Naming Names: Getting The Name Right On a UCC Financing Statement

July 15, 2007
Eric J. Snyder

Few issues are litigated more furiously these days than the proper debtor’s name on UCC financing statements. Naming issues continue to challenge creditors notwithstanding attempts to simplify the UCC’s filing requirements and its stated goal of reducing incorrect filings. Some recurring themes come up in disputes over names, and these themes suggest some observations and recommendations.

Article 9 of the UCC provides a notice system under which a creditor need not record security agreements but, instead, only a single document notifying third parties that the creditor may have an interest in certain property owned by the named debtor. This is usually done by filing a financing statement with the appropriate state’s secretary of state[1] whose office indexes filings according to the debtor’s name[2]. This enables potential creditors to search the index by entering the debtor’s name.

Under §9-503(a)(1) of the UCC, financing statements list a debtor’s name sufficiently only if they state the exact name indicated in the public record of the debtor’s jurisdiction of organization. Trade names are insufficient to identify business entities[3]. For individuals, the UCC[4] requires only that creditors should use the ‘individual name’ for the debtor, without defining or commenting further on the phrase’s meaning.

While errors in the financing statements are excepted if they are not seriously misleading (minor error rule), the UCC specifies a definitive test for whether erroneous financing statements are seriously misleading. Misspelled or erroneous names are by default ‘seriously misleading’ unless a computerized search of the filing office records, inputting the debtor’s correct legal name and using the official search logic (if any), would nonetheless reveal the erroneous filings.[5]

Although creditors are directed to use the name on the debtor’s organization documents when completing a financing statement[6], most states have adopted software with rigid and unforgiving search logic, often yielding harsh results for seemingly minor naming errors that would have passed muster under the previous version of the UCC. Courts have deemed several financing statements deficient in which the listed name deviated from the name on charter documents in seemingly trivial respects.

For example, in Host America Corp. v. Coastline Fin., Inc.[7], a financing statement named the debtor as ‘K W M Electronics Corporation’. The correct name was determined to be K. W. M. Electronics Corporation.” The court held that the filing statement failed the minor error test because a search under the debtor’s correct name (i.e. with periods) using the filing office’s search logic would not have revealed it.

In In re Tyringham Holdings, Inc.,[8] where the financing statement omitted ‘Inc.’, instead listing the debtor’s name only as ‘Tyringham Holdings’, the same result occurred. Other creditors have lost the perfection of their liens due to abbreviating a debtor’s name rather than spelling it fully, and due to various punctuation errors, such as omitted hyphens, misplaced commas and errant spacing.[9]

The case law is equally strict as to individuals. In In re Kinderknecht,[10] the debtor’s correct legal name was ‘Terrance Joseph Kinderknecht’ and the financing statements used only the name ‘Terry J. Kinderknecht’. The appellate court, in reversing the trial court, held that only full legal names would satisfy the ‘individual name’ requirement of the UCC and the failure to name the debtor any other way was seriously misleading. Several cases since Kindernecht have reinforced the principle that only a full ‘legal name’ of an individual is sufficient on financing statements.[11]

Financing statements fail the minor error rule, and are considered ‘seriously misleading’, if a state’s official search logic cannot find the erroneous filing in a search under the debtor’s correct name. The choice of search software thus controls the minor error rule, since the results for any given search determines what is seriously misleading. A majority of states (including New York) have adopted the Model Administrative Rules (MARS).

MARS returns only search results that are virtually an exact match of the search term but it does ignore punctuation, case, accents, capitalization, spaces and other ‘noise words,’ as well as words or abbreviations indicating the nature of the organization, such as ‘Corp.’, ‘Co.’ or ‘Ltd.’. However, it does not accommodate abbreviations, variations of names, misspelling or typographical errors.

The variety of search logic employed by different states leads to inconsistent results. For example, the financing statement in Host America Corp. (‘K.V. M.’ versus ‘K V M’) failed Utah’s extremely restrictive search logic, but it may have been revealed in a search in a MARS state. In short, technology has effectively repealed the minor error rule in states whose search logic requires only exact matches.

Now that a single ‘all or nothing’ filing is required for single and multi-state transactions, the consequences of getting it wrong have increased dramatically. For registered organizations, we recommend obtaining a current certified copy of the debtor’s organizational documents and using the name shown in the documents.

One should not merely rely on good standing certificates or a secretary of state’s web site to determine the debtor’s exact name. If there is a conflict, it may be advisable to file multiple financing statements, one in each name.

With respect to individuals, filers should review the driver’s license, passport, social security card or, if possible, birth certificate to verify the individual’s full legal name. Again, if there is a conflict, multiple filings reflecting each variant would be prudent.

The UCC imposes draconian consequences for the erroneous filing of financing statements. Diligence in filing will minimize the risk that seemingly trivial mistakes will lead to dire results.[12]

[1] UCC §§ 9-501-521.

[2] UCC § 9-519(c).

[3] UCC § 9-503(c)

[4] UCC § 9-503(a)(4)(A).

[5] UCC § 9-506(c).

[6] UCC § 9-503(a)(1).

[7] 60 UCC Rep. Serv. 2d 120 (D. Utah 2006).

[8] 354 B.R. 363 (E.D. Va. 2006).

[9] See. e.g., Receivables Purchasing Co., Inc. v. R&R Directional Drilling, L.L.C., 263 Ga. App. 649 (2003)( filing listing debtor as ‘Net work Solutions, Inc.’ where correct name was ‘Network Solutions, Inc.’); ITT Commercial Finance Corp. v. Bank of the West, 166 F.3d 295 (5th Cir. 1999)(filing listed debtor as ‘Compucentro, USA, Inc.’ instead of ‘Compu-Centro, USA, Inc.’).

[10] 308 B.R. 47 (D. Kan. 2004).

[11] In re: Michael R. Berry, Jr., 61 UCC Rep. Serv. 2d 95 (Bankr. D. Kan. 2006)(filing under ‘Mike Berry’, instead of ‘Michael R. Berry, Jr.’ or ‘Mike Berry, Jr.’ found to be seriously misleading); Pankratz Implement Co. v. Citizens Nat’l Bank, 281 Kan. 209, 130 P.3d 57 (2006)(Kansas Supreme Court held that financing statement listing the debtor’s name as ‘Roger House’ rather than the actual ‘Rodger House’ was ‘seriously misleading’ and, thus, failed to perfect secured party’s lien).

[12] Judgment liens, tax liens, state tax liens and environmental liens are not subject to the UCC and the validity of notices of such liens may be determined by criteria more subjective than UCC tests.