Search Logic from MARS
Unfortunately, Justice Holmes's famous statement may not be valid under Revised Article 9, for while he had certainly never heard of computers or search logic, both will impact the interpretation of the revised UCC provisions. Here is the problem: while §9-7052 seems to preserve security interests properly perfected under old Article 9,3 §9-703(b) establishes a one-year grace period in which to meet the requirements of Revised Article 9.4
Section 9-705 says, in effect, that if a financing statement was sufficient to perfect a security interest under the old Article 9 rules, even if it does not comply with the revised name and collateral description requirements of Revised Article 9, it remains valid under Revised Article 9. If, however, it would be deemed seriously misleading under the case law construing old Article 9 in the jurisdiction of filing, then you have until June 30, 2001, in most jurisdictions, to file a corrective amendment.5
If your documentation lists the exact legal name of the debtor as now required by Revised Article 9,6 no action is required. Where the debtor is a registered organization,7 the documents should reflect the correct corporate name, and if they do, no action will be necessary.8 If, however, the financing statement contains anything but the exact legal name of the debtor (including punctuation and spaces in some cases), whether an organization or individual, an amendment will have to be filed or the perfection will lapse irretrievably on July 1, 2002.9
If the name in the financing statement varies from the legal name of the debtor, the need for action will depend on the construction the jurisdiction's courts have given old Article 9's seriously misleading language, the search logic (or logics) available to search the filing office's existing database, and how similar the name in the filed financing statement is to the legal name of the debtor. The law in this area is not going to be made in cases where transactional lawyers carefully reviewed the documentation and prepared the financing statements and other documents where there are millions of dollars involved. It is going to be made in the small business and farm cases where the debtor uses a nickname or trade name, or the creditor filed under old Article 9 against a trade, nickname or incomplete name—anything but the debtor's full legal name.
The courts developed a variety of analyses under old Article 9's §9-402 as to what sufficed to properly list the name of the debtor.10 As Prof. Zekan notes, about the only rule that the courts agreed upon was that a filing in the debtor's legal name was always sufficient. Further, the courts were "in general agreement that the dispositive question to determine a financing statement's legal sufficiency with respect to the debtor's name is 'whether a...search under the debtor's...name would uncover the filing.'"11
Although Prof. Zekan details the wide variety of analytical approaches developed by the courts, the common thread is the reasonably diligent searcher test that asks what the hypothetical diligent searcher would have found or searched.12 The rulings are typified by two opinions by the Tenth Circuit. In one, a filing under the name "Hilton Inn" was found ineffective to perfect a security interest in the property of a partnership named "Beacon Realty Investment Company of Salina," which did business under the trade name Hilton Inn.13 The court essentially concluded that a financing statement filed in the debtor's trade name, which bore no similarity to the partnership's name, was insufficient. Although there is contrary authority, the majority rule is that a trade name filing that bears no resemblance to the debtor's legal name is ineffective.14 However, the court upheld a filing in the trade name "Thriftway Auto Stores" where the debtor's actual corporate name was "Thriftway Auto Supply Inc."15 The court stated:
A creditor or other interested party should behave in a reasonably prudent manner by conducting a reasonably diligent search. In this particular case, the name used by Star was substantially similar to the debtor's true legal name in that it contained the two most unique and descriptive words in the debtor's true legal name, "Thriftway" and "Auto." A reasonably prudent creditor conducting a reasonably diligent search would have formulated a search aimed at revealing filings under substantially similar names.16
Thus a filing in the trade name or even an incomplete form of the legal name may be effective under the state interpretation of the old law.17 The problem will be demonstrating that the financing statement that lists anything but the legal name would be discovered by a reasonably diligent searcher may prove tricky. In effect, Revised Article 9 grafts onto the existing legacy electronic filing systems' new search logic or logics.
An "Article 9 Filing Project," made up by interested parties and representatives of the various state filing offices, drafted Model Administrative Rules (MARS) for the International Association of Corporation Administrators (IACA).18 The MARS contain a detailed description of a standard search logic. As of this writing, the majority of states have adopted some form of MARS, although some have modified the search logic rule in minor respects.19 The MARS search language is much stricter than the old manual search system and, as has been discussed in this column before, will not find financing statements that do not exactly match the name for which the search is made.20 In effect, the model search logic ignores spaces, punctuation and many organizational forms indications (e.g., Inc., etc.) in the name being searched and returns only filings that are exact matches for that name.21
The model search logic does not follow the reasonably diligent searcher standard that most courts applied in some form since there is no human judgment involved in it at all. Moreover, most states have modified the MARS search logic in some way. Thus the first problem for creditors is that using the standard search logic in the filing office22 will not return anything but exact matches for the name searched. For example, a search under most variations of the MARS search logic in the name of a corporation named Argus Inc. will return only organizations such as Argus Inc., Argus L.L.C., Argus LLC, Argus Co., etc. It would not return a filing in the name of Argus Tapes and Records, yet most reasonably diligent searcher tests would find that the latter name sufficiently identifies the debtor to place creditors on notice. Likewise, a search for Thriftway Auto Supply Inc. would not return a filing in the name of Thriftway Auto Supply, the trade name filing held effective under Oklahoma's old Article 9.23
If the only search logic available is based on MARS, it will be virtually impossible to find financing statements that differ from the debtor's name in even the most minor way. Therefore, most states have adopted alternative search logic24 rules that allow more liberal but often inconsistent search methods. For example, the Kansas Secretary of State offers as an official search (for a fee) a more liberal search logic via the Internet. Under the Internet search logic, a search for "Argus" would return not only the various Argus organizations, but any organization that begins with Argus, including Argus Tapes and Records. But a search for Thriftway Auto Supply Inc. would not return Thriftway Auto Stores because the match is not exact. However, a search for simply Thriftway Auto, or simply Thriftway, would return Thriftway Auto Stores.25
Searching individual names will be equally inconsistent and confusing. A MARS-based standard search logic search for Pearson will return only organizations that begin with that name. But a search under the Internet search logic will produce not only the organizations but all individuals with the last name of Pearson. Likewise, a standard search for John Pearson will return any financing statement listing individuals named John Pearson, regardless of middle name, but a search for John K. Pearson will return only the filings where the John Pearsons' middle names begin with K. And none of the search logics would return a filing in the name of Bubba Pearson if the search is done in the name of John Pearson. A search for Kenneth Pearson would not return John Kenneth Pearson.
While it would be impossible to begin to describe the errors in spelling, spacing, punctuation or even listing the wrong first or middle name, it is safe to say that creditors will probably find ways to misstate the debtor's name in a financing statement that cannot be imagined now.
However, it is clear that, under the reasonably diligent searcher test, if whatever search logic is used does not return the financing statement, it is not preserved under §9-705, and an amendment is necessary under §9-703 before the one-year grace period expires or the effectiveness of the financing statement lapses. Counsel is thus faced with a complex problem requiring consideration of the name used in a financing statement, the rule in the jurisdiction of filing on how close the financing statement has to be to the legal name, and the search logic or logics available to access the existing filing data base. This may lead to a "clean-heart-and-empty-head" approach where counsel searches in the legal name of the debtor under the standard search logic; if it does not return the client's filing, the only safe course is to amend the financing statement within one year of the effective date.
And if Justice Holmes were still alive, he'd have to amend his statement about the law, for the life of the UCC law is not going to be experience, but search logic.
1 Holmes, Oliver Wendell Jr., The Common Law at 1 (http://plague.law.umkc.edu/Books/Holmes/claw_c.htm). Return to article
3 Subsection (b) provides:
Pre-effective date filing. The filing of a financing statement before this act takes effect is effective to perfect a security interest to the extent the filing would satisfy the applicable requirements for perfection under this act. Return to article
4 Subsection (b): provides:
Continuing priority over lien creditor: perfection requirements not satisfied. Except as otherwise provided in §9-705 and amendments thereto, if, immediately before this act takes effect, a security interest is enforceable and would have priority over the rights of a person that becomes a lien creditor at that time, but the applicable requirements for enforceability or perfection under this act are not satisfied when this act takes effect, the security interest:(1) is a perfected security interest for one year after this act takes effect;
(2) remains enforceable thereafter only if the security interest becomes enforceable under §9-203, before the year expires; and
(3) remains perfected thereafter only if the applicable requirements for perfection under this act are satisfied before the year expires. Return to article
7 §9-102(70). Essentially, a registered organization is an entity formed under the laws of one of the states, the District of Columbia or federal law that must register with the jurisdiction of organization. Return to article
12 As Prof. Zekan notes, even the cases following the holding in Brushwood v. Citizens Bank (Matter of Glasco Inc.), 642 F.2d 795, 31 UCC Rep. Serv.16 (5th 1981), generally referred to as the Glasco approach, are based on the premise that a reasonably diligent searcher would check for filings under a trade name generally used by the debtor. Id. at 390. Although Glasco and its progeny have been harshly criticized by both commentators and courts alike, they remain the test in many jurisdictions. Return to article
15 Citizens National Bank & Trust Co. v. Star Automotive Warehouse Inc. (In re Thriftway Auto Supply Inc.), 39 F.3d 1193 (table only) (unpublished opinion), 25 UCC Rep.Serv.2d 982 1994 WL 637047 at 1 (10th Cir. 1994). Return to article
17 Section 9-503 requires the registered organizational name of the debtor as listed on the public record of the debtor's jurisdiction of organization or, in other cases, the debtor's individual or organization name. However, §9-521(a) requires the debtor's exact full legal name in the financing statement. Return to article
19 Ernst, Carl R., Uniform Commercial Code Revised Article 9 Alert (Ernst Publishing Co. LLC, 2001). A revised version was due out in March 2002. The work contains a state-by-state analysis of the search logic. A number of states have not adopted any rules on search logic, leaving the question open as to exactly how the existing data base can be searched. See, also, http://www.ernst.cc/. Return to article
22 A financing statement is not deemed seriously misleading if a search of the records of the filing office under the debtor's correct name using the filing office's standard search logic would disclose a financing statement that does not include the debtor's name as required by §9-503. 9-506(c). Return to article
24 Or logics. North Carolina offers no less than seven search logics accessing the same database, but often producing different results (based on the author's conversation with Lexis Nexis Document Solutions Inc. Vice President Trish Bogenrief). Return to article