SEC v. ISC, Inc.: UCC-1 Ineffective Due to Mistake in Debtor's Name | Practical Law

SEC v. ISC, Inc.: UCC-1 Ineffective Due to Mistake in Debtor's Name | Practical Law

In United States SEC v. ISC, Inc., the court found a UCC-1 financing statement to be ineffective in perfecting a creditor's security interest due to an extra space in the debtor’s name.

SEC v. ISC, Inc.: UCC-1 Ineffective Due to Mistake in Debtor's Name

Practical Law Legal Update w-010-4138 (Approx. 3 pages)

SEC v. ISC, Inc.: UCC-1 Ineffective Due to Mistake in Debtor's Name

by Practical Law Finance
Published on 26 Sep 2017 • USA (National/Federal)
In United States SEC v. ISC, Inc., the court found a UCC-1 financing statement to be ineffective in perfecting a creditor's security interest due to an extra space in the debtor’s name.
On August 30, 2017, the court in United States SEC v. ISC, Inc. found a UCC-1 financing statement (UCC-1) to be ineffective to perfect a creditor's security interest due to an extra space in the debtor's name on the UCC-1 (United States SEC v. ISC, Inc., (W.D. Wisc. Aug. 30, 2017).
Double Bubble, Ltd. (DB) was a creditor of ISC, Inc. (the debtor). In 2016, after a judgment against the debtor in an enforcement proceeding filed by the SEC, a federal court appointed a receiver for the debtor and an asset sale was initiated.
DB filed a UCC-1 with the Wisconsin Department of Financial Institutions (DFI) to perfect its security interest in the debtor's assets. The receiver, however, classified DB as an unsecured creditor in its proposed distribution plan since a search of the debtor's name in the DFI records did not produce DB's UCC-1. This was due to the fact that DB inadvertently included an extra space in the debtor's name on its UCC-1, listing the debtor as "ISC, Inc ." instead of "ISC, Inc."
DB objected to its classification as an unsecured creditor arguing that its UCC-1 could have been found using a different search, for example using only "ISC" and that this would have been a "reasonably diligent" search.
However, the court found that DB's UCC-1 was "seriously misleading" because of the extra space in the debtor's name and therefore ineffective to perfect DB's security interest. The court reasoned that:
  • The "reasonably diligent" standard has been replaced in the Uniform Commercial Code (UCC) by a clearer standard based on filing office computerized search logic.
  • Under the UCC, a financing statement that fails to sufficiently provide the name of the debtor is seriously misleading (see Wis. Stat. 409.506(2)). There is an exception if a search of the filing office records using the debtor's correct name and the filing office's standard search logic will find the UCC-1 with the incorrect name (see Wis. Stat. 409.506(3)).
  • In this case, the extra space in the debtor's name in DB's UCC-1 prevented the UCC-1 from coming up in a search using the debtor's correct name.
  • The court concluded that DB should be classified as an unsecured creditor.
Although many filing offices disregard spaces in their standard search logic, this error turned out to be crucial in determining DB's status in the proceedings.
This case is yet another reminder of the care that must be taken in preparing financing statements. Even a tiny error may render them ineffective. For information on financing statements, see Practice Note, UCC: Preparing and Filing Financing Statements.