: September 17, 2018

9/17/2018 9-508 (1) the financing statement is effective to perfect a security interest in collateral acquired by the new debtor before, and within four months after, the new debtor becomes bound under Section 9‑203(d); and September 17, 2018

9/17/2018 9-508 (2) the financing statement is not effective to perfect a security interest in collateral acquired by the new debtor more than four months after the new debtor becomes bound under Section 9‑203(d) unless an initial financing statement providing the name of the new debtor is filed before the expiration of that time. September 17, 2018

9-508 (c) [When section not applicable.] 9/17/2018 9-508 (c) [When section not applicable.] This section does not apply to collateral as to which a filed financing statement remains effective against the new debtor under Section 9‑507(a). September 17, 2018

What Does this Mean? Perfection of the SI 9/17/2018 What Does this Mean? Perfection of the SI In 6-15, again assuming that 9-203(d) applies, Bank’s SI in after-acquired property acquired by JPI is perfected as to property acquired within 4 months of the change And thereafter if new debtor’s name does not make filed old debtor’s name seriously misleading September 17, 2018

What Does this Mean? What is the priority of this SI? 9/17/2018 What Does this Mean? What is the priority of this SI? This is addressed by 9-326. September 17, 2018

9-326 (a) [Subordination of security interest created by new debtor.] 9/17/2018 9-326 (a) [Subordination of security interest created by new debtor.] Subject to subsection (b), a security interest that is created by a new debtor in collateral in which the new debtor has or acquires rights and is perfected solely by a filed financing statement that would be ineffective to perfect the security interest September 17, 2018

9/17/2018 9-326 but for the application of Section 9-316(i)(1) or 9-508 is subordinate to a security interest in the same collateral which is perfected other than by such a filed financing statement. September 17, 2018

9/17/2018 9-326 (b) [Priority under other provisions; multiple original debtors.] The other provisions of this Part determine the priority among conflicting security interests in the same collateral perfected by filed financing statements described in subsection (a). However, if the security agreements to which a new debtor became bound as debtor were not entered into by September 17, 2018

9/17/2018 9-326 the same original debtor, the conflicting security interests rank according to priority in time of the new debtor’s having become bound. September 17, 2018

9/17/2018 6-15: Answer Priority In 6-15, Bank loses to Finco as to after-acquired property acquired by JPI Bank will be perfected as to that property solely under 9-508 9-326(a) subordinates Bank’s SI September 17, 2018

6-15: Answer Bottom Line on 6-15 9/17/2018 6-15: Answer Bottom Line on 6-15 Bank will win as to pre-change property Bank will lose to Finco as to post-change property, even if 9-203(d) does apply, which we have not yet determined September 17, 2018

6-15: Answer Bottom Line on 6-15 9/17/2018 6-15: Answer Bottom Line on 6-15 What happens if Bank files a new FS in new debtor’s name within four month window called for by 9-508(b)(2)? 9-326(b) seems to say Bank loses to Finco in this situation (and see example 4 in the comments) But compare Bank of the West and Kupperman September 17, 2018

Summit Staffing Polk County, Inc. 9/17/2018 Summit Staffing Polk County, Inc. Randy Vincent Summit Staffing of Polk County, Inc. 3/14/02: Incorporation 8/22/01: SA: AR 9/4/01: FS: AR Summit Staffing as 2nd debtor Associated 10/16/02: What is SP’s position? September 17, 2018

Searching Florida What names should we search on? 9/17/2018 Searching Florida What names should we search on? Summit Staffing of Polk County, Inc.? Summit Staffing? Randy Vincent? Randy A. Vincent? Vincent, Randy? Vincent, Randy A.? Randolf Vincent? September 17, 2018

Florida UCC Search Here https://www.floridaucc.com/uccweb/SearchDisclaimer.aspx September 17, 2018

11/12/08 Search: “Summit Staffing of Polk County, Inc.” 9/17/2018 Run on 11/12/2008 11/12/08 Search: “Summit Staffing of Polk County, Inc.” September 17, 2018

11/12/08 Search: “Summit Staffing” 9/17/2018 11/12/08 Search: “Summit Staffing” September 17, 2018

11/12/08 Search on Lapsed Statements: “Summit Staffing” 9/17/2018 11/12/08 Search on Lapsed Statements: “Summit Staffing” September 17, 2018

9/17/2018 September 17, 2018 Vincent FS

9/17/2018 [More] September 17, 2018

9/17/2018 September 17, 2018 Vincent FS

9/17/2018 September 17, 2018 Vincent FS

Applying 9-203(d) Says the Court 9/17/2018 Applying 9-203(d) Says the Court In this case, after entering the security agreement with Associated Receivables, the business changed its business structure from a sole proprietorship (Randy Vincent d/b/a Summit Staffing) to a corporation (Summit Staffing of Polk County, Inc.). September 17, 2018

Applying 9-203(d) Says the Court Is this what 9-203(d) says? 9/17/2018 Applying 9-203(d) Says the Court The new corporation became generally obligated for the obligations of the sole proprietorship, including the obligation secured under the security agreement, and acquired or succeeded to all or substantially all of the assets of the sole proprietorship. Is this what 9-203(d) says?

9/17/2018 When Does 9-203(d) Kick In? 9-203(d): By operation of law other than this article or by contract: (1) the security agreement becomes effective to create a security interest in the person’s property; or September 17, 2018

9/17/2018 When Does 9-203(d) Kick In? (2) the person becomes generally obligated for the obligations of the other person, including the obligation secured under the security agreement, and acquires or succeeds to all or substantially all of the assets of the other person. September 17, 2018

Duty to Search v. Duty to Look through Search Results 9/17/2018 Duty to Search v. Duty to Look through Search Results Says the Court “A searcher is not required to conduct multiple searches; however, a searcher must reasonably examine the results of the proper search using the debtor’s correct name to determine if any financing statements relating to the debtor are disclosed by that search.” September 17, 2018

Duty to Search v. Duty to Look through Search Results 9/17/2018 Duty to Search v. Duty to Look through Search Results Says the Court “If a reasonably diligent searcher would find the erroneous financing statement among the results of a proper search, then notice of the financing statement has been provided. Such a financing statement meets the requirements of 9‑506(c) and is not seriously misleading.” September 17, 2018

Planned Furniture Promotions 9/17/2018 Planned Furniture Promotions Ben/Laura Youngblood Benjamin S. Youngblood, Inc. 2/25/99: Incorporation 2/4/99: Inv, AR, EQ, All assets of Old Salem Furniture 2/22/99: FS: B&L Y 7/9/01: Modification done with B&L Citizens Bank 10/16/02: What is Bank’s position? September 17, 2018

What Kind of Case is This? 9/17/2018 What Kind of Case is This? Name Change or Incorporation? What turns on that? Says the Court “A search of the filing records under the name ‘Benjamin S. Youngblood, Inc.’ would almost assuredly turn up a financing statement filed under the name Benjamin Scott Youngblood.” September 17, 2018

What Kind of Case is This? 9/17/2018 What Kind of Case is This? “It is therefore reasonable to conclude that a diligent creditor searching the filing records under the name Benjamin S. Youngblood, Inc. would be put on notice to inquire into the interests of a debtor listed as Benjamin Scott Youngblood. As a result, the name change cannot be considered seriously misleading.” September 17, 2018

What Kind of Case is This? 9/17/2018 What Kind of Case is This? “Accordingly, the Bank’s security interest remained perfected at all times and the IRS’s motion for summary judgment must be denied.” September 17, 2018

Understanding 9-325 Buyer Debtor Finco Bank 9/17/2018 Understanding 9-325 Buyer Debtor 3/1: Transfer of EQ with SI surviving 1/1: $, SA: EQ, FS: EQ 2/1: $, SA: EQ, FS: EQ 3/15: Who has priority in EQ at Buyer? Bank Finco September 17, 2018

9-325: Priority of security interests in transferred collateral. (a) Subordination of security interest in transferred collateral. Except as otherwise provided in subsection (b), a security interest created by a debtor is subordinate to a security interest in the same collateral created by another person if: September 17, 2018

9-325: Priority of security interests in transferred collateral. (1) the debtor acquired the collateral subject to the security interest created by the other person; (2) the security interest created by the other person was perfected when the debtor acquired the collateral; and (3) there is no period thereafter when the security interest is unperfected. September 17, 2018

Answer Bank has priority over Finco under 9-325 September 17, 2018

Understanding 9-325 Buyer Debtor Finco Bank 9/17/2018 Understanding 9-325 Buyer Debtor 3/1: Transfer of EQ with SI surviving 2/1: $, SA: EQ, FS: EQ 1/1: $, SA: EQ, FS: EQ 3/15: Who has priority in EQ at Buyer? Bank Finco September 17, 2018

Answer Bank has priority over Finco under 9-325 Surprising? This is a deviation from financing-statement based temporal priority Reflects a different type of temporal priority as pre-transfer, Bank was first and 9-325 continues that September 17, 2018

2/1: $, SA, FS: All Assets & AAP 9/17/2018 6‑16: Changes ParentCo SubCo1 SubCo2 3/1: $, SA, FS: AA & AAP 2/1: $, SA, FS: All Assets & AAP Finco Bank 4/1 Who has priority? September 17, 2018

Answer No SI conflict between Bank and Finco September 17, 2018

2/1: $, SA, FS: All Assets & AAP 9/17/2018 6‑16: Changes ParentCo SubCo1 SubCo2 3/1: $, SA, FS: AA & AAP 2/1: $, SA, FS: All Assets & AAP 3/15: Division transfer Finco Bank 4/1 Who has priority? September 17, 2018

Answer New Conflict Emerges between Bank and Finco Consult 9-325 (and maybe 9-326) September 17, 2018

Answer Answer Applies to collateral transferred in 3/15 transaction Based on FSs alone, Bank would appear to win 9-325(a) calls off that rule to preserve the priority position that existed prior to the transfer This is the so-called “double debtor” problem (see 9-325 comment 2) September 17, 2018

Next Question What about newly-acquired assets after the transfer of the division? 9-325 applies only to transferred collateral Consult (again) 9-326 If it applies, Finco will be junior to Bank as to post-transfer assets under 9-326(a) (but see Bank of the West) September 17, 2018

2/1: $, SA, FS: All Assets & AAP 9/17/2018 Mergers I ParentCo SubCo1 SubCo2 3/15: Merger of 2 into 1 3/1: $, SA, FS: AA & AAP 2/1: $, SA, FS: All Assets & AAP Finco Bank 4/1 Who has priority? September 17, 2018

Answer As to the pre-merger assets now held by the surviving entity Each secured party holds serve (maintains the pre-merger priority) as to those assets under 9-325 September 17, 2018

Answer As to the post merger assets acquired by the surviving entity Assume 9-203(d) applies (and it should) That means that SubCo1 becomes bound by operation of law to the 3/1 Finco SA Finco will be perfected under 9-508 but will want to file within 4 months if seriously misleading September 17, 2018

Answer Finco will be junior to the post-merger new assets under 9-326 To Sum Each SP maintains priority to pre-merger assets SP of surviving entity is superior to new post-merger assets under 9-326 given vanishing entity SP perfection flows from 9-508 September 17, 2018

2/1: $, SA, FS: All Assets & AAP 9/17/2018 Mergers II ParentCo SubCo1 SubCo2 3/15: Merger of 1 into 2 3/1: $, SA, FS: AA & AAP 2/1: $, SA, FS: All Assets & AAP Finco Bank 4/1 Who has priority? September 17, 2018

Answer With different survivor, priority to new post-merger assets flips Finco will have priority as to those assets as now Bank will be claiming perfection via 9-508 September 17, 2018

Who has priority to post July 1st AR of beverage operations? 9/17/2018 Bank of the West BCI BWTC Allied Bank of the West 4/5/82 SA: INV, AR, PR FS: Calif SS 7/1/84 Transfer of Beverage Business Allied BIBCO 1/13/84: Restructuring 6/11/84: Name Change 1/5/84 Factoring Deal SA: INV, AR, PR FS: Calif SS CCFS Who has priority to post July 1st AR of beverage operations? September 17, 2018

Answer Under Revised Article 9? 9/17/2018 Answer Under Revised Article 9? Critical question is whether 9-203(d) applies If yes: Allied/Bibco becomes bound under CCFS agreement 9-508(b) gives 4 month perfection 9-326(a) subordinates CCFS position if Bank of the West is perfected and remains perfected. September 17, 2018

Answer Under Revised Article 9? 9/17/2018 Answer Under Revised Article 9? If no: Bank of the West wins, even if unperfected As to 9-203(d) Do note 9-203 Comment 7 “In many cases, paragraph (2) will exclude successors to the assets and liabilities of a division of a debtor.” September 17, 2018

Answer Under Revised Article 9? 9/17/2018 Answer Under Revised Article 9? Same issues posed by case still exist Only question is whether express limited embrace of new debtor situations will limit the willingness of courts to go outside the statute September 17, 2018

Merrill Lynch v. Kupperman 9/17/2018 Merrill Lynch v. Kupperman PGB PITTRA 2003: Incorporation and Asset Transfer 2002: $, SA, FS: All Assets (and binding on “successors and assigns”) 2004: $, SA, FS: All Assets 2006: Who has priority? Merrill Chase September 17, 2018

What Should We Make of Footnote 2? Text “Even assuming that this claim was properly raised, New Jersey law does not compel a contrary conclusion. Under 9-326(a), a perfected security interest that is effective solely under 9-508 is subordinate to a perfected security interest that is effective by means other than solely under 9-508.” September 17, 2018

What Should We Make of Footnote 2? Text “However, Comment 2 of 9-326 explains that ‘a filed financing statement that is effective solely under Section 9-508’ does not ‘encompass a financing statement filed against the original debtor which remains effective against collateral transferred by the original debtor to the new debtor.’” September 17, 2018

What Should We Make of Footnote 2? Text “As described above, 9-507 applies to the assets transferred from PITTRA to PGB. Thus, Merrill has priority of interest.” Does that seem right? September 17, 2018