Recently, the United States Bankruptcy Appellate Panel of the Eighth Circuit decided In re EDM Corp.,[1] affirming that a creditor’s priority in collateral may be sacrificed if the debtor’s exact legal name is not exclusively used in the financing statement. The court held that section 9-503 of the Uniform Commercial Code (the “UCC”) requires “nothing more and nothing less” than the name of the debtor indicated on the public record of the debtor’s state of organization, and that even adding a correct d/b/a to an otherwise accurate debtor’s name could prevent the filing from perfecting the security interest.

Factual Background

The issue in the case was which lien held by three creditors had the highest priority on the ambulance owned by the Debtor, EDM Corporation. Hastings State Bank (“Hasting”), TierOne Bank (“TierOne”), and Huntington National Bank (“Huntington”) each filed UCC financing statements.

Hastings was the first to file, attempting to secure loans to the Debtor in excess of $4.5 million. Hastings identified the Debtor as “EDM Corporation d/b/a EDM Equipment.” EDM Equipment was the trade name of the Debtor. EDM Corporation was the organization’s registered name in Nebraska, its state of organization.

Subsequently, TierOne provided a line of credit to the Debtor and ran a UCC search using standard search logic under the name “EDM Corporation.” More than 40 states adopting Revised Article 9 of the UCC have also adopted “search logic” administrative regulations. Nebraska’s search logic is typical of those states and requires that data be entered into the system and indexed based on the exact names listed in the field on the financing statement reserved for the debtor’s name. Some “noise words,” such as company, limited, incorporation, and corporation are ignored. However, the list does not include “d/b/a” or names used as a “d/b/a”.

The search did not reveal Hastings’ financing statement. TierOne then filed its financing statement, listing the debtor as “EDM Corporation” with the Nebraska Secretary of State. Huntington similarly did the same. Neither conducted a search using the “d/b/a EDM Equipment” name, nor did they have actual knowledge of the lien.

The Bankruptcy Court for the District of Nebraska held that the financing statement was not validly perfected because of the inability to find Hastings’ financing statement by searching the Debtor’s registered organizational name.

The Eighth Circuit Bankruptcy Appellate Panel’s Opinion

The Bankruptcy Court’s decision was affirmed. The Panel held the inclusion of the trade name resulted in the financing statement not sufficiently providing the name of the debtor, in violation of sections 9-502 and 9-503 of the UCC. A safe harbor provided by section 9-506 of the UCC did not apply, because the error in the name rendered the filing seriously misleading.

The Panel began by recognizing the purpose of filing a financing statement is to put subsequent creditors on notice that the debtor’s property is encumbered. The first step in that process is “finding the UCC statement in the first place.” This is done by conducting a search under the Debtor’s name. The burden of correctly identifying the debtor falls on the creditor.

The identification requirements are found in sections 9-502 and 9-503 of the UCC. Section 9-502 of the UCC provides that “a financing statement is sufficient only if it . . . provides the name of the debtor. . .” Section 9-503 of the UCC details that “if the debtor is a registered organization [the statement is sufficient] only if the financing statement provides the name of the debtor indicated on the public record of the debtor’s jurisdiction of organization which shows the debtor to have been organized.” The section also provides that a financing statement is not rendered ineffective by the absence of a trade name, and if the statement only provides the trade name, it does not sufficiently provide the name of the debtor.

The Panel interpreted sections 9-502 and 9-503 of the UCC to require the exact legal name for a registered organization to appear in the name field on the financing statement. Trade names may be added as other or additional names on a financing statement, but not in place of, or as part of, the debtor’s organizational name.

Lastly, the Panel turned to the safe harbor provided in section 9-506 of the UCC. The safe harbor will save a financing statement from being rendered ineffective due to an erroneous debtor name if a standard search logic search under the debtor’s correct name would disclose the financing statement. Hastings’ financing statement was not disclosed using standard search logic. Under the search logic regulations for Nebraska, common to other jurisdictions, d/b/a is not included as a “noise word.” Thus, inclusion of the d/b/a name to the debtor’s name field on the financing statement made the document seriously misleading as to the name of the debtor.

The Eighth Circuit Panel summarized the key lesson to be learned: “it simply cannot be the rule that a financing statement should be deemed effective as long as words constituting the legal name of the debtor appear somewhere in the string of words listed as the debtor’s name, and regardless of whatever additional words are tacked on to the end.”

Conclusion

When identifying a registered organization as the debtor on a financing statement, use nothing more, and nothing less than the exact name of the debtor as recorded in the public record of the debtor’s state of organization. Trade names may be added to the filing, but not as part of the organizational name itself.