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12/11/2010

Financing Statement Demands Total Accuracy Of Debtor Name

Interpreting Nebraska law, the United States Bankruptcy Appellate Panel of the Eighth Circuit held in In re EDM Corporation (431 B.R. 459) that a financing statement failed to sufficiently provide the name of a debtor, where the name listed on the financing statement consisted of the debtor’s organizational name coupled with the debtor’s trade name.  As a result of the insufficient name, the financing statement was not validly perfected, and the secured party at issue lost its first position lien on the underlying assets.

This holding emphasizes the need for secured parties to use diligence when filing financing statements against registered organizations such as corporations and limited liability companies.  With respect to financing statements filed against registered organizations, Nebraska law requires the debtor to be identified by the name indicated on the public record of the debtor’s jurisdiction of organization (i.e. the articles of incorporation for a corporation, or the articles of organization for a limited liability company).  Like many other jurisdictions, the Nebraska Secretary of State maintains an on-line data base that allows secured parties access to public records to identify the proper name of debtors that are registered organizations formed under Nebraska law.  Secured parties should use the name indicated on the public record of the debtor’s jurisdiction – without any additions or omissions.  As demonstrated in In re EDM Corporation, failure to adhere to this simple rule can have severe consequences.

The official name of the debtor in In re EDM Corporation was “EDM Corporation”, but the debtor commonly conducted business using the trade name “EDM Equipment”.  On the financing statement at issue the initial secured party listed the debtor’s name as “EDM Corporation d/b/a EDM Equipment”.   Two subsequent secured parties extended credit to the debtor and took security interests in some of the same assets as the initial secured party.  Each of the subsequent secured parties conducted lien searches to identify existing liens, and neither of the searches revealed the existing lien of the initial secured party.  The debtor filed bankruptcy, which gave rise to a dispute between the initial secured party and the subsequent secured parties as to the effectiveness of the initial secured party’s financing statement.

The court in In re EDM Corporation emphasized that financing statements are filed in order to put subsequent creditors on notice of existing liens. The court noted that the simple rule regarding how a debtor is to be named on a financing statement places the burden on the filing party to get the debtor’s name correct.  With respect to registered organizations, the applicable rule requires the secured party to use the debtor’s name indicated on the public record of the debtor’s jurisdiction of incorporation – nothing more, and nothing less.   By adding the debtor’s trade name to end of the debtor’s organizational name, the initial secured party in In re EDM Corporation rendered the financing statement ineffective.

If a secured party wants to put subsequent creditors on notice of an existing lien against a registered organization that utilizes a trade name, the secured party may consider listing two (2) separate names on the financing statement.  The official UCC financing statement form contains two (2) separate fields to accomplish this: Field No. 1 for a debtor’s proper legal name; and Field No. 2 for additional names such as trade names.  Only the proper name will be effective vis a vis subsequent creditors, but adding the trade name to Field No. 2 may accomplish the desired goal of putting additional parties on notice of the existing lien.

Secured Parties should consult with legal counsel if they have any questions regarding the proper name or names to use in connection with a financing statement.