Marks & Associates, P.C. 
February 2017
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Welcome to 2017.

Mid February is a good time to check those New Year's resolutions that made so much sense in December and fill in any you forgot to make. We resolve to get our newsletter out more or less monthly. Sorry, things have been really busy, for example:

We have hired a new lawyer, Ian J. Platt, who comes to us with years of experience in not only equipment finance but other forms of asset-based lending. An introduction to Ian is elsewhere in this issue. As two of our lawyers are now members of the State Bar of Georgia, we are expanding our work both into that state and into other areas of corporate and commercial law.

We are in process of opening an Atlanta office. We will be located in downtown Atlanta, and ready to be hospitable when NAELB, NEFA and ELFA meetings come to town, as well as addressing the needs of clients in Georgia and surrounding environs.

We are sad to report that Bill Phillips has left the firm to pursue other opportunities. Bill will continue to handle litigation matters on which he is currently working with the client's consent.

All that business, together with the customary year-end closings, has kept us hopping. Now, as to your resolutions:

1. How about resolving to sit down and read your lease or EFA documentation? We have been suggesting this for quite some time and we have gotten a few calls from people who were surprised at what they found.

2. Have you taken a look at the licensing and usury laws of various states in which you have lessees and borrowers? While we hate to beat this drum again, it is obvious that many of our readers are still living in the twentieth century (did you ever think you would live to hear someone say that?), where equipment finance companies paid little or no attention to these laws.

a. Do you lease or finance motor vehicles?

b. Do you enter into leases or loans with an implicit or stated interest rate over 18%?

c. Do you offer micro ticket financings (under $25,000)?

3. When was the last time you sat down with your operations people and whatever closing checklist you use to ensure that best practices are understood and are being followed?

a. Are UCC's filed within 20 days after delivery of equipment to your lessee/borrower if you intend to rely on PMSI?

b. Do you send inventory notices out if the equipment is or is similar to equipment your lessee or borrower rents out and/or sells? Do you understand your exposure if your equipment is characterized as inventory?

c. Do you always get insurance certificates at closing and do they properly show you as additional insured/loss payee on the correct form?

d. Do you have adequate proof that the person signing your documents is who he says he is and has authority to bind the company?

As to the last of these, our crystal ball is still at the cleaners but there is more than a little evidence that the coming year is going to see an uptick in business. That tends to bring with it new fraud schemes. We are going to hit a few basic law points in this and upcoming issues.

A personal note, here's hoping that the coming year sees cooler heads prevailing and bringing us together as Americans. Please consider whether what you do or say helps or hurts in this effort. This goes equally for those who are pleased and those who are displeased with the election results. There is much work to be done to repair our economy for the good of all of us and it will be easier if we find a way to pull together. Who knows? Maybe the folks in Washington will follow our lead.
Firm News: Welcome to Ian J. Platt!

We are excited to announce that Ian has joined our firm as a shareholder. He will continue to practice in Atlanta, out of our new downtown office. 

Ian is an honors graduate of Suffolk University Law School, and his background includes several years of practice at a major Boston law firm before he headed south to join the in house legal team at Textron Financial Corporation. He offers our clients more than 20 years of experience in a wide range of commercial matters, including equipment finance and other types of asset based lending, and related corporate matters. Please click [here] for more information about Ian and his practice.

   Back to the Basics
Part I: Corporate (LLC, etc.) Authority

In an ideal world all we should need is to have the President or Vice President of a company sign a document and we would be good-to-go. The problem is that company officers are only authorized by law (automatically) to sign documents and engage in activities in the corporation's "ordinary course of business". Note that I slipped in "corporation". The general rule is true for other legal entities but, unlike corporations, limited liability companies, limited liability partnerships, limited partnerships and general partnerships do not, traditionally have the same officers as corporations. In other words "the President" can mean different things outside the corporation world. More on that in a later issue when we will discuss LLC's, limited partnerships and the like. 
Corporations have been around since the 17th century in England, where they were originally formed to protect investors financing exploration of the New World. Common law and some state statutes grant authority to four statutory officers (President, Vice President(s), Secretary and Treasure) and assistants to the Secretary and Treasurer. These officers are generally considered to have authority to act in the corporation's ordinary course of business. In other words, the President has authority to buy inventory, for cash or on time, and to sign a contract to sell goods or provide services that is the chief business of the company. Other "officers" such as managers and directors (meaning officer-directors and not members of the Board of Directors, which is every bit as confusing as it sounds) may be named but do not automatically have authority.

Any officer's authority may be expanded or limited by the Articles of Incorporation or By-Laws of the corporation. Copies of the Articles of Incorporation may be obtained from the Office of the Secretary of State of the state in which the corporation is incorporated, but the By-Laws are generally maintained only in the corporation's books. These can be certified by an officer of the corporation by their weight and reliability is less certain. Also, By-Laws can generally be changed by vote of directors, without shareholder vote.

In most cases, especially for smaller corporations, Articles and By-Laws do not specify things that the officers can do outside the ordinary course of the corporation's business. This leaves a question as to whether entering into a lease or financing of a delivery truck, printing press, telephone system or other equipment useful in the business is or is not in the ordinary course.

One of the reasons we are so concerned about all of this is that any shareholder who thinks an officer has entered into a contract outside of the scope of his or her authority can attack that contract as ultra vires, a fancy Latin word that means "unauthorized". Moreover, a creditor can attack an unauthorized commitment, particularly if the corporation is in bankruptcy.

Given this uncertainty, the classic closing package requires that the corporation's Board of Directors specifically approve equipment leases and financings. The Board of Directors of corporations have the authority to elect and determine the authority of all officers unless expressly prohibited by the Articles of Incorporation or, in some cases, By-Laws. Armed with a copy of the Articles and By-Laws and evidence of the Board's approval in the form of Board Resolutions, we can generally be comfortable that the execution and performance of the contracts is duly authorized. 

In the traditional closing, the By-Laws and Resolutions are attached to a certificate signed by the corporate Secretary of another officer, certifying that those attachments are true and correct copies. The certificate may also include incumbency information, in the form of sample signatures of the officers who will sign the Lease of EFA and a certification that those are the correct signatures of the persons named, who hold the offices specified. Some Secretary of State offices will provide lists of officers named in annual report filings by the corporation as additional evidence.

So what happens when the Board is too busy or the deal is too small or some Board member is out of the country, etc.? One exception to the requirement of actual authority is "apparent authority." This theory allows a lessor or lender to rely on the appearance that the officer has authority to act. It is why we do not worry over the fact that a reasonably clever person can forge signatures or otherwise defraud other parties in preparing false Secretary Certificates and such. Once it is established that the lessor or lender was reasonably diligent and relied in good faith on the documentation furnished, most judges will rule that the signer had apparent authority. This is particularly true if the corporation put the signer in the position to exceed his authority, such as an actual corporation Vice President creating a bogus resolution.

We can also argue that leasing or financing essential equipment is really in the ordinary course of the corporation's business and under the basic statutory authority of senior officers. Like apparent authority, however, this is an argument, not a certainty. It is best reserved for use in the unfortunate situation where a fraud has occurred and we are looking for a reason to bind the lessee or borrower.

Guaranties are particularly troublesome. It can be argued that a guaranty of another's obligations is never in a corporation's ordinary course of business. Then again, where a holding company does nothing other than guaranty its subsidiaries' obligations...maybe. Guaranties are often targets for judges. Suretyship defenses, such as requirements that the lessor or lender first sue the lessee or borrower, come up if the document does not address them. Some courts have inquired as to the consideration (value) to the guarantor of signing the guaranty, especially where the guarantor is not a corporate parent or shareholder but a subsidiary or affiliate with no interest in the lease or loan itself.

Once upon a time, all this was addressed by requiring an Opinion of Counsel (a legal opinion letter) to the effect that the document is "duly authorized, executed and delivered and is the legal, binding and enforceable obligation of...." along with opinions as to the authority of the signer and other legal matters. Legal opinions are often required for larger transactions, but in many cases, they are too expensive to be justified. Moreover, the lawyer is going to require the same documentation as the lessor or lender in order to justify the opinion.

In the last few years, modified officer's certificates have become popular for smaller transactions. These certificates state that the officer signing the documents (i) has the authority under the corporation's Articles and By-Laws, and (ii) routinely signs similar documents, which are in the ordinary course of the corporation's business. They are very similar to legal opinions, but are given by corporate officers. They may provide apparent authority but the officers obviously do not carry malpractice insurance, so their value is questionable.

So...what is the bottom line/takeaway/part of all this you need to remember? A judgment call is necessary when accepting anything short of the traditional corporate resolution/legal opinion evidence of authority. The fact is that claims that a transaction is ultra vires or not duly authorized and signed by an authorized officer are rare. We cannot say what is enough, all a lawyer can do is alert clients to the risks, but we also prefer our clients take into account the practical realities.

It is important for asset based lenders and other secured parties under the Uniform Commercial Code to know and use the correct names of their customer (or "debtor" in UCC terminology). While this is true for many reasons, the discussion below focuses on using the correct debtor's name in UCC financing statements, including some key principles and practical considerations.

First a little background. Under the UCC, a secured party ordinarily is required to perfect its security interest in inventory, equipment and various other types of personal property by filing an effective financing statement. One requirement to have an effective financing statement is that it "sufficiently" provide the name of the debtor This part of a financing transaction is critical, as insufficiently naming the debtor renders the financing statement ineffective to perfect the secured party's security interest in the applicable collateral. This is true even if there is an enforceable lease, equipment finance, loan, security or other agreement (putting aside the question of how potential debtor name inaccuracies may impact the agreement itself and other aspects of the transaction).

Corporations, limited liability companies and other registered organizations

The general rule is that the correct name of a debtor that is a corporation, limited liability company or other registered organization is the name included within its filed charter document (its "public organic record"), such as articles of incorporation or articles of organization. It is important to reference the most up to date version, in case of any name changes since the organization's creation. Often a secured party's typical practice includes checking a Secretary of State's website or other means of electronic searching and verification of registered organization names and other organization information. States also offer an ability to obtain some type of an "official" verification in the form of a certificate of good standing, certificate of existence or comparable document. Name verification as to these entities is usually very quick and accurate, but it is important to note that the only record on which a secured party can actually rely is the name listed on the public organic record (i.e., the filed articles of incorporation or organization). The secured party relying on anything less than the current public organic record is taking a modest risk - if the Secretary of State database is incorrect or out of date, a filing in the wrong name will be ineffective. In many states, a secured party can order a certified "long form" copy that includes both the initial formation documents and all amendments, which will ensure a secured party that it has the correct debtor name.

Unregistered organizations

Unlike the registered organization scenario, filing against the correct name can be much more challenging when the debtor is an unregistered organization, such as the classic situation of a general partnership that is formed without the need for registration. In that instance, the usual requirement is to provide "the organizational name" of the debtor if it has one, or in the absence of an organizational name, to provide the names of the partners comprising the debtor. That requirement can be difficult to meet in reality, particularly when state law may liberally recognize the existence of a general partnership without any formal documentation. A secured creditor may then be left with guesswork as to the true "name" of the partnership or its partners. Somewhat different rules apply for unregistered trusts and other unregistered organizations.


For debtors who are individuals (which would include an individual acting as a sole proprietor), the correct name to use typically is the name listed on the individual's unexpired driver's license (if the person has one) or other specifically designated form of alternative identification. Some jurisdictions, however, allow use of the license/identification standard as a safe harbor rather than require it. If the individual has no qualifying license or other identification, then the correct name to use (or possible option in jurisdictions following the safe harbor approach) would be the person's "individual name" or the person's surname and first personal name. In that situation, the secured creditor still would want to take steps to verify the individual's name, which might include review of other government issued identification. These other steps are not fool proof, however, particularly if they may indicate different spellings or alternate "names" for the same individual.

Practical considerations

     1. Given the potential severe consequences of filing against an incorrect debtor name, the safe practice when there's doubt is to include alternate names/spellings on the financing statement as additional named debtors. While some states charge an extra fee to include additional debtor names, the relatively small amount will be money well spent if it avoids a potentially costly future fight with other creditors or a bankruptcy trustee. Thought also will need to be given as to possible changes in the underlying financing documentation.

     2. Certain inaccuracies will not make a listed debtor name incorrect for UCC perfection purposes so long as the name is not "seriously misleading," which generally means that a search of the correct name using the applicable UCC filing office's standard search logic would disclose the incorrectly listed name. This typically helps when there are variations in punctuation and other minor differences that are not a factor in a jurisdiction's standard search logic. It is important to note that states use different standard search criteria. "Acme, Inc." may or may not be differentiated from "Acme Corporation" or even "Acme Incorporated." "Jon Jones" may not be sufficient to perfect against "John Jones" or "Jonathan Jones."

     3. Debtor post-documentation name and other changes also can impact perfection, so it is important for secured creditors to consider up front appropriate ways to address the potential impact of changes. Steps would include ensuring financing documentation incorporates sufficient covenants and other protections, including a requirement that the debtor notify the secured party prior to or at least promptly after any name change, as well as following account maintenance and other operational procedures adapted to meet the needs of the particular financings involved.  

Birmingham Office
400 Century Park South
Suite 100
Birmingham, AL 35226
(205) 251-8301

Direct Mail To: 
P.O. Box 11386
Birmingham, AL 35202
Barry S. Marks   
Direct:  205.251.8303 │
Matthew D. Evans   
Direct:  205.251.8302  │

Atlanta Office
P.O. Box 566726
Atlanta, GA 31156
Ian J. Platt  
Direct:  770.988.5949  │

The  material in  our newsletter s and on  our web site is for informational purposes only and is not legal advice.  Neither your review or use of any of such  materials  nor any correspondence which does not expressly confirm an attorney-client relationship create s an attorney-client relationship between you and  our firm or any of  our attorneys. You should not act upon any  information  in any of our newsletters or on our web site without seeking advice from a qualified attorney, accountant or other professional. Please note that you should not send  us any confidential information until you have received written agreement from  one of our attorneys to perform legal services. Unless you have received such  a written agreement, we will not consider any information you send us as confidential. No representation is made that the quality of the legal services to be performed  by our firm or any of our attorneys is greater than the quality of legal services performed by other lawyers.