By Paul Hodnefield, Associate General Counsel, Corporation Service Company

Secured parties occasionally discover that they filed a financing statement with an incorrect debtor name.  A debtor name error ordinarily renders a financing statement seriously misleading and ineffective.  Therefore, most secured parties either amend or re-file the financing statement immediately upon learning of a debtor name error. 

There are some secured parties, however, that believe no further action is necessary to correct a debtor name error if the financing statement shows up on a search.  These parties rely on UCC Section 9-506(c), which provides that a debtor name error will not make the financing statement seriously misleading if a search of the filing office records under the correct debtor name, using the jurisdiction’s standard search logic, would disclose the record. 

Reliance on Section 9-506(c) for perfection is a risky proposition for secured parties.  Filing offices can and do change search logic.  Even if a financing statement was disclosed on a prior search, any reprogramming of the search logic could change the result in the future and make the record seriously misleading.  This article provides some examples of how search logic can change and offers some simple solutions to help secured parties avoid the risk.

A financing statement sufficiently provides the name of the debtor if it meets the requirements of Section 9-503(a).  Strict compliance is necessary.  Any deviation in the debtor name will cause the financing statement to be seriously misleading under Section 9-506(b).  The only exception occurs when a search conducted in accordance with Section 9-506(c) discloses the record.  Thus, the effectiveness of a financing statement that contains a debtor name error will depend entirely on the jurisdiction’s standard search logic.

Most state-level filing offices use search logic based on the rules applied to search requests by the Model Administrative Rules (“MARS”) developed for implementation of Revised Article 9.  The MARS search logic generally requires an exact match between the name being searched and the name in the index.  The search logic only disregards specific minor differences between the names.  For example, MARS Rule 503.1 provides that case, punctuation, certain ending “noise words,” “The” at the beginning of the name and spaces are all disregarded when conducting a search. 

The filing office methods for dealing with noise words offer some examples of how search logic interpretation and programming can affect search results.  “Noise words” are words or abbreviations that designate the type of entity.  The list used by most filing offices includes noise words such as “CORPORATION,”  “LLC” and “LIMITED PARTNERSHIP.”  MARS search logic Rule 503.1.5 provides that noise words “at the end of the organization name” are to be disregarded.

Exactly how the search logic disregards ending noise words varies by filing office.  Most filing offices use search logic that disregards all ending noise words.  Search logic programmed in this manner would equate the correct name of “ABC COMPANY, INC” with both “ABC COMPANY” with “ABC” because all the ending noise words would be ignored. 

A different filing office approach is to disregard only very last ending noise words or abbreviations.  In that case “ABC COMPANY, INC” and “ABC COMPANY” are not equivalent.  The search logic would disregard only “INC” from the former and “COMPANY” from the latter.  Under this approach, the resulting text of the two names would not match.  A financing statement filed on “ABC COMPANY” would be seriously misleading if the correct name was “ABC COMPANY, INC.”

Filing offices also use different methods for how the search logic identifies ending noise words.  Search logic programmed to look for a string of noise word characters will produce different results than search logic programmed to look for whole noise words.   For example, if the search logic looks for noise words as simply a string of text, it would equate “ABC-NACO, INC” with “ABC.”  The logic would disregard “INC,”, then “CO” and then “NA” because each string of characters is on the ending noise word list used by most states.

A different result would occur if the search logic used a whole word match.  In that case the search logic would equate “ABC NACO, INC” with “ABC NACO, ” but not “ABC.”  Only “INC” would be disregarded because the whole word “NACO” is not on the ending noise word list.

A secured party that relies on Section 9-506(c) for perfection is at substantial risk if a filing office changes the programming for MARS Rule 503.1.5.  Records that were previously effective under Section 9-506(c) may no longer be disclosed on a search.  That will be the case later this year when the Minnesota Secretary of State rolls out its new UCC online system. 

Currently, the Minnesota Secretary of State filing office search logic disregards all ending noise words.  When the new UCC system rolls out later in 2010, the search logic will only disregard the last ending noise words.  As a result of the new system implementation the search logic will no longer disclose some financing statements that were disclosed on prior searches conducted under the same published rules. 

There are some actions a secured party can take to reduce the risk of search logic changes.  If the secured party does discover a debtor name error in its filed financing statement the best practice is to first conduct a Section 9-506(c) search to verify the name is currently sufficient, then amend the financing statement as soon as possible.  The search results should be filed to preserve evidence of perfection and priority as of the amendment date.  Although probably unnecessary, the secured party may also want to file a new initial financing statement as a belt and suspenders approach.

Another measure a secured party can take is to do a search to reflect on the correct debtor name after filing an initial financing statement.  The search results will not disclose the financing statement if it contains any serious name errors.  That gives the secured party an opportunity to promptly fix the problem while the risk is low.  If the search does disclose the record, the secured party should verify that the indexed debtor name is correct.

The simplest method of all is to ensure the debtor name is correct in the first place.  Search logic is irrelevant for determining sufficiency if the debtor name complies with Section 9-503(a).  Of course, getting the name right is easier said than done.  The UCC preparation process still involves human judgment.  Even the most diligent secured party will occasionally make debtor name errors. 

Paul Hodnefield is Associate General Counsel for Corporation Service Company and a frequent speaker/writer on UCC search and filing issues.  Please feel free to contact him with questions or comments at communications@cscinfo.com. You can also learn more about UCC related topics in CSC's publication, The UCC Filing Handbook. Click here for more information.