A record filed under UCC Article 9 provides notice to interested parties that a security interest may exist. As a mere notice, the UCC financing statement is a simple record. It generally requires little more than the party names, addresses, and an indication of the collateral. The secured party generally does not need to include dollar amounts, terms and conditions, or other information about the debtor or transaction as part of the financing statement.
It is possible, however, for the secured party to provide too much information on a UCC record. In some cases, providing information not required by Article 9 could expose a secured party to liability. A debtor recently tried to hold the secured party accountable for the unnecessary disclosure of financial information on a UCC record in the case of Brackfield Associates Partnership v. Branch Banking & Trust Co., 2015 WL 517737 (E.D. Tenn. Sept. 4, 2015).
Brackfield Associates, a partnership ( “Brackfield”), opened a line of credit with Branch Banking & Trust Co. (the “Bank”) in 2011. One of the conditions of the line of credit loan was that Brackfield occasionally had to provide the Bank with financial information, including spreadsheets with a detailed list of its assets and liabilities.
Later, Brackfield executed a security agreement that granted the Bank a security interest in certain personal property to stand as collateral for the loaned funds. The Bank perfected its security interest by filing a UCC financing statement with the Tennessee Secretary of State and also with the Knox County Register of Deeds. The Bank’s UCC financing statements were not limited to the specific collateral subject to the security agreement, but included the full list of assets and liabilities that Brackfield had provided as part of its loan obligations.
Almost two years later, Brackfield learned that the Bank’s financing statement included the full list of assets instead of describing only the collateral covered by the security agreement. After being notified of the error, the Bank filed a UCC3 amendment. However, Brackfield claimed the amendment itself included unredacted financial records that were not required to perfect the security interest.
Brackfield brought suit against the Bank in federal district court alleging that by filing the financial information the Bank had violated federal laws, including the Right to Financial Privacy Act (“RFPA”). The complaint also asked the court to exercise supplemental jurisdiction over two other state law claims.
Brackfield later admitted that only the RFPA claim was relevant to this case and those counts were dismissed. However, Brackfield argued that the Bank’s actions violated the RFPA, which entitled it to receive both the statutory penalty set forth in the RFPA and actual damages. The Bank responded with a motion to dismiss the RFPA claim.
The RFPA requires federal agencies (the “Government”) to follow established procedures when seeking a customer’s financial records. The Government may access a customer’s financial records only if the customer authorizes the disclosure, the Government obtains a subpoena or summons, or the records are sought pursuant to a search warrant.
Under the RFPA, a financial institution may not provide the requested financial records until the Government certifies in writing that it has complied with the applicable requirements. The RFPA also restricts financial institutions from initiating disclosure of customer financial records to a Government authority, except under very narrow circumstances involving suspected illegal activity.
The court, however, found a big problem for Brackfield’s claim. The complaint did not allege that the Bank disclosed any of their financial information to the Government (neither the state nor county filing offices were “Government” for purposes of the RFPA because they were not federal agencies). Brackfield made no showing that the Government ever was in possession of the financial information. Moreover, the alleged damages, including lower credit score and impaired value of the collateral, did not arise from an RFPA violation.
The court determined that the Bank did not violate the RFPA because the information was not disclosed to the Government and dismissed that claim. The court declined to exercise jurisdiction over Brackfield’s state law claims and dismissed those without prejudice.
The takeaway from this case is that it is possible for a secured party to provide too much information on a financing statement. Although the Bank was found not to have committed a violation of federal law in this case, it may not be as successful with the state law claims. Filing a financing statement that includes more private financial information than is required to perfect the security interest could violate other state or other federal laws. That is especially the case if the record includes non-public personal information about an individual debtor, such as a social security number, birth date or personal financial information, unless that information is expressly required by state law. Consequently, secured parties should be careful about providing any sensitive information on a UCC record that is not required for filing under UCC Article 9.
Paul Hodnefield is Associate General Counsel for CSC and a frequent speaker/writer on UCC due diligence issues. Please feel free to contact him with questions or comments at firstname.lastname@example.org or 800-927-9801, ext. 61730.