United States Securities and Exchange Commission v. ISC, Inc.: One Key Stroke On Space Bar Dooms Lender’s Security Interest
Every day, we read about how artificial intelligence will render our jobs obsolete in the foreseeable future. A recent decision of the United States District Court for the Western District of Wisconsin may provide a glimpse of what a world in which computers rule the world may look like.
In United States Securities and Exchange Commission v. ISC, Inc., ISC, Inc. had been placed into receivership. The receiver requested that the Wisconsin Department of Financial Institutions search for financing statements filed against ISC to perfect security interests in its assets under the Uniform Commercial Code. The search revealed no filings.
The receiver liquidated ISC’s assets and proposed to distribute the proceeds of sale to ISC’s creditors pro rata. Double Bubble, Ltd. objected to the proposed distribution on the grounds that it had a perfected security interest in ISC’s assets because it had filed a financing statement with the Department of Financial Institutions and thus was entitled to the proceeds of sale.
So why didn’t Double Bubble’s filing turn up in the search that the receiver obtained from the Department of Financial Institutions? The answer, watch very closely here, is that Double Bubble’s financing statement identified the debtor as “ISC, Inc .” and the Department had searched for filings against “ISC, Inc.” Because of the space between the “c” and the period in “Inc.” in Double Bubble’s filing, the search for filings using the debtor’s name without the space did not find the filing.
Double Bubble argued that the extra space in the debtor’s name should not invalidate its filing because the Uniform Commercial Code provides that an error in the debtor’s name does not render a filing ineffective as “seriously misleading” if “a search of the records of the filing office under the debtor’s correct name, using the filing office’s standard search logic, if any, would disclose a financing statement that fails sufficiently to provide the name of the debtor.” Double Bubble pointed out that if the receiver had requested a search for filings against “ISC” or “ISC, Inc” with no period, the Department of Financial Institutions would have found its filing despite the extra space.
Although the court agreed with Double Bubble that its filing would indeed have been found if the Department had run its search in either of the ways that Double Bubble suggested and that it would have been reasonable for the Department to have run the search more than one way to make sure that nothing was missed, it nevertheless held that Double Bubble’s filing was ineffective and that it did not have a perfected security interest in ISC’s assets. The Court noted that when Article 9 of the Uniform Commercial Code was overhauled nationwide, the former standard for judging the adequacy of a filing by whether it would be found in a “reasonable search” had been replaced with the test of whether it would be found by a search using the applicable filing office’s “standard search logic.” The reason for the change, the court said, “was to replace the former reasonableness standard with a clearer standard based on the computerized search logic of the filing office.” In other words, there was a conscious decision made to make the way computers search control over the way humans used to search. As the standard search logic used by the Department of Financial Institutions was to search only for filings under the debtor’s precise legal name and a search using that search logic did not find Double Bubble’s filing, Double Bubble lost.
No doubt, the Department of Financial Institutions could have developed a search logic using current technology that would have found filings despite minor errors just like a reasonable search conducted by a human would have under the old standard. However, nothing in the Uniform Commercial Code requires filing offices to develop search logic that will find all of the filings that a human would have found. Whatever “standard search logic” a given office’s computer uses rules the day.
