Inclusion of Trade Names in the Financing Statement Name Box and the Power of Trustees to Avoid Secured Creditors Liens

By: Marissa T. Kovary
St. John's Law Student
American Bankruptcy Institute Law Review Staff

Recently, in Hastings State Bank v. Stalnaker (In re EDM Corp.),[1] the Eighth Circuit BAP held that a UCC-1 financing statement containing the debtor’s “doing business as” name did not properly perfect the lender’s lien. A search of the Nebraska Secretary of State’s Uniform Commercial Code (“UCC”) records using the office’s standard search logic did not reveal the financing statement.  As a result, the lender lost its priority in the collateral. In this case, Hastings filed a financing statement identifying the debtor as “EDM Corporation d/b/a EDM Equipment.”[2] Two subsequent lenders searched the UCC records for “EDM Corporation,” but the standard search logic did not reveal Hastings’s financing statement.[3] Both filed financing statements listing the debtor as “EDM Corporation.”[4] After EDM filed its chapter 7 petition, the three lenders each asserted a lien against the proceeds of the collateral, raising the issue of priority.[5]

 The BAP identified the threshold issue to be whether Hastings sufficiently provided the name of the debtor.[6] Creditors need to be precise when filing a UCC-1.[7] Trade or other names cannot be added in place of, or as part of, the debtor’s organizational name.[8]  The court then turned to UCC § 9-506 to determine whether the error rendered the filing seriously misleading.[9] A debtor’s name is not seriously misleading if a search using the debtor’s correct name would return the creditor’s UCC-1 filing statement.[10] A search of the Secretary of State’s records according to the office’s standard search logic and using “EDM Corporation” did not disclose Hastings’s financing statement.[11] The addition of “d/b/a” to the debtor’s name field made the document seriously misleading.[12] The court reasoned that a financing statement is not effective just because the debtor’s legal name appears somewhere in the string of words listed as the debtor’s name.[13]   

In re EDM is significant because of its implications for trustees’ powers in bankruptcy.  The trustee, acting as a hypothetical judgment lien creditor, may avoid unperfected security interests under section 544’s strong arm power.[14] If a creditor’s security interest is not properly perfected, the creditor’s unperfected interest is subordinated to the trustee’s interest on the estate’s behalf.[15] In order for a creditor to have a perfected lien, its financing statement must correctly provide the debtor’s name.[16] In re EDM stands for the proposition that the inclusion of a trade name in a financing statement’s name box is a fatal error that allows a trustee to avoid a secured creditor’s lien.

 


[1] 431 B.R. 459 (B.A.P. 8th Cir. 2010).

[2] Id. at 461.

[3] Id. at 461–462. 

[4] Id. at 462. 

[5] Id. at 461, 462. 

[6] 431 B.R. at 467; see Neb. Rev. Stat. U.C.C. § 9-502(a)(1) (1999).   

[7] See 431 B.R. at 465 (stating that registered organization’s name on financing statement must be “the name of the debtor indicated on the public record of the debtor’s jurisdiction of organization” and absence of debtor’s trade name does not render financing statement ineffective, but listing only debtor’s trade name does).

[8] Id.    

[9] Id. at 467.

[10] Id.; see Neb. Rev. Stat. U.C.C. § 9-506(a)(iii) (1999).

[11] 431 B.R. at 467. The Nebraska Administrative Code contains a standardized list of “noise words” that are ignored in the search process; the list does not include “d/b/a” or names used as a d/b/a. Id.; see 436 Neb. Admin. Code § 503.4.

[12] 431 B.R. at 467.

[13] Id.     

[14] E.g., In re Jim Ross Tires, Inc., 379 B.R. 670, 674 (Bankr. S.D. Tex. 2007). 

[15] In re Alvo Grain & Feed, Inc., Bankr. No. BK08-80876-TLS, 2009 WL 5538645, at *2 (Bankr. D. Neb. 2009).  

[16] Id.