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©2009 Incisive Media US Properties, LLC
September 14, 2009
and search logics are not uniform across
jurisdictions. Accordingly, this safe
harbor may be a thin reed to rely on.
By Karen B. Gelernt,
Lech Kalembka
and E. Perry Hicks
B
y now, Revised Article 9 of the
Uniform Commercial Code (UCC)
has become familiar to most
transactional lawyers.1 Before we get too
comfortable, though, we should familiarize
ourselves with another round of proposed
amendments. These amendments, which
are expected to be finalized next year,2
will not involve major surgery; instead,
they will offer the balm of guidance and
clarity concerning certain issues that have
irritated commercial practice over the
past few years. This article will discuss
some of these troublesome issues and the
resolutions, if any, contemplated by the
amendments.
Debtor Name Issues: Introduction
A financing statement is effective only
if, among other things, it “provides the
name of the debtor.”3 While the rule seems
innocuous enough, underneath its surface
is a minefield of uncertainty. Failure safely
to negotiate this minefield likely will result
in the secured creditor’s supreme penalty:
loss of perfection.
As a preliminary matter, the current
version of the UCC includes a safe harbor
under which a financing statement is effective
notwithstanding minor errors or omissions
Karen B. Gelernt is a partner, and Lech Kalemb­ka is
special counsel, in the New York office of Cadwalader,
Wickersham & Taft. E. Perry Hicks is an associate in
the firm’s Charlotte, N.C., office.
www. NYLJ.com
Individual Debtors
Providing
Clarity
In Article 9
Proposed amendments seek
to address troublesome issues.
so long as such errors or omissions are not
seriously misleading.4 Errors and omissions, in
turn, are not seriously misleading if a search
under the “debtor’s correct name,” using
the “filing office’s standard search logic,”
would disclose the financing statement
notwithstanding the errors or omissions. 5
The UCC does not define “search logic,”
A heavily litigated issue under
Revised Article 9 6 has been what
name constitutes an individual debtor’s
“correct name” for purposes of filing a
financing statement. 7 Revised Article
9 states the tautological rule that “A
financing statement sufficiently provides
the name of a debtor…only if it provides
the…name of the debtor.”8 Importantly,
this provision does not clarify whether
a nickname is sufficient or whether the
failure to include a middle name or
initial will render a financing statement
ineffective.
To appreciate the issue, consider an
individual debtor named Harry Truman.
Is the correct first name of such debtor
“Harrison” or “Harry”? Does the debtor
have a middle name? If the individual
claims that his full and correct middle
name is “S” (i.e., period omitted), would
a financing statement filed against “Harry
S. Truman” be ineffective? Further, what is
the source of an individual debtor’s name:
a birth certificate, passport, driver’s license,
Social Security card—or all (or none) of
the above? Better guidance on this issue would
increase certainty, thereby reducing transaction
costs for filers and searchers alike.
Proposed Solutions. The proposed
amendments identify three alternatives to
address the “correct name” issue for individuals:
(i) the “Safe-Harbor” Approach, (ii) the
NYLJ/ISTOCK
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monday, september 14, 2009
“Only if” Approach and (iii) the “Priority”
Approach. The “Safe Harbor” Approach
consists of two sub-alternatives, one that
would rely on the name as indicated on a
valid driver’s license of the debtor (or other
State-issued identification document) and a
second that would deem sufficient a financing
statement that lists the surname, first given
name, and first initial of the second given
name (if any) of a debtor.
The “Only if” Approach relies on a waterfall
of identification documents, starting with a
driver’s license, followed by an identification
card, a U.S. passport and, ultimately, a simple
name format consistent with the second “Safe
Harbor” sub-alternative described above. The
“Only if” Approach would promote efficiency
by limiting possible “correct names” to those
appearing on the relevant documents or
resorting to the default name format in the
absence of such document. Nevertheless,
this rule would have a potential pitfall: if the
identification document used only a middle
initial instead of the full middle name, a
financing statement using the latter might be
invalid. For example, if a debtor’s passport
included the name Harry S. Truman, a secured
party that filed against Harry Shippe Truman
could be unperfected.
The “Priority” Approach is similar to
the “Only if” Approach in that it relies on
a hierarchy of identification documents
to identify the “correct name,” but this
approach adds a fallback alternative. Under
this approach, a secured party can file using
the name of the debtor, even if that name is
not the name prescribed under the applicable
identification documents. Filings that rely on
the fallback name are subordinate to filings
that list the debtor’s name in accordance with
the hierarchy of identification documents, but
are prior to subsequent lien creditors. The
“Priority” Approach may thus be contrasted
with the “Only if” Approach, under which
a secured party that filed against a debtor in
a manner inconsistent with the prescribed
protocol would be unperfected and, therefore,
subordinate to a subsequent lien creditor as
well as to a secured creditor that filed as
A heavily litigated issue under Revised Article 9 has been what name
constitutes an individual debtor’s ‘correct name’ for purposes of filing a
financing statement. Consider an individual debtor named Harry Truman.
Is the correct first name of such debtor ‘Harrison’ or ‘Harry’?
prescribed by such protocol.
Registered Entity Debtors: Generally
Although the UCC currently provides more
concrete guidance regarding the correct name
of a debtor that is a registered entity, issues have
arisen about the exact source of such correct
name. The “correct name” of a registered entity
is “the name of the debtor indicated on the
public record of the debtor’s jurisdiction of
organization which shows the debtor to have
been organized.”9
The problems are, first, determining what
constitutes the “public record” and, second,
determining which record controls where there
is more than one such record. The proposed
amendments address both points. First,
they would add a new term “public organic
record,” which is defined as a record filed with
or issued by a state or the United States to
form or organize an entity or to authorize an
entity to commence business in a jurisdiction.
This definition excludes other public records
or indexes maintained by jurisdictions, such as
good standing certificates or indexes of domestic
corporate entities.
The proposed amendments also establish
rules for determining which “organic public
record” controls. If there is more than one
such record, the most recently filed record
controls, and where there are multiple
references within the applicable record, the
reference that is identified as indicating the
name of the debtor controls.
Trade Names
Less is more regarding the name of a debtor
that is a registered entity. Adding a trade
name to the “correct name” of the debtor
will render an otherwise effective financing
statement ineffective if including the trade
name makes the financing statement “seriously
misleading.” This is the painful lesson learned
by the creditor in In re EDM Corp., 68 UCC
Rep.2d 139 (Bankr. D. Neb. 2009). In this
case, Hastings State Bank listed the name
of its debtor as “EDM Corporation d/b/a
EDM Equipment” in its financing statement.
Another creditor subsequently filed a financing
statement against the same debtor, using the
name “EDM Corporation.” Because a search
using the name “EDM Corporation” did not
identify the filing against “EDM Corporation
d/b/a EDM Equipment,” Hastings’ filing was
deemed seriously misleading.
Electronic Chattel Paper
Revised Article 9 introduced a category of
collateral termed “electronic chattel paper.”
Perfection in such collateral can be obtained
by filing or by control. The concept of “control”
with respect to electronic chattel paper under
the current UCC requires the satisfaction of
several particular elements, compliance with
which (or even comprehension of) is difficult.
For example, “control” of chattel paper requires
that “it be a physical impossibility (or sufficiently
unlikely or implausible so as to approach
practical impossibility) to add or change an
identified assignee without the participation of
the secured party.”10 The practices that satisfy
this high standard are unclear and the inability
to predict whether a specific practice satisfies
this requirement impedes the development of
such practices.
The proposed amendments would effectively
conform this concept of “control” to that
adopted in Article 7 of the UCC with respect
to electronic certificates of title.11 The new
approach would retain the standard under the
current UCC as a “safe harbor”; that is, if a
secured party satisfies the particular elements
required for “control” under the current regime,
it will be perfected by control.
monday, september 14, 2009
The proposed amendments also include
a general test to establish “control,” under
which a “secured party has control if a system
employed for evidencing the transfer of interests
in the chattel paper reliably establishes the
secured party as the person to which the
chattel paper was assigned.” Although an
official comment to the proposed amendments
explains that the concept of reliability is a high
standard, encompassing the general principles
of uniqueness, identifiability and unalterability
found in the “safe harbor” test, it does not state
strict guidelines as to how these principles
must be realized. It is hoped that the proposed
amendment would provide the market with
the flexibility needed to develop technologies
and practices adequate to convey “control” of
such collateral.
Payment Stripping
The court in In re Commercial Money
Center Inc., 350 B.R. 465 (2006), wrestled
with the issue of whether payment streams
“stripped” from leases that constitute “chattel
paper” retain their status as chattel paper
or assume independent status as “payment
intangibles.” In an often criticized holding,
the court determined that these payment
streams are payment intangibles. The upshot
of this holding is that the sale of such stripped
rights are perfected without further action by
the secured party, because sales of payment
intangibles are automatically perfected.12
A comment to the proposed amendments
carries the day for the critics of the Commercial
Money Center holding by indicating that an
assignment of rights “ancillary” to chattel paper
is an assignment of chattel paper.
Anti-Assignment Overrides
Sections 9-406(d) and 9-408(a) of the current
UCC render ineffective most contractual
provisions that purport to prohibit or restrict
the assignment of certain types of collateral,
including chattel paper, instruments and
payment intangibles. These overrides enable a
debtor to utilize the economic value of rights to
payment that might otherwise be rendered idle
due to a restriction on assignment of such rights
in the underlying documentation. Creditors
are cautioned, however, that developments in
certain jurisdictions have diminished the impact
of these overrides.
Several jurisdictions, including Delaware,
have amended their enactments of these
sections, as well as their statutes governing
limited partnerships and limited liability
companies, to “override the override.”
Accordingly, anti-assignment provisions
included in the constituent documents of
limited partnerships and limited liability
companies organized in such jurisdictions are
enforceable.13 These non-uniform provisions
limit the ability of borrowers to finance their
equity in these types of entities and increase
transaction costs by requiring prospective
lenders to obtain waivers and consents before
relying on this type of collateral.
In addition, the provisions of uniform
Sections 9-406 and 9-408 that override
statutory and regulatory restrictions on the
assignment payments rights were not adopted
in New York.
The proposed amendments will not offer any
help to secured creditors in this area.
Cash as a Financial Asset
Since no asset is more liquid than cash, it
is not surprising that cash ranks high on the
collateral hit parade. Where cash is posted
to a deposit account maintained by a bank,
the path to perfection by control is clear.14
In some cases, however, the cash has not
been posted to a deposit account as original
collateral but is proceeds of securities credited
to a securities account. In these cases, the
parties will often agree to treat cash held in
the securities account as a “financial asset,”15
in which case the same Article 8 mechanics
that achieve perfection by control in securities
credited to the account will perfect the security
interest in cash held therein.16
Nevertheless, for a variety of reasons, some
intermediaries refuse to treat cash as a financial
asset. In these instances, the safest approach
for the creditor is to have the cash held in a
separate deposit account. Although some parties
attempt to finesse the issue by designating a
single account as part securities account and
part deposit account, this approach likely will
not pass muster.17
Again, the amendments do not address this
issue.
••••••••••••••••
•••••••••••••
1. Revised Article 9 became effective in New York and
most other U.S. jurisdictions on July 1, 2001.
2. A drafting committee was appointed in 2008 to
identify issues and draft appropriate amendments. The
proposed amendments were first read at the annual
meeting of the Uniform Law Commission in July 2009.
3. UCC §9-502(a)(1).
4. UCC §9-506(a).
5. UCC §9-506(c).
6. See, e.g., Hopkins v. NMTC Inc. (In re Fuell),
2007 Bankr. LEXIS 4261 (“Andrew Fuel” insufficient
where debtor’s name is “Andrew R. Fuell”); Pankratz
Implement Co. v. Citizens Nat’l Bank, 130 P.3d 57 (Kan.
2006) (financing statement filed against “Roger House”
ineffective where debtor’s name is “Rodger House”);
Morris v. Snap-On Credit, LLC (In re Jones), 2006
WL 3590097 (Bankr. D. Kan. 2006) (“Chris Jones”
insufficient where debtor’s name is “Christopher Gary
Jones”); and Clarke v. Deere & Co. (In re Kinderknecht),
308 B.R. 71 (B.A.P. 10th Cir. 2004) (financing statement
filed against “Terry J. Kinderknecht” ineffective where
debtor’s name is “Terrance Joseph Kinderknecht”).
7. Non-uniform amendments have been adopted
in Illinois, Texas and Virginia to address this issue. A
proposed solution was passed in Nebraska, although
implementation has been postponed.
8. UCC §9-503(a)(4)(A).
9. UCC §9-503(a)(1).
10. See Official Comment 4 to §9-105.
11. After Revised Article 9 was adopted, Article 7 was
modified to incorporate a general test consistent with the
Uniform Electronic Transactions Act.
12. UCC §9-309(3).
13. See DEL. CODE ANN. tit. 6 §§17-1101(g) and
18-1101(g) (2009); see also VA. CODE ANN. §§13.11001.1(B) and 50-73.84(C) (2009); KY. REV. STAT.
ANN. §275.255(4) (2009).
14. UCC §9-304.
15. UCC §8-102(a)(9)(iii).
16. UCC §8-106(d).
17. Insofar as the definition of “deposit account” (UCC
§9-102(a)(29)) excludes “investment property” and the
definition of “investment property” (UCC §9-102(a)
(49)) includes “securities account,” it would appear that
“deposit account” and “securities account” are mutually
exclusive categories of collateral.
Reprinted with permission from the September 14, 2009
edition of GC NEW YORK. © 2009 Incisive Media US
Properties, LLC. All rights reserved. Further duplication
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