What this is: When it comes to securing interests and protecting creditor rights, Uniform Commercial Code (UCC) filings are a cornerstone of commercial transactions.
What this means: But even the most carefully prepared UCC-1 financing statement can be rendered ineffective if it doesn’t align with the debtor’s legal name as it appears in their Articles of Formation or Amendments. In the world of secured transactions, precision isn’t just important, it’s everything.
The Legal Name Standard
Under UCC Article 9, a financing statement must provide the exact legal name of the debtor. For registered organizations like LLCs or corporations, this means the name as it appears in the Articles of Formation filed with the Secretary of State. If the name is even slightly off, missing punctuation, incorrect abbreviations or outdated information, the filing may be deemed “seriously misleading,” and the security interest could be invalidated.
Why Articles of Formation Matter
The Articles of Formation (or Articles of Incorporation) are the foundational documents that legally establish a business entity. They contain the official name of the organization, which is the only name that should be used in a UCC filing. Relying on trade names, DBAs or informal references can lead to costly mistakes.
Common Pitfalls:
- Using abbreviated names
- Using tradenames or assumed names
- Relying on outdated internal records
The Role of Amendments
Businesses evolve. They merge, rebrand, restructure, or undergo ownership changes, and when they do, they often file Amendments to their Articles of Formation with the Secretary of State. These amendments may include changes to the legal name of the entity, its registered agent, principal office address or business purpose. Among these, a name change is particularly critical for lenders and secured parties to monitor.
If your UCC filings don’t reflect a debtor’s updated legal name, your security interest may become seriously misleading under UCC Article 9. This can result in the loss of perfection for collateral acquired after the name change, especially if a UCC-3 amendment is not filed within the required four-month window.
The Four-Month Rule: Timing Is Everything
Under UCC § 9-507(c), if a debtor’s name changes and the original UCC-1 filing becomes “seriously misleading,” the secured party has four months to file a UCC-3 amendment to correct the name. If the amendment is not filed within this window, the original financing statement becomes ineffective for collateral acquired after the four-month period.
What This Means:
- Collateral acquired before or within four months of the name change remains protected.
- Collateral acquired after four months may not be perfected unless the amendment is filed.
- Missing this deadline can result in loss of priority or even loss of the security interest against new creditors.
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Case Studies: When UCC Filings Go Wrong
In re EDM Corp.
A case in the Nebraska Bankruptcy Court involved a dispute over priority of liens on the debtor’s assets, specifically an ambulance, between Hastings State Bank and other creditors. Hastings’s financing statement was filed first. However, Hastings identified the debtor as “EDM Corporation d/b/a EDM Equipment” on the financing statement rather than the correct legal name of EDM Corporation. The other creditors alleged Hastings’s financing statement failed to properly provide the debtor’s name as required and was seriously misleading. The other creditors argued Hastings’s lien was thus not perfected.
The bankruptcy court held Hastings’s financing statement was insufficient, and EDM appealed. The court ultimately ruled that Hastings State Bank’s financing statement was not properly perfected because it included the debtor’s “doing business as” name, which made the filing seriously misleading.
In re TW Automation, LC
In this case, the Small Business Administration (SBA) issued a loan to TW Automation, LC (TWA). In exchange, TWA granted the SBA a blanket security interest in all its assets. To perfect this interest, the SBA filed a financing statement with the Kansas Secretary of State in July 2020. However, the financing statement contained a small but critical error: the debtor’s name was listed as “TW Automation, LLC” instead of the correct legal name, “TW Automation, LC.”
In 2023, TWA filed for Chapter 11 bankruptcy. During the proceedings, the court was asked to evaluate whether the SBA’s financing statement was sufficient under the Uniform Commercial Code (UCC). According to UCC § 9-506(b), any error in the debtor’s name can render a financing statement “seriously misleading.” An exception exists under § 9-506(c), which states that a financing statement is not seriously misleading if a search using the correct debtor name, based on the filing office’s standard search logic, would still reveal the erroneous filing.
The key issue was whether a search for “TW Automation, LC” would uncover the financing statement filed under “TW Automation, LLC.” This hinged on how the Kansas Secretary of State’s search logic treats “ending noise words”—terms like “Inc.” or “LLC” that indicate the type of entity.
Kansas regulations do disregard certain entity designators in search logic, but “LC” is not among them. As a result, the court found that a search for the correct name “TW Automation, LC” would not reveal the financing statement filed under “LLC.” Therefore, the SBA’s filing was deemed seriously misleading and ineffective under Kansas UCC law.
Key Takeaways from These Cases:
- Exact Match Required: Courts consistently require the debtor’s name to match the legal name on formation documents exactly.
- Search Logic Matters: If a filing doesn’t appear in a standard search, it’s likely to be ruled seriously misleading.
Best Practices for Lenders and Legal Teams
Courts have consistently ruled that even minor deviations in a debtor’s name can render a UCC filing ineffective. This can result in a creditor losing its priority position, or worse, its entire security interest, if the debtor defaults or files for bankruptcy. To protect your interests, the following best practices should be considered.
Integrate Checks into Loan Origination: Make entity name verification a mandatory step in your client intake or loan origination process. Always obtain a copy of the debtor’s current Articles of Formation and any Amendments.
Automate Monitoring: Use technology to track changes in business registrations and receive alerts when amendments are filed.
Train Your Team: Ensure that legal, compliance and operations staff understand the importance of name accuracy and the four-month rule.
Audit Regularly: Conduct periodic audits of your UCC portfolio to identify and correct any discrepancies before they become legal liabilities.
Document Everything: Keep a record of the Articles of Formation and any amendments used to support your filings. This can be critical in the event of a dispute.
File Amendments When Needed: If a name change occurs, file a UCC-3 amendment to update the financing statement.
Conclusion
In UCC filings, the devil is in the details. Articles of Formation and Amendments are not just bureaucratic paperwork: they are the legal backbone of your filing’s validity. By taking the time to verify and update debtor names, you protect your interests and ensure your filings stand up in court.
This article is provided for informational purposes only and should not be considered, or relied upon, as legal advice.
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