by Laurence Vinson, Bradley
Alabama banks and other secured parties sometimes have difficulty completing the UCC-1 financing statement form in the manner provided by Article 9, “Secured Transactions,” of the Alabama Uniform Commercial Code with respect to debtors that are registered organizations, according to an unscientific survey by the author of a sample of UCC-1s filed in the Office of the Secretary of State of Alabama. If an error in completing a UCC-1 causes the UCC-1 to be ineffective, the secured creditor will not have a perfected security interest in collateral that would have been perfected by filing an effective UCC-1. Common potential problem areas include incorrect debtors’ names, incorrect secured parties’ names, and misspellings.
To be sufficient a financing statement must (1) provide the name of the debtor, (2) provide the name of the secured party, and (3) indicate the collateral covered by the financing statement. If the financing statement is related to real property, such as a fixture filing, additional information also is required.
Name of the Debtor
If the debtor is a registered organization such as a corporation, limited liability company, or limited partnership, a financing statement sufficiently provides the name of the debtor only if the financing statement provides the name of the debtor indicated in the record which shows the debtor to have been organized and which is filed as a public record in the state in which the debtor was organized. In Alabama, in most cases the applicable public record is the certificate of formation filed in the office of the judge of probate of the county where the registered organization was formed, including any filed amendments to the certificate of formation. A copy of the certificate of formation is forwarded by the judge of probate to the Secretary of State of Alabama. The names of registered organizations formed in Alabama and the names of debtors on UCC-1 financing statements filed in the Secretary of State’s office are searchable on the website of the Secretary of State of Alabama. These online databases are not the official record, however. In the case of a discrepancy between the name of a registered organization on file in the Secretary of State’s online databases and the name shown on the organization’s certificate of formation, the name shown on the certificate of formation will control.
Banks and other secured parties often include the debtor’s jurisdiction of organization after the debtor’s name in the space for the “Debtor’s Name” on the UCC-1. For example, if the debtor’s name as shown in its certificate of formation is “Acme, Inc.,” the debtor’s name may be shown on the UCC-1 as “Acme, Inc., an Alabama corporation,” Thus, the name provided as the “Organization’s Name” on the UCC-1 includes the debtor’s name, and it also contains information in addition to the debtor’s name shown on the debtor’s certificate of formation. This practice leads to the question whether the name shown on the UCC-1 provides “the name of the debtor” as required for the financing statement to be sufficient.
A financing statement which substantially satisfies the requirements of Article 9 is effective even if it has minor errors or omissions, unless the errors or omissions make the financing statement “seriously misleading.” As a general rule, a financing statement that fails sufficiently to provide the name shown on the certificate of formation of a debtor that is a registered organization is seriously misleading. However, if a search of the records of the filing office under the debtor’s correct name, using the filing office’s standard search logic, would disclose a financing statement that fails to provide the name of the debtor shown on the debtor’s certificate of formation, the name provided does not make the financing statement seriously misleading. Fortunately, it appears that if a search is made under the name “Acme, Inc.,” for example, the search logic used in the UCC database of the Alabama Secretary of State – at least as applied to an unofficial search on the Secretary of State’s website – will disclose a financing statement that provides the debtor’s name as “Acme, Inc., an Alabama corporation.”
If another creditor or a trustee in bankruptcy of the debtor were to ask a court to determine that the secured party’s financing statement is ineffective because it provides information in the “Organization’s Name” box in addition to the name of the debtor shown in its certificate of formation, it would be incumbent upon the secured party to offer in evidence a search report issued by the Secretary of State in response to a request submitted solely in the correct name of the debtor which report discloses the financing statement filed by the secured party with the additional information in the box for the debtor’s name (e.g., the report shows the financing statement filed naming the debtor as “Acme, Inc., an Alabama corporation”). The best practice in order to avoid this risk and potential expense is for the secured party to provide as the name of the debtor on the UCC-1 only the debtor’s name exactly as indicated on the debtor’s certificate of formation, without adding any additional information.
The procedures of the Alabama Secretary of State describe some aspects of the search logic used to search for UCC-1s filed in that office:
(3) Rules applied to search requests. Search results are produced by the application of standardized search logic to the name presented to the filing officer. Human judgment does not play a role in determining the results of the search. The following rules apply to searches.
(a) There is no limit to the number of matches that may be returned in response to the search criteria.
(b) No distinction is made between upper and lower case letters.
(c) Punctuation marks and accents are disregarded.
(d) Words and abbreviations at the end of a name that indicate the existence or nature of an organization [e.g., “Inc.,” “Corp.,” “LLC”] as set forth in the “Ending Noise Words” list as promulgated and adopted by the International Association of Corporation Administrators are disregarded.
(e) The word “the” at the beginning or end of the search criteria is disregarded.
(f) All spaces are disregarded.
The search logic used for UCC-1 searches by the Secretary of State of Delaware is very similar to that used by the Secretary of State of Alabama. This is good news for banks and other secured parties in Alabama, because many borrowers which are registered organizations are organized under Delaware law. The only correct place to file most financing statements which name a registered organization as the debtor is in the UCC filing office in the state where the debtor was organized.
The standard search logic used by the filing offices in some other states is not as forgiving as the search logic used by the Alabama Secretary of State appears to be. For example:
A bankruptcy court in Virginia held that a financing statement was insufficient where the abbreviation “Inc.” was omitted from the name of the debtor on the filed UCC-1.
A bankruptcy appellate panel, in a case where the debtor’s correct name was “EDM Corporation,” held that a financing statement that provided the name of the debtor as “EDM Corporation d/b/a EDM Equipment” was ineffective under the search logic used in Nebraska. The secured party in that case argued that its financing statement sufficiently provided the debtor’s name because the words “EDM Corporation” were included in the name provided. The appellate panel disagreed, saying that the financing statement did not provide the name of the debtor and that it was seriously misleading.
A bankruptcy court in Texas, in a case where the debtor’s correct name was “Jim Ross Tires Inc.,” held that a financing statement that provided the debtor’s name as “Jim Ross Tires, Inc. dba HTC Tires & Automotive Centers” was ineffective. The court said the addition of the dba name conflicts with the purposes of the indexing system and the administrative procedures for indexing and searching UCC records filed with the Texas Secretary of State.
A federal court in Wisconsin, in considering a financing statement where the secured party accidentally included a space between “Inc” and the period following those letters, thereby providing the debtor’s name as “ISC, Inc .” (rather than “ISC, Inc.”), held that the financing statement did not sufficiently provide the name of the debtor and was seriously misleading. Apparently, the search logic in that state treats a space the same as a letter of the alphabet. As a result, incorrectly adding the space before the period created a “misspelling” of the debtor’s name that would cause the search logic not to disclose the financing statement filed by the secured party.
A bankruptcy court in Texas, in a case where the debtor’s correct name was “BFN Operations LLC”, held that financing statements filed in Michigan and Tennessee that provided the debtor’s name as “BFN Operations, LLC abn Zelenka Farms” were ineffective because the standard search logic used in those states would not have disclosed the financing statements in a search made using the debtor’s correct name.
Name of the Secured Party
A number of Alabama banks put their bank’s name in the “Secured Party’s Name” box on the UCC-1, followed by additional information such as “an Alabama Banking Corporation” or “an Alabama State Bank.” As noted above, to be effective a financing statement must “provide the name of the secured party.” While Article 9 goes into considerable detail in describing when a financing statement sufficiently provides the name of the debtor and when an error in the debtor’s name shown on the financing statement is not “seriously misleading”, no similar rules are provided with regard to the sufficiency of a secured party’s name or the effect of an error in the name of the secured party provided on the financing statement.
It seems that the correct name of a secured party, followed by additional information such as “an Alabama Banking Corporation”, should not cause the name of the secured party shown on the UCC-1 to be insufficient because it is not seriously misleading and also – and primarily – because searches for UCC-1s are not performed in the name of the secured party. Still, the best practice is to provide only the secured party’s correct legal name, without any additional information, in the space for the name of the secured party on the UCC-1.
Misspellings and Similar Errors
Spelling counts. If the debtor’s name as shown on the UCC-1 is misspelled or contains similar errors, the UCC-1 very likely will be ineffective. UCC lien searches are performed by word searches in the correct name of the debtor, and a misspelling of the name of the debtor on the UCC-1 almost certainly will cause the debtor’s name to be “seriously misleading” because the UCC-1 will not be disclosed in a search using the correct spelling of the name of the debtor. For example, debtors’ names that begin with the word “Alabama” are fairly common in Alabama. A search of the online UCC records of the Alabama Secretary of State using the misspellings “Alabma,” or “Albama” turns up UCC-1s that have been filed with that misspelling shown as part of the debtor’s name. Those UCC-1s likely will be deemed to be ineffective if the error was made by the secured party and not as a data entry error by the filing office, because a search of the debtor’s correct name using the standard logic of the filing office likely will not turn up those financing statements.
For example, a bankruptcy court in Florida held that a financing statement that provided the debtor’s name as “John Bean Farms, Inc.” was seriously misleading where the debtor’s correct name was “John’s Bean Farm of Homestead, Inc.” And, in the first of the two Texas bankruptcy court cases described above, a UCC-1 filed by another creditor named the debtor as “Jim Ross Tire Inc.” instead of “Jim Ross Tires Inc.” (the “s” in “Tires” was omitted). The court found that the UCC-1 was not effective because a search under the debtor’s correct name using the standard search logic of the filing office would not disclose the UCC-1 on which the “s” in “Tires” had been omitted.
The importance of providing the debtor’s name on the UCC-1 exactly as it is shown on the debtor’s certificate of formation cannot be overstated. If the debtor’s name provided on the UCC-1 is not the name indicated on the debtor’s certificate of formation, and if a search of the UCC records under the debtor’s correct name made using the standard search logic of the filing office would not disclose the UCC-1, the UCC-1 is “seriously misleading” and will be as ineffective as it would if it had never been filed.
Larry Vinson regularly counsels financial institutions of all sizes on new CFPB regulations, bank regulatory and product questions, and all aspects of state and federal consumer credit compliance. On questions relating to the Uniform Commercial Code, he is a resource for the firm’s clients and for other lawyers both inside and outside the firm. He served as Chair of the Alabama Law Institute advisory committees on Revised UCC Article 9, “Secured Transactions,” Revised UCC Article 3 and Article 4, and Revised UCC Article 1 and Article 7.