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What's In A Name?

April 1, 2006

By: Stephen M. Goldberg

A landmark decision was recently issued by a federal appeals court that may change the way secured parties conduct their due diligence for secured transactions.  In United States v. Crestmark Bank, 412 F.3d 653 (6th Cir. 2005), the Court found that IRS tax liens filed under a variation of the debtor’s registered name were sufficient to take priority over earlier filed financing statements of a secured lender.

In April 1998 and again in April 2001, Crestmark perfected its security interest in the debtor’s assets by filing a financing statement identifying the debtor as "Spearing Tool and Manufacturing Co.", its precise name registered with the Michigan Secretary of State.  Meanwhile, the debtor became delinquent in its federal tax payments.  In October 2001, following its customary procedure and using the name that appeared on tax returns of the debtor, the IRS filed notices of a federal tax lien with the Michigan Secretary of State identifying the company as "SPEARING TOOL & MFG. COMPANY, INC."  The IRS filing using the debtor’s "taxpayer" name differed from the company’s precise Michigan registered name because it used an ampersand in place of "and," abbreviated "Manufacturing" as "Mfg.," and spelled out "Company" rather than use the abbreviation "Co."

As it made additional advances to the debtor, Crestmark periodically submitted lien search requests to the Michigan Secretary of State using the company’s exact registered name.  These searches, using the Secretary of State’s standard electronic search logic, disclosed only liens matching the precise name of the company, not liens filed under slightly different or abbreviated names such as the IRS lien.  The search logic, moreover, ignored certain "noise" words and their abbreviations, including "Incorporated" and "Company."

The questions before the court were two-fold:  (i) whether state or federal law determines the sufficiency of the IRS’s tax lien notices; and (ii) whether the IRS notices sufficed to give the tax liens priority over Crestmark’s security interests as to advances made after the filing of the tax liens. On the first issue, the court ruled that federal law controls the sufficiency of the IRS tax lien notices, not state law.  According to the court, the plain text of the Internal Revenue Code and regulations indicate that a tax lien notice using IRS Form 668 is sufficient regardless of state law.  On the second issue, the court ruled that the IRS’s notices were sufficient even though the federal tax liens would not have been revealed by a state UCC search using the company’s precise registered name.  In so ruling, the court concluded that Crestmark had not conducted a reasonable and diligent search.  According to the court, Crestmark should have searched for "Spearing Tool & Mfg." as well as "Spearing Tool and Manufacturing" because "Mfg." and the ampersand are common abbreviations of the only two words in the name that could be, and commonly are, abbreviated, and because Crestmark had notice that the company sometimes used those abbreviations.

As a consequence of this decision, a federal tax lien, effectively invisible to a creditor relying on the debtor’s registered name and standard UCC search logic, may trump a prior perfected security interest.  To minimize this risk, secured creditors should consider (i) requesting that the debtor provide front-page copies of its federal tax returns for a 5 to 10 year period in order to verify the "taxpayer" name that may be used by the IRS in filing a federal tax lien on IRS Form 668, (ii) conducting name variation searches in all states where the debtor does business, resides or owns property and (iii) using any names so discovered to conduct searches in the appropriate jurisdictions for federal tax liens (plus any other non-UCC liens filed in the same index).

For more information about this topic, please contact Stephen M. Goldberg at 410.752.9736 or via e-mail at sgoldberg@tydingslaw.com.

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