SECURED LENDERS BEWARE: IRS PLAYS BY ITS OWN RULES IN FILING FEDERAL TAX LIENS

Secured Lender, The, Sep/Oct 2005 by Sayre, Stephen D, Pierce, Darrell

Readers of The Secured Lender have been repeatedly warned that Revised Article 9 requires filers of financing statements to get the debtor name right, particularly when the debtor is a "registered organization," which has an established and objectively verifiable name.' Under Revised Article 9, where the debtor is a registered organization, such as a corporation, limited partnership or limited liability company,2 a financing statement will be effective only if it sets forth the correct debtor name, or if, notwithstanding the fact that it sets forth an incorrect name, it is nevertheless revealed by a search conducted under the correct debtor name of the records of the relevant filing office using the filing office's standard search logic. This objective and practical test enables a searcher who can confidently establish a debtor's correct name and jurisdiction of organization to search one time and be assured that the search will reveal all potentially effective financing statements filed against its debtor.3 Thus, a secured lender will be able to limit the scope of its searches with confidence that all prior Uniform Commercial Code security interests will be discovered.4 This confidence is coupled with a strict search logic that has the effect of limiting search results.5 The combined effect of Revised Article 9's registered organization name rule and this strict search logic was designed to reduce transaction costs by minimizing incorrect matches and the corresponding need to conduct further due diligence for the searcher to be assured that a financing statement revealed by a search is not, in fact, applicable to the relevant debtor.

Although there have been very few reported decisions applying Revised Article 9's strict debtor name requirement for registered organizations, in the few reported cases courts seem to have applied this requirement as intended. See, e.g., Receivables Purchasing Co. v. R&R Drilling, L.L.C., 588 S.E.2d 831 (Ga. Ct. App. 2003) (holding that a UCC-1 filed against "Net work Solutions, Inc." - rather than the correct name of "Network Solutions, Inc." - was seriously misleading where a search of the filing office's records using its standard search method did not reveal the financing statement filed against the incorrect name); In re Asheboro Precision Plastics, Inc., No. 03-11319C-7G, 04-2043, 2005 WL 1287743 (Bankr. M.D.N.C. March 1, 2005) (use of purported trade name "Wade Technical Molding, Inc." in place of debtor's correct legal name, "Asheboro Precision Plastics, Inc.," rendered financing statement seriously misleading).6 The whole idea was to limit search results while assuring searchers that the limited results were adequate, and the courts seem to have accepted the resulting rebalancing of the interests of filers and searchers.

However, while Revised Article 9 made significant improvements with respect to the Article 9 search process, the new statute does not govern all interests that may have priority over an Article 9 secured party. The Court of Appeals for the Sixth Circuit has recently ruled that, as with many things involving Uncle Sam, the IRS plays by a different set of rules. The ruling arose in connection with the bankruptcy proceeding of Spearing Tool and Manufacturing Co., a Michigan corporation ("Spearing"). See, In re Spearing Tool and Manufacturing Co,. No. 03-72070, 2005 WL 1430501 (6th Cir. June 21, 2005).

The facts of this case are not unusual. In April 1998, Crestmark had entered into a lending agreement, which had granted Crestmark a security interest in all of Spearing's assets. Crestmark perfected its security interest by filing a financing statement, which correctly identified Spearing as "Spearing Tool and Manufacturing Co.", the name Spearing registered with the Michigan Secretary of State. In April 2001, Spearing entered into an additional secured financing arrangement with Crestmark, under which Crestmark agreed to purchase accounts receivable from Spearing, and Spearing granted Crestmark a security interest in all its assets. Crestmark again perfected its security interest by filing a UCC financing statement, again using Spearing's correct legal name.

Meanwhile, Spearing fell behind in its federal employment-tax payments. On October 15, 2001, the IRS filed two notices of federal tax lien against Spearing with the Michigan Secretary of State. Each lien notice identified Spearing as "Spearing Tool & Mfg. Company Inc.," which varied from Spearing's correct name, because it used an ampersand in place of "and," abbreviated "Manufacturing" as "Mfg.," and spelled out "Company" rather than the abbreviation "Co." Crestmark periodically submitted lien search requests to the Michigan Secretary of State, using Spearing's exact registered name, but under Michigan's standard computer search logic, the liens filed by the IRS were not revealed. And even though Crestmark's February 2002 search results came back from the Secretary of State's office with a handwritten note stating: "You may wish to search using Spearing Tool & Mfg. Company Inc.", Crestmark did not search for that name at the time. So Crestmark, unaware of the tax liens, advanced more funds to Spearing between October 2001 and April 2002.