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In July 2001, Revised Article 9 of the Uniform Commercial Code (“UCC”) became effective in virtually all states, including Ohio (see R.C. § 1309.101, et seq.). Some commentators labeled

it as an effort to “make the world safer for secured creditors” and less appealing for bankruptcy trustees. Nonetheless, more than ten years later, Revised Article 9 still contains traps for unwary or careless secured creditors. It also presents corresponding opportunities for lien creditors and bankruptcy trustees.

Trying to list all potential traps is beyond the scope of this article. Instead, below are examples of mistakes or issues that continue to arise.1

Collateral Description Foul-UpsIn order to create a valid security interest, a security agreement must contain a “reason-able description” of the collateral. UCC §§ 9-203(b)(3)(A); 9-108(a). Likewise, for those security interests that are perfected by filing, a UCC financing statement must “indicate” the collateral that it covers. UCC §§ 9-502(a)(3); 9-504. With few exceptions, neither a security agreement nor a financing statement must de-scribe collateral with particularity. Moreover, a description that indicates the collateral by Article 9 “type” (such as “accounts” or “inven-tory”) is sufficient. UCC § 9-108(b)(3).

Inattentive secured creditors nonetheless can misstep. For example, a financing state-ment permissibly can identify the collateral broadly, such as “all of the debtor’s assets” or “all of the debtor’s personal property,” pro-vided that in the security agreement the

debtor authorized the description to be that expansive. UCC §§ 9-504(2); 9-509(b)(1). But the rule for creating a security interest is differ-ent. In a security agreement, “super-generic” descriptions such as these do not “reasonably describe” the collateral and, therefore, are not effective to create a valid security interest in such property. UCC § 9-108(c). Secured creditors continue to overlook this. Thus, the creditor in Mac Naughton v. Harmelech, 2010 WL 3810846 (D.N.J. Sept. 22, 2010), learned to its chagrin that the phrase “all of [the debtor’s] right, title and interest in any and all real or personal property wherever located” was inef-fective to create a valid security interest.

Occasionally, a creditor may worry that an overly broad introductory description of collateral in a security agreement will render an accompanying, more specific description ineffective to create a valid security interest. Courts have been forgiving about this, though, especially where the more specific description utilizes the UCC collateral “types.” See, e.g., In re Lifestyle Home Furnishings, LLC, 2009 WL 1270317 (Bankr. D. Idaho May 7, 2009).

In certain instances, however, describing collateral by Article 9 “types” is forbidden. Property that constitutes “commercial tort claims” or —in a consumer (rather than non-consumer) transaction—“consumer goods, a security entitlement, a securities account, or a commodity contract” must be described specifically. UCC § 9-108(e) & comment 5.

Even though Article 9 adopts a “notice filing” system, unless secured parties are very careful they may end up inadvertently limiting the scope of their perfected security

interests or, at the very least, having to defend their lien perfection in court. In a recent case, Wells Fargo Equipment Finance, Inc. (“Wells Fargo”) stepped into the shoes of The CIT Group/Equipment Financing, Inc. (“CIT”) as a secured creditor. CIT’s initial financing state-ment described the collateral as “[e]quipment and inventory financed by The CIT Group/Equipment Financing, Inc.”. Wells Fargo amended CIT’s original financing statement to substitute itself as the new secured party, but Wells Fargo never amended the collateral de-scription to refer to equipment and inventory that it (rather than CIT) financed. Despite this oversight, a bankruptcy court and (on appeal) a district court concluded that this description placed searchers on sufficient inquiry notice that Wells Fargo might claim a lien on equip-ment and inventory that it financed. In re D & L Equipment Inc., 457 B.R. 616 (E.D. Mich. 2011). Wells Fargo prevailed, but only after taking its chances in two courts.

Other Financing Statement GaffesSometimes simple things can be difficult. Cor-rectly identifying a debtor’s name may be one of them. For a financing statement to be effec-tive, it must (among other things) “provide the name of the debtor.” UCC § 9-502(a)(1). If the debtor is a “registered organization,” such as a corporation or LLC, the name on the financ-ing statement is sufficient only if it matches the debtor’s name “indicated on the public record of the debtor’s jurisdiction of organiza-tion which shows the debtor to have been organized.” UCC § 9-503(a)(1). The financing statement remains effective notwithstanding minor errors or omissions, provided that these errors or omissions do not make it “seriously misleading.” UCC § 9-506(a). A mistake will make a financing statement “seriously mis-leading” if a search of the filing office’s records under the debtor’s “correct name,” using the filing office’s standard search logic, would not disclose the financing statement. UCC § 9-506(c).

Even the slightest error in a debtor’s name can be fatal, if it means that a search of the filing office will not disclose the financing statement. In In re PTM Technologies, Inc., 452 B.R. 165 (Bankr. M.D.N.C. 2011), for instance, just omitting the “h” from “Technologies” in the debtor’s name rendered a financing state-ment ineffective.

Like misspellings, including extraneous information in a financing statement can be lethal. UCC § 9-503(c) specifies that a debtor’s

BY JEFFREY C. TOOLE

UCC Article 9: More Than Ten Years LaterTraps For The Unwary Still Linger

CLEVELAND METROPOLITAN BAR JOURNAL JANUARY 2012 WWW.CLEMETROBAR.ORG28 |

“trade name” will not suffice. Only the debtor’s “correct name” will do. But what if a financing statement identifies the debtor by its “correct” name and its trade name? Once again, the answer depends on whether the filing office’s standard search logic would disclose the financing statement. In In re EDM Corp., 431 B.R. 459 (Bankr. 8th Cir. 2010), the secured party’s financing statement listed “EDM Cor-poration d/b/a EDM Equipment.” Searches under the (correct) name “EDM Corporation” did not disclose that financing statement, so it was deemed ineffective. Bottom line: Stick to the debtor’s exact name.

Similarly, using unapproved UCC forms may be unwise. For example, in In re Camtech Precision Mfg., Inc., 443 B.R. 190 (Bankr. S.D. Fla. 2011), the secured party filed financing statements in Florida and New York utilizing Florida’s standards forms. To add two other debtors’ names, the secured party appended a plain paper attachment listing them, rather than the standard attachment form approved in Florida and New York. The filing offices indexed the financing statements under the name of the debtor on the face page, but not under the names of the “additional debtors” on the plain paper attachment. Searches of the filing offices under the additional debtors’ names did not reveal the financing statements. As to those two debtors, they were deemed ineffective. The lesson is clear: Whenever practicable, use the approved forms and then double-check to ensure that a search of the fil-ing office will reveal the financing statements under each additional debtor’s name.

More Name Problems: Individual Debtors Determining an individual debtor’s proper name can be yet another trap. Article 9’s rule on this is circular: “[a] financing statement suf-ficiently provides the name of a debtor…only if it provides the individual…name of the debtor.” UCC § 9-503(a)(4)(A). The provision also does not clarify whether a nickname is adequate, or whether the failure to include an individual debtor’s middle name or middle initial will render a financing statement ineffective. So, secured creditors have learned the hard way that, for example, “Terry J. Kinderknecht” is ineffective where his name really is “Terrance Joseph Kinderknecht,” Clark v. Deere & Co. (In re Kinderknecht), 308 B.R. 71 (Bankr. 10th Cir. 2004), and “Chris Jones” is not adequate when his name is “Christopher Gary Jones.” Morris v. Snap On Credit, LLC (In re Jones), 2006 WL

3590097 (Bankr. D. Kan. 2006).The uncertainty does not end there: What

source document provides the debtor’s “correct name”: a birth certificate, a driver’s license, a Social Security card, a passport, or something else? Further, what should a lender do if these or other potential source documents contain different variations of the same individual’s name? And if an individual is married but uses her maiden name at work, should the fi-nancing statement identify her by her maiden name or her married surname?

One obvious alternative is for a secured party to identify the individual debtor in its security agreement using all name variations, and then file financing statements for each such variation. Paying to file financing state-ments is much less expensive than paying to defend lawsuits.

Changes in a Debtor’s Name or LocationAside from identifying the debtor’s “correct name,” a secured party must be mindful that the name or location of its debtor may change—jeop-ardizing the continued perfection of its security interest. The impact of name changes is relatively straight-forward. Assume a registered organiza-tion properly changes its name in the public records. Next, assume the debtor’s new name is so different from its former name that a search of the UCC filing office under the new name would not reveal the secured party’s financing statement, which was filed under the debtor’s former name. In that event, a competing creditor or bankruptcy trustee likely would argue that the name change made the secured party’s financing statement “seriously misleading” and ineffective.

The implications of a location change are more complicated. A location change may occur in several ways, such as when an individual debtor moves to a different state, or because the owners of a registered organization decide to “reincorpo-rate” it in a new state. Article 9 provides that all financing statements must be filed in the juris-

diction of the debtor’s location. UCC § 9-301(1). If a debtor subsequently moves its “location” to another jurisdiction, the secured party must take action to maintain perfection of its security interest. In general, if a debtor’s “location” moves to a new jurisdiction, the security interest in col-lateral that existed before the move will remain perfected for a fixed period of time (either four months or one year, depending upon the cir-cumstances, as long as the financing statement in the former location does not expire earlier than that). UCC § 9-316(a)(2); (a)(3). It will be con-tinuously perfected if it is timely “re-perfected” in the new location. UCC § 9-316(b). Collateral that a debtor acquires during the “grace period” will be unperfected until re-perfection occurs. See UCC § 9-316(a). If the security interest is not re-perfected within the “grace period,” it is deemed never to have been perfected as against a “purchaser of the collateral for value,” including other secured parties. Thus, a secured creditor that does not timely re-perfect may become subordinate to other secured parties (old or new) on all of its collateral—even collateral that existed before the “location change.”

As a result, a secured party must diligently monitor its debtor’s name and location and act promptly to “re-perfect” if a change occurs. Likewise, a new lender who proposes to take a security interest in a debtor’s assets should ascer-tain whether the debtor has changed its location during the previous four months (or one year), and, if so, it should search UCC filings in the debtor’s current and former states of location.

ConclusionRevised Article 9 may have made the world “safer for secured creditors” in some respects, but secured creditors must remain wary and diligent. Otherwise, they may fall into any of these or other traps that still linger.

Jeffrey C. Toole is a shareholder with the law firm of Buckley King in its Financial Services Practice. He assists clients in complex situ-ations involving commercial debt

restructuring matters, and represents key play-ers in Chapter 11 reorganizations. He has been named to The Best Lawyers in America and Ohio Super Lawyer. He can be reached via email at toole@buckleyking.com or via phone at (216) 685-4749. The author would like to acknowledge the contributions of Lindsay Maxwell of Buckley King to this article.

1 Proposed amendments to Revised Article 9 have been formulated that would address some, but not all, of the topics addressed in this article, as well as several interpretive issues. As of January 2012, those 2010 amendments were enacted in 9 states and are pending in several others, including Ohio (see Senate Bill 208). For the latest developments regarding adoption of these amendments, see http://nccusl.org/Act.aspx?title=UCC Article 9 Amendments (2010).

A secured party must diligently monitor its debtor’s name and location and act promptly to “re-perfect” if a change occurs.