Reasonable and Diligent Search Must Include Search of Name Abbreviations
by Andrew P. Moratzka; Mackall, Crounse & Moore PLC; Minneapolis
The Sixth Circuit recently held that a “reasonable and diligent” search requires a lender to search certain name abbreviations when conducting a lien search in the Secretary of State’s Office. In re Spearing Tool and Mfg. Co., --- F.3d ----, 2005 WL 1430501 (6th Cir. 2005).
Crestmark had a lending relationship with Spearing Tool and Manufacturing Co. (“Spearing”). In 1998 and 2001, Crestmark perfected two security interests in Spearing’s assets by filing a UCC financing statement using “Spearing Tool and Manufacturing Co.,” Spearing’s precise name registered with the Michigan Secretary of State. Because of a delinquency in federal employment-tax payments towards the end of 2001, the IRS filed two notices of a federal tax lien against Spearing with the Michigan Secretary of State. Each lien identified Spearing as “Spearing Tool & Mfg. Company Inc.,” which varied from the precise name registered with the Michigan Secretary of State. Crestmark, unaware of the tax liens, advanced more funds after the IRS filed the tax lien. Crestmark discovered the tax liens after Spearing filed for bankruptcy relief. Two issues were before the court.
The first issue was whether state or federal law determines the sufficiency of the IRS’s tax lien. Regulations provide that the IRS must file tax-lien notices using IRS Form 668. The Court of Appeals noted that the Internal Revenue Code states that the form and content of notice must be prescribed by the U.S. Treasury Secretary and “‘be valid notwithstanding any other provision of law regarding the form or content of a notice of lien.’” Id. at *2. (quoting 26 U.S.C. §6323(f)(3)) (emphasis in original). Based on this language, the court of appeals held that federal law controls whether the IRS’s lien notice was sufficient. Id.
The remaining issue was therefore how much specificity federal law requires for taxpayer identification on tax liens. The Court of Appeals then narrowed the issue to whether a “‘reasonable and diligent search would have revealed the existence of the notices of the federal tax liens under these names.’” Id. (quoting Tony Thornton Auction Serv. Inc. v. United States, 791 F.2d 635, 639 (8th Cir. 1986).) Of critical importance to the court of appeals’ determination was that not only did Crestmark have notice that Spearing sometimes used the abbreviations “Mfg.” and “&,” but also that the Michigan Secretary of State’s office sent a handwritten note recommending a search using the abbreviations set forth in the IRS’s filings. Combining these facts with the overall purpose of the tax lien statute, and the parties’ respective burdens for conducting searches, the Court of Appeals held that a reasonable and diligent search by Crestmark would have disclosed Spearing’s IRS tax liens. Id. at *3.
The reach of the Sixth Circuit’s holding remains to be seen. The Court of Appeals stated “We express no opinion about whether creditors have a general obligation to search name variations. Our holding is limited to these facts.” Id. (emphasis added). But, the court of appeals stated that while requiring the IRS to comply with UCC Article 9 would spare banks significant inconvenience, Supreme Court precedent favors the federal government’s interest in prompt and effective tax collection, which trumps the banks’ convenience in loan collection. Id. at *4. Based on these comments, the best practical advice is to search abbreviations when recommended by the secretary of state and to obtain a written representation from the borrower that no outstanding tax liens have been filed against the borrower.