Text Added to Debtor Name Text Rendered Financing Statement Seriously Misleading
By Paul Hodnefield, Esq.
Filers sometimes use the debtor name field on a UCC financing statement to communicate information about the debtor, such as debtor’s capacity or other facts that a searcher might find helpful. However, the purpose of the debtor name on a UCC financing statement is solely to allow retrieval of the record. If the debtor name field is used to communicate any information besides the debtor name, it will frequently render the financing statement seriously misleading and not effective. Yet, filers continue to make such errors. One recent case, Fishback Nursery, Inc., v. PNC Bank, N.A., 2017 U.S. Dist. LEXIS 207823 (N.D. Tex. Dec. 19, 2017), demonstrated the consequences of adding information to a UCC debtor name.
This case involved a priority dispute between competing secured creditors over the proceeds from a sale of the debtor’s assets in bankruptcy. PNC Bank, N.A. (the “Bank”) was a secured creditor of BNF Operations, LLC (the “Debtor”). The Bank held a security interest in substantially all the Debtor’s assets perfected by the filing of a financing statement.
Later, Fishback Nursery, Inc. and Surface Nursery, Inc. (collectively the “Nurseries”) sold agricultural products on credit to the Debtor’s locations in Oregon, Michigan, and Tennessee. The Nurseries claimed to hold a security interest or agricultural lien in those agricultural products. Both security interests in farm products and agricultural liens fall within the scope of UCC Article 9. To perfect their interests, the Nurseries filed UCC financing statements with the secretaries of state in Oregon, Michigan, and Tennessee. Each financing statement filed by the Nurseries provided the Debtor’s name as “BNF Operations, LLC abn Zelenka Farms.”
After the Debtor filed for Chapter 11 Bankruptcy, the Nurseries filed suit seeking a declaratory judgement that they had valid, enforceable, properly-perfected liens that were superior to PNC’s claims. Likewise, PNC sought judgment in its favor. Both PNC and the Nurseries then moved for summary judgment.
The outcome of the issue depended on the sufficiency of the debtor name on the Nurseries’ financing statements. The court observed that the correct debtor name was “BNF Operations, LLC.” However, the Nurseries’ financing statements included additional information in the debtor name field that was not part of the correct debtor name. As a result, the financing statement provided the debtor name as “BNF Operations, LLC abn Zelenka Farms.”
The court concluded that due to the extra information in the debtor name field, the Nurseries’ financing statements failed to provide the correct name of the debtor. The financing statements, therefore, would be seriously misleading unless a search of the filing office records on the correct debtor name, using the jurisdiction’s standard search logic under UCC § 9-506(c), would disclose the record.
PNC ran § 9-506(c) compliant searches of the UCC records in the relevant jurisdictions but those searches failed to disclose the Nurseries’ financing statements. Based on the search results, the court determined that the financing statements were not effective. Consequently, the court granted PNC’s motion for summary judgment.
The takeaway from this case is that Article 9 requires a financing statement to provide the exact debtor name set forth in the source document specified for the particular type of debtor in UCC § 9-503(a). Any added information, abbreviations, or omissions in the debtor name field will generally prevent the standard search logic used by most jurisdictions from disclosing the record. As a result, such errors are likely to render the financing statement seriously misleading and leave the secured party with an unperfected security interest.
There is nothing wrong with providing additional information that would be helpful to those who search UCC records. However, the filer must provide any such information in a separate part of the financing statement, not the debtor name field.
Paul Hodnefield is associate general counsel for CSC® and is a frequent speaker and writer on UCC due diligence issues. Please feel free to contact him with questions or comments at firstname.lastname@example.org or 800-927-9801, ext. 61730.