UCC EXPERT’S CORNER: Debtor’s Ongoing Use Did Not Make Former Name Sufficient for Financing Statement

By Paul Hodnefield, Esq.

Secured parties are generally solely responsible for providing the correct debtor name when filing a UCC financing statement. Failure to conduct thorough debtor name due diligence may inadvertently lead to filing under an incorrect debtor name, even when appearances suggest the name was correct. The effect of such an error was recently demonstrated in the case of In re Wastetech, LLC, 2019 Bankr. LEXIS 1713 (Bankr. N.D. Ga. May 31, 2019).

Between June and September 2017, NTC Waste Group, LLC (the “Debtor”) entered into a series of Purchase and Sale of Future Receivables Agreements (the “Agreements”) with Silverline Services, Inc. (the “Secured Party”). In each of the Agreements, the Debtor granted the Secured Party a security interest in a substantial portion of its assets to secure the performance of its obligations under those agreements.

On July 7, 2017, after the relationship began but before the Secured Party perfected its security interest, the Debtor filed a Certificate of Amendment with the secretary of state to change its name. The amendment changed the Debtor’s name from NTC Waste Group, LLC to Wastetech, LLC. Despite the name change, the Debtor continued to operate under its former name and it never notified the Secured Party of the name change.

The Secured Party filed a financing statement on November 14, 2017 to perfect its security interest in the Debtor’s assets. However, the name provided for the Debtor on the financing statement was NTC Waste Group, LLC, not Wastetech, LLC.

Just a few months later, on February 13, 2018, the Debtor filed for bankruptcy and a Trustee was promptly appointed. The Trustee brought an adversary action against the Secured Party seeking avoid the security interest because the financing statement failed to provide the correct name of the debtor. The Trustee then moved for summary judgment on its claim.

In opposition to the motion, the Secured Party argued that it did not knowingly or intentionally list the incorrect Debtor name on the financing statement. It was simply not aware of the name change. The Secured Party and Debtor began their relationship before the name change and the Debtor continued to operate the business under its former name. As a result, the Secured Party argued that the Debtor’s conduct created the misleading impression that the Secured Party could file under the Debtor’s former name.

The Secured Party further argued that there was a strong relationship between the former Debtor name and the current Debtor name. A search of the secretary of state business records on one name would disclose the other.

The court was not persuaded and noted that all of the Secured Party’s arguments were irrelevant. It didn’t matter whether the Secured Party would have been confused by the Debtor carrying on business under the former name or whether the former and current name were associated in the state business records. What mattered was whether the financing statement provided the correct name of the debtor and, if not, whether the financing statement would be disclosed by a search of the correct debtor name using the jurisdiction’s standard search logic and provided in the Georgia version of UCC § 9-506(c).

In this case, the financing statement failed to provide the correct name of the Debtor. The Trustee also presented sufficient evidence to demonstrate that a search conducted in accordance with UCC § 9-506(c) failed to disclose the financing statement. Consequently, the court found that the financing statement was ineffective and granted summary judgment in favor of the Trustee.

The important thing to take away from this case is that there is no substitute for due diligence. The UCC filing system is designed to protect third parties who search the records, not the secured party or debtor. As the beneficiary of the security interest, the secured party is solely responsible under Article 9 for strict compliance with the applicable debtor name requirements. A secured party cannot safely rely on the debtor’s representations as to its correct name. Nor may the secured party rely on any source for the debtor name other than the source specified in UCC § 9-503(a) for the particular type of debtor. In this case, the Secured Party could have protected itself by checking the public organic record for the correct name during the financing statement preparation process. Instead, the Secured Party relied on other information and, as a result, suffered the consequences of filing under the incorrect debtor name.

Paul Hodnefield is associate general counsel for CSC® and is a frequent speaker and writer on UCC due diligence issues. Please feel free to contact him with questions or comments at paul.hodnefield@cscglobal.com or 800-927-9801, ext. 61730.

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