UCC Debtor Name: To Avoid Disaster Dot All of The I’s and Don’t Forget the T’s

Mainsource Bank v. Leaf Capital Funding, LLC (In re Nay), 563 B.R. 535 (Bankr. S.D. Ind. 2017)

A bank brought an adversary proceeding seeking a determination of the validity and priority of the competing lien of an equipment lender. The bank also objected to the proof of claim filed by the equipment lender. The case turned on the effect of a minor error in the equipment lender’s UCC financing statement.

The bank made a $1.2 million loan that was secured by personal property owned by the debtor, including equipment. The bank’s security interest was properly perfected by a filed UCC financing statement.

Subsequently a second lender made a $41,000 loan and a $36,950 loan to finance the purchase of certain equipment. In each case the debtor granted a purchase money security interest (PMSI) in the financed equipment to secure the acquisition loan.

Normally this means that the equipment lender would have priority over the bank even though the bank’s UCC financing statement was filed first. However, as a condition of this result the PMSI must be properly perfected.

The debtor was an individual named Ronald Markt Nay. Unfortunately for the equipment lender, both of its UCC financing statements identified the debtor as “Ronald Mark Nay” (omitting the “t” from his middle name). The bank contended that this error caused the equipment lender’s UCC financing statements to be ineffective.

The court reviewed section 9-506 of Article 9 of the UCC as enacted by the applicable state:

  1. A financing statement that substantially satisfies UCC requirements is effective “even if it has minor errors or omissions, unless the errors or omissions make the financing statement seriously misleading.”
  2. Subject to the following exception “a financing statement that fails sufficiently to provide the name of the debtor in accordance with [UCC 9-503(a)] is seriously misleading.”
  3. However: “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 to sufficiently provide the name of the debtor in accordance with [UCC 9-503(a)], the name provided does not make the financing statement seriously misleading.”

In other words, a failure to use the correct debtor’s name in a UCC financing statement will be fatal unless a search using the correct name would nevertheless disclose the financing statement.

The administrative rules provided that the search request “must set forth the full correct name of the debtor or the named variant desire to be searched” and states that the full name of an individual consists of a first name or initial, a middle name or initial, and a last name – although a request may be submitted without the middle name or initial. Thus, an argument could be made that an appropriate search would include using just the debtor’s first and last names, in which case the equipment lender’s financing statement would be disclosed.

The bank’s response was that UCC 9-506 requires a search using the debtor’s “correct” name, which means a name that complies with UCC 9-503(a). The court agreed with the bank.

Under the applicable version of the UCC 9-503(a), the only sufficient name for an individual was the name on the driver’s license (as opposed to the alternative adopted by some states that merely establishes a safe harbor if the name on the driver’s license is used). Since the debtor’s name on his driver’s license was “Ronald Markt Nay,” the court concluded that this was the “correct” name that must be used in the referenced search.

Consequently, the search would not have disclosed the equipment lender’s UCC financing statement. Thus the name was insufficient and the financing statement was seriously misleading, with the result that the financing statement was ineffective. As a consequence, the court determined that the equipment lender’s security interests were unperfected, and the bank had a first priority lien on the equipment.

It is easy to underestimate the importance of preparing UCC financing statements. The equipment lender might have fared better in a state that used the name on a driver’s license as a safe harbor, but there are no guarantees. As this case illustrates, even the tiniest of errors can cause a lender to become unsecured. It is easy to imagine that the error in this case could have been caused by helpful software doing an AutoCorrect that nobody noticed. And note that the danger is not limited to bankruptcy cases: this was a dispute between lenders that turned solely on provisions of the UCC, not the special rules of bankruptcy.

Vicki R Harding, Esq.

About BankruptcyRealEstateInsights

Vicki R. Harding was a partner in the Detroit office of Pepper Hamilton LLP who moved to Arizona seeking warmer weather. Ms. Harding continues to handle commercial transactions with an emphasis on real estate and bankruptcy issues (but no longer owns a snow shovel).
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