What’s in a Name?
Revised Article Nine and Individual Debtors: The Legalities and Practicalities
by Wendy Hall, Bass, Berry & Sims,
Gary A. Norton, Whitfield & Eddy
and Sacha Ross, Berman & Norton Breman, A P.A.
To date, all of the states have adopted the Revised Article 9 to the Uniform Commercial Code (“Revised Article 9”). The revisions to Article 9 were an effort to, among other things, simplify the rules for practitioners and to eliminate some of the ambiguities surrounding former Article 9. Revised Article 9, to its credit, eliminated many ambiguities. For example, Revised Article 9 clarifies the ambiguity that surrounded the name of a registered organization on a financing statement. Revised Article 9 makes it clear that to perfect a security interest in collateral of a registered organization, a secured creditor must place the corporation’s registered name on its financing statement (i.e., the exact name used by the entity on the secretary of state’s web site). Accordingly, a secured creditor is given a definitive, universal checkpoint for ensuring compliance with Revised Article 9. While the process for perfection of collateral owned by a registered entity is clear, Revised Article 9, unfortunately, is not as clear as to perfection of collateral owned by individual debtors.
For individual debtors, §9-503 requires that a secured creditor use the individual name of a debtor; however individual name is not defined. This raises the issue of how a secured creditor, potential lender or trustee ensures that the name given by an individual debtor is the correct individual name. Is the individual name the name that the debtor signs on the debt instrument, or the name as it appears on the debtor’s driver’s license? Or must a secured creditor require a birth certificate, social security card or passport? What if the individual marries before or after she uses her birth certificate as proof of name? Revised Article 9 does not provide answers to the foregoing questions.
Section 9-506(a) provides that a financing statement is effective unless minor errors and omissions render it seriously misleading; §9-506(b) provides that except as provided in §9-506(c), a financing statement that does not comply with §9-503 is seriously misleading; and §9-506(c) of Revised Article 9 states that if a search of the records under the debtor’s correct name, using the standard search logic, would disclose a financing statement that fails to otherwise comply with §9-503 (i.e., the requirement to use the debtor’s individual name), then the financing statement is not seriously misleading.
While §9-506(c) purports to provide a safe harbor for creditors, creditors perfecting liens against individual debtors must rely on this safe harbor at their own risks, as the requirements (i.e. “correct name” and “standard search logic”) of the safe harbor are not clearly or easily followed. Beyond the ambiguity associated with the term “correct name,” the reality is that there is no standard search logic and the vast differences in the search engines used by the various states seriously hinder a creditor’s attempt to avail itself of the safe harbor provision of Revised Article 9.
The Legalities
Only a few courts have published opinions on the issue of what is the “correct name” under Revised Article 9. Quite recently, on November 16, 2004, the Kansas State Court of Appeals provided some insight as to when a name is seriously misleading on a financing statement. In that case, an individual named Rodger House purchased a tractor from Pankratz Implementation Company. House executed a note and a security agreement in favor of Pankratz on the day of the purchase and the note and the security agreement was assigned. The Assignee filed a financing statement under the misspelled name of “House, Roger.” Later, House executed a note and security agreement for a loan in favor of Citizens National Bank (“Citizen”). Citizen filed its financing statement with the correct name, House, Rodger. House then petitioned for bankruptcy protection and the priority dispute ensued.
The district court granted summary judgment in favor of Pankratz because Pankratz filed his financing statement prior in time to that of Citizen. Citizen appealed and argued that the “Roger” on the financing statement rendered it seriously misleading and as a result, only Citizen has a properly perfected security interest. The Kansas State Court of Appeals agreed and found the financing statement filed by Pankratz was seriously misleading. The court in Pankratz relied on the reasoning set forth by a Bankruptcy Appeal Panel for the Tenth Circuit in Kinderknecht. In Kinderknecht, the court held that for a financing statement to be effective, the creditor must have the individual debtor’s legal name. Here the court was faced with the question of whether a secured creditor who listed a debtor as Terry rather than Terrance, complied with the requirements of Revised Article 9. The court reasoned that to require the use of the legal name sets forth a clear test, simplifies the parameters of a Uniform Commercial Code search, avoids litigation regarding nicknames, and is not difficult or unduly burdensome to the creditor.
It is this logic, which demands the use of the debtor’s legal name, that is the line of logic adopted in Pankratz. While it is clear from these decisions that “correct name” is the “legal name,” the cloud of ambiguity remains. As posed above, what is a legal name and how can a creditor be certain that the name given by a debtor is in fact the debtor’s legal name? Although caselaw is emerging on this issue, a court has yet to define legal name, which is essential if creditors are to ever truly have a safe harbor when perfecting liens against individual debtors.
The Practicalities
While these questions make their way through our courts it will be necessary to have a working knowledge of the existing search logics and engines in the various states. Each state has its own system for filing, storing and retrieving financing statements. Set forth in this article’s attachment is a spreadsheet that indicates the type of system for each state, a brief description of how to use the system, a description of the search logic and the web site address for the secretary of state.
Currently, 30 states, including Washington, D.C., offer free online access to their financing database. Eleven states, including Texas and California, charge a fee or require membership to search their online database. Incredibly, there are 10 states, including Illinois, that do not have online access to their databases. Accordingly, New York is the only “large” state with free, online access to its UCC filings database.
The International Association of Commercial Administrators (“IACA”) has established a set of standard search rules that each state may adopt. Only seven states—Arizona, Iowa, Kentucky, New Mexico, North Carolina, Oregon and Colorado—have adopted the IACA search logic, and three others—Alaska, New York and Pennsylvania—appear to have a system that resembles IACA, but have not formally adopted the IACA system.
Disclaimer
While the information presented in this article, including the spreadsheet that indicates the type of search system used for each state, is the result of extensive effort and believed by the authors to be accurate, you are cautioned that neither ABI nor the authors intends any warranty nor that reliance be placed upon these materials in advising your clients without conducting independent research.