Alerts

Broad Search Logic Avoids Surprises

A recent UCC case has become a sobering reminder that though it’s imperative to get the Debtor’s name right when filing a financing statement, errors are inevitable. As a searcher, enhancing your due diligence and accessing resources to provide expanded search results can prepare you for what could otherwise be a big surprise at a bankruptcy hearing.

In 2012, Secured Party “Double Bubble” took a security interest in assets owned by Debtor “ISC, Inc.” In filing its financing statement, however, Double Bubble erred and put a space between the “c” and the period in “Inc .” Though more strict than most state published search logic, Wisconsin’s Department of Financial Institutions did not disclose Double Bubble’s lien when a search was run using the correct name: ISC, Inc. The space between the “c” and the period resulted in a hidden lien. Double Bubble argued that a diligent searcher would have accessed the broader search option available on the state’s website. Since Revised Article 9 was enacted, however, the diligent searcher standard has been replaced with something much stricter in most jurisdictions: the filer must get the name right, exactly right, every time to avoid a strict search logic that would otherwise render the UCC hidden and ineffective.

Though “good” case law prevailed here and upheld the statute, an uninformed prior secured creditor would have been blindsided at this hearing had they not had prior knowledge of the lien. Casting a wide net and using broad search logic within the due-diligence process has its merit.

Legislation Affects Entity Formation and Operation

Understanding each jurisdiction’s legislation as it relates to entity names is paramount for effective formation and operation of any business entity.

Florida passed amendments to its Fictitious Name Act, effective July 1, 2017. The act requires anyone doing business in Florida under a name other than the person’s legal name to register the fictitious name with the Division of Corporations of the Department of State. The amendments clarify the fictitious name registration process, by illuminating the documentation and information needed when registering a fictitious name, the time period for which a registration is valid, and the process for cancellation of the registration. Further, the legislation adds an exemption from registration for limited liability companies that already conduct business in a name that is licensed or registered and negates the need for a sworn statement when registering a fictitious name. Notably, limited partnerships, limited liability partnerships, limited liability limited partnerships, and limited liability companies should be careful when using certain words, abbreviations, and designations, as they may be prohibited unless the entity actually qualifies as that particular type of entity. Failure to comply with provisions under the Fictitious Name Act now constitutes a noncriminal violation, as opposed to the former classification of a misdemeanor. Finally, renewal of registration may be barred under certain conditions under the amendments.

Texas also passed legislation related to names of domestic and foreign entities, effective June 1, 2018. This legislation allows an entity or person to file a certified copy of a final judgment to establish the right to use the name in Texas. Names will need to be “distinguishable from” other names, instead of avoiding being “deceptively similar to” other names under the current version of the legislation. The “distinguishable from” standard will be expanded in its application to fictitious names under which foreign entities are registered. Formerly, names were only checked against names of existing filing entities, registered foreign filing entities, reserved names, and other registered names.

Online Notarizations Available in Five States

e-Notarization in Five States: What’s Next…Snapchat?

Texas recently passed HB 1217, joining Virginia, Montana, Ohio, and Nevada in allowing online electronic notarizations. The bill, to be effective January 1, 2018, allows for the commissioning of online notary publics and directs the secretary of state to develop rules to maintain electronic notarization standards. Online electronic notarizations will require the notary to verify the identity of a person creating an electronic signature at the time that the signature is taken by using two-way video and audio conference technology.

Identity may be verified by: (1) personal knowledge, or (2) remote presentation of a government-issued identification credential, credential analysis, and identity proofing. The bill limits online notarizations to documents, transactions, or signers that are tied to Texas. Examples include, but are not limited to, documents involving Texas real estate, documents that will be filed with a Texas court, and signers who are in the state at the time of the notarization. The online notary public must keep an electronic record of all electronic documents notarized for at least five years.

Did Your UCC Recording Hit the Mark?

Through their association, the International Association of Commercial Administrators, UCC filing officers spend significant time debating and sharing information about what may or may not trigger the rejection of a submitted financing statement in their state. Recently, there has been some debate regarding what constitutes a record. For example, when submitting a UCC form with multiple debtors, if one debtor’s identification is presented correctly but another’s is incomplete, will the filing office reject the document in its entirety, or will it reject part of the document?

For example, a mailing address for the debtor is required in all states. If I have provided an address for debtor #1, but not for debtor #2, what happens to my financing statement? There has yet to be consensus across the jurisdictions. Some argue that a record constitutes the information that is indexed – which could certainly be a portion of the submitted document. The risk here, however, is that the searchers reviewing filed copies of financing statements are likely to assume that the filing is effective for all debtors if the document was accepted and date-stamped. Best practices, as always, require filers to run searches to reflect on all debtors in order to confirm effective indexing for all.

Why a Mailbox is a Bad Idea

Did you know that state laws mandate that a corporate entity must maintain both a registered agent and registered office on public record? Both the agent and office must be physically located in the state in which the business is registered. In addition to having a registered agent listed in the domestic home state, a company must also have a registered agent in each state where business is transacted. This consumer- and business-protection requirement is intended to ensure that both the state and public have record of a point of contact for the business entity. The primary purpose of this contact is to aptly receive and quickly forward legal service of process and other important notices.

Failure to acknowledge legal communication in a timely manner exposes an entity to many inconvenient and costly risks such as default judgments, and loss of good standing resulting in revocation and forfeiture of business registration, to name a few. For this reason, a company must maintain a valid registered agent and address. Many states explicitly prohibit entities from listing virtual addresses, post office boxes, private mailboxes, and from using private mailbox providers as registered office addresses. Utilizing a trusted professional nationwide registered agent service provider gives you the national presence a company needs and helps reduce the chances of delayed receipt of vital information.

If interested in learning more about Capitol Services’ registered agent safeguards, please contact us at 800.345.4647 for more information.

Legislation Passes Uniform Business Laws

Many states decided to streamline and modernize legislation governing business entities in 2016 by adopting uniform laws. Indiana enacted considerable changes with its adoption of provisions of the Uniform Business Organizations Code, including the Uniform Model Registered Agents Act and the Uniform Model Entity Transactions Act, effective January 1, 2018. This adoption allows for common provisions for all business entities related to filing mechanics, names, registered agents and offices, qualifications, mergers, conversions, domestications, and many other areas of the law. Some of the most notable modifications include nine new documents to be filed involving domestication, interest exchange, conversion, and the registration of a commercial registered agent. Another notable change is the addition of biennial reporting requirements for limited partnerships and limited liability partnerships

Another state that adopted changes effecting limited partnerships was Tennessee, with its adoption of the Tennessee Uniform Limited Partnership Act of 2017. The new law contains many substantive changes including altering the presumed term of a limited partnership from fifty (50) years to perpetual duration and authorizing any lawful purpose for limited partnerships, regardless of whether for profit. Other changes include impacts to provisions governing transferable interests upon dissociation of a limited partner and the timing and process of dissolution upon dissociation of a limited partner and/or a general partner. Further, the bill authorizes limited partnerships to amend the certificate of limited partnership to state the partnership is dissolved and file a statement of termination indicating the limited partnership has completed winding up and is terminated.

Pennsylvania also adopted the Uniform Limited Partnership Act, along with the Uniform Partnership Act and the Uniform Limited Liability Company Act. Effective February 21, 2017, key changes include clarification and harmonization of provisions governing derivative lawsuits, expansion of the liability protection for partners of limited liability partnerships, clarifying provisions regarding charging orders, and codifying duties owed by limited liability company managers and limited partnership general partners to the business entity. The legislation also permits the formation of nonprofit limited partnerships and nonprofit limited liability companies. Further, a new certificate, called a certificate of authority, is created under the legislation, which allows limited liability companies or partnerships to create a public record of a person or position in the entity who has the legal authority to sign for the entity or otherwise act on the entity’s behalf. The certificate of authority can also be filed with a county’s recorder of deeds office and can be amended or canceled after filing.

Connecticut’s laws governing limited liability companies got their first major revision with the passage of the Connecticut Limited Liability Act, effective July 1, 2017. Modeled after the Revised Uniform Limited Liability Company Act, the legislation changes many provisions related to mergers between limited liability companies; adds provisions on derivative actions by a member, fiduciary duties and charging orders against members, and interest exchanges; and modifies when a member can bind the limited liability company as agent. Further, the bill changes the name of limited liability company’s founding document from “articles of organization” to “certificate of organization.” A limited liability company is no longer required to designate if it is manager-managed in the founding document; however, it must include this designation in its operating agreement. Other changes include authorizing resignation of agent for administratively forfeited or foreign revoked limited liability companies, changing the annual report contents and due date to April 1 for all limited liability companies beginning April 1, 2018, and authorizing withdrawal of filings made with the Secretary of State before the filing is effective and correction filings. The legislation also updates certain filing fees and amends protections for names and name registrations.

Illinois also enacted changes to its Limited Liability Company Act, effective July 1, 2017. The new amendments update provisions regarding merger, conversion, and domestication and create two new documents, the statement of authority and statement of termination. A statement of authority is now required to execute instruments transferring real property or to enter into other transactions on behalf of the limited liability company. The statement of termination is now required after winding up a dissolved limited liability company