Every creditor taking a security interest with respect to certain types of collateral such as accounts, equipment, inventory and general intangibles, knows that the creditor must file a UCC-1 Financing Statement to perfect its lien against the personal property. A creditor typically uses a standardized form listing the name of the debtor, the creditor and a description of the collateral. Once a UCC-1 Financing Statement is filed with the appropriate governmental authority, typically a Secretary of State, the government employee enters the data from the UCC-1 Financing Statement into a computerized indexing system. If a potential lender wants to determine for itself whether there are existing liens on a borrower’s property, that lender can submit a request to the governmental authority for a lien search.

More than 40 states that have adopted revised Article 9 of the Uniform Commercial Code (UCC) have also adopted administrative regulations, which guide both the governmental authority in entering data from financing statements, as well as the public in conducting searches. Parts of the regulations are often referred to as “search logic.” Search logic requires that data be entered into the system and indexed based on the exact name listed in the field on the UCC-1 Financing Statement reserved for the debtor’s name. The purpose of this system is to put subsequent creditors on notice of asserted liens and, if everything is done correctly, the UCC search should reveal any financing statements filed.

The law regarding perfection of liens and the sufficiency of a UCC-1 Financing Statement to perfect the lien is in the UCC as adopted from state to state. For purposes of this article, initially we are going to refer to the Nebraska Commercial Code. Section 9-502(a)(1) provides that a UCC-1 Financing Statement is sufficient only if it provides the name of the debtor.

Section 9-503(a)(1) notes that a UCC-1 Financing Statement sufficiently provides the name of the debtor if the debtor is a registered organization, only if the UCC-1 Financing Statement lists the name of the debtor indicated on the public record of the debtor’s jurisdiction of organization which shows the debtor to have been organized. Registered organization is defined in §9-102 to include corporations, limited partnerships and limited liability companies.

Section 9-503(b)(1) states that a UCC-1 Financing Statement that provides the name of the debtor in accordance with subsection (a) is not rendered ineffective by the absence of a trade name or other name of the debtor. Section 9-503(c) says that a UCC-1 Financing Statement that provides only the debtor’s trade name does not sufficiently give the name of the debtor.

Section 9-506(a) provides that a UCC-1 Financing Statement is effective, even if it has minor errors or omissions, unless the errors or omissions make the financing statement seriously misleading. A UCC-1 Financing Statement that fails sufficiently to provide the name of the debtor in accordance with §9-503(a) is seriously misleading. 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 UCC-1 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 UCC-1 Financing Statement seriously misleading.

Case 1: In Re: EDM Corp.
This discussion brings us to In re: EDM Corp., 431 B.R. 454 (8th Cir. BAP 2010). In that case, the bank made a loan to EDM Corporation, a Nebraska corporation. The debtor routinely did business as EDM Equipment and was commonly known by that name, although it had no registered trade names with the Nebraska Secretary of State. The bank was granted a security interest in various assets of the debtor obtaining a broad description of the collateral including all inventory and equipment. The bank filed its UCC-1 Financing Statement identifying the debtor as EDM Corporation d/b/a EDM Equipment.

There was a dispute as to lien priority between three creditors with respect to an ambulance that was pledged as collateral to all three creditors. Despite conducting lien searches using the debtor’s organizational name of EDM Corporation, neither of the other two creditors was advised by those searches of the existence of the prior lien of the bank, and neither had actual knowledge of the lien. Therefore, when the debtor filed a voluntary Chapter 7 bankruptcy, an adversary action was filed to determine which creditor had lien priority in the ambulance.

The Bankruptcy Appellate Panel for the 8th Circuit discussed that the purpose of filing a UCC-1 Financing Statement is to provide those dealing with a particular borrower knowledge of the status of the commodity in question so that they may protect their interest and act in a commercially prudent manner. Thus the proper way to search a corporate entity is by searching the records under the debtor’s organizational name. Relying on a similar Texas case entitled In re: Jim Ross Tires, Inc., 379 B.R. 670 (Bankr. S.D. Tex. 2007), where the name of the debtor in the records of the Texas Secretary of State was Jim Ross Tires, Inc. and the creditor listed the name of the debtor as Jim Ross Tires, Inc. d/b/a HTC Tires & Automotive Centers, the Texas Court held that because a trade name made the name of the debtor overbroad and could not be located by Texas search logic, the UCC-1 Financing Statement was not effective.

Likewise, in EDM, the addition of the d/b/a EDM Equipment to the debtor’s name made the UCC-1 Financing Statement seriously misleading because standard search logic could not locate it because the debtor’s organizational name was EDM Corporation not EDM Corporation d/b/a EDM Equipment. Consequently, the Nebraska Court held that the bank’s lien was rendered unperfected and therefore the other creditors had lien priority over the bank.

Case 2: In Re: Camtech Precision Manufacturing Inc.
In another UCC-1 Financing Statement case decided on January 31, 2011, the United States Bankruptcy Court for the Southern District of Florida, West Palm Beach Division in the case In re: Camtech Precision Manufacturing, Inc., also found a financing statement seriously misleading for a different reason. In Camtech, the bank filed a UCC-1 Financing Statement in both New York and Florida to perfect a security interest in the assets of a group of corporate debtors. One company was listed as the debtor in the debtor box on the first page of the filings. Two other companies were listed as “additional debtors” on a plain paper attachment to the UCC filings. However, there was no notation in the “additional debtor” box on the first page of the UCC-1 Financing Statement, directing the reader to look at the attachment listing the additional debtors. In preparing the UCC filings, the bank failed to use the nationally approved standard “additional party” forms to indicate the existence of additional debtors.

Following the Chapter 11 filings of the two additional debtors, an adversary proceeding was brought against the bank seeking to invalidate its status as a secured creditor because its UCC-1 Financing Statements were seriously misleading. In this case, the court held that there was an indexing error caused by the bank with respect to the names of the additional debtors because the bank failed to use the proper forms.

The court stated, “Filing officers are not required to look through every page of a financing statement to ascertain the names of additional debtors, nor do they have any duty to index based on information contained in an unapproved additional party attachment that is not referenced in the additional debtor box on the first page of the UCC-1. This is not a case in which the error of the filing officer accounts for the filing statement not having been indexed as to the additional debtors. This is a case in which the filer’s error in using an unreferenced and unapproved form caused the financing statements to be seriously misleading and ineffective.” Therefore, as a result of not using the form as intended, the bank apparently lost $4 million.

Conclusion
The bottom line is that creditors need to be extremely careful and painstakingly correct when they prepare and file UCC-1 Financing Statements. If the creditor believes it is important to use a trade name, a trade name should be described in the additional debtor section of an approved form, not as an attachment or part of an organizational name. Also make certain that the UCC-1 Financing Statement is filed in the debtor’s place where it is incorporated, not where the principal place of business is. For all of those creditors doing business with Delaware corporations that are not doing business in Delaware, the place to file the UCC-1 Financing Statement is in Delaware.

Out of an abundance of caution, filing a UCC-1 Financing Statement where a debtor’s principal place of business is located may also be helpful and will potentially alert a creditor that there is a lien, but it is not the proper place to perfect the lien interest. It is also highly recommended that after a UCC-1 Financing Statement is filed, the creditor conducts its own UCC search in order to make certain that it has been properly indexed and filed. If a creditor does not want to do this in all transactions because of the time and cost involved, it is understandable, but certainly in larger transactions the creditor should do so. The creditor does not want to lose millions of dollars because of an error with the UCC-1 Financing Statement.

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Andrew K. Alper is a partner with the law firm of Frandzel Robins Bloom & Csato, LC in Los Angeles. Alper has been representing equipment lessors, funding sources and other financial institutions since 1978. Alper obtained his Bachelor of Arts degree in Political Science, magna cum laude, from the University of California at Santa Barbara, and received his Juris Doctor from Loyola Marymount University School of Law making the Dean’s List. Alper’s practice emphasizes the representation of equipment lessors and funding sources in all aspects of equipment leasing including litigation, documentation, bankruptcy and transactional matters. Besides representing equipment lessors and funding sources, Alper represents banks and other financial institutions in the area of commercial litigation, insolvency, secured transactions, banking law, real estate and business litigation.