Most secured creditors experience some measure of relief once their financing statements are filed and their security interests are properly perfected. These parties, however, must remain ever mindful of the possibility that their debtors may subsequently undergo or undertake certain changes that can effectively strip the secured parties' perfected status. Such changes include (a) changes in the debtor's name, (b) changes in the debtor's location, (c) changes in the location of collateral and (d) "organizational changes" by the debtor (e.g., mergers, incorporations, re-incorporations in different jurisdictions, etc.).

Before the recent revisions, Article 9 of the Uniform Commercial Code (old Article 9) set forth specific rules addressing (to varying degrees) each of these scenarios. As is more fully discussed below, the latter rules have been clarified, and in some instances significantly modified, under revised Article 9.

Changes in the Debtor's Name

Revised Article 9 retains the same basic rules regarding debtor name changes that existed under old Article 9. Thus, as was the case under old Article 9,¹ if a debtor's name change does not render a financing statement filed under the debtor's old name "seriously misleading," the financing statement remains effective, and the secured creditor need not undertake any responsive steps.² If the debtor's name change renders an existing filing "seriously misleading," the existing financing statement will remain effective with respect to collateral acquired by the debtor either prior to the name change or within four months after the name change.³ It will not be effective, however, with respect to collateral acquired by the debtor more than four months after the debtor's name change unless, prior to the expiration of such four-month period, the secured creditor files an "amendment to the financing statement" (correcting the seriously misleading reference to the debtor's old name).⁴

While old Article 9 contained a similar four-month "grace" period, it provided for the filing of "a new appropriate financing statement" during the grace period.⁵ Old Article 9's reference to a "new appropriate financing statement" prompted some parties to argue (with little apparent success) that financing statements rendered seriously misleading as a result of a name change could only be corrected by the filing of a new UCC-1 financing statement rather than a UCC-3 amendment.⁶ Under the language of revised Article 9, it is clear that UCC-3 amendments are the appropriate method for responding to seriously misleading name changes.⁷

Although it does not materially alter old Article 9's four-month grace period for "seriously misleading" changes in a debtor's name, revised Article 9 does provide additional guidance on when a change in a debtor's name will be considered "seriously misleading." Under old Article 9, this question was left to judicial interpretation. Pursuant to the provisions of §9-506(b) and (c) of revised Article 9, a name change is deemed seriously misleading unless a search by the relevant filing office under the debtor's new name—using the filing office's "standard search logic"—would disclose a financing statement filed under the debtor's old name. As several commentators have suggested,⁸ the latter standard may be considerably less forgiving than the construction of the "seriously misleading" standard adopted by many courts under old Article 9.⁹ Accordingly, secured creditors engaging in transactions under Revised Article 9 may have to monitor possible name changes by their debtors with increased vigilance.

Changes in the Debtor's Location

Under old Article 9, the appropriate jurisdiction within which to file a financing statement perfecting most forms of intangible collateral (such as accounts and general intangibles) was determined by where the debtor maintained its place of business or, if the debtor had more than one place of business, where the debtor maintained its chief executive office.¹⁰ Consequently, when a debtor changed its place of business or its chief executive office, a financing statement filed in the debtor's original place of business could be rendered ineffective.

Under Revised Article 9, this is no longer the case with respect to a broad category of debtors—namely, those debtors that are "registered organizations" (i.e., corporations, limited partnerships, limited liability companies, and other organizations organized "solely under the law of a single state...and as to which the state...maintain[s] a public record showing the organization to have been organized.").¹¹ Specifically, in the case of these latter entities, the appropriate place to file a financing statement under revised Article 9 (for both tangible and intangible forms of collateral) is the state in which the debtor is "registered."¹² Thus, when a debtor that is a registered organization moves its chief executive office to another jurisdiction, the appropriate place to file a financing statement remains the state in which the debtor is registered, and, assuming the secured creditor has filed a financing statement in the latter jurisdiction, it need not undertake any additional action to preserve its perfected status.

The same is not true, however, with respect to those debtors that are not registered organizations. In the case of debtors of the latter type, revised Article 9 provides that the proper jurisdiction within which to file a financing statement is the debtor's place of business/chief executive office (or, if the debtor is an individual, his or her residence).¹³ Accordingly, location changes by such "non-registered" debtors will continue to pose potential problems for secured creditors under revised Article 9.

Indeed, revised Article 9 may make matters more difficult for those secured creditors lending to commercial debtors operating as sole proprietorships, as the proper jurisdiction to file a financing statement with respect to such debtors is now their place of residence (rather than where they maintain their place of business/chief executive office as was the case under old Article 9).¹⁴ Thus, under revised Article 9, secured creditors lending to sole proprietors will have to monitor the location of the debtor's residence, even though they may customarily interact with the debtor only at his or her place of business.

When a "non-registered" debtor relocates to another jurisdiction, revised Article 9 imposes essentially the same re-filing obligations upon the secured creditor that existed under old Article 9. Specifically, in such circumstances, the secured party is generally required to file a financing statement in the jurisdiction to which the debtor has relocated within four months of the debtor's relocation.¹⁵ If the secured creditor fails to do so, its security interest will be deemed unperfected "prospectively" with respect to any party obtaining an interest in the debtor's collateral after the expiration of such four-month period and "retroactively" with respect to "purchasers for value"¹⁶ who acquire interests in the collateral during the four-month period following the debtor's relocation.¹⁷ If, however, the secured creditor re-files in the debtor's new jurisdiction within four months of the debtor's relocation, its security interest will be considered continuously perfected—at least with respect to collateral acquired by the debtor before its relocation.¹⁸ In the case of collateral acquired by the debtor during the four-month grace period following the debtor's relocation, the Official Comment to Revised U.C.C. §9-316 suggests that a timely re-filing by a secured creditor in the new jurisdiction may not necessarily protect its position against intervening interest-holders.¹⁹ The uncertainty surrounding this latter issue could present very significant problems for inventory and receivables lenders who rely heavily on after-acquired collateral.

Changes in the Location of Collateral

Under old Article 9, the collateral's physical location determined the proper jurisdiction within which to file a financing statement for most forms of tangible collateral (including inventory and equipment).²⁰ As indicated above, revised Article 9 rejects this approach and, except for titled goods and certain specialized types of collateral, makes the debtor's location the sole determinant for the appropriate jurisdiction within which to file a financing statement for both tangible and intangible collateral.²¹ Accordingly, changes in the location of collateral will ordinarily not threaten the continued perfection of a security interest under revised Article 9.

Organizational Changes by the Debtor

In addition to name changes and relocations, debtors may also undergo different "organizational changes" after a secured creditor has properly filed its financing statement. Such organizational changes can come in a variety of forms, including (a) conversions from a sole proprietorship or general partnership to a corporation or limited liability company, (b) re-incorporation or re-registration in a new jurisdiction, and (c) corporate mergers.²²

In contrast to old Article 9's rather limited treatment of this subject,²³ revised Article 9 contains detailed rules addressing the impact of such organizational changes on the continued perfection of a secured creditor's security interest. In order to create a conceptual framework for these rules, revised Article 9 treats organizational changes of a debtor as a transfer of the debtor's assets to a "new debtor."²⁴ The extent to which this deemed "transfer" impacts the continued perfection of a secured creditor's security interest then depends principally on the following considerations: (a) whether the "new debtor" is located in the same or a different jurisdiction than the original debtor, and (b) whether the collateral in question was acquired before or after the debtor's organizational change.

If the "new debtor" is located in the same jurisdiction as the original debtor (e.g., if the original debtor merges into another corporation and the surviving corporation is incorporated in the same jurisdiction as the original debtor), then a secured creditor of the original debtor will remain perfected with respect to collateral acquired by the original debtor before the organizational change.²⁵ Assuming its security interest extends to after-acquired property, the secured creditor's security interest will also remain perfected with respect to property acquired after the original debtor's organizational change, provided that the name of the "new debtor" (e.g., the name of the surviving company in a corporate merger) does not render the secured creditor's financing statement under the original debtor's name "seriously misleading."²⁶ If, however, the new debtor's name renders financing statements under the name of the original debtor's name seriously misleading (as often may be the case), then a secured creditor's security interest will not remain perfected with respect to collateral acquired more than four months after the organizational change unless the secured creditor files an appropriate financing statement under the new debtor's name before each four-month period expires.²⁷

Different rules apply if the "new debtor" is located in a different jurisdiction than the original debtor. In such circumstances, the secured creditor's lien against collateral owned by the original debtor prior to the debtor's organizational change will continue to be perfected, provided that the secured creditor files an appropriate financing statement in the jurisdiction of the new debtor within one year of the debtor's organizational change.²⁸

If the secured creditor fails to timely undertake such action, its security interest will be considered unperfected "prospectively" with respect to any parties obtaining interests in the collateral after the expiration of the one-year period following the organizational change and "retroactively" with respect to a purchaser for value who acquires an interest in the collateral during such one-year period.

In the case of property acquired by the new debtor after an organizational change, a secured creditor of the original debtor is not afforded any type of grace period within which to re-file. Instead, the secured creditor's lien on such property will remain unperfected until the secured creditor files an appropriate financing statement against the new debtor in the new jurisdiction, in which event the latter statement will only operate "prospectively" with respect to parties that acquire interests in such property after the financing statement is filed.²⁹

Conclusion

In certain respects, revised Article 9 has reduced the ongoing monitoring obligations of those secured creditors who perfect by filing. In particular, the elimination of collateral location as a determinant of the proper jurisdiction within which to file a financing statement has freed secured creditors from the concern that their perfected status may be jeopardized in the event their debtors surreptitiously move collateral to another jurisdiction. In addition, the clarification that revised Article 9 has brought with respect to organizational changes by a debtor should diminish the uncertainty and confusion that secured creditors previously experienced when confronted by such changes.

Nevertheless, revised Article 9 continues to impose significant monitoring responsibilities upon secured creditors, and these parties (and their counsel) must be fully familiar with the intricacies of revised Article 9's new rules and clarifications if they hope to avoid the many traps and pitfalls that can arise when a debtor undergoes changes after a security interest has been perfected by filing.

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Footnotes

¹ U.C.C. §9-402(7) (1972). Return to article

² U.C.C. §9-507(c) (1999). Return to article

³ U.C.C. §9-507(c)(1) (1999). Return to article

⁴ U.C.C. §9-507(c)(2) (1999). Return to article

⁵ U.C.C. §9-402(7) (1972). Return to article

⁶ See, e.g., Pennsylvania Record Outlet Inc. v. Mellon Bank, 894 F.2d 631 (3rd Cir. 1990). Return to article

⁷ U.C.C. §9-507(c)(2) (1999) expressly provides for the filing of "an amendment to the financing statement which renders the [original] financing statement not seriously misleading..." Return to article

⁸ See Pearson, J., "A Bubba by Any Other Name...Individual Names Under Revised Article 9," 12 Norton Bankr. L. Adv. 1 (December 2001); Warner, R., "Using the Strong-arm Power to Attack Name Errors Under Revised Article 9," 20 Am. Bankr. Inst. J. 22 (October 2001). Return to article

⁹ See, e.g., Knudson v. Dakota Bank and Trust Co. (In re Knudson), 929 F.2d 1280, 1283 (8th Cir. 1991) (holding that under old Article 9, a financing statement was not seriously misleading if a third-party searcher searching under the debtor's correct name would be "reasonably likely" to find the financing statement). Return to article

¹⁰ U.C.C. §9-103(3)(e) (1972). Return to article

¹¹ U.C.C. §9-102(70) (1999). Return to article

¹² U.C.C. §9-301(1) (1999); U.C.C. §9-307(e) (1999). Return to article

¹³ U.C.C. §9-301(1) (1999). Return to article

¹⁴ U.C.C. §9-307(b)(1) (1999). Return to article

¹⁵ Cf. U.C.C. §9-103(3)(e) (1972) with U.C.C. §9-316(a)(2) (1999). Return to article

¹⁶ Old Article 9 also made the secured creditor's lien retroactively unperfected with respect to "purchasers" but did not contain the qualifying language "for value." See U.C.C. §9-402(7) (1972). Return to article

¹⁷ U.C.C. §9-316(b) (1999). For an insightful discussion regarding the bankruptcy avoidance implications of this rule, see Hillinger, I., and Hillinger, M., "2001: A Code Odyssey (New Dawn for the Article 9 Secured Creditor)," 106 Com. L.J. 105, 133-135 (Summer 2001). Return to article

¹⁸ U.C.C. §9-316(b) (1999). Return to article

¹⁹ Comment 2 to U.C.C. §9-316(b) (1999) provides that "[t]his section addresses security interests that are perfected (i.e., that have attached and as to which any required perfection step has been taken) before the debtor changes its location. It does not apply to security interests that have not attached before the location changes." Return to article

²⁰ U.C.C. §9-103(1) (1972). Return to article

²¹ U.C.C. §9-301 (1999). Return to article

²² See U.C.C. §9-203(d) (1999). Return to article

²³ See U.C.C. §9-402(7) (1972). Return to article

²⁴ U.C.C. §§9-102(56) and 9-203(d) (1999). Return to article

²⁵ U.C.C. §9-507(a) (1999). Return to article

²⁶ U.C.C. §9-508(a) (1999). Return to article

²⁷ U.C.C. §9-508(b) (1999). Return to article

²⁸ U.C.C. §9-316(a)(3) and (b) (1999); Comment 2, Example 4 to U.C.C. §9-316 (1999); see, also, Comment 3 to U.C.C. §9-507 (1999). Return to article

²⁹ Comment 2, Example 5 to U.C.C. §9-316 (1999). Return to article