Wednesday, February 14, 2018
Ag Finance – Getting the Debtor’s Name Correct on the Financing Statement
Farmer and ranchers regularly engage in secured transactions. For instance, the typical farmer doesn’t have enough cash on hand to buy high-priced farm machinery and equipment outright. That means that the seller extends credit to finance the purchase or the farmer finds acceptable financing elsewhere to make the purchase. In either situation, the parties execute a security agreement evidenced by a financing statement that is then filed of public record. The filing allows other potential creditors to check if a lien already exists on the debtor’s property before extending credit.
The public filing means that the debtor must be identified. The proper identification of the debtor is key, and many creditors have learned the hard way that a slight slip up in properly identifying the debtor in the financing statement can change their secured interest to an unsecured one.
The property identification of the debtor in a financing statement, that’s the topic of today’s post.
Perfecting a Security Interest
Normally, a security interest in tangible property is perfected (made effective against other creditors) by filing a financing statement or by filing the security agreement as a financing statement. Indeed, filing a financing statement usually is the only practical way to perfect when the debtor is a farmer or rancher. An effective financing statement merely indicates that the creditor may have a security interest in the described collateral and is sufficient if it provides the name of the debtor, (UCC §9-502(a)(1)) gives the name and address of the secured party from which information concerning the security interest may be obtained, gives the mailing address of the debtor and contains a statement indicating the types or describing the items of collateral.
Note: An adequate description of the collateral is critical if there is to be attachment and perfection. UCC §9-108. This is an important point that can arise in an agricultural context with respect to real estate, livestock and equipment that can be used either directly or indirectly in agricultural production activities.
Name of the debtor. The name of the debtor is the key to the notice system and priority. The financing statement is indexed under the debtor’s name. If the debtor is a registered organization, only the name indicated on the public record of the debtor’s jurisdiction or organization is sufficient. For example, in In re EDM Corporation, 431 B.R. 459 (B.A.P. 8th Cir. 2010), a bank identified a corporate debtor on the financing statement as "EDM Corporation D/B/A EDM Equipment” and the court held that the identification was seriously misleading because a search conducted by using standard search logic did not reveal the bank's interest. The court also held that the addition of the debtor's trade name to its registered organization name violated Rev. UCC 9-503. But, federal tax liens appear not to be subject to the same exact match standard. The test is whether a reasonable searcher would find the lien notwithstanding the use of on abbreviation. See, e.g., In re Spearing Tool and Manufacturing Co., 412 F.3d 653 (6th Cir. 2005), rev’g, 302 B.R. 351 (E.D. Mich. 2003), cert. den.sub nom, ,Crestmark Bank v. United States, 127 S. Ct. 41 (2006). Under UCC § 9-506, a financing statement is effective even if it has minor errors or omissions unless the errors or omissions make the financing statement seriously misleading. A financing statement containing an incorrect debtor’s name is not seriously misleading if a search of the records of the filing office under the debtor’s correct legal name, using the filing office’s standard search logic, if any, discloses the financing statement filed under the incorrect name. However, some states have regulations defining the search logic to be used and may require that the debtor’s name be listed correctly. See, e.g., In re Kinderknecht, 308 B.R. 47 (Bankr. 10th Cir. 2004), rev’g, 300 B.R. 47 (Bankr. D. Kan. 2003); Pankratz Implement Co. v. Citizens National Bank, 130 P.3d 57 (Kan. 2006), aff’g, 33 Kan. App. 2d 279, 102 P.3d 1165 (2004); In re Borden, 353 B.R. 886 (Bankr. D. Neb. 2006), aff’d, No. 4:07CV3048, 2007 U.S. Dist. LEXIS 61883 (D. Neb. Aug. 20, 2007); Corona Fruits & Veggies, Inc. v. Frozsun Foods, 143 Cal. App. 4th 319, 48 Cal. Rptr. 3d 868 (2006).
Theissue of the property identification of the debtor came up again in a recent case. In In re Pierce, No. 17060154, 2018 Bankr. LEXIS 287 (Bankr. S.D. Ga. Feb. 1, 2018), a bank financed a debtor’s purchase of a manure spreader. The bank properly filed a financing statement listing the debtor’s name as “Kenneth Pierce.” At the time of the filing, the debtor’s driver’s license identified him as “Kenneth Ray Pierce, but the debtor would always sign his licenses as either “Kenneth Pierce” or as “Kenneth Ray Pierce.” Approximately two years after the bank filed, the debtor filed Chapter 12 bankruptcy. The bank filed a proof of claim in the amount of $14,459.81 and attached the financing statement. The debtor filed an objection claiming that because the bank failed to correctly identify him as “Kenneth Ray Pierce” on the financing statement, the bank’s security interest was unsecured along with its claim. After determining that the debtor had standing to use the trustee’s avoidance powers and bring an action under 11 U.S.C. §544, the court found the bank’s interest to be unsecured. The court noted that Georgia Code §11-9-503(a)(1)-(4) required an individual debtor’s name on a financing statement to match the debtor’s name on the debtor’s driver’s license. The court noted that such imprecise match was seriously misleading and that Georgia law required that debtor’s name on the financing statement match the typed name on the debtor’s driver’s license. The court also pointed out that had the bank followed the Georgia UCC-1 Financing Statement Form which instructs the use of the debtor’s exact full name, the debtor would have been identified the same as the typed name on the debtor’s driver’s license.
Properly identifying the debtor on a filed financing statement is critical to ensuring that a creditor has perfected its interest in the collateral. An exact match is required. Lenders must be careful.