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BEWARE: Appeals Court Rules Tax Lien Holders Not Subject to Same UCC Filing Rules as Commercial Secured Creditors

August 17, 2005

With the adoption of revised Uniform Commercial Code (UCC) Article 9 came more certainty on where and under what debtor name a secured creditor should file its UCC financing statements and conduct UCC searches. Unfortunately, as demonstrated by a recent Sixth Circuit Court of Appeals decision, tax lien holders are not subject to the same UCC filing rules and secured parties need to conduct tax lien searches accordingly.

In the Matter of Spearing Tool and Manufacturing Co., Inc., decided on June 21, 2005, the U.S. Court of Appeals for the Sixth Circuit upheld a Michigan Bankruptcy Court decision in favor of the IRS, giving priority to tax liens that the secured creditor did not locate in its search. The debtor, a Michigan corporation, had the official registered name of “Spearing Tool and Manufacturing Co., Inc.” The debtor’s secured creditor filed its UCC financing statements under that name, thus perfecting its liens under the Michigan Uniform Commercial Code. The IRS subsequently filed tax liens under the name used by the debtor on various tax returns, “Spearing Tool & Mfg. Company Inc.” Apparently, though not totally clear in the case, the lender made subsequent advances more than 45 days after the lien was filed.

The court ruled that federal law controlled whether the IRS’s lien notice was sufficient. Citing prior case law, the court found a debtor/taxpayer is sufficiently identified in an IRS lien if a “reasonable and diligent search would have revealed the existence of the notices of federal tax liens” filed against the debtor/taxpayer. The court considered various factors such as the use of “Mfg.” and “&” as common abbreviations for “Manufacturing” and “and,” respectively, as well as the debtor’s occasional use of the abbreviated name in the conduct of its business and the fact that the Michigan Secretary of State Office had suggested to the secured creditor that a name variation search be conducted. Based on the revised Article 9 requirements, there should have been a different result.

In light of this decision we suggest reviewing a borrower’s tax returns for other names to determine where and under what names to search for tax lien notices. Cautious lenders should also conduct name variation searches in all states where the borrower does business, resides or owns property.

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