UCC ARTICLE 9 SEARCH AND FILING BASICS
Looking for an excellent overview or great refresher course on the Uniform Commercial Code (UCC) filing process? This webinar is designed to explain the fundamentals of the Article 9 filing process.LEARN MORE
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Attendees will learn the basic concepts of the UCC filing system and best practices when preparing a UCC financing statement—great for those new to UCC filing or for legal and financial professionals with more UCC experience.
Join CSC Associate General Counsel Paul Hodnefield for this hour-long webinar on the basics of Article 9 as they apply to UCC searches and filings. In this webinar, Paul will cover:
Essential concepts that underline the UCC search and filing system
Basic due diligence and best practices for filing and searching
How to avoid common traps for the unwary
Disclaimer: Please be advised that this recorded webinar has been edited from its original format, which may have included a product demo. To set up a live demo or to request more information, please complete the form to the right. Or if you are currently not on CSC Global, there is a link to the website in the description of this video. Thank you.
Annie: Hello, everyone, and welcome to today's webinar, "UCC Article 9 Search and Filing Basics." My name is Annie Triboletti, and I will be your moderator. Joining us today is Paul Hodnefield. Paul is the Associate General Counsel for CSC, where he is responsible for advising the company regarding real estate recording, notary, Uniform Commercial Code, and other public record transaction services. And with that, let's welcome Paul.
Paul: Thank you, Annie. Yeah, as Annie said, my role at CSC is to advise the company regarding our transactional services, including UCC. And in that capacity, it's my job to monitor legislation, monitor case law. I participate in the industry, co-chairing a task force with the American Bar Association on filing office operations and search logic. I participate with the filing officers and their organization, IACA, and spend a lot of time troubleshooting filing office issues. So needless to say, between all that I get a lot of information. And one of the funnest parts of my job is when I can share that. And that's what I'm going to do today.
Today specifically is a program on the basics of UCC Article 9 search and filing. Now, this is a basics, but whether you're brand new to the UCC or have been around for a while, it will hopefully teach you something new, or serve as a good reminder anyway of how things are done and, just as importantly, why things are done a certain way in the UCC.
So due to our wide range of audience, the way I'm going to approach this today is I'm going to begin with an introduction on a little bit of background on Article 9 and the role of the filing office, just some preliminary concepts that need to be understood, and then I'll move on and talk about the financing statement, due diligence that's required, what information goes in there, where to file, and I'll be putting a lot of emphasis on debtor name issues. I'll also talk about addresses and collateral and things like that. And then for the final part of the presentation, I'll talk about search basics and best practices. And at the end, hopefully we'll have some time for questions.
So I'll go ahead and get started with the basic concepts here that are important to understand. First of all, what we're talking about are filing and searching of UCC records under UCC Article 9, which is the provision of the Uniform Commercial Code that governs security interests.
Now, a security interest is a type of lien. It's a consensual lien. It's one that arises voluntarily by contract between the debtor and the secured party, whereby the debtor grants the secured party an interest in the debtor's assets in exchange for some benefit, such as a loan or something like that. And this is a benefit for the secured party, because if the debtor does not fulfill their obligation, the secured party has the pledged assets that they can look to, to pay the outstanding obligation. And it's a great way of reducing risk.
But when a debtor and the secured party get together and by contract agree to pledge certain assets in that type of situation, there's an important effect of that, and that is that it impacts the rights of third parties if the secured party gets to have first dibs on the debtor's assets. What about other parties that were not, you know, involved in that contract that might also have a claim on the debtor's assets? There's trade creditors, other unsecured creditors. There might be someday a bankruptcy trustee. There's lien creditors. There's all sorts of folks out there that might want some of the debtor's assets due to some conduct of the debtor.
Well, if the assets are pledged to the secured party, these aren't available to these third parties, and they had no say in it. And because the security agreement, the contract that creates the security interest affects the rights of these third parties, the courts will not enforce that security agreement unless the secured party first does what's called perfect the security interest. Perfect really simply means giving notice to the world of the security interest so that third parties have a place to look and they can see that the debtor's assets are already encumbered, and then they can take that into account before entering into a transaction with the debtor.
Therefore, that brings us to the next thing, which is the term "perfection." It's important to understand that perfection makes the security interest against the rights of third parties. The security interest is enforceable between the debtor and secured party as a contract, but the courts won't enforce it if third parties are involved. And there are always third parties involved, again bankruptcy trustees, unsecured creditors, things like that.
So perfection is very important because the difference between perfection and non-perfection of a security interest can mean the difference between collecting everything that's owed and collecting nothing that's owed. So very important to achieve perfection.
Now, usually perfection is achieved by filing a financing statement to put the world on notice that a security interest may exist. There are other ways of perfection as well, by taking possession of the collateral or control of the collateral in some cases, but we're focusing on the filing of financing statements today.
Now, a related term to perfection is "priority." Perfection relates to enforceability of the security interest. Priority relates to the order in which competing claims are satisfied. It's not unusual for a debtor to grant more than one security interest in the same collateral. That is allowed by Article 9, and it's understood that that will happen. There's good reason why it's allowed.
But if the debtor defaults, the courts need an orderly way of sorting out who gets what. And the general rule under Article 9 is that priority ranks from the earlier time of filing or perfection, meaning the first to file a financing statement is going to get first in line for the debtor's assets. And that's important, because the first in line, the first priority secured party gets paid in full, before the second priority secured party sees a penny. And as a result, being lower in priority than a secured party expected can be just as bad as being unperfected, which can be just as bad as being unsecured. So it's very important to achieve not just perfection, but also priority.
Now, we're talking about the basics today. Well, why are the basics so important? There's a number of reasons.
Number one, Article 9 of the UCC, there's a component to it in many, many different types of commercial transactions, not just traditional secured loans, but certain other types of mergers, acquisitions, and seller financed sales of a business, things like that. Because it plays such an important role, it's sometimes called "the most important article." And spending most of my time with Article 9, I tend to agree with that.
It's also important to understand that the search and filing process is not necessarily intuitive. It's not based on common sense, or at least on its surface it's not based on common sense. The statutory requirements have been long thought out and thoroughly vetted by the drafters who spent a lot of time balancing various interests and things like that. And the result is a very, very good statutory scheme that provides certainty and clarity for the most part and, perhaps most importantly, uniformity.
But as I said, it's not necessarily intuitive because you can't read a single provision of Article 9 alone. There's usually a roadmap that has to be followed through various sections. And a good way to find that out is to take a look at the official comments to each section. And that'll tell you what other sections of the code might also be implicated.
Very important thing about why the basics matter, and that's because the little things can have a big impact. There are times in Article 9 when the secured party must strictly comply with the statutory requirements, no room for error, no substantially complied will work. It's all or nothing. Article 9 does that in certain cases. And, again, because it's not intuitive, even seemingly minor errors can have an impact, a magnitude far higher than it would appear.
So, you know, what are the consequences that can arise from this? Well, there's a lot of them. For example, I'll give you some examples here of why the little things are so important. On a UCC search a secured party and the secured party's counsel, actually the debtor and debtor's counsel made an error that was also overlooked by the secured party. And as a result of misinterpreting the search, the secured party was left unperfected on a $1.5 billion loan. Not a good situation to be in.
In other cases, there have been cases out there where a secured party omitted punctuation in the debtor name, and that left the secured party unperfected for $450,000 worth of loan balance.
Putting the debtor name in the wrong form field, the secured party was left unperfected on a secured loan that was worth over $100,000. All because of these seemingly minor errors.
I mean, even an extra space in the debtor name, one little extra space has left the secured creditor unperfected and therefore collecting pennies on the dollar instead of most of what they're owed. So it is important to pay attention to these basics and understand that these little things do matter.
Now, of course, the filing office plays a central role in all this, and it is important to understand what the role of the filing office is in the filing and search process. It's actually a lot less than many people realize. The filing office is actually intended to be a neutral repository for these notices of private agreements. These things aren't filed for a government purpose. It's not a government function. Government is just kind of the neutral party here that holds all these for public inspection. And because they're not for a government purpose, the role of the filing office is actually quite limited.
The duties of the filing office are purely ministerial, meaning that Article 9 does not allow them to exercise judgment or discretion. In fact, it's designed to operate as a computer process, computer electronic filing, computer searching and things like that. Or at least it's at the minimum intended to be medium neutral, to allow for it to be a computer process and operates without human judgment or discretion.
In this type of system, the duties of the filing office are limited. Their job is to index records that are submitted for filing by the debtor name or file number, and there is a bias in favor of filing in the drafting policy of Article 9. With that in mind, the filing office can only reject a record that's submitted for reasons set forth in the statute. And those reasons are generally limited to the ability of the filing office to index the record. It has nothing to do with the correctness or accuracy or the underlying documentation. It's only can they index it for retrieval.
And as far as searching goes, the filing office reports only search results that match the name being searched exactly after they've applied their standard search logic.
Just a couple of more comments, before I move on to the financing statement about filing offices. There are some things the filing office does not do. They don't decide what is correct or not. They don't fix errors. In fact, a filing office has no power whatsoever to make a record effective or ineffective. That is solely and exclusively the responsibility of the filer and the searcher when it comes to interpreting records. So very important to understand the filing office is not there to correct errors or do anything along that line.
Well, now on to the financing statement. First a few things to consider about the financing statement, like what is it? Well, a financing statement is nothing more than a notice. All it is, is a notice that the security interest may exist. It is not a document that can be enforced in its own. Nobody has ever sued to enforce a UCC financing statement because there's nothing to enforce. It's like all it is, is a notice.
As a mere notice, the contents are very basic, just enough to provide notice — the party names and addresses and an indication of the collateral. You're not going to find dollar amounts, terms and conditions, covenants and things like that ordinarily in a financing statement. They just aren't required. And because the details of the transaction cannot be found in the record itself, they're not part of the public record. It is the drafting policy of Article 9, and it's been recognized by the courts and commentators that interested parties, in other words, those who search the records must conduct further inquiry to understand the full state of affairs. They have to look beyond the public record to get all the necessary information. It's as simple as that.
Now, to properly complete a financing statement, there's some upfront information gathering that's required of the secured party or whoever is preparing it. First of all, it's necessary to identify the debtor to know whether it's an entity or an individual. Obviously, because the debtor is the party that holds the collateral, and it's the debtor name, that must go on the financing statement.
It's also important to determine the nature and status of the collateral because, obviously, it has to be described on the financing statement. But the collateral may also play a role in determining what debtor name is required on the financing statement, and we'll come back to that later. Also, the collateral may determine what law governs perfection and, therefore, where records will be filed and searched in some cases. And again, we'll come back to that.
And it's important to determine the debtor's location up front because this will identify the law governing perfection for filing search process in most cases. In many cases, it's based on the type of debtor that's involved and it isn't always intuitive.
So really, when it comes down to determining the filing location, it's actually a multi-step process. First is to determine the law that governs perfection of the security interest, and that's based upon the location of the debtor. And then once the debtor's location is determined, then it's necessary to check the statute in that state to determine what office is the place for filing. So the first step, determine the location of the debtor, which is set forth in Section 9-307. Then look to the statute that governs the filing office within the state where the debtor is located.
So what is the filing location? The general rule is that it is the central filing office of the state where the debtor is located. There are some exceptions to this general rule. If the collateral consists of real estate-related collateral, and there's three types of that: fixtures, which are goods that either have been or will be so integrated into real property that an interest arises by operation of property law; timber to be cut; or minerals to be extracted. These are so closely related to real property that there's an overlap between real property law and UCC. And as a result, there are special governing law provisions for this type of collateral. And in order to obtain priority with respect to recorded real estate encumbrances, it's necessary to file on these in the office where a mortgage would be recorded on the affected real property, the related real property.
There's also an exception to the central filing rule in two states — Georgia and Louisiana. This is because neither state has a central filing office. In Georgia, you can file with any clerk of the Superior Court of any of the 180 plus counties in Georgia, regardless of where the debtor or the collateral are actually located in the state. And the same applies in Louisiana. You can file with the clerk of any parish in Louisiana. And, you know, in both states, Georgia and Louisiana, these local filing offices are tied into a central search system. So they're effective regardless of where the debtor or the collateral are located in the state.
So where is a debtor located? Well, it depends on the type of debtor. A registered organization, which includes corporations, LLCs, and most other entities that are formed by filing a document with the secretary of state of a state, they are located when they were formed and organized. This is not always intuitive. For example, you might have a Delaware corporation with its headquarters in California. All of its employees in California, all of its assets in California, in fact, nobody from that company has ever even set foot outside of California. Nevertheless, proper place to file would be Delaware, because that's where they were formed or organized.
Other types of organizations are located at their place of business. And if they have more than one place of business, then they're located at their chief executive office. So the general rule of thumb, if they're not a registered organization, look to where they carry on their affairs, where's their central place or their chief executive office.
Individuals are located at the person's principal residence. Ordinarily, that's easy to determine. Sometimes people have more than one residence, so in different states. And if they do when they move between them, this can especially be the case with high income individuals who may be personal guarantors and things like that. You may have to file in more than one state just to be sure that whatever is their principal residence is actually covered.
There are special rules for a number of other types of debtors. I'm not going to go into them very much today at all. Just be aware that they exist and be prepared to dig a little deeper if they come up. One is what happens if the debtor is located in a jurisdiction that doesn't have a filing system like Article 9? If they don't have a requirement for the public recordation or filing of security interests, then the debtor is deemed located in Washington, D.C.
Now, where is this likely to happen? Most commonly it'll be with foreign governments, where the debtor is located in a foreign jurisdiction that doesn't have an Article 9 like filing system. Many countries do. You know, Canada, New Zealand, Australia all have secured transactions laws based on the UCC, for example. So a debtor located in Canada, the proper place to file would be Canada actually. But in other countries, they might not have a registration system. And also, certain sovereign Indian tribes within the United States may not have. They're treated as a state, and if they don't have a filing or registration system, that could be an issue. So you have to deal with those on one-off basis.
Now, let's move on and talk about the contents of the financing statement. What exactly goes into these notices? Well, obviously, there's the debtor name and address. There's room for two debtors on the face of the form. You can usually put as many on electronically as you want. There's also the secured party information, name and address, and an indication of the collateral.
Now, of all this information, there is nothing more important than getting the debtor name right. So I'm going to focus on the debtor name here for a bit. It's important to understand some essential debtor name concepts to understand what the rules really are.
One of the first and foremost is what is the purpose of the debtor name on the financing statement? It's not what many people might think. It is not to identify the debtor. It is there for one purpose and one purpose only, and that is to allow retrieval of the record using clear and consistent search rules. That's the only reason for it. And in fact, because of that, the debtor name rules under Article 9 in some cases do not require a name other than the actual name of the debtor on the financing statement. It's counterintuitive, but it works better for the retrieval process.
The debtor name requirements are all found in Section 9-503(a). This provides the name of the debtor for purposes of the financing statement and for purposes of the financing statement only. It may be a different name than is used on the security agreement and other documentation.
It's important to understand that whatever goes into the Name field is the debtor name. Everything that goes in that field will be indexed by the filing office exactly as it appears. Remember, filing offices don't correct things.
Also, a debtor name is only provided if it's in the debtor Name field. That's the only way a filing office knows it's a debtor name, and they will only index if it's in the Name field.
Let me give you a couple examples here. Here we have company, a debtor named Furness Inc. And they've also provided some additional helpful information for a searcher they think. They provided the President's name in parentheticals after the correct name of the debtor. They may think they've done something right here. But the problem is that this extra information is not part of the debtor name or at least not part of the correct debtor name. And by adding it in here, this entire string of text is now the debtor name. And that is critical for a reason I'll demonstrate in a few minutes here. You know, if that string doesn't equal the string that's the correct debtor name, that's a problem.
Here's another example. Somebody has decided to attach Addendum "A" with a long list of debtor names on it. Each one of those debtor names I'm sure the secured party confirmed was correct at a great investment of time and expense, but they weren't provided in Name fields. And because they weren't in the Name fields, the filing office didn't or won't index them. And as a result, the only debtor name that goes in there from this debtor Name field is See Attached Addendum "A." None of those other names are entered because they weren't in the Name field. As far as the courts are concerned, they weren't provided.
Some more essential concepts to understand. Remember, the filer is solely responsible for providing the correct name. The filing office isn't going to fix it. All they do is they transcribe exactly the contents of the field into the searchable index. They only index names that are provided in the Name field. Remember, they're not exercising judgment or discretion. And the result of this is that whatever is in the Name field becomes the debtor name, whether intended or not, and a debtor name isn't provided unless it's in the Name field.
And taking it even further, a name provided in the wrong debtor Name field is not provided either. And that's because there's both individual and organization name fields. And if an organization name is placed in the individual name field, or vice versa, these are separate fields in the database. And if you search an organization name, it doesn't even look at the individual name fields. If you search an individual name, it doesn't even look at the organization name field. As a result, if it's in the wrong field, it's not provided.
And a correct name must be correctly provided. Making formatting errors on the name can be just as bad as spelling errors.
So what does it mean to have a sufficient debtor name on a financing statement? Well, there's two issues here. The first is the debtor name must either strictly comply with section 9-503(a). And when I say "strictly," I mean strictly. It has to be exact. Even a common out of place or an extra space in the name means it's not the name of the debtor. And if it's not the name of the debtor, then under Section 9-506(b), the financing statement is seriously misleading and not effective and the secured party is unperfected.
So it must strictly comply or the financing statement is seriously misleading, with one exception. If a debtor name doesn't strictly comply with 9-503(a), yet a search of the filing office records on the correct name using the jurisdiction standard search logic, if that would find the financing statement with the incorrect debtor name, then that incorrect debtor name does not make the financing statement seriously misleading.
So either the debtor name has to strictly comply, or the financing statement has to show up on a search of the correct debtor name using the jurisdiction standard search logic.
Note that if it shows up on a search, that doesn't mean the name is correct. It just means that the incorrect name does not render the financing statement seriously misleading. So if there is any deviation in the debtor name, then the issue becomes will it show up on the search logic? And therefore search logic is very important in this process. So I'm going to spend a minute and explain how search logic works.
Most states use a search logic that was developed by the filing officers organization, IACA, as part of their Model Administrative Rules for Article 9. Now, about two-thirds of the states, maybe a little more now have adopted the Model Administrative Rules and the model search logic that goes with it.
Now, the model standard search logic will compensate somewhat for minor, good faith deviations by disregarding . . . Well, first, it disregards upper and lower case but then it disregards spacing, punctuation, ending noise words, which are words, phrases, and abbreviations that designate the type of entity. It will also disregard "The" at the beginning of the name, and it does this through a normalization process.
When a financing statement is filed, the name on the financing statement is taken by the computer, and it's run through a multi-step process. First, it makes it case neutral. Then it strips out the punctuation. Then it goes to the ending noise words. And starting at the far end of the name, it works its way back to the left until it runs out of ending noise words. And then finally, if "The" appears at the beginning, it'll be stripped out. And then what you are left with is a normalized string of characters based on the name that was submitted.
Now, when somebody does a search, the computer normalizes the name being searched and then compares that string of text to the normalized strings of text in the index, and only exact matches are reported at that point.
Let me show you how it works with an actual example. The name of our example here, the name provided on the formation documents, so the entity which is the source of the debtor name for a registered organization is The Artisan Chef Manufacturing, LLC. Well, so that's the name on the source document for the financing statement. Well, the secured party, in this case, changed the name. They made it Artisan Chef Manufacturing, LLC, and then put "The" in parentheses at the end.
Well, with this change in the name, it's no longer the name of the debtor required by Article 9. So the financing statement is only going to be not seriously misleading if a search for the correct name would disclose this.
Now, using the model standard search logic, if you take the name on the source document and run it through the normalization process, you get this string of text. That's the normalized correct name. But the name on the financing statement, it will go in there and it will make it case neutral, and it'll strip out the punctuation. But when it comes to the ending noise words, "The" is not an ending noise word, so it stops and moves on to the next step. It doesn't strip out LLC.
And so what you get for the normalization is the full string of text in there. And the result of that is that they don't match. It's not the name of the debtor. It won't show up on a search using the standard search logic. As a result, the financing statement is seriously misleading and not effective.
Standard search logic is not necessarily entirely uniform from state to state that uses it. There are some deviations, and that's why, you know, it's very dangerous to rely on it. For example, some states remove all ending noise words. Some only remove the last ending noise word. So if you have ABC Company Inc., some states will disregard Company and Inc. Others will just disregard Inc. That makes a difference on what kinds of names would be found on a search. Also, there's no uniform noise word list that is used from state to state. The ending noise words are different.
As far as spaces go, some states don't disregard two spaces in a row. They only disregard one. Others don't disregard any spaces at all.
And punctuation is an ongoing problem. The process for dealing with punctuation varies. What is punctuation? What isn't? And how do you treat non-keyboard characters? You know, even how do you treat the ampersand. Some states treat it as the equivalent of "And." Some states treat it as the equivalent of the word "And" but they don't equate it to "And." And others treat it as punctuation and disregard it during the normalization process. So it's a big issue.
Bottom line, from a filing perspective, never ever rely on the search logic to save a financing statement that doesn't correctly provide the debtor name. If you come across, one fix it. Search logic can change. There's all sorts of potential issues in here.
With that, let's move on to the debtor name requirements. It's typically based on the type of debtor. The most common type of debtor in a commercial lending situation is a registered organization, which includes corporations, LLCs, and so forth.
The source of the debtor name for a registered organization is the "public organic record," which is a defined term in Article 9. I'm not going to go in and spend a lot of time on that right now. But suffice it to say it's formation documents, and typically Article 1 of the articles of incorporation will set forth the name. That's the source of the name for a registered organization.
For an individual, in the vast majority of states, they require the name on the individual's unexpired driver's license that's issued by that state. Or if they don't have driver's license, the state issued ID card in many but not all states.
If the collateral is administered by a decedent's personal representative, in other words if the collateral is part of a decedent's estate, then Article 9 says the financing statement must provide the name of the decedent and in a separate part of the financing statement indicate the collateral is being administered by a personal representative. Couple of things here, the name of the decedent is an individual name and should go in the individual name fields. If you really want to take a belt and suspenders approach, I suppose you could also put in the organization name field, but it's got to be in the individual name field. And then check the box that's on the form or its electronic equivalent to indicate that the collateral is being administered.
If the collateral is held in a trust that is not a registered organization, then Article 9 requires the financing statement to provide the name of the trust, if it has a name specified in its organic record. Or if no name is specified, which is very common in the common law trust, then the financing statement must provide the name of the settlor or testator, the person or entity that created the trust either in a trust document or in a last will and testament in the case of a testator.
Now, if the settlor or testator is provided, then in a separate part of the financing statement the filer must provide additional information to distinguish the trust from other trusts with the same settlor or testators.
Also, the financing statement must indicate the collateral is held in the trust. Do that using the checkbox on the form or its electronic equivalent.
For any other type of entity, there is no safe harbor. There's no specific correct name. The filer simply has to do sufficient due diligence to determine what name or names could be correct and then file that name or alternative possible correct names as separate debtors on the financing statement.
And if the debtor doesn't have a name, provide the names of all the individuals and entities that comprise the debtor as if each was a debtor in their own right.
So here's an example of how that works. We have a name on the public organic record. This arose from an actual case. The debtor name was ISC, Inc. So this is the correct name of the debtor. That was what was on the public organic record, the Articles of Incorporation on file with the Wisconsin Department of Financial Institutions. Well, there were some financing statements filed on this debtor. One secured party filed correctly on ISC, Inc. Although I think it should have been all uppercase to match, but that generally isn't the problem.
But somebody else filed incorrectly. Now, at first glance, this doesn't look incorrect does it? Well, if you look closely, you'll see that there's an extra space in the name there between C and period. Now, ordinarily, in states that follow the model standard search logic, this wouldn't be an issue because they strip out the space and the punctuation and everything would be fine. The only problem is the standard search logic used by the Wisconsin Department of Financial Institutions does not disregard spaces. In this case, with the extra space in the name, it was not the name of the debtor, and it didn't show up on a search using the jurisdiction standard search logic. As a result, the financing statement was seriously misleading and not effective.
So, again, when it comes to debtor names, there's no shortcuts. You've got to get it right. And debtor names need to be provided exactly as they appear in the source document, and I mean exactly, no deviations whatsoever.
The financing statement must provide some additional information about the parties as well. The debtor address must be provided. What's required is actually "a" mailing address for the debtor. There is no "the" mailing address for a debtor. It can be any one of several mailing addresses. It can be a P.O. box. It can be a physical location. It just has to be "a" mailing address from the debtor.
And it's required not for sufficiency, the financing statement but to avoid rejection. If the filing office took it and indexed it without an address, the financing statement would still be fully effective and it would perfect the security interest. But the filing office is entitled to reject it without a debtor address.
One thing to bear in mind when it comes to providing the address of the debtor, the address of the registered agent of a registered organization is not a mailing address for the debtor. That is a mailing address for the registered agent, who accepts service of process on behalf of the debtor. But it is not a mailing address for the debtor. So just bear that in mind. I get asked about that a lot.
As far as the secured party name goes, the rules that apply to debtor names do not apply at all to a secured party name. Just about anything goes. It can be a trade name, which doesn't work for a debtor. It can have abbreviations. It can have all sorts of errors and deviations. In fact, it doesn't even have to be the actual name of the secured party. It can be a name of a representative of the secured party and doesn't even have to indicate that. The reason is these aren't retrieved by secured party name. Secured party address, it simply has to provide a mailing address for the secured party, and, again, this is to avoid rejection. Bottom line when it comes to secured party information, as long as the secured party can be reached through the name and address provided, that's generally good enough.
As far as the collateral statement goes, Article 9 is very generous in the secured party's favor for how they can describe the collateral. All it has to do is reasonably indicate what's covered. That can be done any one of several ways. It can be very specific, John Deere Model 350, bulldozer serial number 12345. It can be by a type defined in the UCC, such as equipment, which will also cover that bulldozer. It could be by a formula or other method of calculating to describe.
It can even be a super-generic description of all assets, if that's generally the case. And now, I do want to caution that all assets is sufficient for purposes of the financing statement, if it does substantially cover all the debtor's assets. It is not sufficient for the security agreement however, and that's because the security agreement is what defines the rights of the parties, whereas the financing statement is only a notice.
Serial and model numbers are generally not required under Article 9. You can put them in there if you want. Many filers don't want to out of fear of what happens if there's a minor error in those. Generally, minor errors in serial and model numbers won't make the financing statement seriously misleading. There's lots of cases on that.
Now, once it's filed, the UCC will be effective for five years. That's the general rule. There are some exceptions to that general rule. Wyoming is the only state with a non-uniform default. Instead of 5 years, they have 10 years. The same applies for a continuation in Wyoming as well. It goes 10 years instead of 5. If the financing statement indicates it's filed in connection with public finance or a manufactured home transaction, it's effective for 30 years. And if it indicates the debtor is a transmitting utility, it's effective until terminated.
I do want to add that there are a lot of non-uniform versions of the public finance and manufactured home transaction effective period out there. So you want to pay attention to the particular state's law if those are applicable.
Now, at the end of the five-year period, the effectiveness can be continued for an additional five-year period by filing a continuation statement. The idea here is that if the record hasn't been terminated, and the parties don't want to continue with the transaction, rather than undergo the cost of filing a termination, this is a way of making the system self-purging of old records. So at the end of the five-year period, it'll lapse unless a continuation statement is filed. But the record can be continued as often as the secured party wants every five years. In fact, in Minnesota, where I'm based, the Secretary of State still has financing statements and a few dozen of them that were filed on July 1st, 1966 and have been continued every five years since then. So they can be continued indefinitely.
So those are the basics about filing a financing statement. Now, I want to run through the basics and some best practices for conducting searches of UCC records. It's the flip side of the filing coin. We file so that records can be found, and we search based on the filing requirements.
A few things to bear in mind from the beginning. First thing is, remember, filers are responsible for getting the debtor name right, filing in the right location and everything. But once they do that, then the risk shifts to the searching party to not only find it, but also correctly interpret it. So if a filing office makes an error, if the filer did everything right, they're protected. The risk of that error falls on the searcher, not the filer. So really what we have is a searcher beware type of system. Searchers have to be extra diligent in conducting their search.
And in order to do a reliable search, it means conducting that diligent search, which is designed to pick up all the records that may be relevant to the transaction, not just necessarily those where the names exactly match, and exercise reasonable diligence while investigating the results. And that means conducting further inquiry beyond the public record to learn the full state of affairs. And if the searcher doesn't do it right and they miss something out there, they're going to find their security interest subordinated to somebody else. And that, as I said, can be just as bad as being unperfected, which can be just as bad as being unsecured.
Why do you have to conduct further inquiry? Here's an example. Let's say somebody does a search and it turns up this name on a financing statement. If you look closely, oops, somebody made a typo in the name. Well, you know, a savvy searcher might look at this and say, "I don't have to worry about it because they didn't get the name right." I found lots of financing statements that did, that say Veterinary Clinic, not Venterinary Clinic.
But the truly diligent searcher is going to know that I can't rely on the face of the public record itself. So I'd better go and double-check and make sure that this name is incorrect. And lo and behold, if you look at the public organic record, the Articles of Organization for this entity, guess what? The typo was in the articles. Everybody, including the owners of this probably believe that this is Windy Hollow Veterinary Clinic, but the legal name is Venterinary Clinic, and by golly, that's the name that has to go on the financing statement.
This was the only one I found that was filed on the correct name. The rest of them said veterinary. So this is the one that is effective and all those other secured parties subordinate. So very important to conduct further research sometimes.
So what names have to be searched? Obviously, the debtor's correct name. It's good to start with the articles or the public organic record or the individual's driver's license. That's a good starting point. But if the debtor has ever changed its name so that a filed financing statement became seriously misleading, that old financing statement may still be effective against the debtor. It only becomes ineffective for after required collateral that's acquired more than four months after the name change. So you have to look at the name history of the debtor and possibly search under old names.
Same thing if the debtor has ever been the survivor of a merger or acquired other businesses. Financing statements filed on the merged entity or the acquired entity may still be effective against the debtor for collateral acquired before or within four months after the transaction. So it isn't always enough to just search the debtor's correct name.
As far as search locations, you need to look at where they would be filed. It's just the mirror image where you file. However, if the debtor has relocated to cause a change in the governing law within the prior year, you also have to look in the former jurisdiction.
Beware though, if you're also looking for tax liens and statutory liens, many states commingle these in the UCC index. But these are subject to different laws far as where they might be filed. Just because a jurisdiction commingles tax liens doesn't mean that's the right place to look for a tax lien. In my example of a Delaware corporation with its headquarters and all operations in California, a federal tax lien would be filed in California, not Delaware. So even though Delaware might commingle tax liens in the UCC index, that doesn't mean that's the place to search.
Also, you have to determine if fixtures, timber, or minerals are part of the collateral. If so, you may have to search in the real estate records as well.
When interpreting a search, verify it includes copies of all the records because the courts will hold that the searcher has full knowledge of all the contents of those records and any, you know, if they trigger a notice inquiry that require further investigation. Make sure to reconcile file numbers and file dates and things like that. Make sure they all add up and that there's no inconsistencies. And if there are, you have to explain any discrepancies before you can rely on the search.
Then you have to determine the effect of the record, bearing in mind that you cannot tell whether the record is effective or not from the face of the record itself. Remember, these are mere notices and further inquiry is required outside the public record to verify the information.
Also, it's important to understand the effects of all amendments. So conduct further inquiry whenever necessary in order to understand the full state of affairs.
There are a lot of traps out there for the unwary searcher. These include the termination that doesn't terminate. In order to be effective, a termination must be authorized by the secured party of record. If it isn't authorized, it's not effective. The filing office will still file it. But that doesn't mean it's effective. You cannot determine whether a termination statement is effective just from the public record alone. And there are plenty of cases where a termination statement may not be effective either because the secured party didn't authorize it, or if there are multiple secured parties, a termination authorized by one has no effect on the financing statement with respect to the interests of the others. So a financing statement can be terminated with respect to one secured party but not another unless that other one also authorized the filing. The issue is authority can't be determined from the public record.
The UCC3 assignment, many people don't realize that this does not assign the security interest. All it does is assign the right to amend the financing statement. And as a result, the assignee becomes a secured party of record and the assignor remains a secured party of record. Important when you're interpreting the search and the assignment, in case you're sending notices to all the parties that are entitled to them. The effect of a UCC assignment, at least a UCC3 is really nothing more than to add a secured party of record.
When interpreting collateral, always read it broadly. Understand that the same collateral can be described in many different ways.
And throughout the process, always remember that one of the biggest traps out there is failure to conduct further inquiry to explain any questions out there or to verify the information that is returned on a search. A search is a starting point for further inquiry. It is not the end of process.