Assignment 17 Perfection Article 9 Financing Statements: The Debtor s Name. Article 9 Filing System. The Debtor s Name. Problem 17.

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1 Assignment 17 Perfection Article 9 Financing Statements: The Debtor s Name Reference: Understanding Secured Transactions 5.02, 5.03 Article 9 Filing System UCC-1 filings are indexed according to the Debtor s name This facilitates the ability of creditors to search for prior filings based upon the Debtor s name The Debtor s Name A UCC-1 cannot be sufficient to perfect a SI unless it contains the debtor s name [ 9-502(a)(1)] To satisfy 9-502(a)(1), you must use the Debtor s legal name [ 9-503(a)] Comment 2: [ 9-503(a)] reflects the view prevailing under former Article 9 that the actual individual or organizational name of the debtor on a financing statement is both necessary and sufficient... Center Bank plans to loan $2.5 million to Lee Leasing, owned by Bob Lee Loan is to be secured by present and afteracquired equipment, inventory, and accounts Under what name (or names) should Center Bank search the records and file a UCC-1? What questions do you ask Bob? 1

2 First question: what form of business organization is Lee Leasing? Is it: A sole proprietorship? A general partnership? A limited partnership? A corporation? An LLC? (or some other form of limited liability entity) Registered Organization Many business organizations (e.g., corporations, limited partnerships, LLCs) are registered organizations [ 9-102(a)(71)] This means that the organization s existence and legal name must be continuously maintained in state records ( public organic record ) [ 9-102(a)(68)] E.g., if Lee Leasing, Inc. is a MO corporation (is organized under MO law), Center Bank can confirm its name by checking MO Secretary of State s office public records If Lee Leasing, Inc. is a MO corporation, MO law will govern whether any SI in its assets is perfected [ 9-301(1), 9-307(e)] Center Bank would search in MO s Article 9 records for prior filings by other creditors, using legal name as it appears on MO Secretary of State s records Center Bank would file its UCC-1 in MO Article 9 records, using legal name as it appears on MO Secretary of State s records Debtor s legal name is Lee Leasing, Inc. Bank files a UCC-1 under the name Lee Leasing. Which statement is correct? A. Name is sufficient, Center Bank s SI will be perfected B. Name is insufficient, Center Bank s SI will not be perfected C. More information is needed to determine if Center Bank s SI is sufficient Name is sufficient, Cente... Name is insufficient, Cen... More information is nee... 2

3 Effect of Errors or Omissions (a) A financing statement substantially satisfying 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. (b) Except as otherwise provided in subsection (c), a financing statement that fails sufficiently to provide the name of the debtor in accordance with Section 9-503(a) is seriously misleading. (c) 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 financing statement that fails sufficiently to provide the name of the debtor in accordance with Section 9-503(a), the name provided does not make the financing statement seriously misleading. Minor error won t defeat effectiveness of UCC-1 if the error is not seriously misleading [ 9-506(a)] But if Debtor s legal name is Lee Leasing, Inc., a filing by Center Bank under the name Lee Leasing is seriously misleading [ 9-506(b)], unless Center Bank is protected by 9-506(c) s search logic rule If a search under the correct legal name, using standard search logic, would reveal the UCC-1 anyway, the error is not seriously misleading Search Logic Approaches Some offices use exact matches only logic In such offices, a search under Lee Leasing, Inc. would not return a UCC-1 filed under the name Lee Leasing (seriously misleading error) Others use more flexible search logic, such as the IACA Model Rules [p. 310] E.g., these rules ignore case, punctuation, spacing, and terms like Inc. or LLC ; thus, a search under Lee Leasing, Inc. would return a filing under the name Lee Leasing If the filing office uses the IACA Model Rules, a search under Lee Leasing, Inc. would locate a UCC-1 filed in the name Lee Leasing (thus Center Bank s filed UCC-1 would be effective) If the filing office search logic returns only exact matches, a search under Lee Leasing, Inc. would not return a UCC-1 filed in the name Lee Leasing (and Center Bank s UCC-1 would be ineffective) 3

4 Problem 17.1(a) Debtor s Correct Name: Heartland Corporation of Iowa Name Shown on Secured Party s Filing: Heartland Corporation Which statement is correct? A. Secured Party s filing is effective B. Secured Party s filing is ineffective Secured Party s filing is e... Secured Party s filing is i... In a filing office that uses IACA standard search logic, this error would render the filed financing statement ineffective Words of Iowa are part of debtor s legal name IACA rules ignore words such as Corporation, but not geographical words, so search for Heartland Corporation of Iowa will not produce filing under Heartland Corporation 17.1(g) is also seriously misleading error (misspelling) Center Bank and Trust is providing financing to Lee Leasing Center Bank s investigation reveals that Lee Leasing is a sole proprietorship Under what name/names does Center Bank file? Proprietorships: Legal Status Note: A sole proprietorship is not a legal entity distinct from the individual proprietor If Lee Leasing is a sole proprietorship, the debtor is Mr. Lee himself Mr. Lee owns the proprietorship s assets, and Mr. Lee is personally responsible for its liabilities Thus, Center Bank must file and search using Mr. Lee s legal name. But why, if third parties would know the business as Lee Leasing? 4

5 Trade Names At first blush, this result seems odd, if he does business as Lee Leasing and this trade name is how 3 rd parties would know his business But: A UCC-1 that contains only the debtor s trade name is not sufficient [ 9-503(c)] Concerns: b/c the assets belong to Mr. Lee as an individual, another creditor dealing with him personally may not be aware he does business as Lee Leasing (and thus might not know to search under that name) Individual Names Problem: There is no public organic record [ 9-102(a)(68)] that provides a definitive legal name for individuals Contrast to registered organizations, where public organic record establishes their legal name (regardless of how they may hold themselves out to the public, i.e., trade name) Deere took SI in collateral belonging to debtor Terrance Joseph Kinderknecht, who went by Terry Deere filed UCC-1 under name Terry J. Kinderknecht In later priority dispute, court held Deere was unperfected! Searchers using his legal name wouldn t find Deere s UCC-1 filed under his nickname Kinderknecht New 9-503(a) (2010) Alternative A [being adopted by most states]: if debtor is an individual, then UCC-1 sufficiently provides the debtor s name only if it includes the name shown on the debtor s unexpired driver s license If the debtor has no unexpired driver s license, UCC-1 is sufficient if it includes Debtor s individual name, or Debtor s first name and last name (surname) This alternative provides maximum possible certainty to searchers 5

6 New 9-503(a) (2010) Alternative B: if debtor is individual, then UCC-1 sufficiently provides the debtor s name only if it includes either: The name shown on the debtor s unexpired driver s license, or The debtor s individual name, or The debtor s first name and last name (surname) Note: Missouri has enacted Alternative A (the only if approach) (most states have adopted Alternative A) Problem 17.1(i) Debtor s Driver s License Name: John Phillip Smith IV Name Shown on Secured Party s Filing: John Philip Smith IV Under 9-503(a), which statement is correct? A. Secured Party s filing is effective B. Secured Party s filing is ineffective Secured Party s filing is e... Secured Party s filing is i... Problem 17.1(j) Debtor s Driver s License Name: John Phillip Smith IV Name Shown on Secured Party s Filing: J. Smith IV Under 9-503(a), which statement is correct? A. Secured Party s filing is effective B. Secured Party s filing is ineffective Secured Party s filing is e... Secured Party s filing is i... In a filing office that uses IACA standard search logic, error in (i) would render the filed financing statement ineffective IACA search logic rules never tolerate a misspelling This error would be seriously misleading unless the filing office s search logic rules returned alternate spellings of Phillip By contrast, error in (j) is harmless (search logic treats no middle name = all middle names, and first initial = any name starting with that initial) 6

7 Suppose that a search for John Phillip Smith revealed 112 filed UCC-1s (1) 1 vs. John P. Smith (2) 3 vs. John Smith (3) 1 vs. John Philip Smith, Jr. (4) 107 against persons named John Smith, but with different middle name or initial Which of these 112 must secured party investigate? Problem 17.5 Problem 17.5 Answer: every one of them! Note: if search under legal name John Phillip Smith returned these 112 UCC-1s, then the name used on each would not be seriously misleading [ 9-506(c)] Thus, you would need to review each one to determine whether it covered your John Phillip Smith! This false positive problem explains why some filing offices use search logic that returns only exact matches! Problem 17.4 Tang Aluminum Products (Tang) is borrowing $1.9 million from Global Bank Closing is to occur in 16 days Global will take a SI in all of the assets of Tang What steps of due diligence would Global Bank undertake in preparing for the closing of this transaction? Step 1: Confirm legal name of Tang Aluminum Products in state of organization Step 2: File Global Bank s UCC-1 ASAP, using debtor s legal name (as reflected in public organic record) Step 3: Once Global Bank s filing shows up on the index, search for prior filings against Tang (using its legal name) Step 4: If no prior filings, Global Bank can proceed to close, take SI in Tang s assets (with expectation of first priority) 7