Update – UCC Search Logic: Can Secured Creditors Be Too Careful?

Last year (October 23, 2009) we posted on the topic of UCC search logic in light of the bankruptcy case of In re EDM Corporation 2009 Westlaw 367773 (Bankr.D.Neb.). In the bankruptcy court, the first-filing lender lost its priority because it had filed a UCC-1 financing statement with the debtor name listed as “EDM Corporation d/b/a EDM Equipment,” which was not located by the two later-filing lenders when doing a search on “EDM Corporation,” which was the debtor’s true legal name. The bankruptcy court held that the financing statement was “seriously misleading” and rearranged the priority accordingly.

Under Revised 9-506(a), errors or omissions in a filed financing statement are of no consequence unless they render the financing statement “seriously misleading.” Revised 9-506(c) provides that if a search in the filing office using the filing office’s standard search logic would disclose the financing statement, then it is not “seriously misleading,” even if it fails to provide the precise name of the debtor as required under Revised 9-503(a).

This case was recently taken up on appeal to 8th Circuit Bankruptcy Appellate Panel (In re EDM Corporation, 2010 WL 1929772 (8th Cir. BAP May 14, 2010)). The appellate panel noted that the first step for creditors in attempting to find prior liens “is finding the UCC statement in the first place, and the way to do that is by searching the records under the debtor’s organizational name. In other words, complete accuracy is even more important with the debtor’s name than it is with the description of the collateral.” The appellate panel ultimately sided with the bankruptcy court finding that the financing statement did not sufficiently provide the name of the debtor and was, therefore, “seriously misleading.”

As we stated in our prior post, this result seems harsh because the first-filing lender was trying to be helpful and extra cautious by using a belt-and-suspenders, cover-all-the-bases approach. “EDM Equipment was an unregistered trade name used by the debtor in the daily conduct of its business activities. Yet, as the appellate panel pointed out, Revised Article 9 sought to “shift the responsibility of getting a debtor’s name right to the party filing the financing statement. This approach would enable a searcher to rely on that name and eliminate the need for multiple searches using variants of the debtor’s name, all leading to commercial uncertainty.” This may seem like a small task when it involves the name “EDM,” but it could be an arduous task if the name were “Smith.”

To avoid most problems, secured creditors should simply running a search on the debtor’s precise legal name after filing their UCC-1 financing statement. If doing so fails to reveal their recent filing, then that secured creditor knows there is a problem with their financing statement. Another option would be to list the d/b/a in the additional debtor field, thereby providing helpful information without running afoul of the requirement for using just the debtor’s registered name. These activities take additional time and money, but learning of the problem at that point is far better than learning of the problem once the debtor enters bankruptcy.