Alerts

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

Know the 45-Day Rule

Did you know that the IRS can prime your priority with a federal tax lien? The infamous 45-day rule allows the secured lender a brief period of time after the filing of a federal tax lien to become aware of such lien. After the secured lender has knowledge of the federal tax lien or upon expiration of the 45 day period, whichever occurs first, collateral acquired or related to any new financing by the lender will be subject to first priority provided to the federal government. As part of your initial due-diligence and filing process, talk to Capitol Services about setting up the important recurring searches that will ensure you are advised of any changes that could jeopardize your portfolio!

Apostilles and Legalizations

In the current business climate, international transactions are becoming increasingly prevalent. The world is getting smaller and you may find in this global marketplace that various documents will need to be legalized or apostilled before being sent to another country.

The simplest way to look at legalizations is as a process of signature authentications, beginning either with a document signed by a notary or produced by a governmental agency and ending with the embassy or consulate of the country in which the document will be used. Each step authenticates the signature before it and the recipient in the target country should consider the document to be valid after it has been through this series of authentications.

In 1961, a group of countries came together under Convention 12 of The Hague. These jurisdictions agreed to recognize one another’s documents without the full legalizations process.
If the country that the documents are coming from and the country to which they are going are both member jurisdictions, the document is apostilled instead of legalized.

Capitol Services can handle each step of both the apostille and legalizations processes. Members of this team are well-versed in the intricacies and idiosyncrasies of the embassies and consulates throughout the country and are happy to help with any questions you may have.

A Very Costly UCC Filing Error

On June 28, 2017, the rollercoaster case with the billion-dollar mistake seems to have finally come to a close with the rendering of a decision by the Seventh Circuit Court of Appeals.

To bring you up to speed, the story begins with two transactions: (1) a secured financial agreement between a syndicate of lenders represented by JP Morgan and General Motors in 2001 for $300 million (the “2001 Synthetic Lease”) and (2) a $1.5 billion dollar loan by over 400 lenders (the “Lenders”), represented by JP Morgan, to General Motors (the “2006 Term Loan”). When the 2001 Synthetic Lease was reaching its maturity date, General Motors instructed its counsel, Mayer Brown, to prepare the documents to pay off the 2001 Synthetic Lease. Mayer Brown prepared the relevant closing documents, including a UCC-3 termination statement.

However, due to the faulty inclusion of the UCC-1 related to the 2006 Term Loan in the search by Mayer Brown paralegal, a UCC-3 termination statement was also prepared for the 2006 Term Loan. To quote the Seventh Circuit’s decision, which will be discussed momentarily, that’s a “a $1.5 billion (with a “b”) mistake.” Mayer Brown provided the draft to JP Morgan’s counsel, Simpson Thacher, for review. Simpson Thacher didn’t catch the billion (with a “b”) mistake and authorized the release. Consequently, both the remaining interest on the 2001 Synthetic Lease and 2006 Term Loan were released.

The mistake went unnoticed until General Motors’ bankruptcy proceedings in June 2009. After the mistake was uncovered, the bankruptcy court agreed to treat the Lenders as if they were still secured, since General Motors had continued complying with the terms of the 2006 Term Loan and the mistake had not led to any practical consequences. After the bankruptcy proceedings, General Motors brought suit in bankruptcy court, claiming that the security interest had been terminated and the Lenders were unsecured. Shockingly, the bankruptcy court found that the security interest had not been terminated.

General Motors appealed the decision to the Second Circuit, who reversed the decision of the bankruptcy court. The Second Circuit held that, even though the release was mistaken, the 2006 Term Loan was terminated when the UCC-3 statement was filed and JP Morgan knowingly terminated the security interest when it authorized the filing.

Unhappy with the Second Circuit’s decision, the Lenders filed a class action suit against Mayer Brown alleging that Mayer Brown committed legal malpractice and negligent misrepresentation. The Lenders alleged that Mayer Brown owed them a duty of care, breached that duty, and caused them harm. The district court disagreed and dismissed the case,  holding that Mayer Brown did not owe a duty of care to the Lenders, who were not its clients but parties adverse to Mayer Brown’s client in the 2016 Term Loan transaction. The Lenders appealed to the Seventh Circuit of Appeals.

The Seventh Circuit agreed with the district court’s assertion that Mayer Brown owed no duty to the Lenders. The Seventh Circuit reasoned that Mayer Brown did not have an attorney-client relationship with the Lenders. Instead, the Lenders “were represented by counsel who were not prevented from reviewing the documents and had no valid justification for relying on Mayer Brown’s drafts.”