Even as the fifth anniversary of the effective date of Revised Article 9 in most states approaches, a number of issues remain open to argument. Several recent cases have addressed two issues—a debtor's legal name and when Revised Article 9 applies to a pre-Revised Article 9 transaction. One issue, an individual's legal name, was recently the subject of a definitive ruling by the Kansas Supreme Court.

The Name Is the Game

Over the years, the appellate courts have dealt with an endless variety of name issues involving UCC filings. Revised Article 9 attempted to deal with name issues in 9-506 and 9-307(c), among other sections. The effort, along with the many articles published in connection with the enactment of Revised Article 9, seems to have succeeded in taming the often uncertain rules of decisional law under old Article 9. In perhaps the most comprehensive discussion to date involving name problems, the Kansas Supreme Court adopted clear rules for identifying individual debtors in UCC filings.¹ (Hereafter, Pankratz)²

The facts of the case are deceptively simple. Rodger (note the "d"—it's important) House purchased a piece of farm equipment and granted the seller, Pankratz Equipment, a purchase-money security interest in 1998. He signed a financing statement and security agreement, both of which correctly spelled his name "Rodger." Pankratz assigned the note and security agreement to John Deere and Co. In filling out the financing statement, John Deere listed the debtor's name as "Roger House" (despite the clear signature reading "Rodger" and the correct name on the security agreement) and filed it with the Kansas Secretary of State. In 1999, House borrowed from Citizens National Bank and granted it a blanket security interest in all his farm equipment. The bank filed a financing statement correctly spelling the debtor's name as "Rodger." Note that all the operative events took place before the effective date of Revised Article 9 in Kansas. More about that later.

House eventually filed for bankruptcy; both creditors obtained relief from the stay and liquidated the equipment and escrowed the proceeds. John Deere reassigned the note to Pankratz, which then sued the bank claiming that its prior-in-time filing gave its security interest priority. The state district court granted summary judgment to Pankratz on the theory that the missing "d" in Rodger was a minor error and not seriously misleading under the Uniform Commercial Code. The bank appealed to the Kansas Court of Appeals, which reversed.³ The Kansas Supreme Court granted a petition for review.

Summary of Ruling

The Supreme Court, in a unanimous decision, affirmed. In the syllabus drafted by the court, it set out several principles:

• The "standard search logic" referred to in K.S.A. 2003 Supp. 84-9-506(c) adopted by regulation by the Kansas Secretary of State is the official and only search that determines whether a name is seriously misleading under K.S.A. 2003 Supp. 84-9-506.⁴
• A filed financing statement substantially satisfying the requirements of K.S.A. 2003 Supp. 84-9-506 is effective, even if it has minor errors or omissions, unless the errors or omissions make the financing statement seriously misleading.
• K.S.A. 2003 Supp. 84-9-503, as well as a reading of the UCC as a whole, leads to the conclusion that an individual debtor's legal name must be used in the financing statement to make it sufficient under K.S.A. 2003 Supp. 84-9-502(a)(1).
• The requirement that a financing statement provide the debtor's name is particularly important, and the actual individual or organizational name of the debtor on a financing statement is required.
• K.S.A. 2003 Supp. 84-9-506(a) is in line with the policy of Article 9 of the Uniform Commercial Code to simplify formal requisites and filing requirements. It is designed to discourage the fanatical and impossibly refined reading of statutory requirements in which courts occasionally have indulged themselves.
• Subsection (b) contains the general rule: A financing statement that fails sufficiently to provide the debtor's name in accordance with §9-503(a) is seriously misleading as a matter of law. Subsection (c) provides an exception where a search in the debtor's correct name discloses the flawed filing.
• The intent of the filing requirements of Revised Article 9 of the Uniform Commercial Code is to shift the burden of filing correctly onto the filers and to allow searchers to rely on one search under the correct legal name of the debtor.

While the Supreme Court did not define "legal name," it made clear that a misspelling of Rodger as Roger is not the debtor's name. It could have stopped there, but it did not. It went on to state that the Tenth Circuit BAP got it right in holding that a filing listing the debtor's nickname "Terry" was insufficient where the debtor's name was "Terrence".⁵ The trick is going to be determining when a name is the debtor's legal name.

To Claim Priority, the First-to-File Creditor Has to Get the Name Right

The ruling places the burden squarely on the creditor to get it right. However, if, as debtor's counsel, you are giving an enforceability opinion, you may have to ascertain the legal name of the debtor. Registered entities such as corporations, limited partnerships or other limited liability companies must use the exact name as listed on the records of the state office in which it is registered.⁶ With individuals, the creditor's problem is more difficult since the case clearly only holds that a misspelling is not the legal name, no matter how close. By adopting the Tenth Circuit BAP ruling in Kinderknecht, the court implied that a nickname filing—even one derived from the legal name—is insufficient. But there is no bright-line definition of legal name for an individual. Problems abound: It is impossible to even list the variations of names that people adopt or are given at birth. Marriage often results in one—or lately both—of the parties changing their name without much in the way of formalities. And of course, Hollywood abounds with various stage names, including a certain debtor recently before the Supreme Court.

The creditor may require proof of the debtor's name. The question as yet unanswered is this: What can the creditor accept as "proof" of the debtor's name?

In In re Asheboro Precision Plastics Inc., (Miller v. Van Dorn Demag Corp.), 2005 WL 1287743 (Bankr. M.D.N.C. 2005) (cited by the court in Pankratz), the bankruptcy court held that a creditor's reliance on the president's representation that a trade name was the actual name of the corporation was not sufficient to save a filing against the trade name. It allowed the trustee to avoid Van Dorn's security interest, even though it appeared that the debtor's president had misled it about the corporate name. Van Dorn actually knew the correct name, but filed in the trade name anyway. In passing, the North Carolina bankruptcy court cited In re Kinderknecht, supra, with approval for its statement that Revised Article 9 was intended to "foreclose fact-intensive tests, such as those that existed under the former Article 9 of the UCC, inquiring into whether a person conducting a search would discover a filing under any given name."⁷

In In re FV Steel and Wire Co., 310 B.R. 390, (Bankr. E.D. Wis. 2004), the court held that another trade name filing was insufficient under Revised Article 9 even though the trade name and the legal name of the debtor were similar. Keystone Steel and Wire Co. was the trade name of Keystone Consolidated Industries Inc. Under former Article 9, one line of authority would have required a generic search for the name "Keystone," which might have disclosed the trade name filing under the old search methods (which generally involved a physical inspection of the actual paper filings!).⁸ Although Thriftway is "unpublished," it contains a comprehensive discussion of the search problem involving similar names and case law under old Article 9. It and cases like it were prime factors in the revisions to former Article 9 relating to entity names.

Unfortunately, individuals do not come with registered names, and names change for a variety of reasons, some of them legal.⁹ A birth certificate, social security card or court order changing the debtor's name is probably the best evidence. But even drivers' licenses and tax returns occasionally have nicknames and need verification. Where one spouse adopts the last name of the other upon marriage, the marriage license may be necessary. By analogy to Asheboro Precision Plastics, supra, just because an individual has used a nickname "Bubba" or "Junior" since he was three years old does not make that his legal name. Suffixes such as "SR" or "JR" or "III" are ignored by the search logic and should not affect validity.

Pankratz unequivocally puts the burden on the creditor to get the individual name right and does not seem to leave open any excuses for error. The Revised Article 9 is a bit clearer as to registered entities, but it remains essential that the name be listed in the UCC filing exactly as it is registered with the state office charged with registering organizations in the state of incorporation.¹⁰

The search logic used by any particular state filing office is a matter of state law (and, to some extent, a legacy of prior computerized databases), so you cannot automatically assume that a filing that is effective in one state will be effective in another state because of differences in search logic. While Revised Article 9 attempted to specify a single correct filing location, multiple filings may remain a simple insurance against a change in registration or place of business.

Does Revised Article 9 Apply?

Pankratz dodged the issue of whether old Article 9 rules apply to priority issues arising after the effective date, since the appellee raised the issue for the first time on appeal after review was granted by the Kansas Supreme Court. In In re Nittolo Land Development Association, 333 B.R. 237, 58 UCC Rep. Serv. 2d 313 (Bankr. S.D.N.Y. 2005), the court held that Revised Article 9 controlled even though the secured transaction antedated the effective date of Revised Article 9, citing 9-702. The court then reserved for future decision the effectiveness of a financing statement listing the debtor as "Nittolo Land Development Associates Inc.," whereas the corporation's registered name was "Nittolo Land Development Association Inc." Since the parties apparently did not address the effect of Revised Article 9 on the error, the court did not reach the issue for decision. It might be noted that the model search logic that has been adopted in many states with modifications would not find the filing against "Associates" in a search of the legal name, since it is not an exact match.

Finally, in In re FV Steel and Wire Company, supra, the court applied Revised Article 9 logic to an old Article 9 transaction and concluded that a filing against a trade name was ineffective to perfect a security interest. In a transaction concluded shortly before the effective date of Revised Article 9, the secured creditor PSC filed a financing statement against the name "Keystone Steel & Wire Co.," whereas the debtor's legal name was "Keystone Consolidated Industries Inc." PSC was aware of the legal name, but for unexplained reasons, filed in the trade name. PSC argued that under old Article 9, a search for "Keystone" standing alone would have disclosed the filing (along with several hundred other filings that began with that word). The court did not discuss the version of the search logic used by the filing office, but under the model logic, a search for "Keystone" standing alone would not have produced the same results. Even though the case was ostensibly decided under old Article 9 rules, the court looked to Revised Article 9 and the many articles on the name issue published around the time of the effective date.

Conclusion

While Pankratz provides broad guidance in that it rules out misspellings of individual names (and in dictim, suggests that nicknames are insufficient), it does not provide a bright-line rule on exactly how a creditor determines an individual debtor's legal name for filing purposes under the UCC. Creditors are left to sort the problem out on a case-by-case basis.

 

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Footnotes

1 Pankratz Implement Co. v. Citizens National Bank, 130 P.3d 57 (March 17, 2006). In the interest of full disclosure, the authors represented the Citizens National Bank in Pankratz.

2 The opinion is available free online at www.kscourts.org/kscases/ supct/2006/20060317/91721.htm. The court affirmed the appeals court decision reported at 33 Kan.App.2d 279, 55 UCC Rep.Serv.2d 245 (2005).

3 Pankratz Implement Co. v. Citizens Nat'l. Bank, 33 Kan.App.2d 279, 102 P.3d 1165 (2004).

4 The Kansas Secretary of State has adopted a slightly modified version of the model search logic promulgated by IACA. See K.A.R. 7-17-21 and 7-17-22.

5 In re Kinderknecht, 308 B.R. 71 (10th Cir. BAP 2004).

6 Some states assign an organizational ID number to registered entities, and that number should be included in UCC 1 financing statement filings in both the state of incorporation and in other states where the debtor has assets. See 9-521 and the instructions for filing out the official form. While failure to include the ID number may not be fatal, it presents an opportunity for litigation that is easily avoided by including the number at the outset.

7 308 B.R. at 74, quoted at 2005 WL 1287743, p. 11.

8 See, e.g., In re Thriftway Auto Supply Inc., (Citizens National Bank & Trust Co. v. Star Automotive Warehouse Inc.), 39 F.3d 1193 (Table), 1994 WL 637047, 25 UCC Rep.Serv.2d 982 (10th Cir. 1994).

9 The musician formerly and presently known as "Prince" presumably has a legal name but for a time demanded that he be referred to in print by a cryptic symbol. Just how that would have been indexed is a puzzle, since it had no known pronunciation. Under Revised Article 9, the symbol may be treated as a trade name and Prince's legal name required to perfect.

10 Even using the name as registered with the state may not be sufficient in the situation where the competing creditor is the IRS. In In re Spearing Tool Inc. (United States v. Crestmark Bank), 412 F.3d 653, 56 UCC Rep.Serv.2d 807, Bankr. L. Rep. P 80,317, 2005 Fed.App. 0271P, 95 A.F.T.R.2d 2005-2890 (petition for cert. filed 2005) (6th Cir. 2005), the bank had filed against the registered name and conducted regular searches under the name. It missed a competing IRS filing recorded against the name the debtor listed on its tax return. The Sixth Circuit held that the IRS regs trumped the UCC filing rules and that the IRS filing took priority, even though it did not comply with the UCC name requirements.