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Fall 2005 Commercial Lending Litigation Update

1. In Re: FV Steel and Wire Company, 310 B.R. 390, 43 Bankr. Ct. Dec. 40, (May 25, 2004).

The Bankruptcy Court for the Eastern District of Wisconsin held that under Illinois law, a Financing Statement which was filed under the Debtor?s trade name rather than under its true corporate name, despite the fact that the Creditor was aware of the Debtor?s corporate name, was ineffective to perfect the Creditor?s security interest. During the Chapter 11 case of FV Steel and Wire Company, Motions were filed to lift stay by Creditor, PSC Metals, Inc. A major issue between the parties was the validity of a UCC Financing Statement filed by PSC against ?Keystone Steel & Wire Co.?, which was a trade name used by the Debtor. The Bankruptcy Court held that PSC?s Financing Statement was insufficient as a matter of law under Revised Article 9, as well as Article 9 in effect at the time the transaction was completed.

2. In Re: Terrance Joseph Kinderknecht, 308 B.R. 71, 52 Collier Bankr. Case. 2d 46, 53 UCC Rep. Serv.2d 167 (April 16, 2004).

The United States Bankruptcy Appellate Panel of the 10th Circuit reversed a Bankruptcy Court Decision in order to set aside a Creditor?s security interest in the Debtor?s farm implements on the basis that the Creditor failed to properly perfect a security interest by using the Debtor?s nickname in its Financing Statement rather than his legal name. The Debtor?s legal name was ?Terrance Joseph Kinderknecht? and his nickname was ?Terry?. The Secured Creditor filed its Financing Statement in the appropriate location listing Terry J. Kinderknecht as the Debtor. The Bankruptcy Court concluded that the Secured Creditor?s Financing Statement was sufficient to perfect its interest in the property by listing the Debtor?s nickname. Upon appeal, the Bankruptcy Appellate panel reversed the Bankruptcy Court and held that the Secured Creditor must list an individual Debtor by his or her legal name and not a nickname. The Appellate Court?s rationale was that under Revised UCC if a Financing Statement fails to sufficiently provide the name of the Debtor, it is seriously misleading as a matter of law.

* Revised Article 9 of the UCC contains an ambiguity that is now being addressed by the Courts. Although Revised Section 9-503 specifically sets parameters for listing a Debtor?s name in a Financing Statement when the Debtor is an entity (such as a corporation), it does not provide any detail as to the name that must be provided for an individual Debtor. The Code simply states that the name of the Debtor should be used. This could be construed as allowing a Debtor to be listed in the Financing Statement by his or her commonly used nickname. However, as the above referenced case indicates, despite the ambiguity, the Court looked to the specific filing requirements for Debtor entities and then applied them to individual filings. ?The more specific provisions applicable to entities, together with the importance of naming the Debtor in the Financing Statement to facilitate the notice filing system and increase commercial certainty, indicates that an individual Debtor must be listed on a Financing Statement by his or her legal name, not by nickname?. The message is obvious, verify the Debtor?s legal name.

3. In Re: Receivables Purchasing Company, Inc., 588 S.E.2d 831 (October 16, 2003).

The Court of Appeals of Georgia held that misidentification of the Debtor?s name on a Financing Statement was seriously misleading, and thus, failed to perfect an Assignee?s security interest in the funds which entitled another creditor to the funds pursuant to a separate judgment lien. Two creditors claimed entitlement to $32,136.84 that was deposited into the Trial Court?s registry. Network Solutions, Inc. granted a security interest in its accounts receivables to Receivables Purchasing Company, Inc. Receivables filed a UCC-1 Financing Statement to perfect its security interest in the payments and listed ?Net Work Solutions, Inc.? rather than the correct name ?Network Solutions, Inc.?. A competing Creditor ran a UCC search under the name ?Network Solutions, Inc.? to determine if there were any outstanding liens. The search failed to reveal Receivables? Financing Statement. The Trial Court held that Receivables? Financing Statement was seriously misleading in that it failed to use the correct corporate name of Network Solutions, Inc. The Trial Court?s decision was affirmed by the Court of Appeals of Georgia.

4. In Re: Perry Hollow Management Company, Inc., 297 Fed.3rd 34 (July 23, 2002).

The United States Court of Appeals for the First Circuit affirmed a Bankruptcy Court and District Court Decision avoiding a Creditor?s security interest in golf carts on the basis that the Creditor failed to file one of its UCC Financing Statements in the correct location. This case was decided under prior UCC law, and not Revised Article 9. However, it is important to note that the Creditor attempted to argue its justifiable reliance on information provided by the Debtor concerning the Debtor?s physical address. The Debtor had premises in one town in New Hampshire and a mailing address in another town in New Hampshire. Under the prior UCC, in order to properly perfect the security interest in the golf carts, the Secured Creditor needed to file in both the County, as well as the Secretary of State?s Office. However, based upon information provided by the Debtor, the Secured Creditor filed in the wrong county. The Court held that substantial compliance with the UCC was not enough to perfect the Creditor?s security interest and justifiable reliance on the Debtor?s information could not serve as a basis to perfect the Creditor?s security interest.

5. Jones v. Federated Financial Reserve Corporation, 144 Fed.3d 961 (May 22, 1998).

The United States Court of Appeals for the Sixth Circuit found that an employer may be subject to vicarious liability for an employee?s unauthorized access to a credit report. The plaintiff brought suit claiming that the employer willfully and negligently violated the Fair Credit Reporting Act by acquiring, through actions of its employee, a report concerning the plaintiff?s credit status. The Court held that because the evidence could support a finding that the employee acted willfully, and because the employee?s actions may be imputed to Federated under the apparent authority doctrine, reasonable jurors could have found Federated liable for a willful violation of the FCRA. Accordingly, the Court reversed the District Court?s award of a directed verdict to Federated on the issue of whether it willfully failed to comply with the FCRA and remanded the claim. Notably, the Court stated that failure to impose vicarious liability on a corporation like Federated would allow it to escape liability for willful or negligent violations of the statute. Because a corporation can only act through its agents, it is difficult to imagine a situation in which a company would ever be found to have willfully violated the statute directly by obtaining a credit report for an impermissible purpose. The FCRA?s intended purpose would be subverted if a corporation could escape liability for a violation that could only occur because the corporation cloaked its agent with the apparent authority to request credit reports. The Court held that a trier of fact could determine that Federated created an appearance of authority that caused the credit reporting agency reasonably and prudently to believe that the employee had made a proper request for a permissible purpose, and that there was reliance on the employee?s apparent authority. Then, the jury could find Federated liable for negligent or willful violations of the FCRA.

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