IRS Lien Filed on Name Variation Trumps UCC Filing

By Catherine Schlomann Robertson
Pahl & McCay
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Please understand that the information discussed in this Article is general in nature and is not intended to be legal advice. It is intended to assist owners and managers in understanding this issue area, but it may not apply to the specific fact circumstances or business situations of all owners and managers. You may need to consult applicable state and local laws. For specific legal advice, consult your attorney.
 

A major decision has been made by the US Court of Appeals for the 6th Circuit that should change the way Secured Parties do their due diligence for secured transactions. The Court reversed the District Court ruling and agreed with the grant of a summary judgment for the government that was granted by the Bankruptcy Court in In re: Spearing Tool and Manufacturing Co., Inc. 2005 U.S. App. LEXIS 11808. The Court found that the IRS tax liens, filed on a variation of the debtor (Spearing Tool & Mfg. Company Inc.), was sufficient and trumped the secured lenders’ UCC Financing Statements filed with the precise name registered with the Michigan Secretary of State “Spearing Tool and Manufacturing Co.”
 

The Issue

Uniform Commercial Code, Revised Article 9, §9-503(a)(1), requires that UCC financing statements sufficiently provide the name of the debtor, only if it provides the name of the debtor indicated on the public record of the debtor’s jurisdiction of organization which shows the debtor to have been organized. Crestmark did that on their financing statements and was perfected under that statute. The IRS filed under their customary procedure on a name as it appeared on the “tax return”. The Court ruled that Federal Law controls whether the IRS’s lien notice sufficed, and not Michigan law, and that the IRS’s identification of Spearing was sufficient even though a search of the Michigan UCC index would not have revealed the liens in question when a search on the name as it appears on the Michigan corporation index is conducted.

As the old adage goes: bad facts create bad law. Part of the difficulty is that Michigan has limited electronic search technology, and also that they were issued a notice by the Michigan Secretary of State that they “might want to search Spearing Tool & Mfg. Company Inc.” but choose not to do so. The Court held that these were “common abbreviations—so common that, for example, we use them as a rule in our case citations.” Crestmark had noticed that Spearing sometimes used these abbreviations, and the Michigan Secretary of State’s office recommended a search using the abbreviations. Combined, these factors indicate that a reasonable, diligent search by Crestmark of the Michigan lien filings for this business would have disclosed Spearing’s IRS tax liens”. Finally, the court seemed surprisingly concerned about the collection of IRS obligations, stating: “Thus, while we understand that a requirement that the IRS comply with UCC Article 9 would spare banks considerable inconvenience, we conclude from Supreme-Court precedent that the federal government’s interest in prompt, effective tax collection trumps the banks’ convenience in loan collection.”

At this time, this logic is confined to the Sixth District Court of Appeals, and the court specifically stated that “We express no opinion about whether creditors have a general obligation to search name variations. Our holding is limited to these facts.” However, you can be sure that should this become an issue for you, any court is going to consider this case and its reasoning.
 

The Solution

If you wish to avoid this potential problem, we recommend that you require the debtor to provide front-page copies of tax returns (the number being a matter of discretion based on the credit amount and potential risk), remembering that Federal Tax Returns are filed quarterly, and then be sure that your “lien alert requests” include both the full corporate name, and also any name(s) used on the tax returns filed with the IRS.
 

UPDATE:

This case was affirmed by United States v. Crestmark Bank (In re Spearing Tool & Mfg. Co.), 412 F.3d 653, 2005 U.S. App. LEXIS 11808, 56 U.C.C. Rep. Serv. 2d (CBC) 807 (6th Cir. Mich. 2005).  A Writ of certiorari was denied by the United States Supreme Court Crestmark Bank v. United States, 549 U.S. 810, 127 S. Ct. 41, 166 L. Ed. 2d 18, 2006 U.S. LEXIS 5700 (2006).  As a result, at least as to the 6th District, this is still good law and binding precedent and there is no chance that it will be reversed by a higher court of law.  However, as we all know, in litigation, different facts may lead to a different result .  Therefore, it is best to discuss the specific facts of your case with your attorney to obtain a knowledgeable opinion on your risk.


After receiving her a B.S. in Finance and her J.D. from the University of San Francisco in 1988, Catherine Robertson has provided collection, bankruptcy and pre-judgment remedy solutions for the clients of Pahl & McCay. She is a partner at Pahl & McCay, and has been rated A-V (highest professional and ethical rating) by Martindale-Hubbell. Should you require expertise or assistance in collecting an outstanding obligation, please consider Pahl & McCay.