The Debtor's Name in UCC Filings

September 1, 1995

FINANCIAL SERVICES NEWSLETTER

THE DEBTOR'S NAME IN UCC FILLINGS:
SOMETIMES FOLLOWING THE
LETTER OF THE LAW IS NOT ENOUGH

Prior to taking a security interest in a debtor's collateral, a financial institution should perform a UCC search to assure that no other creditor has a prior interest in the collateral. Such searches are made by searching for the debtor's name in the appropriate filing office (i.e., either the Secretary of State or Judge of Probate). The UCC states that a financing statement "sufficiently shows the name of the debtor if it gives the individual, partnership or corporate name of the debtor, whether or not it adds other trade names or names of partners." UCC ß 9-402(7). The commentary to the UCC in Alabama clarifies that filing under a trade name alone is not sufficient, but rather the actual corporate (or other legal) name must be used. It would follow that a creditor that searches under the correct legal name of a person, partnership or corporation and finds no prior security interest would be confident that its security interest will be superior to the security interest of others in the same collateral.

In priority disputes, however, several courts recently have held that a UCC search limited to the correct legal name of the debtor is insufficient. These courts have held that the creditor should also search for names that are "linguistically similar" to that of the debtor. The courts based their holdings upon the language in UCC ß9-402(8), which states that a financing statement is effective "even though it contains minor errors which are not seriously misleading."

For example, one court held that where a debtor's true name was "Thriftway Auto Supply, Inc.", the filing of a financing statement under the tradename "Thriftway Auto Stores" was sufficient notice of a security interest to prime a subsequent creditor that searched only the debtor's true legal name. Arguably, the court reached the wrong result; however, this holding can serve as an impetus to assure that searches for financing statements are thorough.

Alabama has revised UCC ß9-402(7) in an attempt to protect a creditor that searches under the correct legal name by stating that "[t]he name of the debtor in the financing statement shall be the individual, partnership or corporate name of the debtor, regardless of tradenames or names of partners." ß7-9-402(7) Alabama Code (1975). However, diligence in this area is still warranted.

In order for a financial institution to be confident that there are no other parties with a prior filed financing statement covering the collateral, we recommend that the following steps be taken:

i) If the debtor is a person, ask whether he or she is known by any names other than that given on a loan application. If so, assure that the UCC search is performed for all names and possible modifications of such names.

ii) If the debtor is a partnership, ask for both the true legal name of the partnership and any tradenames. Search for financing statements under all names used.

iii) If the debtor is a corporation, ask whether it has ever changed its name and whether it has any tradenames. Again, search under all names used and possible modifications of such names.

An additional step that a creditor should take to protect its interest is to perform routine corporate due diligence on its customer. The lender's requirement that Articles of Incorporation, Certificates of Existence, Certificates of Good Standing and partnership agreements be provided by debtors before closing is based, at least in part, on the need to assure that the correct legal name of the debtor is used in financing statements. Assuring that the correct legal name is used in financing statements and that all financing statements are cross-indexed under any tradenames or partner's names should protect against future priority disputes based upon the identity of the debtor.

Some Further Thoughts: Remember the two "Four-Month" Rules

Even a properly filed financing statement subsequently may become ineffective due to certain actions of the debtor. If the debtor changes its name to the extent that a financing statement becomes "seriously misleading," the financing statement is not effective with respect to collateral acquired by the debtor more than four months after the change. In addition, a financing statement is not effective with respect to collateral that is moved outside the state in which the financing statement is filed, unless a financing statement is filed in the new state within four months.

Both of the situations described above emphasize the need for a creditor to monitor its debtors' activities, and to require the debtor to provide notice of any change of name or change in the location of collateral. In each case, the UCC permits the creditor to file a new financing statement without obtaining the debtor's signature.