When a business borrows money in a secured financing, the creditor records a UCC filing that names the business as the debtor. It’s unusual for the owners of the business to review that filing. But the name entered in the debtor field is enormously important: if it is incorrect, even slightly, the creditor’s security interest may never have been perfected at all. Courts have found that errors as minor as a space or an extra d/b/a were enough to make the filing seriously misleading.
The creditor’s job is to “perfect” its security interest. Perfection means writing up a strong security agreement, filing it correctly, and following the rules of Article 9 of the Uniform Commercial Code. Get the debtor’s name wrong, and the interest may never be perfected. People often think an online search is enough to find the debtor’s correct legal name. But Article 9-503(a) says that for a registered entity you must get the debtor’s name from its official public records. A small misspelling, combined with exacting search rules, can become very expensive. That is how a lender can think that they have secured their collateral when, in fact, they haven’t.
Seriously Misleading
A court isn’t going to care if your creditor meant well or the name is close. The test is: would a search using the debtor’s correct legal name, done in the state’s normal search system, have found the filing? If not, the filing is seriously misleading and the security interest isn’t perfected. This standard is strict, and as one Texas court admitted, it can be harsh. The name box, in other words, should not be approached like a multiple choice exam. Instead, it should be approached as a fill in the blank exam. Four cases show how unforgiving this is.
When Hastings State Bank filed a UCC financing statement, it included the debtor’s public record name and a d/b/a name (“doing business as”). The bank’s debtor was named EDM Corporation and its d/b/a was EDM Equipment. The bank used a non-standard-form financing statement, and in the debtor name field put ‘EDM Corporation d/b/a EDM Equipment.’ Two other lenders later failed to find the financing statement in a UCC search. The Eighth Circuit upheld the bankruptcy court’s decision to rule that the financing statement was ineffective (in favor of the Chapter 7 trustee) because of the addition of the d/b/a. In its opinion, the court said that the standard-form financing statement says right there that you’re not supposed to add a d/b/a or any other extraneous information to the debtor name field. In the court’s view, one should use exactly the public record name, no more and no less.
CCF Leasing Company leased some equipment to Wing Foods, Inc. and filed a UCC financing statement to perfect its security interest in the equipment, but they mistyped the debtor’s name as ‘Wing Fine Food.’ The Idaho court ruled that this was seriously misleading because a search under the jurisdiction’s search logic wouldn’t reveal the financing statement. This made the filing fatally flawed, and Wing Foods, Inc. could avoid CCF Leasing Company’s security interest in its Chapter 7 bankruptcy.
In Jim Ross Tires, Inc., a case out of Texas, the creditor had the debtor listed as ‘Jim Ross Tires Inc. DBA HTC Tires and Automotive’ (mixing the legal name and the dba). The court ruled the name was seriously misleading because the type of search logic that would be used to perform a UCC search in that state wouldn’t have found the financing statement. The creditor insisted it had a perfected interest because the filing could be found with a “non-standard wild card search.” But the court didn’t buy that, ruling the financing statements ineffective and recognizing that although the outcome is harsh, it must be considered in light of rights between competing creditors.
The last mistake was the smallest of all. In Georgia’s Receivables Purchasing Co. v. R&R Directional Drilling case, the creditor just added a space to the debtor’s name. It said ‘Net work Solutions, Inc.’ When the state authority ran a search under the correct name, Network Solutions, Inc., it didn’t find the financing statement. The appeals court ruled that the creditor did not have a security interest in the assets because the financing statement was seriously misleading.
What good is this to a small business owner under pressure from creditors? In each of these cases, the issue was whether a creditor had an actually perfected security interest, when the interest was challenged by other creditors or a bankruptcy trustee. In Wing Foods, the debtor managed to escape the security interest in its Chapter 7 bankruptcy. Whether a given filing is defective or not depends on the facts, and on the search logic of the particular state where it was filed, so it is a matter to be explored with a lawyer rather than one to take for granted. Delancey Street is not a law firm, and we don’t make judgments about whether a filing is or isn’t defective. When litigation or bankruptcy is the right solution, we send you to an independently vetted attorney, and the relationship you have is with that attorney. What we do is negotiate with funders and lenders for less than the full balance owed.
Check the Debtor Name on Each Filing
So what do you do if you’re a business owner and you find a stack of UCC filings against your company? Simply read them. Check the debtor name on each filing against your exact legal name as it appears in your Articles of Incorporation. Look for any added d/b/a, any missing or extra word, any stray space, or an ampersand where your legal name says ‘and.’ Those little details are what the courts in these cases turned on. Creditors are supposed to run the same check from their side. Just going online and searching a debtor’s business name isn’t good enough. Even a small change to the name, or the inclusion of a d/b/a, could invalidate a filing. The legal name of a corporation comes from its Articles of Incorporation, filed with the state, and the name should be monitored for any future changes. It’s also worth knowing the search logic that the state uses, because if a space is mistakenly added to the debtor’s name, or ‘and’ is changed to ‘&’, a UCC filing could be declared ineffective.
If you’re underwater on your secured debt, understanding what filings are good and which are bad helps you see the whole picture. We offer a free, confidential first consultation, and if there’s a less expensive fix or if filing for bankruptcy makes more sense, we’ll tell you that on the first call.
