“ONLY IF” MEANS ONLY IF
UCC Article 9 Filing System
Under Article 9 of the Uniform Commercial Code security interests in most personal property securing business debt are perfected by filing a UCC financing statement in the appropriate central filing office. With few exceptions, such as perfection of purchase money security interests, the first creditor to file a correctly prepared financing statement in the proper location has priority over a security interest perfected in the same property by a later filing.
Prospective lenders search the UCC filing office records under the “name” of the proposed borrower to confirm that there is no indication on file that any other party may have a prior perfected security interest against the proposed borrower covering the offered collateral. Filing offices index UCC files by the debtor’s “name.”
What’s In A “Name”?
When the debtor is a “registered organization,” such as a corporation, limited partnership or limited liability company, under Article 9 its “name” for filing purposes is the exact name that appears in the official records of the state of organization of the borrower as reflected in its filed organizational documents. This is an “only if” rule: The only correct name for a registered organization for filing purposes is the exact name on the official records, and there should be no excuse for perspective lenders not to “get it right.” Under the UCC file drawer system, a lender making a search can rest assured that, if UCC filings are not found using the “only if” name of a registered organization and applying the state’s normal search logic, there would be no effective filings against the assets of the proposed borrower.
Prior to adoption of the latest revisions to UCC Article 9 (July 1, 2013 in almost every jurisdiction but August 28, 2013 in Missouri), determining the “name” of an individual borrower for UCC filing purposes was a challenge because there is no official registry for individual names, nor, prior to the new revisions, was there a single generally accepted source for determining an individual’s name.
Problems Caused by the “Name Game”
Prior to adoption of the latest UCC Article 9 revisions, proposed lenders had to play a guessing game as to the names under which a prior creditor may have filed a UCC financing statement against the lender’s prospective borrower. Further, under typical circumstances, the “name game” was played in the bankruptcy court, normally by a trustee in bankruptcy attempting to void the perfection of a security interest held by a lender of a borrower that is in bankruptcy. The results of there being no established rule for determining the name of an individual debtor have been unfortunate. For example:
- In a 2012 Illinois bankruptcy case, a bankruptcy court held that the “name” of a debtor was the name on the debtor’s birth certificate and not the name used by the debtor on his driver’s license, tax returns, bank accounts or other business records.
- A district court, on appeal, however, in that same case held that the “name” was not from a birth certificate but could be determined from looking at how the debtor generally used his name on such items as driver’s license, social security card, tax returns and other official documents.
- In a 2012 New Mexico bankruptcy case, the court held that the name of the debtor was the name on his birth certificate and rejected use of his driver’s license name on a filed financing statement.
- In a 5th Circuit United States Court of Appeals case in 2007, the court held that a debtor’s nickname was sufficient to validate a UCC filing rather than the debtor’s birth certificate name or the name on the debtor’s driver’s license and otherwise generally used.
- In a 10th Circuit United States Court of Appeals case, which began in a Kansas bankruptcy court, the court rejected the use of a nickname and held that the proper name for filing was the debtor’s birth certificate name.
In all of these cases, a creditor who thought that it was properly perfected became in danger of losing its perfected status and being relegated to the status of an unsecured creditor – the definition of a bad day for a lender.
“Only If” Rule for Name of Individuals
Effective July 1, 2013 in virtually every state (except Missouri, where the effective date was August 28, 2013), Article 9 was amended to attempt to solve the “name game” for filings against individuals. The framers of revised Article 9 (the National Conference of Commissioners on Uniform State Laws), however, apparently could not agree on the exact method for establishing an individual debtor’s name for filing purposes and therefore gave the states two alternatives:
- The “only if” alternative, under which the only correct name for UCC filing purposes against an individual holding an unexpired driver’s license issued by the state of the debtor’s principal residence is the exact name on the license.
- The “safe harbor” alternative, under which use of the driver’s license name is sufficient (and, therefore, a lender can feel comfortable that it has a properly perfected security interest using such name) but is not necessarily the only correct name, with the result that the “name game” continues for UCC filers and searchers in the jurisdictions adopting the “safe harbor” alternative since there would not be a single bright line test.
Of the 45 states adopting the UCC amendments, 37 of them have adopted the “only if” alternative. Those states include Missouri and the surrounding states of Kansas, Nebraska, Iowa, Illinois, Arkansas, Kentucky and Tennessee. Only a few states have adopted the safe harbor alternative, the closest state to Missouri being Colorado.
“Only If” Means Only If
Lenders have had 12 years of experience under the “only if” rule for registered organizations and are generally well satisfied with the certainty that rule provides. As with the rule regarding registered organizations, there should be no excuse for not “getting it right” regarding the name of an individual who has a valid driver’s license issued by his or her state of residence.
Even the “only if” rule, however, includes some specific fall-back rules in the unusual event that the debtor does not have an unexpired driver’s license, such as the use of the debtor’s last name and first personal name, in that order.
Some Issues Raised by the “Only If” Rule
A person preparing a UCC financing statement against an individual debtor under the “only if” rule still has some challenges, such as:
- Determining what is the first name and the last name on a driver’s license. Current Missouri driver’s licenses list the last name on one line and the first and middle names or initials on a second line, but not all states list last name first on their driver’s license or list last name on a separate line. Recommendation: Do multiple filings coverings all possible order variations. Each filing form has “additional debtor” boxes in which variations can be inserted to give the searching world notice as a business matter of the secured party’s security interest.
- If there is not enough space on driver’s license for the debtor’s full name: file using the exact partial name of the debtor as stated on the driver’s license and then also file (using the “additional debtor” box) against the actual full name of the debtor.
- If driver’s license contains a typographical error in the name: file according to the exact name on the driver’s license (with the typographical error) and also under the correct name (in the additional debtor box).
- If debtor has a compound first name such as “Mary Beth” or has a hyphenated or a multiple-name last name: determine the possible variations and file against all possible variations in the order of the names (the UCC financing statement addendum form has numerous additional debtor boxes).
- If the driver’s license includes an obvious nickname (“Mike Johnson”): file in exactly that name and also file (using the additional debtor box) under the more traditional name (such as “Michael Johnson”).
There are other unusual circumstances that would require careful analysis when attempting to determine the “only if” name for an individual debtor. When in doubt, bank legal counsel should be consulted. Also, the general recommendation is that filings should be made against all possible names that could be the correct driver’s license name.
The latest UCC Article 9 revisions will solve the “name game” for most secured loans made to individuals. The revision, however, does raise certain challenges. Determining the name for filing purposes, even under the only if rule, is something that requires knowledge of the revised rules and careful analysis.