By Paul Hodnefield, Esq.
A source of ongoing confusion since the 2010 Amendments to UCC Article 9 (the “Amendments”) took effect in most states is how to properly complete the new UCC forms when the collateral is held in a trust. This situation results from changes to both the debtor name rules and the form layouts. This article explains how to properly complete the new financing statement form for filing in states that have enacted the Amendments when the collateral is held in a trust. [1]
As a threshold issue, it is important to note that the Amendments clarified, but did not change, the debtor name rules when collateral is held in a trust. Prior to the effective date of the Amendments, the identity of the debtor determined what debtor name was sufficient for purposes of the financing statement. Unfortunately, that led to a lot of errors. Filers were strongly tempted to file under the name of the trustee, the actual debtor in most cases, rather than the debtor name required by Article 9. Unfortunately, the name of the trustee was and is not sufficient as the name of the debtor for purposes of the financing statement.
To help filers reach the right result, the Amendments changed the inquiry from the identity of the debtor to the status of the collateral. Now the debtor name required by Article 9 depends on whether the collateral is held in a trust, not the identity of the debtor. Only the process for determining the correct name to provide on the financing statement changed. The outcome is the same as before the Amendments took effect.
The identity of the actual debtor is still important because it determines the filing location and information for the address form fields. However, it no longer plays any role in determining what debtor name is sufficient for the financing statement.
The new rules for trust-related debtor names are found in UCC § 9-503(a)(3). If the collateral is held in a trust that is not a registered organization,[2] then the debtor name required for purposes of the financing statement depends on the organic record of the trust. If the organic record specifies a name for the trust, then the financing statement must provide the name specified.
In many cases, the organic record fails to specify a name for the trust. If no name is specified in the organic record, then the financing statement must provide as the name of the debtor, the name of the settlor and, in a separate part of the financing statement, additional information to distinguish the trust from other trusts having one or more of the same settlors.
Also in a separate part of the financing statement, the record must indicate that the collateral is held in a trust. This indication is required for sufficiency of the debtor name under § 9-503(a)(3).
Once the UCC filer has figured out what name is required under the foregoing rules, it is time to complete the new financing statement form (or its electronic equivalent). The first step is to correctly provide the debtor name.
The name of the trust will always be an organization name. The name must be provided in the organization debtor name field, such as Item 1a on the financing statement. The name should appear exactly as it was specified in the organic record of the trust, nothing more and nothing less. Any added information, such as date of the organic record, trustee name or capacity will almost certainly render the financing statement seriously misleading and leave the secured party unperfected.
When the trust does not specify a name in its organic record, the financing statement must provide the name of the settlor. A settlor may be an individual or an organization. The financing statement must provide the debtor name in the field that corresponds to the nature or character of the name, not that of the actual debtor. For example, the actual debtor, the trustee, may be an organization such as a bank. Yet, the financing statement might need to provide the individual name of the settlor. In that case, the name must be provided in the individual name fields, even though the actual debtor is an organization.
The debtor address fields should contain a mailing address of the actual debtor. Normally, that will be the trustee of a common-law trust. There are no special rules for the address of a trust-related debtor. Often, filers will use the address field to identify the trustee and aid with correct delivery. For example, the address field might provide “c/o Jane Smith, Trustee, 123 Main St.” The address field is of limited size, so sometimes it will be better to provide the full name and address of the actual debtor in a separate part of the record.
The financing statement must indicate that the collateral is held in a trust. Before the Amendments took effect, there were two indication checkboxes located in Item 17 of the former UCC1AD Financing Statement Addendum form. One checkbox identified the debtor as a trust and the other identified the debtor as a trustee acting with respect to property held in a trust.
The new form contains only one check box to indicate the collateral is held in trust. This check box is now located in Item 5 on the financing statement form UCC1, not on the addendum form. The addendum form is no longer required to make this indication. Those who file UCC records should always check the appropriate box in Item 5 to make the required indication when the collateral is held in a trust.
One concern with the check box in Item 5 is that it states “see UCC1AD, Item 17 and instructions.” Item 17 on the UCC1AD is simply a one-line field labeled “MISCELLANEOUS.” It contains no specific reference to trust-related filings. Moreover, the instructions for Item 17 on the back of the UCC1AD do not mention trusts or trustees at all.
The reference to addendum Item 17 following the check box label in Item 5 was simply guidance for where a filer may provide the additional information required if the financing statement provides the name of the settlor. The filer is not required to use Item 17 for this purpose. In practice, Item 17 may be too small to allow the filer to provide the additional information necessary to distinguish the trust from other trusts with the same settlor or settlors. Moreover, filers often want to provide more detailed information about the trust or trustee, even if not required by statute.
Additional information about the trust, trustee or anything else the filer wants to provide can go just about anywhere, such as in Item 17, in the collateral field or on an attached exhibit. The one place where the additional information must never go is in the debtor name field. Adding any additional information to the name field will almost certainly render the financing statement seriously misleading.
Taking all the forgoing information into account, the proper preparation of a financing statement for trust-related transactions requires the following steps:
- Provide the name of the trust, if it has a name, in the organization’s debtor name field.
- Provide the name of the settlor, if required, in the debtor name field that corresponds to the nature of the settlor name, i.e., individual name must be provided in the individual name field, even if the actual debtor, the trustee, is an organization.
- Provide the address of the actual debtor in the debtor address fields. Due to the limited space in the address fields, the filer may consider providing full contact information for the actual debtor, typically the trustee, on an attached exhibit.
- Check the box in Item 5 of the financing statement to indicate that the collateral is held in a trust.
- Provide additional information, if required (because the name of the settlor is provided or simply to provide more information about the transaction), in Item 17 of the addendum form or as an attached exhibit. In the alternative, include the additional information, clearly labeled, in the collateral field.
Conclusion
The Amendments changed the rules for dealing with trust-related collateral. However, the changes have a minimal impact on the filing process. Those who file UCC records can avoid most errors by becoming familiar with the new forms, understanding the process for determining the correct debtor name, and completing the financing statement using the steps outlined above.
Paul Hodnefield is Associate General Counsel for Corporation Service Company and a frequent speaker/writer on UCC due diligence issues. Please feel free to contact him with questions or comments at phodnefi@cscinfo.com or 800-927-9801, ext. 62375.
[1] A list of states where the Amendments are currently in effect is available at www.csctransactionwatch.com/amendments.
[2] Debtor name sufficiency for a trust that falls within the new definition of “registered organization” is governed by the registered organization debtor name rules in § 9-503(a)(1).