– Summary by Ronald Joseph
In this dispute 1944 Beach Boulevard, LLC (“Beach Boulevard”) and its affiliates were jointly and severally indebted to Live Oak Banking Company (“Live Oak”) in the amount of about $3 million stemming from two loans for $2.5 million each. The loans
were secured by a general lien on all of Beach Boulevard’s assets. To state its secured lien on the loans, Live Oak recorded it in the Florida Secured Transaction Registry, but mistakenly listed Beach Boulevard as “1944 Beach Blvd., LLC” instead of “1944 Beach Boulevard, LLC”.
In 2019 Beach Boulevard voluntarily filed for reorganization under Chapter 11 bankruptcy. Beach Boulevard searched the Registry and did not see Live Oak’s lien on the first page of 20 search results, but rather on the preceding page. Beach Boulevard filed a claim stating that Live Oak’s failure to state the lien clearly in the Registry was misleading under Florida law. Live Oak took the position that it’s entry in the Registry was a minor error that still complied with Florida law and asked that the lien be enforced. Live Oak also argued that its entry was not misleading because it could be found within one page of the search results in the Registry.
The US District Court of Appeals for the 11th Circuit referred this case to the Florida Supreme Court to decide three questions under Florida state law: (1) If a debtor’s name is not correctly stated on financing statements is the stated name sufficiently accurate if it returns the actual debtor’s name within the first 20 results when it is searched for with a standard search in the Florida Secured Transactions Registry database? (2) If not, does that search return all names in the Registry’s database which
the user can browse with the tabs on the search results page? And (3) If the search returns all names in the Registry’s database, are there limits on the user’s obligation to browse those names and if so, what factors should court’s use in determining if the user has satisfied those obligations? The court decided that the Florida Secured Transactions Registry does not have a standard search function as per industry’s definition of standard search and that the three questions were not applicable, ruling in favor of Beach Boulevard.
In its analysis the court began by explaining the statute that applies to these facts and questions. The statute states that minor errors or omissions in the name would be permissible so long as they didn’t make the financing statement seriously misleading.
The statute goes on to state that if a search of the Registry with the correct name and using the Registry’s “standard search logic” would still return the finance entry in the Registry with the erred name, then the erred name would not be seriously misleading.
In applying the statute to the facts, the court decided that the state law would not apply because the Florida Secured Transactions Registry’s search function was not a standard search function as per industry’s definition. The court ruled that the exception for small errors did not apply, that Beach Boulevard could avoid the debt in its bankruptcy proceedings and Live Oak would lose its claim to the secured lien against Beachwood Boulevard’s assets. The court went on to explain that the search function in the Registry was not in line with industry standards because it merely returned results from the searched point in the full registry organized alphabetically. The accepted industry practice is to return unambiguous search results, that are specific hits for the searched terms. The court chose to rule the search to be non-standard which was more in line with the federal secured transactions definition of “standard search”. In eliminating the tolerance afforded names with errors when standard search is used, the court felt that the remaining applicable statute required exact name usage to avoid
seriously misleading the financial community reliant on the Registry’s accuracy for reducing risk in business decisions.