Secured Creditors Should Monitor Name Changes by Their Account Debtors

By Avery, Wesley H. | Business Credit, March 2000 | Go to article overview

Secured Creditors Should Monitor Name Changes by Their Account Debtors


Avery, Wesley H., Business Credit


A secured lender has the duty to amend its financing statement if its account debtor changes its name or else it will lose its perfected security interest in after-acquired collateral beginning four months after the debtor's name change.

A financing statement is designed to alert a potential creditor to the possibility of a pre-existing security interest in collateral with which it intends to secure a loan. See In re Atlas Technologies, Inc., 78 B.R. 394, 397 (E.D.N.Y. 1987). Under UCC 9-402(8), codified in this state as Cal. Comm. Code 9402(8), a financing statement which contains minor errors which are not seriously misleading remains legally effective. However, where a debtor changes its name such that an existing financing statement bearing its name becomes seriously misleading, a secured party claiming a security interest in property owned by that debtor must file a new financing statement which lists the new name of the debtor, or else its security interest in property acquired by that debtor more than four months after that change (such as new inventory) is no longer perfected. See UCC 9-402(7), codified as Cal. Comm. Code 9402(7). Once a security interest becomes unperfected, in the event of the debtor's bankruptcy, it becomes subjec t to avoidance by a bankruptcy trustee under 11 U.S.C. 544(a).

If a Financing Statement is Seriously Misleading, a Security Interest in After-acquired Inventory is Jeopardized if the Account Debtor Declares Bankruptcy

Under 11 U.S.C. 544(a)(1), a bankruptcy trustee has the rights of a hypothetical lien creditor as of the date of the filing of the bankruptcy petition. The rights of a lien creditor are determined pursuant to state law. See In re Kors, Inc., 819 F.2d 19, 22-23 (2d Cir. 1987). Under California's version of the Uniform Commercial Code, a lien creditor has priority over an unperfected, though secured, creditor. In the bankruptcy context, therefore, the creditor is reduced to the status of an unsecured creditor if its security interest in collateral is not perfected.

A determination of whether the name of a debtor on a financing statement is seriously misleading is to be made on a case-by-case basis. There is plentiful case law which interprets UCC 9-402 to determine when a financing statement has become seriously misleading. See e.g., In re Gibson's Discount Pharmacy of Bristol, Tennessee, Inc., 15 UCC Rep. Serv. 233 (ED. Tenn. 1974) The financing statement is in the name of Gibco Discount Drugs, Inc. instead of Gibson's Discount Pharmacy of Bristol, Tennessee, Inc.

Courts have generally treated a mistake involving a descriptive word other than at the beginning of a debtor's name as a minor error that is not seriously misleading under UCC 9-402:

When determining whether an inaccuracy in the naming of the debtor in the financing statement was a "minor error" which was "not seriously misleading" a court must ask whether a reasonably diligent searcher would be likely to discover a financing statement indexed under the correct name... In this regard, the inquiry must question the extent of the discrepancy between the debtor's true name and that indicated on the financing statement so as to determine whether the filing gave the minimum information necessary to put any searcher on inquiry.

TMMB Funding Corp. v. Associated Food Stores, 136 A.D.2d 540, 542-543, 523 NYS.2d 161 (1988).

What Constitutes "Seriously Misleading" Has Not Changed with the Computer Revolution

With the Internet revolution of the late 1990s, potential secured creditors are able to access public records much more efficiently and precisely than they were able to do so in 1962 when the Uniform Commercial Code was drafted. The purpose of the UCC "was and is the codification, the simplification and the modernization of the laws governing commercial transactions." In re Bennett Funding Group, Inc., 203 B.R. 30, 37 (Bankr. N.D.N. …

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