Magazine article Business Credit

Creditor's Claim Unsecured after Debtor's Name Change

Magazine article Business Credit

Creditor's Claim Unsecured after Debtor's Name Change

Article excerpt

A vendor taking a security interest in certain of the debtor's assets requires the vendor to strictly comply with Article 9 of the Uniform Commercial Code (UCC) to create and perfect a security interest in the collateral. A vendor must also be vigilant to stay "perfected", as various changes may occur in regard to the debtor that granted the security interest, and the collateral in which the vendor has a security interest. A vendor's failure to vigilantly monitor the debtor and collateral can result in the vendor losing its secured status. The recent decision of Matter of Special Care reminds vendors that they must file an amended UCC-1 financing statement after a debtor corporation has changed its name which results in the vendor's financing statement being "seriously misleading" - or risk a bankruptcy trustee unseating the lien.

Security Interest After Corporate Name Change

In Special Care, the creditor took a security interest in the accounts receivable of the debtor, which at the time was named Davidson Therapeutic Services, Inc. The creditor filed a financing statement listing Davidson Therapeutic Services as the debtor. Two months later Davidson Therapeutic Services formally changed its corporate name to "Special Care, Inc." The creditor never filed an amendment to its Financing statement to reflect the name change of the debtor. The debtor filed bankruptcy two years later. The trustee filed a lawsuit with the bankruptcy court to unseat the lien of the creditor, contending that the financing statement was seriously misleading.

No Security Interest Where Financing Statement Is Seriously Misleading

A security interest is generally defined as an interest in personal property or fixtures which secures payment or performance of an obligation on behalf of the creditor. A formal, binding agreement must exist between the debtor and the creditor looking to obtain a security interest to make it enforceable. Such an agreement must describe the property in which the debtor has conveyed a security interest in assets to the creditor.

A Financing statement, or UCC-1, perfects the creditor's interest in the collateral. A financing statement is filed with the filing office (usually the secretary of state). The purpose of the financing statement is to provide notice to possible creditors that a security agreement exists. A financing statement must give the correct name of the debtor, and be signed by the debtor. A financing statement that misnames the debtor is nevertheless effective, so long as the error is not "seriously misleading". However, if the financing statement misnames the debtor so much that it is misleading to a party searching for lien filings against the debtor, the filing has no effect and does not perfect the security interest. A filing officer uses the debtor's names to compose the index and subsequent parties use the index to find the filing. If the debtor's name is wrong, the index may be wrong and subsequent parties are thus misled. …

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