The Debtor’s Name: Requirements for Perfection
by Bill D. Bensinger
Baker, Donelson, Bearman, Caldwell & Berkowitz PC; Birmingham, Ala.
Under §9-502(a) of the Uniform Commercial Code (UCC),1 three requirements exist for a financing statement to be “sufficient”: (1) the name of the debtor, (2) the name of the secured party or a representative of the secured party, and (3) an indication of the collateral covered by the financing statement. (§9-502(a)(1)-(3)) These requirements facilitate a system of notice filing under which security interest documents need not be filed, but rather only a single document notifying parties-in-interest that a creditor may have an interest in certain property owned by the named debtor. Clark v. Deere and Co. (In re Kinderknecht), 308 B.R. 71, 73-74 (10th Cir. BAP 2004) (citing Official UCC Comment 2). Arguably, the most significant of these requirements is the name of the debtor.
Under §9-506(a), a financing statement is “effective” unless it is seriously misleading. Section 9-506(b) provides that a financing statement that “fails sufficiently to provide the name of the debtor in accordance with §9-503(a) is seriously misleading.” The exception to the general rule under §9-503(b) is §9-503(c), which provides that “[i]f 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 in accordance with §9- 503(a), the name provided does not make the financing statement seriously misleading.” A recent bankruptcy court opinion emphasizes the significance of using a debtor’s legal name when filing financing statements. In re Tyringham Holdings Inc., 354 B.R. 363 (Bankr. E.D. Va. 2006).
In Tyringham, the debtor, Tyringham Holdings Inc., held certain inventory consigned to it by Suna Bros. Inc. (Suna). Id. at 364. Suna held a security interest in the consigned inventory and attempted to perfect its interest by filing a financing statement with the Virginia State Corporation Commission (VSCC). Suna listed the debtor’s name in the financing statement as “Tyringham Holdings,” omitting the “Inc.” in the debtor’s legal name because it believed it to be a “noise word.” The debtor challenged Suna’s interest in the consigned inventory. The issue to be decided by the court was whether the financing statement was seriously misleading under §9-506(a).
The court held that the financing statement was seriously misleading. The court first reviewed §9-506, which identifies the standard to determine if a filing is seriously misleading. Section 9-506 states that “the appropriate standard by which to judge a search is the filing office’s standard search logic for a search under the debtor’s correct name, in the filing office’s database.” Id. at 365. Suna argued that searches by private search companies disclosed the existence of the financing statement and therefore Suna should be considered properly perfected. Suna also argued that the state’s search logic was faulty because it did not filter out “Inc.” as a “noise word.” Under the search logic promulgated by the International Association of Corporation Administrators (IACA), “Inc.” is a noise word that is removed or ignored in the process of performing electronic database searches for financing statements.
The court rejected these arguments, stating that “[t]he relevant standard is clearly no longer the diligent searcher’s standard search logic nor a private search organization’s standard search logic, but it is instead the filing office’s standard search logic.” Id. at 366. The court reasoned that the financing statement was seriously misleading because
[t]he official search certified by the State Corporation Commission, under the correct name, “Tyringham Holdings Inc.,” fails to disclose the Suna financing statement. Thus, the only search which used the correct name under the standard search actually employed by the State Corporation Commission did not disclose the Suna financing statement.
Id. at 368.
Four practical considerations support strict adherence to the legal name standard and rejection of the diligent searcher standard. In re Kinderknecht, 308 B.R at 75. First, “mandating the debtor’s legal name sets a clear test so as to simplify the drafting of financing statements.” Id. The court in Tyringham determined that the burden should fall on Suna (or Suna’s counsel) at the drafting stage to ensure that the financing statement included the “Inc.,” rather than facing litigation over the issue and losing. Second, “setting a clear test simplifies the parameters of UCC searches.” Kinderknecht, 308 B.R. at 75. By using a debtor’s legal name, the secured party will not have to address any trade names for the debtor— or in the case of an individual, a nickname— when conducting searches. Third, requiring a debtor’s legal name will avoid litigation as to the debtor’s trade name or nickname, and as to whether a reasonable searcher should have known to use that name. Id. Finally, “obtaining a debtor’s name is not difficult or burdensome for the creditor taking a secured interest in the debtor’s property.” Id. at 76.
In Tyringham, the court emphasized the importance of using a debtor’s correct legal name when filing financing statements, and underscored the importance of understanding the search logic in the respective state of filing. In Tyringham, Suna wrongly assumed that because “Inc.” was a noise word under IACA search logic, it was a noise word under the VSCC search logic. However, as the court pointed out, the VSCC search logic provided that “‘[c]ertain business words are modified to a standard abbreviation . . .’ the last of which is ‘incorporated’ to ‘inc.’ If ‘inc.’ is a standard abbreviation, it cannot simultaneously be a disregarded noise word according to the State Corporation Commission’s standard search logic.” Tyringham, 354 B.R. at 367. While many states have adopted the IACA search logic, some states, like Virginia, have developed their own search logic or made modifications to the IACA search logic.
Section 9-506 provides an objective standard to determine the effectiveness of a financing statement. The standard requires the use of a debtor’s legal name. The subjective diligent searcher standard is no longer applicable. Secured parties must be diligent in using the correct legal name of debtors when filing financing statements.
1 All references are to the Uniform Commercial Code, Article 9.