What's in a name? Banks need to pay close attention to the names they list on UCC financing statements

As we begin 2013, it's a good time to refresh memories regarding some basic ways banks can protect their security interests. Every banker should be familiar with the process for filing UCC financing statements with the Iowa Secretary of State. These financing statements protect a bank's interest in collateral used to secure loans to customers.

One of the critical pieces of information required on a UCC financing statement is the debtor's name: 

This is a section that can trip up the unwary. In order for a bank to ensure that it has a properly filed a UCC financing statement, it needs to include the exact full legal name of the debtor. In the case of an entity, this means the name on file with the Iowa Secretary of State, or place where the entity is organized.

Many businesses, however, may shorten their full legal name or use a d/b/a ('doing business as'). These names may be useful, but they do not constitute an entity's real name. This is important because under Iowa regulations, when a bank or other creditor searches for UCC financing statements filed for a particular debtor, the database search function will only return exact matches.

For example, if a bank lends money to a company with the legal name 'Midget Widget Co.' then it needs to list the debtor on the financing statement as 'Midget Widget Co.' If the bank files a UCC financing statement and lists the debtor as 'Midget Widget Co. d/b/a Widgets ‘R' Us' then a search of the UCC database for 'Midget Widget Co.' will not bring up the bank's financing statement. As a result, another creditor will be unable to find the financing statement the bank has filed. More importantly, this will mean that the bank has not properly protected its security interest, and may end up forfeiting its priority status.

While this may seem like a straightforward point, it has tripped up more than one creditor. In In re EDM Corp., a creditor bank extended loans in excess of $4.5 million to a debtor. The creditor bank attempted to perfect its lien by filing financing statements that listed the legal name of the debtor and the debtor's d/b/a. A second creditor bank then extended $3 million in loans to the debtor. The second creditor bank ran three separate UCC searches to find other lien holders. None of the searches revealed the first creditor bank's financing statement. The second creditor bank then perfected its lien by filing a UCC financing statement listing only the debtor's legal name.

When the debtor declared bankruptcy, the first creditor bank asked the bankruptcy court to determine the priority of the liens. The bankruptcy court decided, and the court of appeals confirmed, that the first creditor bank had failed to properly perfect its lien because it had not listed the correct legal name on the UCC financing statement. The first creditor bank lost priority to the second creditor bank.

A properly filed financing statement should only list the exact legal name of the debtor as determined by the place where the debtor is organized. This could mean looking outside of Iowa if dealing with a foreign debtor. Any questions regarding the filing of UCC financing statements should be directed to the bank's attorney.  

The material in this blog is not intended, nor should it be construed or relied upon, as legal advice. Please consult with an attorney if specific legal information is needed.