It’s well known that just about any error in the debtor name can render a UCC1 financing statement seriously misleading and not effective. For years, courts, commentators, and others have cautioned that the debtor name for purposes of the financing statement must strictly comply with the statutory requirements set forth in Article 9 of the Uniform Commercial Code (“UCC”). That includes “ending noise words,” a term which is defined as words, phrases, and abbreviations that designate the entity type. A court recently addressed the impact of an error in ending noise words in the case of In re TW Automation, LC, 2024 Bankr. LEXIS 2955 (Bankr. D. Kan. Dec. 2, 2024).
In this case, the Small Business Administration (“SBA”) made a loan to TW Automation, LC (“TWA”). In return, TWA granted the SBA a blanket security interest in all of its assets. The SBA perfected its security interest by filing a financing statement with the Kansas Secretary of State in July 2020.
The SBA’s financing statement contained a seemingly minor error in the debtor name. Instead of providing the correct name, TW Automation, LC, the financing statement listed the debtor name as TW Automation, LLC.
In 2023, TWA filed for Chapter 11 Bankruptcy protection. As part of the proceedings, the court was asked to determine the sufficiency of the SBA’s financing statement. The general rule under UCC 9-506(b) is that any error in a debtor name will render a financing statement seriously misleading. The only exception is set forth in UCC 9-506(c), which provides:
If a search of the records of the filing office under the debtor’s correct name, using the filing office’s standard search logic, if any, would disclose a financing statement that fails sufficiently to provide the name of the debtor in accordance with Section 9-503(a), the name provided does not make the financing statement seriously misleading.
Due to the SBA’s ending noise word error in this case, the outcome would depend on whether a search of the correct debtor name ending in LC would find the financing statement with the debtor name that incorrectly provided the ending of LLC. It all boiled down to how the Kansas Secretary of State’s standard search logic handled ending noise words.
Most state level filing offices, including the Kansas Secretary of State, use the model standard search logic set forth in the Model Administrative Rules (MARS) for UCC Article 9. MARS was drafted by the International Association of Commercial Administrators (“IACA”), the state-level filing officers’ professional association.
The IACA model search logic disregards most minor errors in spacing, punctuation, ending noise words, and “The” if that word appears at the beginning of the name. However, state search systems do not intuitively know what constitutes a noise word. Artificial Intelligence has not yet made its way into filing office search systems. Instead, the search logic compares the debtor name endings to a set list of noise words created by the particular filing office. If an ending appears on the state’s noise word list, then the search logic will disregard it.
In this case, the Kansas Secretary of State’s administrative rules set forth the ending noise word list, which did not include LC. Therefore, the LC would not be disregarded in the search string. As a result, a search of the correct name with LC would not find similar names with different endings that were disregarded.
The SBA argued that LC is disregarded under the administrative rules because it’s an ending noise word that indicates the existence or nature of an organization. Because the rule said the list of noise words “shall include” those ending noise words specifically listed in the rule, it suggested that it was not an exhaustive list and other noise words could be included.
TWA, however, responded that getting the debtor name right is of critical importance because that’s how UCC records area indexed. In addition, TWA noted that the filing office does not disregard LC on an actual search of the debtor’s correct name and that LC and LLC are not equated in the secretary of state’s system. Moreover, it’s an automated system that is designed to operate without human judgment or discretion.
The Court concluded that LC is not disregarded under the Kansas Secretary of State’s search logic, and that a search of the name TW Automation, LC, would not (and did not) disclose a financing statement under the name TW Automation LLC. Therefore, the SBA’s financing statement was seriously misleading and ineffective.
The takeaway from this case is that it’s risky to assume that search logic will catch ending noise word errors in a debtor name. Standard search logic function and the ending noise word lists vary from state to state. In fact, there’s no official or model noise word list. IACA declined to maintain a model noise word list for MARS.
A secured party simply cannot rely on a filing office’s standard search logic to compensate for any errors in a debtor name, no matter how seemingly minor. The safest course of action is to ensure that the debtor name is correctly provided on the financing statement in the first place. After all, if the secured party gets it right, the record is sufficient, regardless of how the search logic operates.
Paul Hodnefield is associate general counsel for CSC and is a frequent speaker and writer on UCC due diligence issues.