Court Says Security Interest Seriously Misleading Even Though Filed Financing Statement Contained Debtor’s Correct Name

May 19, 2010 | Erin Herbold


Normally, a security interest in tangible property is perfected by filing a financing statement. An effective financing statement indicates that the creditor may have a security interest in the described collateral and is sufficient if it provides the name of the debtor, 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. Listing the correct name of the debtor is critical to the notice system and priority of creditors, because financing statements are 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 (usually with the state secretary of state) is sufficient and can be accessed by creditors.

Article 9 of the Uniform Commercial Code specifies that a financing statement is effective even if it has minor errors or omissions unless the errors or omissions make the financing statement seriously misleading. Under Article 9, a financing statement that contains 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 discloses the financing statement filed under the incorrect name. However, some states take the position that misspelling or shortening a debtor’s name on a financing statement is seriously misleading. Generally, these states, including Nebraska, require listing of the full legal name of the individual or the entity.

In this case, the bankruptcy court for the district of Nebraska ruled that a Nebraska bank’s lien was not properly perfected due to the listing of the debtor’s registered name and the debtor’s trade name on its financing statement filed with the Nebraska Secretary of State.   The debtor’s official name of record at the Nebraska Secretary of State’s office was “EDM Corporation.” The debtor often did business as “EDM Equipment” and was commonly known by that name in the state. However, “EDM Equipment” was never a registered trade name with the state of Nebraska. Three banks asserted a lien against the company. The sole issue before the court was to determine the priority and validity of the liens.

The first bank to file a financing statement identified the debtor as “EDM Corporation d/b/a EDM Equipment.” The next two creditors filed financing statements subsequent to the first bank’s filing, listing the debtor as “EDM Corporation.” Neither of these corporations had actual knowledge of the first bank’s lien, and when they conducted a lien search using the Nebraska Secretary of State’s standard search logic identifying the debtor as “EDM Corporation,” the first bank’s financing statement was not discovered.

Nebraska adopted and follows a revised version of Article 9. More than 40 states have adopted similar “search logic” regulations. Nebraska’s version of Article 9 provides that “a financing statement is sufficient only if it… provides the name of the debtor.” Further, “if the debtor is a registered organization, 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…” will the financing statement be sufficient. Nebraska law (Neb. Rev. Stat. §9-506 (a)(ii)) specifies that failure to provide the correct legal name of the debtor is “seriously misleading” and will cause the financing statement to fail. While the bank had listed the correct legal name of the debtor on the financing statement that they filed, the court determined that the addition of the debtor’s trade name was seriously misleading and invalidated the financing statement and, hence, the bank was unsecured.

The bank appealed, arguing, that they properly complied with the requirements of Nebraska’s revised Article Nine because “EDM corporation” was included in the name provided on the financing statement.  The Bankruptcy Appellate panel disagreed, noting that the purpose of properly filing a financing statement is to put subsequent creditors on notice that the debtor’s property is already encumbered. A search by the other creditors using standard search logic did not disclose the bank’s interest.  The bank argued that the state’s search logic must have been faulty because they did include the debtor’s registered name in the financing statement as filed.  The court acknowledged that fact, but read the statute to mean that the addition of a trade name to a financing statement containing the debtor’s registered name was not permissible.  According to the court, “complete accuracy is even more important with the debtor’s name than it is with the description of collateral.”

According to the court, Revised Article 9 “evidenced an intent to shift the responsibility of getting the debtor’s name right to the party filing the financing statement.”  Such a requirement, the court reasoned, would lead to more commercial certainty in the filing of financing statements.  In addition, the court noted that the official comments to Revised Article 9, adopted in Nebraska, indicate that trade names cannot be included in addition to the organizational name of the debtor.  Thus, the bank’s addition of “d/b/a EDM Equipment” was a seriously misleading.

The court did mention, however, that this rule applied to corporations and other organizations, but did not “necessarily” apply to debtors “who are human beings.”  Specifically, Nebraska’s Revised Article 9, the court stated, leaves “some room for judgment in the search process as to human beings.” So, if an individual is widely known by a name other than their legal name, a searcher might be expected to look under those names as well.  There is no public “registry” of people (as there is with legally-formed organizations) that lists people’s correct legal names.   EDM Corporation v. Hastings State Bank, No. 10-6001, 2010 Bankr. LEXIS 1373 (B.A.P. 8th Cir., May 14, 2010).