1944 Beach Boulevard, LLC v. Live Oak Banking Company

50 F.4th 979

• Court: Court of Appeals for the Eleventh Circuit
• Decided: September 29, 2022
• Docket: 21-11742
• Status: Published

Opinion

USCA11 Case: 21-11742 Date Filed: 09/29/2022 Page: 1 of 12

[PUBLISH] In the United States Court of Appeals For the Eleventh Circuit

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No. 21-11742 Non-Argument Calendar ____________________

In Re: NRP LEASE HOLDINGS, LLC, et al., Debtors. ___________________________________________________

1944 BEACH BOULEVARD, LLC, Plaintiff-Appellant, versus LIVE OAK BANKING COMPANY,

Defendant-Appellee. USCA11 Case: 21-11742 Date Filed: 09/29/2022 Page: 2 of 12

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Appeal from the United States District Court for the Middle District of Florida D.C. Docket No. 3:20-cv-01344-TJC ____________________

Before NEWSOM, LAGOA, and ANDERSON, Circuit Judges. LAGOA, Circuit Judge: This case returns to us for disposition from the Florida Su- preme Court, to which we certified three questions of Florida law. 1944 Beach Boulevard, LLC v. Live Oak Banking Co. (In re NRP Lease Holdings, LLC) (“1944 Beach I”), 20 F.4th 746, 758 (11th Cir. 2021). In considering our certified questions, the Florida Supreme Court found dispositive a threshold issue that we did not expressly address: “Is the filing office’s use of a ‘standard search logic’ neces- sary to trigger the safe harbor protection of section 679.5061(3)?” 1944 Beach Boulevard, LLC v. Live Oak Banking Co. (“1944 Beach II”), No. SC21-1717, 2022 WL 3650803, at *1 (Fla. Aug. 25, 2022). The Florida Supreme Court answered that question in the affirmative. And the court further determined that Florida does not employ a “standard search logic.” Id. The Florida Supreme Court thus concluded that the statutory safe harbor for financing statements that fail to correctly name the debtor cannot apply, “which means that a financing statement that fails to correctly USCA11 Case: 21-11742 Date Filed: 09/29/2022 Page: 3 of 12

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name the debtor as required by Florida law is ‘seriously misleading’ under Florida Statute § 679.5061(2) and therefore ineffective.” Id. We therefore hold that Live Oak did not perfect its security interest in 1944 Beach Boulevard, LLC’s, assets because the two UCC-1 Financing Statements filed with the Florida Secured Trans- action Registry (the “Registry”) were “seriously misleading” under Florida Statute § 679.5061(2), as the Registry does not implement a “standard search logic” necessary to trigger the safe harbor excep- tion set forth in Florida Statute § 679.5061(3). Accordingly, we re- verse the district court’s order affirming the bankruptcy court’s grant of Live Oak Banking Company’s cross-motion for summary judgment and remand for further proceedings. I. RELEVANT BACKGROUND 1 Beach Boulevard, and its affiliated businesses, filed volun- tary petitions for relief under Chapter 11 of the United States Bank- ruptcy Code. Id. at 750. Beach Boulevard and its affiliates were jointly and severally liable to Live Oak on two loans guaranteed by the U.S. Small Business Administration; these loans purported to be secured by a blanket lien on all of Beach Boulevard’s assets. Id. Live Oak, in an attempt to perfect its security interest in these as- sets, filed two UCC-1 Financing Statements with the Registry. Id. “These filing statements identify the debtor as ‘1944 Beach Blvd., LLC,’ instead of its legal name, ‘1944 Beach Boulevard, LLC,’ as

1The relevant facts of this appeal are set forth in our previous decision, 1944 Beach I. See 20 F.4th at 750–52. USCA11 Case: 21-11742 Date Filed: 09/29/2022 Page: 4 of 12

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listed in the articles of organization filed with the Florida Secretary of State.” Id. Beach Boulevard filed a complaint asserting that Live Oak’s UCC-1 financing statements were “seriously misleading” under Florida Statute § 679.5061(2) and therefore ineffective to perfect Live Oak’s security interest. Id. at 750–51. The parties eventually cross-moved for summary judgment, and the bankruptcy judge granted summary judgment for Live Oak, concluding that Live Oak’s financing statements fell under the “safe harbor” of Florida Statute § 679.5061(3) “because the Registry’s standard search logic discloses the Financing Statements on the page immediately pre- ceding the initial page on the Registry’s website.” Id. at 751. Thus, the bankruptcy court found the Live Oak’s financing statements were “not seriously misleading and [were] effective to perfect [Live Oak’s] security interest in all of [Beach Boulevard’s] assets.” Id. (some alterations in original). The district court, sitting in an ap- pellate capacity, affirmed the bankruptcy court’s order. Id. at 751– 52. Beach Boulevard then appealed to this Court. II. STANDARD OF REVIEW District courts sit in an appellate capacity when reviewing bankruptcy court judgments; they accept the bankruptcy court’s factual findings unless they are clearly erroneous and review legal conclusions de novo. Rush v. JLJ Inc. (In re JLJ Inc.), 988 F.2d 1112, 1116 (11th Cir. 1993). As the second court of review, this Court “independently examines the bankruptcy court’s factual findings USCA11 Case: 21-11742 Date Filed: 09/29/2022 Page: 5 of 12

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for clear error and reviews de novo the legal determinations of both the bankruptcy and district courts.” Id. The standard of review for a motion for summary judgment under Rule 7056 of the Federal Rules of Bankruptcy Procedure is the same as Rule 56 of the Federal Rules of Civil Procedure. See Gray v. Manklow (In re Optical Techs., Inc.), 246 F.3d 1332, 1334 (11th Cir. 2001). Summary judgment is appropriate “if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.” Fed. R. Civ. P. 56(a); accord In re Optical Techs., 246 F.3d at 1334. III. ANALYSIS As we explained in 1944 Beach I, 11 U.S.C. § 544(a) provides that “the trustee in a bankruptcy case is granted the status of a hy- pothetical lien creditor and may avoid any lien that is not properly perfected under state law as of the petition date.” 20 F.4th at 752. Thus, we must look to Florida law to determine whether Live Oak perfected its security interest in Beach Boulevard’s assets. To per- fect a security interest under Florida law, “a creditor must file a ‘fi- nancing statement’ with the Registry,” id. (quoting Fla. Stat. § 679.5011), and “[a] financing statement must provide three pieces of information to be considered sufficient for perfection: (1) the name of the debtor; (2) the name of the secured party; and (3) a description of the collateral covered by the financing statement,” id. (quoting Fla. Stat. § 679.5021(1)). USCA11 Case: 21-11742 Date Filed: 09/29/2022 Page: 6 of 12

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Florida Statute § 679.5061 concerns the “[e]ffect of errors or omissions” in financing statements. The statute provides, in rele- vant part: (1) A financing statement substantially complying with the requirements of this part is effective, even if it has minor errors or omissions, unless the errors or omissions make the financing statement seriously misleading. (2) Except as otherwise provided in subsection (3), a financing statement that fails sufficiently to provide the name of the debtor in accordance with s. 679.5031(1) is seriously misleading. (3) 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 financ- ing statement that fails sufficiently to provide the name of the debtor in accordance with s. 679.5031(1), the name provided does not make the financing state- ment seriously misleading. As explained by the Florida Supreme Court, the “first sub- section states that a financing statement may contain minor errors or omissions and remain effective to perfect a security interest, un- less the error or omission renders the financing statement ‘seri- ously misleading.’” 1944 Beach II, 2022 WL 3650803, at *3 (quoting § 679.5061(1)). The second and third subsections of the statute, in turn, define “seriously misleading” as it relates to errors or admis- sions in naming the debtor. Id. Section 679.5061(2) “creates a zero- USCA11 Case: 21-11742 Date Filed: 09/29/2022 Page: 7 of 12

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tolerance rule, under which a financing statement that fails to name the debtor as directed in [Florida Statute § 679.5031(1)] is ‘seriously misleading.’” 2 Id. And section 679.5061(3) creates a “safe harbor exception” to subsection (2)’s zero-tolerance rule providing that a financing statement with errors or omissions in naming a debtor “will still be effective to perfect a security interest so long as ‘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’ the financing statement.” Id. at *4 (quoting § 679.5061(3)). Turning to this case, Beach Boulevard and Live Oak disagree as to whether Live Oak’s financing statements fell under the safe harbor exception in section 679.5061(3). As we explained before, “Live Oak’s financing statements do not appear on the initial page of twenty names generated by a Registry search using Beach Boule- vard’s correct legal name,” but “they do appear on an immediately preceding page.” 1944 Beach I, 20 F.4th at 754. Beach Boulevard

2 Section 679.5031(1) specifies how to correctly name a debtor that is a regis- tered organization: [a] financing statement sufficiently provides the name of the debtor . . . only if the financing statement provides the name that is stated to be the registered organization's name on the public organic record most recently filed with or enacted by the registered organization's jurisdiction of organization that purports to state, amend, or restate the registered organiza- tion's name 1944 Beach II, 2022 WL 3650803, at *3 (quoting § 679.5031(1)(a)). USCA11 Case: 21-11742 Date Filed: 09/29/2022 Page: 8 of 12

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contends that “the initial page of twenty names is both the begin- ning and the end of the ‘seriously misleading’ inquiry,” while Live Oak asserts that “it is just the beginning and that its financing state- ment appearing on the preceding page falls into the statutory safe harbor.” Id. Because this case presented a novel issue of Florida law that divided bankruptcy courts within our Circuit, and because we faced substantial doubt as to how the Florida Supreme Court would resolve the split, we certified these three questions to that court: (1) Is the “search of the records of the filing office un- der the debtor’s correct name, using the filing office's standard search logic,” as provided for by Florida Stat- ute § 679.5061(3), limited to or otherwise satisfied by the initial page of twenty names displayed to the user of the Registry's search function? (2) If not, does that search consist of all names in the filing office's database, which the user can browse to using the command tabs displayed on the initial page? (3) If the search consists of all names in the filing of- fice's database, are there any limitations on a user's obligation to review the names and, if so, what factors should courts consider when determining whether a user has satisfied those obligations? 1944 Beach I, 20 F.4th at 758. The Florida Supreme Court, however, found “dispositive a threshold question” that was not expressly certified by this Court: USCA11 Case: 21-11742 Date Filed: 09/29/2022 Page: 9 of 12

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“Is the filing office's use of a ‘standard search logic’ necessary to trigger the safe harbor protection of section 679.5061(3)?” 3 1944 Beach II, 2022 WL 3650803, at *1. And reading the language of section 679.5061(3), the court concluded “yes.” Id. After analyzing the relevant statutory text, the Florida Su- preme Court also explained that section 679.5061(3) “does not de- fine the scope of the search of the filing office’s records that is nec- essary to determine whether the safe harbor applies,” i.e., did not explain what “standard search logic” means in the context of the statute. Id. at * 4. But, the court noted, “the meaning of ‘standard search logic’ as used in Article 9 of the Uniform Commercial Code, which governs secured transactions and which Florida has adopted is well understood within the industry. . . . and is reasonably ac- cepted to mean a procedure that ‘identif[ies] the set (which might be empty) of financing statements on file that constitute hits for the search,’ or stated differently, that produces an ‘[u]nambiguous identification of hits.’” Id. (quoting Kenneth C. Kettering, Standard Search Logic Under Article 9 and the Florida Debacle, 66 U. Mia. L. Rev. 907, 913 (2012) (citations omitted)). The court then con- cluded that Florida’s Registry, while offering an option for search- ing its records, did not have an option that was a “standard search logic.” Id. Indeed, when conducting a search, “the Registry returns a list of twenty names starting with the name that most closely

3 Because the Florida Supreme Court found this question dispositive, it found it unnecessary to reach the questions we certified to it. 1944 Beach II, 2022 WL 3650803, at *5. USCA11 Case: 21-11742 Date Filed: 09/29/2022 Page: 10 of 12

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matches the name entered,” which “ is but a point from which the user can navigate forward and backward through all of the names indexed in the Registry.” Id. And, as the Florida Supreme Court explained, a “‘search procedure that returns as hits, for any search string, all financing statements in the filing office’s database cannot rationally be treated as a ‘standard search logic.’” Id. (quoting Ket- tering, supra, at 913). The Florida Supreme Court therefore adopted “the defini- tion of ‘standard search logic’ accepted in the secured transactions industry, which requires the search to identify specific hits, if any,” and held that “the search option offered by the Registry, which re- turns the entire index, is not a ‘standard search logic.’” Id. at *5. The court held that “section 679.5061(3) provides one way and one way only to search the filing office’s records for purposes of deter- mining whether the safe harbor applies to a financing statement that incorrectly names a debtor—i.e., ‘using the filing office’s stand- ard search logic, if any.’” Id. As a result, the court explained that “[b]ecause the Registry lacks a ‘standard search logic,’ the search contemplated by section 679.5061(3) is impossible, which means that filers are left with the zero-tolerance rule of section 679.5061(2).” Id. Because the zero-tolerance rule applies “until the Registry employs a standard search logic, . . . any financing state- ment that fails to correctly name the debtor as required by section 679.5031(1) is ‘seriously misleading’ and therefore ineffective.” Id. The Florida Supreme Court’s answer to the threshold ques- tion it identified resolves this appeal. As explained by the Florida USCA11 Case: 21-11742 Date Filed: 09/29/2022 Page: 11 of 12

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Supreme Court, since the Registry currently does not implement a “standard search logic,” it is impossible to conduct a search neces- sary to qualify for the safe harbor exception contained in section 679.5061(3). Id. Thus, section 679.5061(2)’s zero-tolerance rule ap- plies. As previously noted, Live Oak’s filing statements identify Beach Boulevard as “1944 Beach Blvd., LLC,” instead of its legal name, “1944 Beach Boulevard, LLC,” listed in its articles of organ- ization filed with the Florida Secretary of State. 1944 Beach I, 20 F.4th at 750. Under section 679.5061(2), Live Oak’s financing state- ments are “seriously misleading” because they “fail[] sufficiently to provide the name of the debtor in accordance with [section] 679.5031(1),” and are therefore ineffective to perfect a security in- terest in Beach Boulevard’s assets under Florida law. See 1944 Beach I, 20 F.4th at 752; § 679.5011. Because Live Oak did not properly perfect its security inter- est in all of Beach Boulevard’s assets under Florida law, and because § 544(a) grants the bankruptcy trustee the status of a hypothetical lien creditor who may avoid any lien that is not properly perfected under state law as of the petition date, the bankruptcy court erred in concluding that Live Oak perfected its security interest. We therefore conclude that the district court erred in affirming the dis- trict court’s grant of summary judgment for Live Oak. IV. CONCLUSION Because Live Oak’s financing statements are seriously mis- leading under Florida law, they were not effective to perfect its se- curity interest in all of Beach Boulevard’s assets. The district court USCA11 Case: 21-11742 Date Filed: 09/29/2022 Page: 12 of 12

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therefore erred in affirming the bankruptcy court’s order granting Live Oak’s cross motion for summary judgment. Accordingly, we reverse the district court’s order affirming the bankruptcy court’s grant of summary judgment for Live Oak, and remand for further proceedings consistent with this opinion. REVERSED AND REMANDED.