The All-Important Debtor Name
Our new bite-sized webinar series, Briefly Speaking, helping paralegals tackles every day challenges more effectively.
UCC Article 9 Filing Essentials – The All-Important Debtor Name, will discuss:
- Debtor name concepts including the role of search logic
- Sufficiency rules for the different types of names
- Common format issues and common errors to avoid
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James: Hello, everyone, and welcome to today's webinar, "UCC Article 9 Filing Essentials, The all-important debtor name," the second in our seven-part paralegal series. My name is James Weir, and I will be your moderator.
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Joining us today are Paul Hodnefield and Helena Ledic. Paul Hodnefield 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. Helena is the Associate General Counsel for CSC in the Chicago office. She is a business attorney, advising senior management and law firms on strategy, business, legal, and technology matters. And with that, let's welcome Paul and Helena.
Helena: Thank you very much, James, and thank you to Paul for walking us through UCC Article 9 filing essentials, the all-important debtor name. With that, I'd like to take us through our agenda here, what Paul will be covering for us. He's going to talk about the essential debtor named concepts. He's going to go into sufficiency and then the role of search logic.
After that, Paul's going to take us through debtor names sufficiency rules. He's going to talk about registered organization debtor names, trust-related debtor names, and individual debtor names. He's also going to talk about the collateral administered by a decedent's personal representative and other debtors that happen to be out there. After that, he's going to take us into formatting issues, talking about the use of debtor name fields. And with that, afterwards, we'll follow up with a question and answer session. And with that, I'd like to turn things over to Paul now.
Paul: Thank you, Helena. UCC financing statements are actually very simple documents. All they do is indicate that a security interest may exist. They are critical in the UCC process to make the security interest enforceable, but they are, nevertheless, very simple. All they do is provide the party names and addresses and an indication of collateral.
Now, of all this information, there is one piece that is critical, and that is the debtor name, and that's because financing statements are indexed and retrieved by debtor name. So the accuracy of debtor names is very critical when it comes to UCC financing statements. Therefore, we're going to spend some time talking about the essential debtor name concepts and then talk about some more details for particular types of debtors.
Because debtor names play such an important role in the retrieval process for UCC records, I'm going to spend some time focusing on some preliminary concepts when it comes to debtor names and what anyone who's filing UCC needs to understand about debtor names. Because, remember, if the debtor name isn't exactly correct, that can cause the search logic to not find the record and it becomes a hidden lien.
So one of the most important concepts to understand about debtor names is the purpose of the debtor name field on the financing statement to begin with. The purpose of the debtor name on the financing statement is not to identify the debtor. The debtor knows who the debtor is, the secured party knows who the debtor is, and anybody searching by debtor name already knows who the debtor is. Now, the purpose of the debtor name on the financing statement is there to allow retrieval of the record using clear and consistent rules. It's not there to identify the debtor, not there to communicate information about the debtor, or for any other purpose. In fact, if it's used for any purpose, it may very well cause the record to become a hidden lien, in which case the secured party will probably find that a security interest is unperfected and it will not be able to enforce it should the debtor default.
Now, the debtor name requirements are found in UCC Section 9-503(a). 9-503(a) provides the rules for sufficiency of the debtor name for purposes of the financing statement and for no other purpose. The name that goes on the financing statement is not necessarily connected to the name that goes on the security agreement or the name of the debtor for other purposes. It's only for purpose of the financing statement.
And remember, again, the purpose of the name there is to allow retrieval of the record. And for this reason, the name required by Section 9-503(a) may not actually be the name of the debtor. It may be a name used to represent the debtor for expediency in the search and retrieval process.
Now, the debtor name requirements found in Section 9-503(a) are based either on the identity of the debtor, for certain types of debtors, or, in certain situations, based upon the status of the collateral. And I'll go into more detail on that later.
Another important concept about debtor names that all filers need to understand is that the filer is solely responsible for getting the debtor name correct on the financing statement. And it's important to do so because, for one thing, filing offices are required to index the debtor name exactly as it appears in the debtor name field of the financing statement. And, in addition to that, filing offices do not index names as debtor names unless they appear in the debtor name field. If it's not provided in the debtor name field, it's not provided at all.
As a beneficiary of the security interest, the secured party is responsible for getting that debtor name correct and providing it correctly. If the secured party doesn't do this, the consequences can be harsh. For example, because the filing office is required to index the entire contents of the name field, anything that goes into that name field is the debtor name, whether it's intended to be or otherwise.
Likewise, if the secured party fails to provide the debtor name in the debtor name field, for instance, they put it on an attachment or something like that, it will not be indexed because the filing office does not index names that are not in the name field, and, as a result, the financing statement won't provide the name. Even more, if the name isn't provided in the correct field, that can have very harsh consequences.
So even the correct debtor name must be provided correctly. It isn't enough to just find the right name. It has to be provided correctly because the layout of the debtor name can impact the correctness of the debtor name every bit as much as spelling and punctuation and all that.
So what exactly is a sufficient debtor name for purposes of the financing statement? Well, as I said, the debtor name rules are laid out in Section 9-503(a). Now, it's important to understand one thing, and that is the debtor name must strictly comply with the requirements of Section 9-503(a). There's no substantial compliance or close enough. It either is the debtor name or it isn't.
Even the tiniest error in the debtor name means that it isn't the debtor name. And if it's not exactly the debtor name required by 9-503(a), then under Section 9-506(b), the financing statement is seriously misleading, and a seriously misleading financing statement is not effective. So, again, we have very harsh consequences and a strict compliance standard for getting the debtor name correct. If even a comma is out of place, that's enough to say it's not the name of the debtor.
Now, all hope is not lost necessarily if there's a minor deviation in the name. There is a savings clause in Section 9-506(c). And what that says is if the debtor name isn't correct, then if a search of the correct debtor name, using the jurisdiction standard search logic, would find the record with the insufficient name, that insufficient name does not render the financing statement seriously misleading. And this makes sense because if it shows up on a search of the correct debtor name, it's not a hidden lien and nobody's harmed by that. It's only if it doesn't show up that people are at risk.
However, the standard search logic used by the vast majority of jurisdictions is very narrow and essentially is an exact match search logic, although it will compensate for some very minor errors in spacing, punctuation, and ending noise words. And it does this through a normalization process. What happens is when somebody files a financing statement, the computer takes the name on the financing statement, runs it through a multistep process where it makes it case-neutral, it removes ending noise words, like Inc., and Limited Partnership, LLC, and so forth. It removes punctuation. It removes "the" from the beginning of the name and finally strips out the spaces.
So what you're left with is a string of text derived from the name on the financing statement. Then, when somebody runs a search, the name being searched is run through that same multistep process, and the resulting normalized string from the name being searched is compared to the normalized debtor names in the index, and only exact matches are reported at that point.
Let me give you an example of how the normalization process works. Let's look at a debtor name here. We'll take a corporation, Paul's Repair, Inc. This is the name set forth on the articles of incorporation or the public organic record for this entity. So this is the correct name of the debtor, Paul's Repair, Inc. Somebody filed a financing statement on this debtor, and here's the name that they provided, Paul's Repair, Inc, and in a parenthetical behind the name, they put "Record Owner," some descriptive information that might be helpful for a searcher. But, unfortunately, this is not the proper place to put it.
The string of text in the debtor name field on the financing statement does not equal the string of text that represents the correct name of the debtor. Therefore, it's not the correct name of the debtor, and the name will render the financing statement seriously misleading and not effective unless a search on the correct name, using the jurisdiction standard search logic, would disclose the record.
Well, if we look at this, it's all going to depend, as far as effectiveness goes, on whether the standard search logic will disclose the record, and that's all going to depend on how these names normalize. Now, the name on the public organic record, Paul's Repair, Inc, after you strip out the spacing, punctuation, and everything, it's going to normalize to a much shorter string of text as you see here.
The name on the financing statement, once you strip out the punctuation, spacing, endings, and all is going to normalize to this longer string of text, and that's because Record Owner is not an ending noise word. So that and anything to the left of it won't be removed by the search logic.
Because the name on the public organic record, which is the name that would be searched, does not match the string of text, the normalized string of text resulting from the name on the financing statement, that means the name on the financing statement is not sufficient and it will render the financing statement seriously misleading and not effective.
Now that we've discussed the sufficiency of debtor names in general, I want to talk about what is the correct name for the different types of situations under which a financing statement may need to be filed.
The first type of debtor I want to talk about is the registered organization. The definition of registered organization under Article 9 includes corporations, LLCs, business trusts, and any other entity that comes into existence through the filing of, the issuance of, or the enactment of a public organic record. A public organic record essentially being the formation documents of the entity.
Now, if the debtor is a registered organization, the financing statement will be sufficient only if it provides the name of the registered organization exactly as it appears on the public organic record that was most recently filed with, issued by, or enacted by the jurisdiction of formation. What that means, it's either, say, the articles of incorporation or articles of organization, or if they have been amended in such a way that purports to change the name, it would be the amendment that changed the name that would be the source of the registered organization name.
As I mentioned, the public organic record is really the formation record of the entity. It's the articles of incorporation or equivalent. However, it can be legislation that forms an entity. For example, Fannie Mae is a corporation that was formed by federal legislation. And also, there are certain types of entities, like certain agriculture or finance banks, that are formed under federal law that the law actually states they come into existence when the government issues a charter, not when they submit an application, like would be the case with a corporation. So know the type of organization you're dealing with and be prepared to look to the formation document, the public organic record to get the name. And then, extract that name and provide it exactly as it appears on the source record when providing it on the financing statement.
Here's a real-life example of how important it is to get the registered organization name exactly correct. In this case, we have the name on the public organic record, in other words, the articles of incorporation for a particular entity. In this case, it's a Wisconsin corporation. The name of the corporation is ISC, Inc. And there's multiple financing statements that were filed on this debtor. One example of a financing statement filed on ISC, Inc. is shown right here, and that is the correct way to provide it. But another secured party made a boo-boo when they filed and they filed it incorrectly.
Now, at first glance, it doesn't look like there's any type of difference. But if you look closely, you will see that the name provided by the second financing statement here has an extra space in the name. Well, a filer might think, "Well, we don't have to worry about that because the search logic disregards the spaces and it won't do any harm."
Well, unfortunately, that's a dangerous assumption, because the model search logic that most states have enacted isn't uniformly . . . I should say that most states have implemented, it's not a matter of law that they have to follow any particular search logic. But most of them follow the same search logic, although there are deviations from state to state. And in Wisconsin, where this was filed, the Department of Financial Institutions, which is the central filing office for Wisconsin, does not disregard spaces. And, as a result, when this debtor defaulted, the secured party that filed with the extra space in the name was found to be unperfected because that financing statement, by providing the extra space in the name, it wasn't the name of the debtor, and it didn't show up on a search using the standard search logic. As a result, the financing statement was seriously misleading and not effective.
Next to a registered organization, the second most common type of debtor found on UCC financing statements is the individual. Now, when it comes to individual debtor named sufficiency under Article 9, there's actually two different schemes that are in use out there. The vast majority of states, sometimes called the "only if" rule for sufficiency of individual debtor names. And under this statutory program, a financing statement is sufficient only if it provides the name indicated on the individual debtor's driver's license or, in many states, if their law expressly provides for it, as an alternative, the state-issued non-driver's identification. So it's either the name on the driver's license or, if state law allows, the non-driver ID card.
There are a few states — I think there's six of them out there — that have a little bit different rule. They have a safe harbor for the driver's license, and there the financing statement is sufficient only if it provides as the individual name of the debtor the name on the driver's license or state-issued ID card, or the surname and first personal name, in other words, the first name and the last name of the debtor, or, kind of a catch-all, the individual name of the debtor. Now, there is a limitation to this. When using the driver's license as the source of the debtor name, the driver's license must be unexpired and issued by the state of filing. And more on that in a moment.
Now, as I mentioned, that limitation on the driver's license has to be built into the due diligence process when determining what the correct name of the debtor is. It's necessary to verify the driver's license as unexpired and also that it's issued by the state where the UCC record would be filed.
What happens, though, if the debtor does not have the driver's license or state-issued ID card in those states that require that? Well, in that case, there is a second-tier safe harbor in which the filer can provide the surname and first personal name of the debtor, in other words, the last name, the first name.
Now, this can actually get kind of complicated, because it's a mini-waterfall sort of and there is some variation from state to state depending on whether it's the "only if" or the Safe Harbor rule. So I do want to provide you with some resources to take a look at. CSC does publish a checklist that shows by state what the statutory requirements are and then has a checklist to walk the filer through determining what the correct name of the debtor is and what document to use for that.
All right. Well, let's take a look at how to use a driver's license or state-issued ID card as the source of an individual debtor name. Believe it or not, the first thing to take a look at is not the name on the driver's license. There's a couple of steps involved first.
The first thing is you need to determine what state the financing statement will be filed in. If we're dealing with a debtor where we expect to file in Pennsylvania, that's actually the first step, we need to confirm that it's a Pennsylvania license. And, in this case, it is. So this crosses the first test to determine whether or not this can be the sufficient source of a debtor name.
Next, again, we don't look at the debtor name. We look at the expiration date. In this case, the license has not yet expired. So we have a driver's license that is unexpired and it's issued by the state in which the financing statement will be filed. As a result, we can use this as the source of the debtor name for purposes of the financing statement. If it was expired or if it was issued by a different state, which is very common because people move across state lines from time to time and don't always change their driver's license right away, if at all. If it is from another state or expired, it cannot serve as the sufficient source of the debtor name for purposes of Article 9, if that name is in any way different from what would otherwise be the correct name of the debtor.
Once we have determined that the driver's license is the sufficient source of the debtor name because it is issued by the state in which the financing statement will be filed and it is unexpired, the next step then is to extract the debtor name. It is important to understand that the debtor name as provided on the driver's license may be formatted a little differently than it would appear on the financing statement. The components of the name may appear in a different order, and it is up to the filer to extract the components of the name and put them in the correct name fields. If there is any question . . . for example, if we have Janice Ann here, is Janice Ann the first name or is Janice the first name and Ann the middle name? If there's a question, it may be necessary to provide the variations as separate debtors so that whatever a court later decides was the correct name actually made it onto the financing statement.
The next debtor name I want to talk about is related to when the collateral is being administered by a decedent's personal representative. It used to be called the decedent's estate under former law. But, basically, the collateral is being held in an estate. And in this type of situation, the debtor name that's required is determined by the nature of the collateral. If the collateral is being administered by a decedent's personal representative, then this rule applies.
The rule for sufficiency, if the collateral is being administered by a decedent's personal representative, is that the financing statement is sufficient only if it provides the name of the decedent and indicates the collateral as being administered by a decedent's personal representative.
So some things to bear in mind about this type of debtor. Number one, the name of the decedent is an individual name. It's the name that the person had while they were alive, so the individual debtor name rules apply to it. However, of course, a decedent isn't going to have an unexpired driver's license anymore, so that's not going to be the source of the debtor name. But, typically, it's going to be the surname and first personal name. And it's provided in the same manner as if they were still a living individual except without a driver's license.
There is some concern sometimes that if the personal representative happened to be an entity, like a bank trustee or something like that, that the name should go in the name field that corresponds to the nature of the actual debtor rather than the nature of the name. That's fine as an additional debtor, but the name of the decedent should be provided, in all cases, as an individual. If the filer wants to also provide it as an organization, they can, although there's no real agreed-upon way to search the name of the decedent as an organization. So if filed under an organization name alone, it's going to be a problem.
And then, make the indication that the collateral is administered by a decedent's personal representative using the checkboxes that are provided on the written form or on its electronic equivalent for electronic filing. Do not try to make that indication in the name field because that indication will then become part of the debtor name. It isn't part of the debtor name required by Article 9.
I want to give you a few examples of estate-related debtor names and really how not to do them. One example. Here we have Estate of Paul C Primus. This was filed in the organization name field. Well, if it was provided correctly in addition to this, it wouldn't be a problem, but this was the only debtor name listed on the financing statement. The other thing is that this included descriptive information in the name field, "estate of." The indication does not go in the name field.
The proper way to file this is Primus in the individual surname field, Paul in the first personal name field, and C in the middle name field. And then, check the box to indicate that the collateral is being administered by a decedent's personal representative. But as it's provided here, it will not be searched correctly, and it will not show up, so it'll be seriously misleading and not effective.
Here is an organization. The filer's provided the name of the executor as well as a name of the estate. Again, that's not correct. The proper way to do this, Nelson in the last name field, Douglas in the first name field, E in the middle name field. This could be provided as an additional debtor if the filer wants to, but the correct name of the decedent should be provided in the individual name fields and the indication that it's an estate made using the checkboxes.
Also, bear in mind that when it comes to debtor names, indications of capacity are almost never part of the debtor name. As executor, as trustee, as whatever, as president, they're not part of the name. They're a title. They're not part of the name.
Again, even putting it in the last name field, if the filer adds the indication to an individual name, that whole string of text is now the individual last name, and searching Schoenholz is not going to find Schoenholz Estate because they don't match, the string of text does not match.
The next type of debtor name I want to address is the debtor name that's required when the collateral is held in a trust that is not a registered organization. If the collateral is held in a trust that is not a registered organization, the financing statement is sufficient only if it provides the name of the trust specified in its organic records, or if no name is specified in the organic records of the trust, then the name of the settlor or the testator. These are the person or entity that created the trust. And, in addition to that, in a separate part of the financing statement, not in the name field, an indication that the collateral is held in a trust.
If the name of the settlor or testator is provided, there's some additional information that's required as well, and it goes in a separate part of the financing statement. If one of these names is provided, there has to be additional information to distinguish the trust from other trusts that might have one or more of the same settlors or testators.
So what does this mean? Well, when it comes to trust-related debtor names, it's important to understand that the only permitted names are the name of the trust or the name of the settlor or testator. The name of the trustee is not sufficient as the name of the debtor for purposes of the financing statement, even though the trustee is probably the debtor for all other purposes. And, again, this is a case where Article 9 uses a name to represent the debtor to allow retrieval of the record because it provides more certainty under the rules I've just covered here.
Always remember that the additional information and trust indications, they're never added to the debtor name. They use the appropriate form checkbox or provide them in a separate part of the financing statement. If they're added to the debtor name, they'll almost always make the record seriously misleading and not effective.
In fact, there is a temptation to add information to the debtor name when the collateral is held in the trust, and that can create some risks for the secured party. There's a lot of confusion over how to file on trust-related names. Just remember, when it comes to filing on a trust-related name, provide only the name that is required by Article 9, nothing more, nothing less, no descriptive information or anything like that.
Let me illustrate why that's such an issue. Here there are five financing statements all filed in relation to the same trust. All five are provided a different way. Now, we can't be sure which is correct, if any of them are correct, because we don't have the organic record of the trust in front of us. But assuming the organic record says the name of this trust is the Deluca Revocable Trust, then only the second and third would be sufficient debtor names, and probably only the third. It depends on the particular state search logic, because without "the" at the beginning of the name, it's not the correct name of the debtor and it's dependent on the search logic.
So there's a temptation to provide all sorts of information to communicate information through the trust-related debtor name. Don't do it. Provide only the name required by Article 9, nothing more, nothing less, at least in the name field. If you do want to provide additional information, that's fine. Do it in a separate part of the financing statement.
To wrap up, I want to talk about a couple of other debtor name requirements. One is for any other type of organization that we haven't already covered. Article 9 has a rule for that. It's a catch-all provision. All it says is that for all other types of organizations, provide the organizational name of the debtor. What that really means is it's left up to the best judgment of the filer as to what the correct name is after they've conducted adequate due diligence to determine what name or names could be correct.
And the best practice in this case, if you're not 100% certain that there's one correct name for the debtor, provide all those names that could be correct as separate debtors on the financing statement. Again, that way whatever a judge later determines is correct will hopefully be on there, because it's a secured party that's responsible for getting it right.
And then, there's the scenario, "What happens if the debtor doesn't have a name?" And this can happen in some cases, especially with something like a partnership, for example, a general partnership. Well, if the debtor doesn't have a name, then Article 9 says provide the name(s) of the individuals and entities that comprise the debtor as if each was a debtor in its own right. So if a member of a partnership is actually a corporation, the registered organization name rule would apply to that debtor name.
Finally, even getting the correct debtor name isn't always enough. That correct debtor name has to be correctly provided as well. There's numerous examples out there of people who got the name correct and then did something that resulted in it being provided incorrectly. And I'm going to give you some examples to think about here.
In this example, USLMC, LLC, assuming that is the correct name of the debtor after looking at its public organic record, that's where the filer should have stopped, because by adding DBA Louisville Men's Clinic, the result is the debtor name is now that entire string of text. All that extra stuff on there is now considered the name of the debtor as far as the financing statement is concerned. And because that string of text doesn't match the correct name of the debtor, it's not the name of the debtor and the search logic will never find it, so it'll be seriously misleading and not effective.
We don't see this as much anymore, but it wasn't unusual and it still happens, that somebody would provide a financing statement, and for the debtor name, it would say, "See attached Exhibit A," or, "See attached schedule," something like that. And on Exhibit A, there's a long list of debtor names, each one of which the secured party has verified as correct at a great investment of time and expense. Yet, none of those names are provided because they're not in the form name fields or their electronic equivalent.
Filing offices are not going to go and try to determine what the filer's intention is. Again, they don't have judgment or discretion to do that. If it's in the name field, they index it. If it's not in the name field, they ignore it. That's what it boils down to. So the only way to find this financing statement is by searching the one string of text that was in the debtor name, "See Exhibit A attached," or, "See Exhibit A" in this case. That's the only debtor name that was indexed in relation to this UCC.
Here we have an individual name that was provided in the organization name field. Well, there's a problem here because individual debtor names are stored in separate fields within the database than our organization debtor names. So if somebody searches correctly for an individual debtor name, they're going to enter it into the individual debtor name search fields. That search will not even look into the organization name field, and, as a result, the debtor named simply isn't provided because it's not provided as an individual name, and it will be seriously misleading and not effective.
This example here actually came out of a case about two years ago where that actually happened. Somebody filed listing the individual as an organization, and the secured party argued that, you know, it should be effective because they did provide the name. But the court correctly noted that they're stored separately and wouldn't even be searched. Moreover they're searched using separate search logic.
And, finally, be very careful, double-check. The filer should always double-check their work because typo errors can fit in easily. Here somebody, I think, was hitting the tab button when they were trying to enter the debtor name onto a fillable form, and instead of entering the name correctly, every time they hit the tab button, it moved it to the wrong field. And, as a result, the name, which probably started out to be an organization name, got broken up and entered into different individual name fields. As a result, the name of the debtor was not correctly provided. It will never be searched correctly. It will never be found. Seriously misleading and not effective.
Well, that wraps up the presentation. I just want to summarize some key points from it because accuracy of debtor names is so critical. Always remember, provide exactly the debtor name that is set forth in the statutory source document, 9-503(a). Provide just the debtor name, nothing more, nothing less. Make sure it is, again, matching exactly the name as set forth in the source documents.
So, with that, I'm going to turn it back over to Helena for questions.
Helena: Paul, thank you very much for walking us through the very important issues surrounding the debtor name, especially with that summary at the end. Paul took us into the essential debtor name concepts, the debtor name sufficiency rules, and he also talked about some formatting issues over there, and we saw some real-life examples of where people have entered names into the wrong fields and caused something to be seriously misleading.