UCC CHALLENGES: DEALING WITH POST-FILING CHANGES
A secured party’s obligations with respect to a financing statement do not end with filing of the record. A number of events can occur post-filing that can threaten perfection or priority of the security interest unless the secured party takes immediate action. These events can raise some of the most complex filing issues under UCC Article 9, yet strict compliance is required, even if the secured party was unaware of the change.LEARN MORE
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Join us for an engaging discussion with CSC Associate General Counsel Paul Hodnefield as he explains what events pose the greatest risk for secured parties, the actions required by Article 9 should they occur and the best practices for minimizing the risks.
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Annie: Hello, everyone, and welcome to today's webinar, "UCC Challenges: Dealing with Post-Filing Changes." My name is Annie Triboletti, and I'll be your moderator for today.
So joining us today is Paul Hodnefield. Paul is the associate general counsel for CSC, where he's responsible for advising the company regarding real estate recording, notary, Uniform Commercial Code, and other public record transaction services. So with that, I'd like to welcome Paul.
Paul: Thank you, Annie. Yeah, as Annie mentioned, I'm associate general counsel with CSC, and in that capacity I'm responsible for monitoring UCC-related legislation, case law, and other developments. I do a lot of troubleshooting with filing offices and generally get a lot of information from a lot of different sources. So I do enjoy being able to share that, and that's what I'm going to do today. And, in fact, what I'm going to do today is address actually some of the biggest challenges under UCC Article 9, and those have to do with the post-filing changes to debtor and collateral information after and how it impacts the financing statement.
Prior to closing a secured transaction and perfecting the security interest, lenders and legal counsel make great efforts to do everything right. They conduct thorough due diligence, verify the accuracy of the financing statement, and are careful to ensure that the record is properly filed in the correct jurisdiction. Then when the deal is closed and the security interest is perfected, the secured party might think it is fully perfected if the debtor later defaults or files for bankruptcy. Unfortunately, this isn't always the case.
A secured party's risk doesn't end just because the deal is closed and the security interest has been perfected by filing. No matter how diligent the filer was before closing, certain post-filing changes involving the debtor or collateral could place the secured party's perfection and priority at risk.
Now not every post-closing or post-filing change requires the secured party to take action. Many types of changes have no effect whatsoever on the perfection or priority of the security interest. However, when certain critical changes occur, the secured party must take action and specific actions listed in Article ,9 and they have to do so within short statutory deadlines. The secured party's failure to take the required action may lead to harsh results. Therefore, it is important that lenders and legal counsel know how to identify critical post-filing events and what actions they have to take in response to those events.
Now that might seem easy enough, but post-filing changes can raise some of the most complex filing issues that arise under Article 9. The rules can be confusing and counterintuitive. Furthermore, it can be difficult to identify all the rules that apply to a particular change event. The rules are not always neatly organized together in the code. They're dispersed throughout Article 9.
Despite the complexity, Article 9 requires secured parties to strictly comply with the statutory filing requirements when critical post-filing changes occur. Substantial compliance isn't enough in most cases. The secured party cannot even claim a lack of knowledge as an excuse for non-compliance following a critical post-filing change. The stakes are very high, and the complexity of the issues can be rather challenging. And this leads to a lot of questions about the process for dealing with post-closing changes or post-filing changes.
This program is intended to help lenders and legal counsel better understand post-filing change issues and how to manage the risks associated with these critical changes. So what I plan to do today is begin with a brief introduction to the Article 9 filing system to offer a better understanding of why post-filing changes are so important. Then I'll move on to the post-filing changes of greatest concern, namely a debtor name change, a new debtor becoming bound by the security agreement or what often is called a double debtor issue, a change in the governing law, and finally transfers of collateral.
For each of these events, I will focus on two separate issues. First the impact of the event on existing collateral, and then the impact of the event on collateral acquired after the event. I will also explain what actions the secured party needs to take and the applicable deadlines. At the end of the presentation, I'll offer some suggestions for how secured parties can minimize their risk by tracking at least some of the post-filing changes, and there will be hopefully some time for questions.
So with that, I'll go ahead and get started with the introduction to the Article 9 filing system. This will be basic for many of you, but it never hurts to have a quick refresher. What we're dealing with here are security interests. A security interest is a right of the holder of the security interest to seize and sell collateral of a debtor to satisfy an obligation if the debtor defaults. It arises by contract between the debtor and the secured party. That's called the security agreement.
And it's important to understand that be by granting a security interest in their assets, the debtor is denying those assets to third parties who might also have claims against the debtor. And so to make the security interest enforceable against the rights of third parties, we have a concept called perfection, which is really nothing more than a method of providing notice to third parties of the claimed security interest so that they can protect themselves before they enter into a transaction with the debtor. Most of the time security interests are perfected by the filing of a UCC financing statement, and that's what we're going to be dealing with here today.
Another important thing to understand about the filing system is that it is a notice filing system. What gets filed are not liens and security interests. They are mere notices that a security interest may exist, and as notices these are very basic documents. The financing statement simply provides the basic information to alert a third party of a claim of a security interest and point them in the right direction to gather additional information. It is the interested party's job to contact the parties involved to learn the full state of affairs.
The notice filing system is intended to protect those interested parties, in other words third parties, potential creditors by giving them notice of the security interest. And as I mentioned, what gets filed are not the liens or security interests themselves, just the notice.
Now if there is a post-filing change to a financing statement, it can be critical because it can prevent third parties from locating the notice of the security interest. And if that happens, then third parties are not able to protect themselves. And so the rules around post-filing changes are generally there to protect the interests of third parties.
So if there is a post-filing change to debtor or collateral information or the governing law, the secured party's perfection may be fully or partially at risk, depending on the change that's involved, unless they take action to protect themselves. I mentioned earlier too that these are complex issues and, in fact, some of the most complex issues that arise under the filing rules of Article 9. I pointed out that the applicable rules are scattered throughout Article 9 in different sections. And if you find this rather confusing, don't worry. Even the courts struggle with these issues, and I'll be able to demonstrate that with some case law coming up here in a little bit.
But it is important to know that the UCC and the courts have demonstrated that they are unforgiving for secured parties that do not strictly follow the rules when it comes to post-filing changes. Remember that these filing rules are there to protect third parties, and so the burden is placed on the secured party to fully comply with their obligations. So the secured party is solely responsible for taking any action that's required following a post-filing change, and the secured party cannot even claim a lack of knowledge as an excuse for non-compliance. The strict compliance is required, and it's the secured party's responsibility to stay up to date on the status of debtors and collateral.
Now remember I mentioned that there are a number of different sections of Article 9 that are applicable to post-filing changes. I've listed the most important ones on the screen here. One of the biggest challenges for many is to figure out which ones apply in which situations. A good rule of thumb or a good bit of advice is that, when a post-filing change occurs, be sure to look at the official comments to each of the applicable sections because the official comments do a really good job of pointing out what other sections are implicated. So, for example, a debtor name change under 9-507 will necessarily involve the impact of Section 9-503 and 9-506, which deal with sufficiency of debtor names. And the amendments necessary to fix that are in 9-512, and the official comments will provide oftentimes a good roadmap to see what other sections may also apply to that particular post-filing change.
Well, let's go on and talk about the specific changes that should be of most concern to secured parties. We'll begin with the debtor name change. This is a common post-filing change.
There are a number of events that can result in a debtor name change. If the debtor is a registered organization, the name changes only when an amendment to the articles of formation, articles of incorporation or organization, or the equivalent formation documents is filed. In other words, when the public organic record has an amendment filed that purports to change the name of the entity. The name doesn't change just because the registered organization gets a new trade name or d/b/a or something like that. It's only when the public organic record changes. For other organizations, however, it may be more difficult to determine when and how the name changes because there may be no public record filing involved, and this requires a closer monitoring of the entity for these types of debtors.
And for an individual, the name can change in a number of different ways. If the driver's license changes or expires, that can be a name change event. There could be other events. Depending on the state, there are different schemes for sufficiency of individual debtor names in use. The majority is the driver's license "only if" rule. But there are some states that use that as a safe harbor, and a couple others that have non-uniform provisions. And so, with individuals, it may be also a challenge to figure out when and how a name changed.
But if a secured party discovers that one of its debtors name has changed, then the first step is to figure out did the name change render the financing statement seriously misleading, the financing statement filed under the former debtor name. That's really the first step. And to make that determination, it's important to understand the general rule for debtor name sufficiency, and that is that the debtor name on a financing statement has to strictly comply with the applicable requirements of Section 9-503(a) based on the type of debtor or whether the collateral is held in a trust or being administered by a decedent's personal representative. If it doesn't strictly comply with 9-503(a), it will render the financing statement seriously misleading under 9-506(b), and we've got a name change that has rendered the financing statement seriously misleading.
However, there is a savings clause we'll call it. It's not really a safe harbor, but it says that if the debtor name isn't correct, if a search of the correct debtor name, using the jurisdiction's standard search logic would disclose the record, then the error in the debtor name doesn't render the financing statement seriously misleading. So it's possible to have a debtor name change, but not have a seriously misleading debtor name under 9-506(c). But just because it shows up on a 9-506(c) search doesn't mean that the secured party shouldn't take any action.
So the first step really is to run a 9-506(c) search on the new debtor name. If it turns up the old debtor name, that's great. Then it's not seriously misleading at that point in time. But if the record isn't disclosed under the old debtor name, then the secured party must take action, and that's set forth in Section 9-507(c). And that really requires filing an amendment.
Now a couple of things that I want people to understand. One is never rely on the search logic to prevent an otherwise insufficient name from rendering the financing statement seriously misleading. The reason is search logic can change. And sometimes it's published, sometimes it's not. Oftentimes it's not. And just because a financing statement shows up on a 9-506(c) search one day doesn't mean it's going to show up the next day. And if it doesn't show up and the secured party hasn't amended the financing statement, that could be a problem. So really if the former name shows up on a 9-506(c) search under the new name, that's great, but the secured party should still file an amendment to add the new name so that there's no question down the road.
Regardless when filing an amendment to bring the name into compliance, the best practice is to file an amendment to add the new debtor name. Even if the difference from the old name appears small, it's better to do an add, and this is my humble opinion. Check with legal counsel to verify that in a particular situation. But, generally, it's better to add the new debtor name and keep the old debtor name in place so both of them continue to be reflected on the financing statement.
Now when a debtor has changed its name in such a way as to render a filed financing statement seriously misleading, the effect on existing collateral is minimal. The secured party will remain perfected for existing collateral and collateral acquired within four months after the name change, even if they take no action to amend the financing statement. So it can sit out there forever under the old name and can even be continued under the old name, and the secured party will remain perfected on the existing collateral.
The real risk is after-acquired collateral, which oftentimes includes some very valuable collateral, like accounts and inventory and things like that. So the effect on after-acquired collateral is that the secured party will become unperfected in collateral acquired more than four months after the name change, unless the secured party files an amendment to add that new debtor name to the financing statement.
So how can we visualize this? Well, let's start out if the debtor's name changed on June 1st, 2023, that gives the secured party four months in which to file the amendment. If the amendment isn't filed in that four-month period, the secured party becomes unperfected on October 1, 2023 for after-acquired collateral, but remains perfected for collateral acquired before June 1st or during that four-month period. So it's after-acquired collateral where the secured party will become unperfected.
If, however, the secured party files an amendment to make the financing statement not seriously misleading during that four-month period, then the secured party, the security interest remains perfected in the collateral all the way through the process and off into the future until the financing statement is terminated or lapses by time. So by filing in that four-month window, there's no break in continuity, no break in priority, no break in perfection for either existing or after-acquired collateral.
However, what happens I think more commonly is that the four-month window will pass before the secured party discovers the name change, and they run and file a new amendment afterwards. So if the secured party isn't aware or for whatever reason they don't file the amendment until December 1st of 2023, they will become unperfected until December 1st, 2023 in after-acquired collateral. They'll remain perfected in the existing collateral acquired before the name change or for four months afterwards, which would be up to October 1st. But because they didn't file the amendment, they're unperfected in after-acquired collateral beginning on October 1, and the amendment would re-perfect that security interest, but it would only have a priority date from December 1st. So the secured party would lose priority against competing security interests and other claimants to the collateral.
So what happens in the event of a debtor name change? Well, it's important for secured parties to be diligent with their debtors. The biggest challenge is finding when a debtor changes its name. There may be loan covenants and things that are in the loan documentation that require the debtor to immediately notify the secured party of any contemplated or actual name change and other things. But frankly, the last thing many debtors will do, be it small business or an individual, the last thing they're going to think of is to notify the lender. So oftentimes the lender isn't going to be able to rely on the debtor. So it's going to be important for the secured party to closely monitor the debtor and monitor the status of the debtor name.
At the earliest possible time, amend the financing statement to reflect the correct debtor name so as to make it not seriously misleading. That can be a debtor change or an add of the new debtor name. I tend to prefer add, but again it's something that should be determined in consultation with legal counsel based on the particular situation. Remember it must be filed either before or within four months after the debtor name change.
And then I think it's always a good idea to conduct a post-filing search on the new name. So once the amendment has been filed, conduct a 9-506(c) search on the new name just as if it was a new initial financing statement to make sure that it does show up on the search and that the record was correctly filed and indexed.
There's a number of different cases out there involving debtor name changes. In re Lifestyle Home Furnishings, this is a case from 2010. The debtor changed its name from Factory Direct to Lifestyle Home Furnishings, two very different names. The secured party failed to amend its financing statement to add the new debtor name within that four-month window. Actually, I think they didn't manage to amend it at all. So they remained perfected in their existing collateral, but they became unperfected for collateral acquired by the debtor more than four months after the name change. And that cost the secured party significantly in this case.
Broyhill Furniture Industries v. Hudson Furniture Galleries, here the first priority secured party didn't amend its financing statement following the debtor's name change. The second priority secured party filed under the correct name of the debtor and was aware of the debtor name change. And the first priority secured party argued that the second priority should not be able to jump ahead of it because it had knowledge of the name change, whereas the first priority party, they didn't. But in any event, the courts went ahead and said, well, actual knowledge of the name change didn't relieve the senior secured party's duty to file its amendment or re-file its financing statement. Actually, in this case, it would have been just to amend its financing statement. Because it didn't do so, the first priority secured party lost its priority position to the junior lender. So important to remember that knowledge is not a factor in determining the secured party's obligations to comply with the requirements.
In re Wastetech, that's an interesting one. What happened is the secured party and the debtor closed on a loan. And before the secured party perfected its security interest by filing, the debtor changed its name and it continued to operate under the old name. But it had officially changed its name in the corporate records of the secretary of state. Well, in that case, the court said the lender was unsecured because at the time of filing, the debtor name, it wasn't really a debtor name change. They were using the old debtor name, and it was wrong. So it is a good idea to monitor between closing and filing as well to make sure that the debtor hasn't changed its name in that type of situation.
All right. The second most common post-filing event, well, I don't know it's the most common, but one of the more difficult is what happens when a new debtor becomes bound by the security agreement. It's sometimes called the double debtor issue. A new debtor is really any person that becomes bound by a security agreement entered into by another person. This can happen by contract or by operation of law other than Article 9, such as the security agreement, a person becomes generally obligated for another person, including the loans that another person has taken out. And there's others that are listed. It's a good idea to take a look at the official comment to Article 9, to Section 9-203(d) and 9-508 as well, which is what governs what happens when a new debtor becomes bound.
But if a new debtor becomes bound, the original debtor's security agreement becomes enforceable against the new debtor, and it isn't necessary to enter into a new security agreement. But if there is a change in such a way that the name is different, it can be an issue.
Some things that that can trigger a new debtor becoming bound, one is an acquisition, where the acquiring party is going to succeed to all the obligations of the acquired party, the original debtor. A merger where the surviving entity or new entity is bound by the security agreements entered into by an original debtor. And sometimes a change in structure, converting from one business entity to another, or a sole proprietor that incorporates, the new entity can become bound by the security agreement entered into by the original debtor.
Now what's the effect of this? There's a couple assumptions I want to put out. Number one is that following the new debtor becoming bound, that the new debtor name is sufficiently different from the original debtor name, so that the filed financing statement under the original debtor name is seriously misleading with respect to the new debtor, and that the new debtor and the original debtor are located in the same jurisdiction, otherwise it triggers a change in governing law, which we'll talk about in a minute.
As far as a new debtor becoming bound when it comes to existing collateral, a financing statement, just like with a debtor name change, is going to remain effective to perfect the security interest in collateral acquired before or within four months after the new debtor became bound. So if the new debtor acquires this collateral from the original debtor, before within four months after the event, the secured party will continue to remain perfected in that existing collateral. But for after-acquired collateral, that acquired more than four months after the new debtor becomes bound, a financing statement naming the original debtor is not going to be effective to perfect the security interest in after-acquired collateral that the new debtor obtains more than four months after it becomes bound by the security agreement.
There is an exception. The secured party can remain perfected in after-acquired collateral if it files an initial financing statement naming the new debtor before that four-month deadline. So just like with a new debtor name, a new debtor becoming bound has that four-month window.
There are some different effects on priority however. A security interest in after-acquired property created by the original debtor might be subordinated in some cases to a security interest in after-acquired property that's created by the new debtor. You can take a look at Section 9-326, Comment 2, Example 2 to illustrate that. There are certain conditions there, which I really don't have time to go into, but there are circumstances where there could be a risk of subordination.
The secured party within that four-month window after the new debtor becomes bound, Section 9-508(b)(2) says that the secured party must file an initial financing statement naming the new debtor. Well, an initial financing statement to most people is a new UCC-1. However, Section 9-512, which deals with amendments, in Official Comment 5 states that an amendment to add a new debtor name would constitute an initial financing statement naming the new debtor.
A couple things on that. Number one don't file a name change amendment to the financing statement naming the original debtor, because if it changes the name from the original debtor, there's a risk that it could undo the original priority on that financing statement. So it's better to just kind of leave it alone or add the new debtor name rather than doing a change, because a change isn't going to be also a new initial financing statement with respect to the new debtor.
Also bear in mind that even if an amendment is filed to add the new debtor name, the amendment while it may constitute a new initial financing statement with respect to the new debtor, it does not extend the lapse date. The financing statement is still subject to its original file date and lapse date, and the continuation window doesn't change. So you would have an initial financing statement or the equivalent of an initial financing statement, but it wouldn't have a five-year effective date from the time the new debtor is added. Rather it would still have its original lapse date. And that means that it's necessary for the secured party to maintain that record.
So in the event of a new debtor becoming bound by a security agreement, there are a few things that secured parties should do. Number one, file an a new initial financing statement to provide the name of the new debtor. The idea here again is to either file a new initial financing statement or file an amendment that adds the name of the new debtor. It must be done before or within four months after the new debtor becomes bound to ensure continuation of perfection in after-acquired collateral. So it's important to get it in within that four-month window and provide the name of the new debtor.
I think it's also a good idea, if it's a separate financing statement naming the new debtor, to keep the original financing statement naming the original debtor active. This ensures that a public record remains of the original filing and perfection, or perfection and priority date, and that it's there in the public record and can be retrieved as necessary.
Finally, it's always a good idea, whenever filing amendments that affect debtor names, to file or to conduct a search to reflect on the new debtor name. For one thing, it'll identify potentially conflicting security interests under the new debtor name that could result in subordination and allows the secured party to take action there. It also, of course, will identify any indexing errors or debtor name errors that could affect the secured party's status. So it's always a good idea to conduct a search to reflect in these circumstances.
The next event is a change in the governing law, and this can occur in a variety of circumstances. Well, what is a change in governing law? Well, it's important to understand that the law of the jurisdiction where the debtor is located governs perfection and priority of a security interest or agricultural lien, with certain exceptions for different types of collateral, like fixtures, timber, minerals, and so forth. But we're dealing with secretary of state level filings here right now.
And so the law of the jurisdiction where the debtor is located governs that. But what happens if the debtor changes their location? So a change to the debtor's situation or a transfer of collateral to a person located in a different jurisdiction may cause the law of another state to govern perfection and priority. And by law of another state, law of another state than the state where the financing statement was originally filed.
So what kind of things trigger a change in governing law? Well, if it's a registered organization, if the registered organization re-domesticates in a new state and that state's law provides continuity of the original entity, so if it's a Washington corporation and it re-domesticates as a Delaware corporation or a Delaware LLC and Delaware law, and I'm just making this up here's an example, but if Delaware law says it's the same entity as originally existed in Washington, then you've got that continuity, and the registered organization is re-domesticated. Otherwise, it's a transfer to a different debtor. For other types of organizations that are not registered organizations, if it relocates its chief executive office or place of business to a new state, moving across state lines, that can trigger a change in the governing law.
And for an individual, if the person moves their principal residence to a different state, so you have somebody who lives in, I don't know, St. Paul, Minnesota, and they move to Hudson, Wisconsin. They've crossed state lines, and now a different state would govern perfection and priority. So a financing statement filed in Minnesota, Minnesota law would no longer govern perfection and priority.
If a new debtor becomes bound by the security agreement entered into by the original debtor and the new debtor is located in a different state, that can trigger a change in the governing law as well. And in some cases, a transfer of collateral to a party that's located in a different state may trigger a change in the governing law.
So what happens if there's a change in the governing law? Well, if the debtor has simply relocated from one state to another, the secured party will remain perfected in the existing collateral for four months after a change in the governing law, and they will continue to be perfected if they file a new financing statement in the new jurisdiction.
If a new debtor becomes bound by the security agreement and is located in a different jurisdiction, the secured party remains perfected and has up to a year, after the transfer of collateral to the new debtor, to file a financing statement in the new jurisdiction. And if the secured party fails to file within the four-month period or one-year period as applicable, they will become totally unperfected for both existing and after-acquired collateral. There's no grace period in there. I shouldn't say grace period. But it's not like it is for a debtor name change where you remain perfected in existing collateral and only lose after-acquired. All collateral, the security interest will simply become unperfected.
Now it may be a shorter period of time than one year or four months. If the financing statement filed in the original jurisdiction has a lapse date that's before the deadline ends in the new jurisdiction, the secured party will have to file before the lapse date in the old jurisdiction. Otherwise, the old jurisdiction becomes unperfected when it lapses, and there is no continuity of perfection and priority. And they, filing in the new jurisdiction after that point, will only get priority from the date of filing as opposed to being able to reach back to the original jurisdiction or the original priority in the former jurisdiction.
As far as after-acquired collateral goes, there is a four-month grace period for a secured party remaining perfected in after-acquired collateral. This was a change with the 2010 amendments to Article 9. The originally revised Article 9 didn't allow any grace period in after-acquired collateral. But it is there now in Section 9-316(h). So there is a four-month period. And again, that four-month period may be shorter than the one-year period for perfection in the new jurisdiction. So there is a potential issue where a secured party could become unperfected in after-acquired collateral if it doesn't file within that four-month period, but it would remain perfected in the existing collateral for up to a year. So the secured party must re-file by that four-month deadline to continue perfection and priority in the after-acquired collateral.
So following a change in the governing law, best practices, a secured party should perfect in the new jurisdiction at the earliest opportunity, ideally even before the debtor relocates if it's possible anyway. I think it's a best practice to keep the original financing statement in the former jurisdiction active. Again, this will preserve evidence of the original perfection and priority, which would disappear once it lapses out. Always a good idea to conduct a UCC search in the new jurisdiction to identify any potential conflicting security interests and also a search to reflect as well to ensure that the debtor name is correct and was correctly indexed.
There's a variety of cases out there involving changes in governing law. Farm Credit Services v. Wilson, what happened here was the debtor sold collateral to a buyer from out of state, who took it out of state. And when the lender tried to enforce a I think it was a conversion claim against the out-of-state buyer, the out-of-state buyer said you didn't re-perfect your security interest in the new state within the correct amount of time. However, the court found otherwise and said the compliance requirement for filing in the new jurisdiction only affects priority between competing security interests. Here we had a competing interest of a security interest versus the claim of a buyer of the collateral. And as a result, the secured party won. Had the buyer of the collateral in different facts, it may have come out differently. But bottom line on it is 9-316 applies to priority between the competing security interests, not necessarily different types of interests. And in this case, the buyer actually had knowledge of the security interest at the time of purchase, and therefore they acquired the machinery subject to the security interest.
H&S Contracting v. Kinetic Leasing, this was a fairly recent case. The secured party transferred collateral from a debtor in South Dakota to a new debtor in Minnesota and never re-perfected in Minnesota. But because the collateral was liquidated at auction before the one-year period expired following transfer to a new debtor in Minnesota, the security interest in identifiable proceeds attached, and it becomes permanently attached to that. So it didn't matter that the secured party failed to file in Minnesota because the identifiable proceeds existed before that time period ran out.
First National Bank of Picayune v. Pearl River Fabricators, this is an early case and demonstrates some of the challenges the court ran into. Here, a secured party took a security interest in equipment that was owned by a Mississippi corporation. And the Mississippi corporation sold the collateral to an Indiana corporation, which in turn then resold it to a Nevada corporation and that corporation moved the equipment and located it physically in Louisiana. All the parties were registered organizations. None of them were organized under Louisiana law. However, the court determined that because the secured party failed to timely file in Louisiana within one year after the debtor transferred the collateral, that it was unperfected. I think the court got this one very wrong, at least as far as where the record had to be filed and so forth. So I wouldn't rely on this case, but it does illustrate the challenges that the courts run into when dealing with these types of issues.
Now I want to talk about transfer of collateral, and I'm talking in the sense of a buyer in ordinary course of business. Ordinarily a buyer in ordinary course of business is going to take free of a security interest created by the seller of the goods. Now a buyer in ordinary course of business is buying goods from a merchant engaged in selling goods of that kind. Just like if you walk into a big-box retail store and buy an expensive television, you walk out of there with that television free and clear of the security interest that applies to the store's inventory, assuming there is one, because walking out with that is a buyer in ordinary course of business. They're buying goods from a seller engaged in or selling goods of that kind. And the idea here is, again, that we want people to be able to take free of the security interest so that some lender doesn't show up knocking on the door wanting to take the TV back if the big-box retailer defaults.
And so if the buyer is a buyer in ordinary course of business from the seller, the secured party is limited to enforcing its security interest in its proceeds of the collateral in the hands of the of the seller. But if the buyer is not in ordinary course of business, the secured party remains perfected and has priority without any further action, unless it has consented to the transfer. And that's assuming the buyer is located in the same jurisdiction as the debtor or seller of the goods.
So if the transfer, however, is not to a buyer in ordinary course or a buyer out of the ordinary course, in other words if it's transferred to a successor in interest, then the new debtor rules apply under Section 9-508. But our focus here is on buyers not in the ordinary course of business.
So, for instance, in Teague v. Taylor, a buyer of an all-terrain loader that bought it from a landscaping business, the owners of the landscaping business were users of heavy equipment in that business, but they weren't the business of selling heavy equipment. And therefore, the buyer was not a buyer in ordinary course because they weren't buying it from somebody engaged in selling equipment of that kind. So when the secured party filed its financing statement against the original debtor, that's all that mattered because the subsequent buyer was going to take subject to that security interest. There's no need to even amend the financing statement. The buyer wasn't a buyer in ordinary course of business.
Element Financial Corp., here there was a company in, I believe, California that owned three Bobcat pieces of equipment, three Bobcats, and the owner of the business took the Bobcats and moved to Florida. Didn't move the business, but moved the Bobcats to Florida and then sold them to a buyer. And the bank wanted to enforce its security interest against those Bobcats. But the buyer wasn't a buyer in ordinary course of business because they were subject to a security interest, but the security interest was not created by the seller. It was created by the first seller, and it was taken without permission. And the first seller was not engaged in the sale of that type of equipment normally.
So it can get kind of complex, and I encourage you, if you have questions, to read the case law to fully understand how the courts approach these things. So if there is a transfer of collateral to a buyer that is not in ordinary course of business, it's not necessary to amend the financing statement. In fact, amending the financing statement may be counterproductive because it could cause a loss of priority due to the change from the original debtor.
If the transferee is a successor in interest to the transferor, in other words they're affiliated somehow, one is acquiring it from the other, it's a new debtor becoming bound, and Section 9-508 would apply.
Also beware in these transfer situations of a change in the governing law. If the transferee is located in a different state, the rules for a change in the governing law might apply as we've seen these things oftentimes overlap, where you'll have a transfer to an out-of-state buyer or a new debtor becomes bound by the security agreement, but is located in a different jurisdiction than the former debtor.
So you can have these multiple issues that arise in the same transaction, and that's what makes these things so complex and makes it so critical for secured parties to pay attention to changes to their debtor or collateral status. So how does a lender identify post-filing changes? It's not always that easy.
It can be done through internal procedures to help identify . . . In other words, anybody that has contact with debtors should be aware of what types of things to watch out for. I've heard of situations where customer service personnel received a call from a debtor and the debtor asked to change their address from one state to another. And the customer service people promptly did that, but that information didn't reach the people who were responsible for maintaining the loan documentation and, as a result, no amendment was filed. So it's important that anybody who is in a position where they can learn of these things be aware of what to look out for and who needs to be alerted.
Another way to identify changes, at least for registered organizations, is through public records tracking. A lender can conduct a search of the secretary of state records on a regular basis, generally every 90 days, to identify organizational changes, and that'll leave 30 days, roughly a month to take action. But this is very labor intensive, time consuming, and costly. There are third-party automated tracking systems that search the public records for changes to registered organization, public organic records. CSC offers this type of service as do our competitors. And it might be something to consider using to help avoid missing things like debtor name changes or new debtors becoming bound, changes in governing law, and things like that.
But there are limitations to tracking. Individual debtors generally can't be tracked because the driver's license isn't a public record. Unless the debtor volunteers the information that they have changed their name or that their driver's license is changed, the lender may have no way to know about it unless they are in contact with the debtor regularly. And not all post-filing changes can be effectively tracked. A transfer of collateral, unless the lender going to drive by a warehouse or check the inventory from time to time, it may be difficult to find out when things have disappeared. Same thing with debtor name changes can be hard to track. I've heard of one who discovered it when one lender found out because they were driving to work and noticed the name on the debtor's building had changed. You know, things like that. That's why it's so important to have that periodic contact with the debtor if there's any concern about a name change like that.