July/August 2010

What’s in a Name? When Verifying Debtor Names, It Can Mean the Difference Between Collecting a Debt or Going Home Empty-Handed

The current economic situation, and the resulting increase in charge-offs and delinquency rates, now has many lenders scrambling to re-examine their policies and practices regarding protection of the collateral securing such loans. Ensuring the correct debtor name is sourced and filed on a UCC Financing Statement is the beginning part of that process.

Every lender needs to be aware of the detail and accuracy required in completing financing statements to ensure their security interest is properly perfected. In the case of a corporation, it means providing the name exactly as it appears in the Articles of Incorporation.

A lender may only exercise its rights to collateral if a borrower is in default on a loan. Given the recent economy, that’s unfortunately not a rare occurrence. U.S. Bankruptcy Court records show there were 1.4 million bankruptcy filings for the 2009 fiscal year ending Sept. 30, 2009. This is a 34.5% increase over the 2008 fiscal year, demonstrating it is increasingly important for a lender to take all steps possible to fully protect its positions.

While it is relatively easy to adequately provide for a security interest in collateral, the Uniform Commercial Code (UCC) filing procedure is sometimes complex and subject to human error at many stages in the process. Issues undermining the attachment, perfection and priority of security interests generally only become apparent once the loan is in default, often long after the loan has been granted.

The current economic situation, and the resulting increase in charge-offs and delinquency rates, now has many lenders scrambling to re-examine their policies and practices regarding protection of the collateral securing such loans. Ensuring the correct debtor name is sourced and filed on a UCC Financing Statement is the beginning part of that process.

Uniform Commercial Code — Revised Article 9

Assuming you are in the correct filing jurisdiction, UCC Revised Article (RA) 9 provides very specific guidance regarding the effectiveness of financing statements. According to the statute:

• A financing statement is not effective to perfect a security interest unless it sufficiently provides the debtor’s name.

• For a debtor corporation, the debtor’s name in the financing statement is sufficient if it is the same as the name listed in the debtor’s Articles or Certificate of Incorporation.

• A financing statement that fails to sufficiently provide the debtor’s name is “seriously misleading,” and for that reason not effective to perfect a security interest.

• The exception is a search of the state’s UCC records under a debtor’s correct name, using the filing office’s standard search logic, would reveal the financing statement with the incorrect name, then the financing statement is not “seriously misleading” and is effective to perfect the security interests.

Recent Court Cases

Fairly recent court cases demonstrate the importance of debtor names on a UCC Financing Statement, and the risks and costs involved when a security interest is not perfected correctly. Specifically, these cases make it clear that a business entity’s name is a valuable differentiator. One case involves a subtle variation on a name, and the second the omission of a reference of incorporation — both minor oversights that cost three lenders hundreds of thousands of dollars. Both present a compelling argument that all lenders should verify debtor names on financial statements using a thorough, effective and scalable methodology to support their asset and security claims.

Wing Foods Inc. and CCF Leasing Co.

In 2008, CCF Leasing Co. (CCF) leased restaurant equipment to Wing Foods, Inc., based in Idaho. Following usual practices, it filed a UCC-1 financing statement with Idaho’s Secretary of State to perfect its interest. Unfortunately for CCF, it incorrectly listed the debtor’s name on the UCC-1 as “Wing Fine Food” instead of “Wing Foods, Inc.”

One year later, Wing Foods filed for Chapter 7 bankruptcy. Rather than allow CCF to make a claim on its assets, it argued that the misrepresentation on the UCC-1 meant it could avoid the leasing company’s security interest. Unfortunately for CCF, the courts agreed that the disparity of the name on the UCC-1 was enough to void the security interest.

Tyringham Holdings Inc. and Suna Bros. Inc.

The negative consequences of filing under the wrong name are further illustrated in the case In re Tyringham Holdings, Inc. In this case, Suna Bros. Inc., a jeweler based in New York, NY, consigned 65 pieces of jewelry worth approximately $300,000 for resale to debtor Tyringham Holdings, Inc., a Virginia corporation.
Under Article 9, Suna’s interest in the consigned goods was a security interest that Suna sought to perfect by filing a UCC-1 financing statement with the Virginia state filing office. The debtor’s name, as contained in Virginia’s corporation records, was “Tyringham Holdings, Inc.” However, Suna’s financing statement listed the debtor’s name as “Tyringham Holdings” — omitting the “Inc.”

Tyringham later filed for Chapter 11 bankruptcy protection. In Tyringham’s bankruptcy case, other creditors tried to invalidate Suna’s claim, arguing that pursuant to Article 9, Suna’s filing was ”seriously misleading” and therefore did not perfect Suna’s lien against the goods.

Was Suna’s financing statement filed in Virginia sufficient to give it a perfected security interest in its collateral? Unfortunately for Suna, it was not. The search logic used by the Virginia filing office considered “Inc.” a significant word, and a search under the debtor’s proper name (with Inc.) did not turn up Suna’s actual, erroneous filing. Therefore, the bankruptcy court held that the financing statement was seriously misleading, the financing statement was deemed unperfected and Suna lost its security interest in its debtor’s collateral.

Lessons Learned

As each case demonstrates, it is critically important to verify and reflect the debtor’s correct name when filing a financing statement. Although the result in all these cases were harsh for the creditors, they are also easy to avoid. Fortunately, there are safeguards and third parties that can assist throughout the lifecycle of every lien, so lenders, leasing firms and others may avoid similar outcomes and actually realize significant benefits at the same time.

To illustrate, below are the key areas that constitute a thorough, effective and scalable methodology in relation to asset and security claims:

• Before making a loan or lending arrangement with a debtor, creditors should use all means to uncover existing UCC filings, tax liens, judgments and similar items on each debtor — including its exact legal entity name. Creditors should also obtain copies of their debtor’s organizational documents (e.g., Articles or Certificates of Incorporation for corporations and articles of formation for limited liability companies). These documents should be embedded as a part of a due diligence/public records database (available from a select number of service providers) and as part of the credit decision and application process.

• One way to ensure the correct name is used is to conduct a legal name verification search and order copies of a company’s Articles of Incorporation and amendments. A similar step can be taken when the debtor is an LLC or other registered business organization. This additional due diligence will help eliminate the risk of errors in accurately entering the debtor’s name in the filing, and help ensure the perfected status of a security interest.
This process can be automated. Creditors can leverage the latest technology to automatically generate legal entity name matches to the debtor (or a list of similar names) while verifying the entity state of domesticity, all within any Web or XML-based third-party or proprietary loan decisioning, credit workflow or related technology tool.

• Filing UCC-1 financing statements electronically through a service provider’s Web-based platform or directly with the 38 states that support e-filing. With some platforms, clients can file or search for a lien in any jurisdiction, make an amendment, monitor liens against their business entity and much more. All activity is in one repository for easy access and visibility. Benefits include reduced costs, reduced or eliminated number of filing errors and near-instantly generated reference data and acknowledgments.

• After the creditor files a financing statement to perfect its interest in collateral, it’s also prudent to obtain a certified search for that filing from the state filing office itself, in order to ensure that little things, like the omission of “Inc.,” or of “Co.,” or of the periods in an abbreviation, don’t mean a lot of pain for the creditor. A Search-to-Reflect (STR) provides verification that each filing is legally valid and enforceable. It also ensures the state filing office properly entered debtor information into the index.

• Business Entity Monitoring — Some providers will also monitor debtor information daily and keep creditors updated about any changes that could leave their business interests vulnerable, including debtor names, mergers, dissolutions or unexpected terminations. When changes in debtor and/or business-entity data occur, the creditors are immediately notified.

• Detection of incorrect debtor names or incorrect jurisdictions is paramount before an issue occurs. Regular scheduled audits and reviews by a professional services team experienced with the nuances of RA9 are strongly recommended. Audits should be scheduled on an ongoing basis to ensure the integrity of the loan portfolio.

• When an error is detected, a UCC-3/Debtor Amendment needs to be filed, replacing (or supplementing) the incorrect debtor information on file with each state.

• Nationwide service teams at some service providers consist of jurisdictional and industry experts, all extremely familiar with each Secretary of State and jurisdictional office requirements throughout the United States and related territories, including policies, procedures, fees, turnaround times and more. Most are also available to facilitate any lien transaction.

Richard Fifield is the vice president of Business Development for CT Lien Solutions, a pioneer in the UCC industry since 1979. A frequent industry speaker and author, Fifield brings more than 20 years of experience working with major lenders and law firms within the scope of industry-related business processes and risk mitigation practices. Previously, Fifield was a business development executive at Intercounty Clearance, acquired by Wolters Kluwer in 1992. He holds a degree in business from the University at Albany, State University of New York.

CT Lien Solutions offers solutions and services for UCC filing, searches and debtor entity verification that can protect lenders and secure positions. Services include: UCC RA9 compliant searches and filings, debtor name verification, direct issuing of UCC statements, Search-to-Reflect verification, corporate name verifications, and nationwide scope and experience.