UCC Expert’s Corner: Extra Space in Debtor Name Makes Financing Statement Seriously Misleading

UCC Expert’s Corner: Extra Space in Debtor Name Makes Financing Statement Seriously Misleading

September 12, 2017

Extra Space in Debtor Name Makes Financing Statement Seriously Misleading

By Paul Hodnefield, Esq.

There is little margin for error when it comes to accuracy of the debtor name when filing a UCC financing statement. Even a seemingly minor error can render the financing statement seriously misleading and leave the secured party with an unperfected security interest. A recent case illustrates just how much precision is required for debtor names when filing UCC records. The case is United States SEC v. ISC, Inc., 2017 U.S. Dist. LEXIS 139258 (W.D. Wis. Aug. 30, 2017).

In 2016, a federal district court appointed a receiver (the “Receiver”) for ISC, Inc. (the “Debtor”) and directed the Receiver to sell the Debtor as a company or just its assets. The Receiver soon found a buyer for substantially all the Debtor’s assets. The court approved the asset sale in May 2017.

The Receiver then sought court approval for distribution of the sale proceeds. The proposed distribution plan would have allowed holders of secured debt to recover at a rate of 100 percent. However, claimants holding unsecured debt would recover substantially less.

In 2012, Double Bubble, LTD (“Double Bubble”) took a security interest in certain assets to the Debtor. To perfect its security interest, Double Bubble filed a financing statement in the Wisconsin Department of Financial Institutions (“WI DFI”). The financing statement listed the Debtor’s name as “ISC, Inc .” Although perhaps not readily apparent, the name mistakenly included an extra space in the Debtor’s name between the last “c” and the period at the end.

As a result of the financing statement debtor name error, the Receiver claimed that Double Bubble was not entitled to claim secured creditor status. The Receiver argued that the error left the security interest unperfected. Therefore, the Receiver classified Double Bubble as the holder of unsecured debt.

Double Bubble objected to being classified as an unsecured creditor. In support of its position, Double Bubble argued that the financing statement could be found by a search of just “ISC” without the corporate ending or punctuation. Such a search, Double Bubble contended, would have been reasonably diligent.

To resolve the dispute, the court began with a review of the applicable law. The general rule is that a financing statement that fails to sufficiently provide the name of the debtor is seriously misleading as a matter of law. The court noted that there was an exception to this rule. If a search of the records of the filing office under the correct debtor name, using the filing office’s standard search logic would disclose the record, then the incorrectly provided name does not make the financing statement seriously misleading.

In this case, the error in the Debtor’s name prevented a search of the correct name using the standard search logic from disclosing the record. Although the search logic used by most state-level filing offices would disregard minor errors in spacing, punctuation, and corporate endings, in this case the standard search logic used by the WI DFI did not overlook the deviation. Moreover, the former “reasonably diligent search” standard for sufficiency of debtor names had been replaced with a clearer computer standard. The fact that the WI DFI allowed searches that would produce broader results did not change the statutory standard. Consequently, the court overruled Double Bubble’s objection to having its claim treated as unsecured.

There are two important takeaways from this case. The first is that there is no such thing as a minor error in a debtor name on a financing statement. Every error has the potential to make the financing statement seriously misleading. The second takeaway is that a secured party should never rely on the search logic to prevent a debtor name error from rendering the financing statement seriously misleading. Search logic can change or malfunction. Therefore, each debtor name on the financing statement should be carefully reviewed prior to filing, and again following return of the filing acknowledgement. Any error detected during this process should be corrected immediately, by amendment if necessary.

Paul Hodnefield is associate general counsel for CSC® 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.