Filing Officer UCC Summit May Affect UCC Search and Filing Best Practices

During August 2005, the International Association of Commercial Administrators (IACA) held a special "UCC Summit" meeting to address lingering UCC Revised Article 9 (RA9) search and filing issues. IACA

Actions by IACA can have a considerable impact on search and filing "best practices" for secured parties.

Model Administrative Rules

Prior to enactment of RA9, IACA promulgated Model Administrative Rules (MARS) for state-level UCC filing offices as contemplated by 9-526(b)(2). Since RA9 took effect, it has become apparent that to continue serving as an effective guide for both filing offices and users the MARS required updates and clarifications in certain areas. This is especially true in the area of search procedures.

As part of the UCC Summit, IACA reviewed the MARS in their entirety, and suggested appropriate changes. The specific items that required revision include:

* A clear definition of "standard search logic";

* Definition of a "search report" and indicate that a "listing" is part of this report;

* Determine whether a copy request shall include copies of related filings;

* Refer to IACA-approved documents, e.g., forms-noise word list, etc., and provide links to these documents from the Model Administrative Rules;

* Define the need for a separate "adverse lien" search in jurisdictions that commingle non-UCC liens in the UCC index/office. This nonstandard search will use broad search logic to find variations of the debtor name.

Darrell Pierce, Esq., of Dykema Gossett PLLC, agreed to draft the revised MARS. Mr. Pierce is ideally suited for the task. He chaired the IACA Article 9 Filing Project and drafted the original MARS with input from both the Jurisdictional Committee and the User/Service Provider Committee. The revised MARS will be circulated prior to the May 2006 IACA Annual Meeting, where IACA members will vote on whether to adopt the revision.

Model Search Report

Currently, each jurisdiction uses its own discretion in determining how to report search results. The format and content of the reports often varies widely by filing office. The lack of consistency makes it difficult for searchers to interpret search results.

In an effort to promote search result uniformity, Carol Nulty, Esq., of Skadden, Arps, et al. presented a proposed "model search report." Ms. Nulty has worked with the IACA secured Transaction section (STS) and the RA9 Filing Project for many years, sharing her experience as a "user." The purpose of this proposal was to provide filing officers with a model report format that is both searcherfriendly and contains all the necessary filing information.

The proposed Model Search Report presents the financing statement records in a logical layout and links the record with all subsequent amendments. The report is designed to present the records in a manner that can be easily understood by the searching party.

The proposal may become a MARS addendum that filing offices can use for future revisions of search result format. The proposed UCC Search Result Cover Sheet and Sample UCC Search Result Report may be available on the IACA Website after the IACA Annual Meeting in May of 2006 at www.iaca.org/sts.

Standard UCC Search Logic Implementation Guide

Revised Article 9 90 -506(c) anticipated that each jurisdiction would implement a "standard search logic." The original MARS section 5 attempted to provide uniform model search logic for use by the jurisdictions. However, many jurisdictions either failed to adopt the model search logic, or implemented it nonuniformly. The result is that the search logic behaves differently between jurisdictions.

In an attempt to assist filing offices in implementing uniform standard search logic, the IACA Information Technology section, some private-search providers and software companies, are working together to develop a programming implementation guide. IACA will make the guide available to all filing offices and include model data entry rules, programming procedures and how to address legacy data issues. The intended result is a uniform search logic implementation that lessens the risk of the logic itself creating "hidden liens" in the UCC index.

The guide will also provide the "IACA List of Ending Noise Words." ' Most individual state filing offices currently use a customized list of noise words derived from the official IACA list. The guide is intended to include direction on managing jurisdictional variations to the IACA list offices and how to communicate any nonuniform variations.

At the UCC Summit, the STS determined that the current "IACA Model Noise Word List" should remain unchanged and continue to serve as a baseline by all filing offices. If individual filing offices make changes to the "model", then they need to provide a copy of the list being used and clearly indicate when changes are made to that list. It is anticipated this implementation guide may become an addendum to the Model Administrative Rules, just like the IACA Noise Word list is today. Please note: This noise word list is the Model and is used as a baseline by the individual filing offices. Each office will have its own version of this list and filers and searchers will need to ascertain the exact list being used by each.

Nonstandard Search Logic to address "Adverse liens" (non-UCC liens)

The availability of non-standard search logic has been a concern of searching parties since the implementation of RA9. A recently decided case, In re Spearing Tool & Mfg. Co, shows this concern was well founded.2 In Spearing, the court found that an 1RS tax lien filed using a variation of the debtor's name was effective, even though it would not appear on a search of the debtor's correct legal name. At the time, the only search logic available in that particular jurisdiction, the Michigan secretary of State, was a RA9-compliant exact-name match. A search using broader, non-standard search logic would have easily found the tax lien.

Many states commingle non-UCC liens in the central UCC index. Depending on the jurisdiction, these may include tax liens, judgments, attorney liens or any other involuntary lien created by statute. In such cases, it is the statute that determines sufficiency of a debtor name, not RA9. Standard RA9 search logic will not turn up effective adverse lien name variations, resulting in "hidden liens."

To address this problem, IACA will recommend that every filing office with adverse liens filed in the UCC index provide a separate search with broad search logic. The additional nonstandard search will allow a searching party to find most, if not all, name variations in the index. The Search Logic Implementation Guide is anticipated to recommend some version of name variation search logic, e.g., soundex, begins with, contains key words, etc.

Transition Rule 9-705(c) continuation controversy and concerns

When RA9 took effect in 2001, it contained transition rules to ensure that secured parties had sufficient time to bring existing financing statements into compliance with the new law. The RA9 transition period will end in most jurisdictions on June 30,2006. After that date, the drafting committee intended that all financing statements either be RA9-compliant, or ineffective.

One of the key transition provisions is 90 -705(c), which describes the effectiveness of actions taken before the effective date. It reads in relevant part:

This act does not render ineffective an effective financing statement that, before July 1, 2001, is filed and satisfies the applicable requirements for perfection under the law of the jurisdiction governing perfection as provided in former section 9-103. However, except as otherwise provided in subsections (d) and (e) and section 9-706, the financing statement ceases to be effective at the earlier of:

(1) The time the financing statement would have ceased to be effective under the law of the jurisdiction in which it is filed; or

(2) June 30,2006.

Unfortunately, 90 -705(c) is less than clear about how it applies to certain pre-effective financing statements. The financing statements in question are those that were filed in the correct location under both old Article 9 and RA9 (those filed in the incorrect RA9 location under old law require an "in lieu" filing and are not affected by this issue); had a lapse date in the second half of 2001; and, finally, were continued prior to the effective date of RA9.

In 2006, many of these financing statements will need to be continued once again. secured parties may be surprised to discover that their financing statements ceased to be effective on June 30, 2006. This issue will only affect a small number of active financing statements, but these are likely to represent significant transactions.

The problem is how to determine the correct continuation window. There are three possible scenarios for determining the continuation window in this situation. The first is that continuations will only be effective if filed between the beginning of the six-month window and June 30, 2006. The second is that the continuation window runs from January 1, 2006 through June 30, 2006. This gives the filer a full six-month window. The final scenario is that the transition end date does not terminate the effectiveness of these financing statements and the filer has the full six months prior to the lapse date to file a continuation.

Each option has its risks. The first scenario has an easy-to-miss shortened window, just days in some cases. Scenario 2 is problematic because filing officers have no statutory authority to accept filings prior to the beginning of the six-month window. Finally, it is not clear that continuations will be effective if filed between June 30, 2006 and the lapse date. At least there is a "safe harbor." In all three scenarios a continuation will be effective if filed between the beginning of the six-month window and June 30 2006 as demonstrated in Figure 1.

The legal community is split on which scenario is the correct way to deal with this issue. There is no expected conclusion to the controversy from the Permanent Editorial Board (PEB). It is expected that the PEB will issue an Official Comment in the Fall of 2005, but that it will do no more than outline the three scenarios and point out the "safe harbor." It will be left to the Courts to decide which scenario is the correct interpretation.

At the May 2005 IACA annual meeting, some prominent members of the legal community asked the filing officers to consider opening the continuation window on January 1,2006 to allow filing parties to choose whichever scenario they wished. Initially, IACA members thought this was a good idea and by resolution adopted that stance. Since then, many individual filing officers, in consultation with state legal counsel, have determined that they should not open the sixmonth continuation window on January 1,2006 without the statutory authority.

A few states have addressed this issue through statute. Tennessee and Oklahoma have opened the continuation window on January 1, 2006. Idaho also opened the window on January 1 for county-level fixture filings. Maryland reset the lapse date on all pre-RA9 financing statements to June 30, 2006.

The best practice for secured parties is to file continuations during the "safe harbor" portion of the six-month window. In some instances, this window can be almost a full six months, but it can also be as short as one day.

The challenge for secured parties is how to identify the financing statement that will be at risk of lapsing on June 30. Some service companies maintain a continuationwindow monitoring system for their customers and will likely notify secured parties and/or their legal counsel of all financing statements that may fall into this category. secured parties who have not availed themselves of these product offerings will need to rely on their internal tracking systems or work with service providers and filing offices in order to avoid the possibility of losing their secured position.

Jurisdictions search chart

In November 2001 the IACA filing officers met to create the "Jurisdictions Guidelines for Accepting a UCC Record Presented for Filing Chart".3 It identifies how different jurisdictions respond to a number of common filing situations. The filing chart has proven to be a helpful resource for both secured parties and service companies in determining how each jurisdiction interprets its duties under RA9.

The success of the filing chart led IACA members to determine that a similar chart is needed to communicate what searchers should expect from each jurisdiction when they submit a UCC-11 Information Request, including the available options and what the results will show.

In advance of the UCC Summit Meeting, the secured Transactions section circulated a questionnaire to all of the IACA member jurisdictions. The membership prepared a chart based on filing office practices of the 28 jurisdictions in attendance. The remaining jurisdictions will be queried in coming months to complete the chart. From this information, the secured Transaction section will create a chart titled, "Jurisdictions Guidelines for Interpreting Search Results in Response to a Request for Information".4 This chart will be presented at the annual IACA meeting in May 2006 for formal adoption.

IACA's next steps

The following items will be on the agenda at lACA's 2006 annual meeting to finalize the work begun at the UCC Summit:

* 9-705(c)

* Implementation Guide for Standard Search Logic

*Implementation Guide for Adverse lien Searching

* Model Administrative Rules - revisions

* Model Search Report

* Jurisdictions Search Chart

* UCC Forms - possible revisions by IACA

* Jurisdictions Filing Chart - possible revisions/ additions

The state-level UCC filing officers are trying to address the needs of their customers and assist the National Conference of Commissioners for Uniform State Laws, the American Law Institute and the PEB in making Revised Article 9 as uniform as possible. The filing officers have been assisted by service providers and the legal community through not only sponsorship funding for meetings, but also in the time and effort of these groups to work with the various IACA sections.

It is important for secured lenders to understand changes in filing office policies and procedures developed through these efforts, as it will impact the sufficiency of search and filing best practices.