By Paul Hodnefield, Esq.

Those who file UCC records have long been aware of the importance of filing under the correct debtor name. However, identifying the correct debtor name is only half the battle. The filer must also provide the name in the correct debtor name fields on the financing statement. Failure to properly transfer the name to the financing statement can render the record seriously misleading to the same extent as if the filer provided the wrong debtor name.

A court recently confirmed that such errors can leave the secured party with an unperfected security interest. The case is In re: Voboril, 2017 Bankr. LEXIS 715 (Bankr. E.D. Wis. March 17, 2017). This case involved a loan made by First Bank Financial Centre (the “Bank”) to Stephen R. Voboril (the “Debtor”). To secure the loan, the Debtor granted the Bank a security interest in a promissory note payable to the Debtor.

On September 29, 2014, the Bank filed a financing statement with the Wisconsin Department of Financial Institutions (“WDFI”) to perfect its security interest in the collateral. The financing statement provided the debtor name “Stephen R. Voboril” in the “Organization’s Name” field of the record. No names were provided in the individual debtor name fields.

The Debtor later filed for bankruptcy. The Chapter 7 Trustee (the “Trustee”) brought an action to avoid the Bank’s security interest, asserting that the Bank’s financing statement was seriously misleading because the debtor name was not properly provided. The Trustee then moved for summary judgment on its avoidance claim.

The WDFI, like the vast majority of state-level UCC filing offices, stores organization debtor names and individual debtor names in entirely separate database fields. Moreover, the filing office applies different search logic to organization debtor names than it does to individual debtor names. Due to the database structure and search logic, the search of a debtor name as an individual would not find an organization debtor name and vice versa.

To address the Trustee’s motion, the court first observed that the Bank had put the debtor name in the wrong place on the financing statement. It was provided as an organization name, rather than an individual name.  Then the court reviewed the applicable law, which provides that a financing statement is seriously misleading if it fails sufficiently to provide the name of the debtor in accordance with UCC § 9-503(a), unless a search on the correct name of the debtor, using the filing office’s standard search logic, would disclose the record. A search of the Debtor’s name in this case as an individual would not disclose a financing statement that provided it in the organization name field.

Nevertheless, the Bank asserted that the financing statement adequately provided the Debtor’s name. Therefore, the financing statement was not seriously misleading. The Trustee, however, argued that a searcher would not discover the financing statement, which rendered it ineffective.

The court determined that a financing statement does not sufficiently provide the name of the debtor if it incorrectly designates the name as an organization when the debtor is an individual. The court reasoned that the purpose of filing a financing statement is to put the world on notice of a secured party’s interest. Since an ordinary course search of the Debtor’s name would not reveal the Bank’s financing statement, it was seriously misleading and not effective to perfect the Bank’s security interest. Therefore, the court granted the Trustee’s motion for summary judgment on its avoidance claim.

The takeaway from this case is that even an otherwise correct debtor name can make a financing statement seriously misleading if it is not provided in the correct format. The debtor name should always be placed in the fields that correspond to the type of name, not the type of debtor or transaction. Those who file UCC records must remember that there is little margin for error with debtor names, including how the name is provided on the form.

Paul Hodnefield is associate general counsel for Corporation Service Company® and is a frequent speaker and writer on UCC due diligence issues. Please feel free to contact him with questions or comments at paul.hodnefield@cscglobal.com or 800-927-9801, ext. 61730.

UCC Expert’s Corner: Right Name/Wrong Field Renders Financing Statement Seriously Misleading