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Bench & Bar of Minnesota is the official publication of the Minnesota State Bar Association.

Checking It Twice: New UCC Financing Statement Rules for Individual Debtors

To resolve confusion over the “name of the debtor” required on a financing statement  to perfect a security interest in personal property, Minnesota adopted changes to UCC Article 9 in 2011 that will become effective July 1, 2013.  In anticipation of these changes and in the spirit of the season, readers are encouraged to make their lists and check them twice.

In this holiday season, many of us engaged in secured transactions are “making a list and checking it twice.”  So in the spirit of the season, it seems only appropriate to extend the metaphor and discuss the need to create a checklist of the new UCC financing statement rules for individual debtors that will take effect on July 1, 2013.  Not to do so runs the risk that you will find worse than coal in your stocking!  But first, some background.

What’s in a Name?

The current Minnesota Uniform Commercial Code (UCC) provides that a secured party may perfect a security interest in most types of personal property by filing a financing statement (UCC-1) in the “name of the debtor.”1 Unfortunately, the UCC never clearly defined what constitutes the “name of the debtor,” and as a result the courts have been left to determine whether a lender properly stated the name of the debtor on a financing statement.  Not surprisingly, the results have been somewhat inconsistent from state to state.

Getting the debtor’s name stated correctly on a financing statement is of critical importance since this is how UCC records are indexed at the Secretary of State’s Office.  Not so long ago, when financing statements were still filed, stored and searched on physical paper, our Minnesota courts and others tolerated minor errors that were not seriously misleading, including at times erroneously stated debtor names.  So it was that as recently as 1994 our own Minnesota Court of Appeals held that a financing statement filed against the “Voyager Corporation” was legally sufficient even when the true name of the debtor was the “Voyageur Corporation.”2

But “close is no longer good enough” today.  With the adoption of the expansive 2000 Amendments to Article 9, which became effective on July 1, 2001, Section 9-506 provided that, while “minor errors” on a financing statement would be tolerated as long as they were not “seriously misleading,” any failure to state the debtor’s name correctly was seriously misleading.3  There was only one exception to this very rigid rule: If a search of the UCC records under the debtor’s correct name and using the filing office’s standard search logic nonetheless turned up a financing statement with an inaccurately stated debtor’s name, the financing statement was not deemed to be seriously misleading and thus was saved from being insufficient.4

The exception to the strict debtor name rule soon proved to be a hollow one when states throughout the country began to establish electronic data storage and search capability for UCC financing statement records.5  Unlike the old paper-based records that were searched by human hands, computer searches of digital records were a lot less forgiving. This led to some troubling cases.  In one fairly notorious opinion, for example, the U.S. Bankruptcy Appellate Panel for the 10th Circuit found that a financing statement filed under the name of “Terry J. Kinderknecht” was not sufficient when his full legal name was “Terrance Joseph Kinderknecht.”6  (Doubtless the last time this Kansas farmer was called “Terrance” was on the day he was baptized!)

Recent Revisions

To help clarify the debtor’s name issue, as well as other issues, the Uniform Law Commission and American Law Institute proposed further revisions to Article 9 in 2010. These changes were adopted in Minnesota in 2011 and have an effective date of July 1, 2013. The most important changes to Section 9-503(a) are as follows:

(4) … If the debtor is an individual to whom this state has issued a driver’s license or state identification card that has not expired, only if the financing statement provides the name of the individual which is indicated on the driver’s license or state identification card;

(5) If the debtor is an individual to whom paragraph (4) does not apply, only if the financing statement provides the individual name of the debtor or the surname and first personal name of the debtor;

Before moving on, note that the just-quoted statutes are the Alternative A version of the official text of new Section 9-503(a)(4) and (5).  Alternative A, which as of this writing has been adopted by a significant majority of states, is sometimes referred to as the “only if” rule since the filer of a financing statement is required to use only the debtor’s name on his or her driver’s license or state identification card; and, only if the debtor does not have either of these items may the debtor’s individual name (i.e., full legal name) or surname (i.e., family name) and first personal name be used.  In contrast, Alternative B is known as the “safe harbor” rule because it allows a filer to use any of the debtor’s (a) individual name, (b) surname and first personal name, or (c) name appearing on a driver’s license.  Since Minnesota has adopted Alternative A, further discussion in this article will be limited to Alternative A; however, care should be taken in the future when making UCC filings and lien searches in other states that may have adopted
Alternative B.

Issues Outstanding

For the most part, the objective of clarifying individual debtor name issues on financing statements has been achieved by the recent changes to Section 9-503(a).  That does not mean, however, that every issue has been addressed, and as a result these changes have already caused, and will continue to cause, significant angst for lawyers and lenders as they prepare for implementing the new naming requirements. The following questions and answers represent some of the most common problems that lawyers and their clients are now facing.

1If a secured party perfects its security interest before July 1, 2013, what must be done after July 1, 2013 to maintain perfection? 

Let’s use an example to illustrate. A secured party made a loan on March 16, 2010 to Maria Smith secured by Maria’s personal property. Relying on her birth certificate, it filed a UCC-1 in Minnesota using the name of Maria Jane Smith. After July 1, 2013, the secured party discovers that Maria’s driver’s license shows her name as Mary Jane Smith. Is its security interest still properly perfected?

Assuming that a new creditor searching under the name Mary Jane Smith would not find the prior UCC-1 filed in the name Maria Jane Smith, the original filing would be seriously misleading after the new rules take effect. Similarly, the same would be true if, for example, Maria used the name M. Jane Smith on her driver’s license.

So what to do?  Under Section 9-805(b), which is part of the new transition rules for the 2010 Amendments, it is important to recognize at the outset that a properly filed financing statement before July 1, 2013 will continue to be sufficient after July 1, 2013, even if it has an individual debtor name on it that would be seriously misleading under the new Section 9-503 requirements.  Doing nothing is therefore one possible course of action that the secured party could take.
But as with most rules there are exceptions, and this transition rule has at least two important caveats.

Caveat No. 1.  Under Section 9-507(c) when a debtor changes its name with the result that the debtor’s name on a financing statement becomes seriously misleading, a secured party has four months to amend the financing statement; otherwise, the financing statement ceases to be sufficient to perfect a security interest in collateral acquired more than four months after the name change.

What this means in our hypothetical example is if the secured party wishes its security interest to cover personal property that Maria Smith might acquire after November 1, 2013 (e.g., after-acquired equipment, inventory, or accounts), it will need to amend its financing statement on Form UCC-3 to state her name as shown on her driver’s license or identification card.7  The likelihood of needing to do this obviously increases when an individual debtor is running a sole proprietorship or farming operation where the debtor acquiring after-acquired property is a significant possibility.

Caveat No. 2.  Problems can also arise when a financing statement filed prior to July 1, 2013 needs to be continued and the debtor name on it has become seriously misleading since it was filed.  In our hypothetical case, the original financing statement filed on March 16, 2010 will expire after five years on March 16, 2015.8  What to do then?

Even though the original filing has remained effective up until its expiration date, it cannot simply be continued with a seriously misleading debtor name on it without being first amended.  As provided by new Section 9-805(c) and (e), what should be done in the example is (a) first, amend the financing statement to indicate the name of “Mary Jane Smith” that appears on her license or identification card, and (b) only then, continue the financing statement on Form UCC-3 for an additional five-year period.9

Note finally that instead of amending the original financing statement, as just discussed in connection with the two caveats, the secured party could simply file a new financing statement with Mary Jane Smith’s driver’s license name on it.  The disadvantage with this approach, however, is that the secured party might lose the priority date its original filing had.10  That being the case, the best practice is, in our opinion, to amend the initial financing statement instead of trying to rely on a new filing.  Also, and this is important, if the secured party amends the financing statement in our example prior to July 1, 2013, it should make sure to do so by stating that Mary Jane Smith is to be an additional debtor name in Item 2b on the financing statement.  This will assure that both the names of “Maria Jane Smith” and “Mary Jane Smith” will be indexed in the UCC filing office records, and there should be no gap in perfection.

2What should a secured party do for new loans made to individuals before July 1, 2013 that will extend beyond that date?

Now, thank goodness, the questions start to get a bit easier!

If the name on the debtor’s driver’s license or identification card is different from the “individual name of the debtor” that a secured party would use for filing prior to July 1, 2013, then the secured party should file a financing statement using both names. The “individual name of the debtor” should be placed in Item 1a of the UCC-1 and the name from the driver’s license or identification card should be placed in Item 2a of the UCC-1.11

Unfortunately, as mentioned above, Article 9 still does not cleanly define what the “individual name” of a debtor is, in large part because different cultures have varying practices when naming individuals.12  Because of this, whenever there is any doubt concerning what name constitutes a debtor’s true “individual name” it is best practice to rely only on the debtor’s birth certificate, marriage certificate, or any court order that may have changed the debtor’s name.

3What should a secured party do if the debtor does not have a driver’s license or identification card from Minnesota?

The general rule is that perfection is determined by the state in which the debtor is located.13 An individual is “located” at that person’s principal residence.14 Assuming that the debtor resides in Minnesota, a secured party would generally need to file in the name that is on the most recent, valid driver’s license or identification card issued by Minnesota. If the debtor does not have a valid Minnesota driver’s license or identification card, then the financing statement will only be sufficient if it contains (a) the individual name of the debtor (i.e., one would need to revert to the pre-July 1, 2013 name rules), or (b) the surname and first personal name of the debtor.

4What if the debtor has a driver’s license or identification card from another state?

If the debtor lives in Minnesota and does not have a valid Minnesota driver’s license or identification card, but does have a valid driver’s license from another state, the rules described in Question 3 above will apply.  In other words, the secured party would be required to file using (a) the individual name of the debtor, or (b) the surname and first personal name of the debtor.  This is because before the driver’s license name can be used, new Section 9-503(a)(4) requires the debtor to have a license issued by “this state,” which in our example is Minnesota.

If the debtor lives in the other state that has issued a valid driver’s license or identification card, the law of that state will determine how the security interest is to be perfected. Because the state in which the debtor is living could have adopted Alternative B to Section 9-503(a)(4) and (5), as discussed above, remember that the filing requirements could be different.

5Does it make a difference if the name on the debtor’s driver’s license is different from his or her actual name?

In our example in Question 1 above, it makes no difference that Maria’s driver’s license has a name that is different from that on her birth certificate. After July 1, 2013, the secured party will need to use the name on her most recent, valid Minnesota driver’s license.

6What happens if the debtor’s driver’s license expires while the debt is unpaid?

If the debtor resides in Minnesota, upon expiration of the Minnesota driver’s license the name that appears on the expired driver’s license may now be insufficient because the new name rules require that a secured party use the name on an unexpired license. If the name on the license is the same as that used on other official documents (e.g., birth certificate, etc.), then the secured party would not need to file an amended UCC-1 because that name would constitute the “individual name of the debtor.” However, if the name on the license is different from those other documents, then the secured party has two options for filing an amended UCC-1: (a) use the individual name of the debtor (the same name standard that applies pre-July 1, 2013), or (b) use the surname and first personal name of the debtor.

7What happens if the debtor marries and takes the surname of the spouse?

As noted in Question 6, and assuming that the debtor resides in Minnesota, if the debtor does not obtain a new driver’s license, the proper name in which to file is that on the unexpired driver’s license (the surname before marriage). If the original Minnesota driver’s license with the unmarried surname has expired, then the secured party would need to file in (a) the individual name of the debtor, or (b) the new surname (i.e., the married name of the debtor) and first personal name. If the debtor has obtained a new Minnesota driver’s license with the new surname, then the secured party should file in the name on the new driver’s license, which may require an amendment to any existing financing statement.

8What should a secured party do if the debtor moves to another state while the loan is outstanding?

Once the debtor establishes a new residence, the law of the state to which the debtor moves will immediately govern perfection.15 The secured party will need to determine the perfection requirements for the state to which the debtor moved. Assuming that state has a requirement that is the same as in Minnesota, the secured party will need to perfect by filing in the new state prior to four months after the change of residence or, if earlier, the date the Minnesota filing expires.16  If the debtor has not yet obtained a driver’s license from the new state of residence, then a filing should be made using (a) the individual name of the debtor, or (b) the debtor’s surname and first personal name of the debtor. If, on the other hand, a new driver’s license has been issued, then the secured party should file in the new state using the name on the new driver’s license.

Parting Thoughts

Two final thoughts are worthy of your consideration.  First, even the drafters of the 2010 Amendments to Article 9 recognized that getting the debtor’s name stated correctly on a financing statement is a tricky business and so recommended filing and searching for UCC financing statements using a number of possible debtor names whenever there is any doubt.17

Second, all of us would do well to remember that “time healeth all things.”18  Most of the vagaries with the transition rules should subside once we get some distance beyond the July 1, 2013 effective date for revised Section 9-503; at least that is the hope of even the most ardent Article 9 lovers among us.

Meanwhile, here’s hoping Santa has an easier time perfecting the filling of your stocking this year!

Gene H. Hennig is a shareholder at Gray, Plant, Mooty, Mooty & Bennett, PA where he concentrates his practice in commercial finance and business transactions.  He has for many years taught Secured Transactions (Article 9) at both the William Mitchell College of Law and the University of St. Thomas School of Law.  Currently he is also one of Minnesota’s Uniform Law Commissioners.

George E. Meinz is a shareholder at Gray, Plant, Mooty, Mooty & Bennett, PA where he practices in the areas of commercial finance and financial services.

 

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