Whats in a Name (Apparently a Lot)

Whats in a Name (Apparently a Lot)

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One of the goals of Revised Article 9 of the UCC (RA9) is to make the rules concerning the completion, filing and searching for financing statements more definitive and conclusive. This is especially true when it comes to properly listing the debtor's name on the financing statement. Through more definitive rules, it was hoped that some of the cases under old Article 9 that ended in litigation could be avoided, such as those circumstances where the name on the financing statement was close to, but not exactly the same as, the company's correct legal name. In those proceedings, even though a search under the correct legal name revealed no filings whatsoever, the secured party would argue that it had a perfected lien because the name listed on its financing statement was not "seriously misleading."

Under RA9, that argument is much more difficult, if not impossible, to win, because, at least for registered organizations, it is now clear that a secured party must use the correct legal name of such registered organization as maintained by the applicable state filing system or its lien will be unperfected. Section 9-503(a)(1). That standard is usually rather easy to satisfy. For example, in the case of a registered organization that is a corporation, the filer need only obtain a good-standing certificate from the state where the corporation is incorporated, fill out the financing statement using the name exactly as set forth on the certificate, and file the financing statement in the state where the corporation is incorporated. Similarly, when searching for financing statements, RA9 generally provides that a searcher need only look under the correct legal name of a registered organization in order to determine if any prior UCC liens have been perfected.

As a result of these changes in the law, RA9 has, by and large, succeeded in making it easier for a party, including a bankruptcy trustee, to determine if a secured party has a prior, perfected UCC lien against a registered organization. Unfortunately, some recent decisions suggest that the same clarity may not exist with respect to financing statements naming other types of debtors. Because a significant volume of secured transactions involve individuals, individuals doing business under trade names and unregistered organizations (e.g., general partnerships), understanding when a financing statement is seriously misleading may still be a matter of discretion instead of black-letter rule.

The problem arises when a search using a debtor's full legal name,3 employing a filing office's standard search logic, does not reveal a filed financing statement. RA9 §9-506(c) continues the rule under old Article 9, which provides that if the failure to find the financing statement occurred because it was "seriously misleading," then the financing statement is ineffective. Under old Article 9, the determination of whether a filing was seriously misleading was decided on a case-by-case basis, and the issue presented was "whether or not 'a reasonably diligent searcher' would be misled by the irregularity."4 Not surprisingly, there were sometimes inexplicable variations in the results of the cases.

In an effort to create more uniformity, RA9 replaced the old rule with a seemingly precise test based on the computerized search logic used by the particular filing office. Under RA9, if the applicable search logic would reveal the financing statement when searching under the correct legal name, the secured party would be perfected; if it is not revealed, then the lien would be unperfected. The new rule appears to be plain and simple. Recent case law, however, suggests that, at least as to individuals, and perhaps as to unregistered organizations, the searching party may have to search under names other than the correct legal name if required to do so by common sense and logic. The reasonably diligent searcher may not be dead yet.

The Financing Statement

The purpose of a financing statement is to give third parties notice of the potential existence of a security interest in personal property. Under §9-502(a) of RA9, a financing statement is sufficient if it includes the name of the debtor, the name of the secured party and a description of the collateral. Because filings are indexed under the debtor's name, the accuracy of the name is critical to the ability to locate existing financing statements. According to §9-503(4), "if the debtor has a name, [the financing statement is sufficient] only if it provides the individual or organization name of the debtor." Thus, failure to accurately list the debtor's name may render the financing statement "seriously misleading" and ineffective to perfect the lien.

Unlike registered organizations, in which the secured party only needs to review the public records to verify the precise name of the debtor, in the case of individuals or unregistered organizations there is no similar, clear source of information for determining the debtor's correct name. Many individuals conduct business under a trade name (a so-called "d/b/a"), and individuals can change their names, use shortened names or nicknames. The name listed on one's birth certificate, driver's license or passport is not necessarily conclusive as a matter of law. Similarly, some businesses are conducted through general partnerships, joint ventures or common law associations, none of which, under most states' laws, are registered organizations whose name can be definitively ascertained from certified public records.

What happens if the filer uses an incorrect name? If the incorrect name is the debtor's trade name instead of the debtor's legal name, it is now clear under §9-503(c) that the use of a trade name is insufficient.5 If, however, the filer attempted to use the debtor's legal name but simply misspelled it, omitted words, added words or committed similar "minor" mistakes, §9-506 will determine if the financing statement is seriously misleading. As under old Article 9, §9-506 continues to recognize that a financing statement with only minor errors or omissions will not be deemed ineffective. Unlike old Article 9, RA9 attempts to provide a bright-line rule for determining what constitutes a minor error or omission by specifying that a financing statement is not 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 financing statement that fails sufficiently to provide the name of the debtor in accordance with §9-503(a)." Section 9-506(c).

Standard Search Logic

Given the bright-line test of §9-506(c), the concept of the "reasonably diligent searcher" would appear to have been extinguished in favor of applying the filing office's standard search logic using a computerized search under the debtor's correct name. An error in listing the debtor's name on the financing statement would render the lien unperfected if a search under the correct name, using the filing office's standard search logic, would not disclose the financing statement. The decision to implement particular search logic by a filing office will play a very large role in determining the outcome of challenges to lien perfection.

Most filing offices have either adopted or substantially follow the model administrative rules for RA9 that were promulgated by the International Association of Commercial Administrators (IACA), which can be found on the IACA web site at http://www.iaca.org. According to IACA standardized search logic, (1) there is no limit to the number of results from a given search, (2) no distinction is made between upper- and lower-case letters, (3) punctuation marks and accents are disregarded, (4) ending noise words, such as "Agency," "LLC" and "Trustee," are disregarded, (5) the word "the" at the beginning of the search criteria and all spaces between words are disregarded, (6) the first and middle names of individuals are treated as the logical equivalent of all names that begin with just the initial letter of such names (e.g., a search for "Martha Stewart" would yield results for all filings with "Martha" as a first name or the initial "M" as the first name and "Stewart" as the last name, together with any name or initial in the middle name field) and (7) searching with no middle name or initial is equated with all middle names and initials.

With the growth of the Internet, more and more filing offices have developed online UCC databases. Currently, at least 36 states provide some ability to search for UCC filings, many of which are free of charge. As a result, more searches are being conducted outside of traditional search companies. The benefits of online searching are numerous, including instant results, potential cost savings to clients and the ability to perform numerous searches at any time of the day or night. The downside is that care must be given to familiarize the searcher, who may only perform searches infrequently, with the respective filing office's standard search logic.6

Human judgment can play a significant role in determining whether or not the search returns accurate results. Because it is more difficult to ascertain the debtor's "name" as required by RA9 in the case of an unregistered organization or an individual, a searcher must continue to use his or her common sense and logic. For example, if a searcher wished to search for all financing statements filed against "Steven Tyler," but mistakenly believed that the debtor's first name was "Stephen," it would not find results for the debtor "Steven Tyler" because the standard search logic would only produce results with the first name of "Stephen" or just the initial "S" and the last name of "Tyler," but not the first name of "Steven" and last name of "Tyler." A searcher looking for "Steven Tyler" would be better served searching under alternative spellings of "Steven" or "S. Tyler" because it would yield the highest number of potentially accurate results. Of course, if the last name is common, the searcher may be faced with sifting through a voluminous stack of financing statements.

The Resurrection of the Reasonably Diligent Searcher

Pursuant to Bankruptcy Code §544(a), a trustee may avoid an unperfected lien on property of the bankruptcy estate. Whether a lien is unperfected is an issue of state law and, in the case of personal property liens, is generally governed by RA9.

Citing to RA9, the trustee in Nazar v. Bucklin National Bank (In re Erwin), 2003 Bankr. Lexis 692 (Bankr. D. Kan. 2003), claimed that a bank's lien could be avoided because the bank failed to properly list the debtor's correct name. Prior to the commencement of the debtor's bankruptcy case, the bank had made a loan to the debtor, which was secured by the debtor's interest in machinery and equipment. The bank filed a UCC-1 financing statement listing the debtor as "Mike Erwin." Erwin later filed for bankruptcy, using his full legal name, "Michael A. Erwin," on his petition.

During the case, the trustee filed the lien-avoidance action, asserting that the bank's lien was ineffective because it was "seriously misleading." The trustee argued that the financing statement naming "Mike Erwin" as the debtor was not filed using the debtor's full legal name, which the trustee argued was the "correct name" under §9-506(c). The trustee's argument was based on the fact that, when he ran a UCC search in the Kansas Secretary of State's filing office using "Michael A. Erwin," the search results did not reveal the bank's UCC filing under "Mike Erwin." The bank argued that the trustee should have searched under other formulations such as "ErwinM" or "ErwinMike," which did reveal the existence of the bank's financing statements.

The court in Nazar noted that RA9 does not establish how to determine an individual debtor's correct name, and that the use of a filing office's standard search logic does not require a search of a debtor's "legal name," "full name" or "correct name." The court rejected the trustee's argument in which he suggested that filing against a nickname was analogous to filing against a trade name. While there is a specific rule declaring the use of a debtor's trade name to be insufficient under RA9, there is no similar provision declaring the use of an individual's nickname to be insufficient. The court denied the trustee's request to avoid the bank's lien and held that "as to individuals, drafters of search requests should exercise some reasonable diligence in formulating those requests...[and] in this limited aspect, the "reasonably diligent searcher" test survives... To hold otherwise here would validate an unacceptable 'gotcha.'"7 Although the Nazar court limited its holding to individual debtors, the court's reasoning would appear to apply equally to all debtors other than registered organizations because only registered organizations are expressly required to be listed by their full, correct and legal name.

Another "Gotcha?"

Code §363(f) provides that a trustee may sell estate property free and clear of any interest in such property only if, among other things, "such interest is a lien and the price at which such property is to be sold is greater than the aggregate value of all liens on such property." 11 U.S.C. §363(f)(3). In order to determine whether there is sufficient equity in the debtor's personal property to warrant a §363 sale, a trustee customarily performs a lien search, including a search of filed and valid UCC financing statements. Whereas in the context of an avoidance action the trustee would likely argue for a narrow lien search, in the sale context, the trustee (as well as the buyer) would likely argue for an expansive lien search in order to cut off as many liens as possible pursuant to the court's powers under §363. Thus, unlike in the case where the debtor is a registered organization, where the debtor is an individual or an entity other than a registered organization, RA9 may permit the trustee some discretion in advocating for the scope of a lien search that will achieve a desired result. The Nazar court, in dicta, agreed that a trustee preparing to sell personal property should do an expansive lien search.8


Although one might believe that RA9 sounded the death knell for the reasonably diligent searcher test, at least in the case of debtors other than registered organizations, the old Article 9 standard may still have some life. Searchers and trustees should be aware that the bright-line rule for searching the names of registered organizations may not be applicable in other circumstances. Searchers should be familiar with the local filing office's search logic and formulate searches accordingly. Although some may decry any ambiguity in the RA9 search rules, depending on the side one is on, the ability to argue for the exercise of discretion or flexibility in the scope of a search may be advantageous.


1 Paul J. Ricotta is a shareholder in Mintz Levin's Boston office in the Bankruptcy, Restructuring and Commercial Law Section. Return to article

2 Adrienne K. Walker is an associate in Mintz Levin's Boston office in the Bankruptcy, Restructuring and Commercial Law Section. Return to article

3 Unless otherwise noted, references to "debtor" in this article refer to a debtor as defined in §9-102(a)(28) of RA9 of the Uniform Commercial Code. Return to article

4 In re Bosson, 432 F. Supp. 1013, 1017 (D. Conn. 1977); see, also, ITT Commercial Finance Corp. v. Bank of West, 166 F.2d 295, 302 (5th Cir. 1999) ("[f]inancing statements that are not likely to be located by reasonably prudent subsequent creditors...cannot provide effective notice to them, undermining the purpose of the UCC filing system"). Return to article

5 The enactment of §9-506(c) was an attempt to overrule those decisions under old Article 9, which held that a financing statement listing a debtor under its trade name was sufficient. See In re Glasco, 642 F.2d 793 (5th Cir. 1981), and In re Paramount International, 154 B.R. 712 (Bankr. N.D. Ill 1993), which held that, in certain circumstances, a filing under a debtor's trade name was sufficient notice of a security interest. Return to article

6 Variations between filing offices can be significant. For example, an online search for a debtor in Arizona closely follows the IACA search logic, whereas a search in Washington must include at least the first initial of an individual debtor's name. Return to article

7 Nazar, 2003 Bankr. Lexis at *27-28. Return to article

8 Nazar, 2003 Bankr. Lexis at *27. Return to article

Journal Date: 
Sunday, May 1, 2005