Lenders Beware: Avoid Use of Trade Names in Financing Statements
November 11, 2011
Avoid Use of Trade Names in Financing Statements
A recent federal court appellate ruling has stripped a bank of its liens, even though the bank properly listed its borrower’s full corporate name in the UCC-1 financing statement. The problem was that the bank also included the borrower’s trade name in the same box.
In Hastings State Bank v. Stalnaker (In re EDM Corp.)/, borrower was incorporated as “EDM Corporation” and commonly known as “EDM Equipment.” Bank #1 gave EDM a loan and filed a UCC-1 financing statement under “EDM Corporation d/b/a EDM Equipment.” .
Bank #2 then extended credit to EDM, having first run a UCC search which did not reveal Bank #1’s financing statement. The standard search logic used by the Secretary of State’s office did not identify “EDM Corporation d/b/a EDM Equipment” as being the same entity as “EDM Corporation.”
Under revised Article 9, UCC-1 financing statement data is entered and indexed based on the exact name listed in the financing statement box for the borrower’s name. Article 9-503 further requires that the borrower’s name in the UCC-1 be exactly as listed in the public records of the borrower’s place of organization. The court interpreted this to mean that trade or other names may be added to the UCC-1 box for other or additional names but not used in the box requiring the borrower’s name.
In the EDM case, Bank #1’s UCC-1 had added such superfluous information to the name box. The court therefore held Bank #1’s lien improperly perfected. Bank #2’s lien was accordingly given first priority in the collateral.
Perfecting liens under Revised Article 9 of the Uniform Commercial Code can be a minefield.