UCC Expert’s Corner: Court Holds That Middle Name Matters on Driver’s License

February 21, 2017

The 2010 Amendments to UCC Article 9, which took effect in most states on July 1, 2013, provided new rules for the sufficiency of an individual debtor name. Most states enacted a legislative option which required a financing statement to provide the name of an individual debtor that was indicated on the person’s unexpired driver’s license issued by the state where the record was filed. A court recently addressed the effect of an individual debtor name that appears differently on the financing statement than on the individual’s driver’s license. The case is In re: Markt, 2017 Bankr. LEXIS 472 (Bankr. S.D. Ind. Jan. 23, 2017).

In this case, Ronald and Sherry Nay (the “Debtors”) had granted MainSource Bank (the “Bank”) a security interest in substantially all of their assets to secure the repayment of multiple loans. The Bank properly perfected its security interest by filing a financing statement with the Office of the Indiana Secretary of State (“IN SOS”) in February 2014.

In December 2015, Debtor Robert Nay (“Nay”) took out two loans with LEAF Capital Funding, LLC (“LEAF”) to finance the acquisition of two Terex Dump Wagons (the “Equipment”). To secure these obligations, Nay granted LEAF purchase money security interests in the Equipment.

To perfect its security interests, LEAF filed two financing statements with the IN SOS, each naming Nay as the debtor. Nay’s most recently issued unexpired driver’s license listed his name as “Ronald Markt Nay”. However, both of LEAF’s financing statements listed the debtor name as “Ronald Mark Nay”. (Emphasis added).

The 2010 Amendments to UCC Article 9 included two legislative alternatives for individual debtor name sufficiency under UCC § 9-503(a). Legislative Alternative A provided that if the debtor is an individual to whom the state has issued an unexpired driver’s license, the financing statement is sufficient only if it provides the individual name of the debtor indicated on the driver’s license. Legislative Alternative B offered a safe harbor whereby the name indicated on the driver’s license is sufficient as the name of the debtor, but other names could be sufficient as well.

Indiana, like the vast majority of states, adopted the 2010 Amendments to UCC Article 9 with Legislative Alternative A. The new individual debtor name rules took effect there on July 1, 2013.

The Debtors commenced a chapter 11 bankruptcy case in May 2016. LEAF filed a proof of claim in which it asserted that it held the first priority security interests in the Equipment. The Bank objected to LEAF’s proof of claim, arguing that LEAF’s omission of the “T” from the Nay’s middle name rendered the two financing statements seriously misleading. The Bank then brought an adversary action seeking a declaratory judgment that the Bank had the first priority security interest in the Equipment and moved for summary judgment.

The court first determined that the misspelled debtor name was not sufficient because it did not provide the debtor name as indicated on the driver’s license. Therefore, the financing statement seriously would be misleading under UCC § 9-506(b), unless LEAF could establish that a search of the correct debtor name using the search logic promulgated by the IN SOS would disclose the record as provided by UCC § 9-506(c).

Nay, arguing in favor of LEAF’s position, claimed that a filing office administrative rule permitted searches on variants of the “full correct name” of the debtor. The Bank, however, pointed out the “full correct name” might not be the same as the “correct name” and that the applicable statute already provided the “correct name” to search. That was the name indicated on the driver’s license. The court agreed with the Bank, reasoning that to do otherwise would contravene the language and intent of the statute.

The court, considering the plain language of the statute, given its ordinary meaning, and reading § 9-503 and § 9-506 together, determined that it was clear the only correct name of the debtor was that indicated on the driver’s license. Therefore, § 9-506(c) provided relief only to the extent the standard search logic would disclose the financing statements, which it did not.  Despite its observation that the result in this case seemed harsh, the court granted summary judgment in favor of the Bank.

The important thing to take away from this case is that there is little margin for error when it comes to debtor names. That is especially the case when the debtor name is that of an individual. The individual debtor name search logic used by most jurisdictions is even stricter than that used for organization debtor names. It generally does not disregard common errors in spacing, punctuation and endings and rarely will find records with spelling deviations.

As a result, when using the driver’s license as the source of an individual debtor name, the secured party must ensure that the name provided on the financing statement exactly matches the name on the driver’s license. That is the case even if the name on the individual’s driver’s license appears to contain misspellings, omissions or other deviations from the person’s actual name. Remember, the name on the driver’s license is the debtor name for purposes of the financing statement.

Paul Hodnefield is associate general counsel for Corporation Service Company® and is a frequent speaker and writer on UCC due diligence issues. Please feel free to contact him with questions or comments at paul.hodnefield@cscglobal.com or 800-927-9801, ext. 61730.