:In re Erwin

50 UCC Rep. Serv. 2d 933 (Bkcy D. Kan. 2003)

EDITORS' NOTE

Kansas's version of Revised § 9-503(a) inserts a non-Code paragraph after paragraph (3), designated (4), and renumbers the following paragraph as (5) accordingly. Thus, Official Text Revised § 9-503(a)( 4)(A) is § 9-503(a)( 5) (A) in Kansas' adoption. See the State UCC Variations Volume, or the equivalent in UCCSEARCH ®;, for more information about state adoptions of UCC revisions and variations to the Official Text.

Nugent, Chief Bankruptcy J.

This adversary proceeding presents a question of first impression interpreting certain recent revisions to Article Nine of the Kansas Uniform Commercial Code dealing with the sufficiency of an individual debtor's name on a financing statement and whether the financing statement is seriously misleading. See KAN. STAT. ANN. §§ 84-9-503(a) and 84-9-506 (2002 Supp.). At issue is whether the use of 'Mike Erwin' as debtor's name on the 1999 financing statement, rather than his full legal name of 'Michael A. Erwin' as listed on debtor's bankruptcy petition in 2002, is seriously misleading, thereby rendering perfection ineffective and the security interest avoidable. The Court answers this question in the negative and rules in favor of the defendant-creditor Bucklin National Bank.

Introduction

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[T]he Court must decide whether the Bank's 1999 financing statement satisfies revised Article Nine's perfection requirements. [Footnote omitted.] If so, the Bank's lien has been continuously perfected and the trustee cannot avoid the Bank's lien.

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The trustee relies on the search logic provisions of revised Article Nine to invalidate the Bank's UCC-1 financing statement. The trustee's argument is that the debtor's name on the UCC-1 financing statement is seriously misleading under KAN. STAT. ANN. (2002 Supp.) § 84-9-506 because the trustee's electronic UCC search by the debtor name of 'Michael A. Erwin' did not reveal the Bank's financing statement filed under the debtor name 'Mike Erwin.' The trustee's argument is premised on the notion that an individual's full legal name is an individual debtor's 'correct name.' The Bank counters that the scope of the trustee's UCC search query was faulty in that it was unreasonably narrow. The Bank argues that a reasonably diligent searcher would not have limited his search to the exact proper name of the debtor as shown on his bankruptcy petition, but would have expanded the search to include common derivations of debtor's formal or proper name.

Statement of Facts

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On June 15, 1999, the Bank filed a UCC-1 financing statement showing 'Mike Erwin' as the debtor. [Footnote omitted.] The financing statement covered the Bank's security interest in machinery and equipment. All of the documents in the Bank's loan file showed debtor's name as 'Mike Erwin,' including a W-9 tax form request for taxpayer identification number and certification. [Footnote omitted.] The debtor has always been known to the Bank as 'Mike Erwin.' * * * The trustee ran an electronic UCC search of the Kansas Secretary of State's office using only the name 'Michael A. Erwin.' [Footnote omitted.] This search did not reveal the Bank's financing statement filed under the debtor name of Mike Erwin.  * * * A search using 'Mike Erwin' resulted in ten (10) hits, all revealing financing statements under the name of Mike Erwin. [Footnote omitted.] This search query would have revealed the Bank's financing statement. * * * A search using the debtor's surname and the first letter of his first name 'M. Erwin' resulted in sixteen (16) hits, and revealed inter alia financing statements under the names of Michael A Erwin, Michael A. Erwin, and Mike Erwin. [Footnote omitted.] This search query would have revealed the Bank's financing statement. Finally, a search using only the debtor surname of 'Erwin' resulted in thirty-seven (37) hits, and revealed inter alia financing statements under the names of Michael A Erwin, Michael A. Erwin, and Mike Erwin. [Footnote omitted.] This search query would have also revealed the Bank's financing statement. * * * In summary, a search query using the debtor name of Erwin, M. Erwin, or Mike Erwin would have revealed the Bank's UCC-1 financing statement and security interest. All of the 'hits' under the various search queries showed debtor's address as Haviland, Kansas, save one. [Footnote omitted.] It is also apparent from the number of hits under the name of Mike Erwin, that the Bank was not the only secured creditor that used 'Mike Erwin' as debtor's name on the UCC-1 financing statement. [Footnote omitted.] Finally, it can be logically concluded that had a search been made by debtor's last name alone, it would have become apparent to the trustee that the debtor used both Mike and Michael as first names and the existence of all filed security interests granted by the debtor would have been revealed.

Analysis

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Overview of Revised Article Nine

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The rules governing the sufficiency of the debtor's name were previously contained in KAN. STAT. ANN. (1996) § 84-9-402(7), which provided:

A financing statement sufficiently shows the name of the debtor if it gives the individual, partnership or corporate name of the debtor, whether or not it adds other trade names or the names of partners. Where married debtors are jointly engaged in business and it is unclear whether a partnership exists, the financing statement may be filed in the names of the individual debtors. Where the debtor so changes the debtor's name or in the case of an organization its name, identity or corporate structure that a filed financing statement becomes seriously misleading, the filing is not effective to perfect a security interest in collateral acquired by the debtor more than four months after the change, unless an amendment to the financing statement is filed before the expiration of that time. . . . . [Emphasis added.]

The current provision addressing the rules for the debtor's name is found at § 9-503 and is significantly more detailed. Section 9-503 states: * * *

The revised code provision retains and expounds upon the seriously misleading test. Section 9-506 provides:

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Some new concepts and rules have been injected by revised Article Nine, particularly § 9-503(a) and § 9-506, that give further guidance concerning the debtor name requirement and the seriously misleading standard. Subsections (1) through (3) of § 9-503(a) give specific rules for determining the sufficiency of a debtor's name, but only for certain types of debtor organizations and entities: corporations, estates, and trusts. In the case of debtor corporations or registered organizations, the name of the debtor is the name on file in the state of organization. [Footnote omitted.] However, § 9-503(a)(5) does not give any specific criteria for the sufficiency of an individual's name. [Footnote omitted.] The drafters clearly understood how to give specific rules for debtor names, even requiring a debtor corporation's 'legal name.' No similar provision was made for individual debtor names and no provision expressly declaring nicknames to be insufficient was included. Accordingly, the Court concludes that the full legal name of an individual debtor is not necessarily required on a financing statement in order to be sufficient under § 9-503(a).

Revised Article Nine also gives statutory guidance concerning the circumstances under which a debtor's name is seriously misleading. [Footnote omitted.] Prior to the enactment of § 9-506(b) and (c), whether a debtor name was seriously misleading was determined on a case-by-case basis. [Footnote omitted.] Now, § 9-506 deems a financing statement seriously misleading if the debtor's name does not comply with § 9-503(a), unless a search under the debtor's correct name, using the filing office's 'standard search logic,' would reveal the financing statement. [Footnote omitted.]

* * * The trustee contends that debtor's 'correct name' is his full legal name and since the search logic under the debtor's full legal name did not reveal the Bank's financing statement, it is seriously misleading. The Bank, of course, argues that Mike Erwin is debtor's 'correct name,' and a search under this name, using the Secretary of State Office's search logic, would have revealed the Bank's financing statement and thus, is not seriously misleading. The Court must therefore determine the meaning of 'correct name.'

At least one commentator has stated that the issue of correct names for individuals has not been addressed by Article Nine. In his article discussing financing statement name errors, Professor G. Ray Warner states-

While these rules make it very easy to determine the correct name for registered organizations, revised Article 9 makes no attempt to resolve the many issues that can arise with respect to human names. For example, the revision does not indicate whether the full legal name is required or whether a nickname or widely used alias is sufficient. While the old manual search systems could accommodate some variation in human names, the modern computerized search logic used by the filing offices has little tolerance for variations. Thus, courts interpreting the revision will be forced to resolve these issues in light of the limitations of computerized filing systems. [Emphasis supplied.]. [Footnote omitted.]

As Professor Warner suggests, this Court must look to the regulations governing UCC filings in Kansas. Under the revised UCC, the Secretary of State's Office is required to adopt 'filing-office' rules to implement revised Article Nine. [Footnote omitted.] These new regulations contain the search logic standards employed by the Secretary of State's office. [Footnote omitted.] The search logic regulation, KAN. ADMIN. REG. § 7-17-22, provides in part –

(a) Search results shall be produced by applying only standardized search logic to each name presented to the filing officer. Human judgment shall not play a role in determining the results of the search, except with respect to supplemental responses regarding individual debtor names that are not automated. [Emphasis supplied.]

Although the search logic standards generally purport to eliminate human judgment in determining the search results, human judgment still plays a role in searches for individual debtor names 'that are not automated.' Moreover, these regulations describe what the filing officer is required to do upon receipt of a search request. The party requesting the search of UCC records is the party that formulates the search request. The Kansas regulations provide:

Each search request shall contain the following information: (1) The name of the debtor to be searched, specifying whether the debtor is an individual or an organization. Each search request shall be processed using the name in the exact form it is submitted; (2) the name and address of the person to whom the search report is to be sent; and (3) the appropriate fee . . . . [Emphasis supplied]. [Footnote omitted.]

The search standards do not require a search by the debtor's 'legal name,' 'full name,' or 'correct name.' Moreover, with knowledge of the search logic standards, the person requesting a search can formulate a narrow or broad search of the debtor's name and fairly predict the search results. The express language of KAN. ADMIN. REG. § 7-17-22(a) contemplates that some human judgment will enter into a search for records pertaining to individuals. And, as is obvious from the number of search queries and results that have been produced in this case, the regulations permit a party to search the UCC records by nothing more than an individual debtor's last name, the broadest of search requests. Therefore, the Court concludes that as to individuals, drafters of search requests should exercise some reasonable diligence in formulating those requests. Would a 'reasonably diligent' title examiner, lender, or purchaser be satisfied with only an 'exact name' search? * * * Accordingly, the Court believes that in this limited aspect, the 'reasonably diligent searcher' test survives. Indeed, Kansas' search logic rules would seem to contemplate as much, at least with respect to individual debtors. To hold otherwise here would validate an unacceptable 'gotcha.'

The Bank's Financing Statement

This brings us to the current case. The Bank used 'Mike Erwin' as the debtor's name on the financing statement. Was the name of debtor sufficient under § 9-503(a)? The Court concludes that it was. Since § 9-503(a) does not require the use of an individual debtor's full legal name, nor expressly prohibit nicknames or common derivations for an individual debtor's first name, the use of Mike Erwin was a sufficient debtor name. Thus, the Court cannot conclude that the use of 'Mike Erwin' on the Bank's financing statement was seriously misleading as a matter of law under § 9-506(b).

Moreover, under § 9-506(c), if a search under debtor's 'correct name,' would have revealed the Bank's financing statement, it was not seriously misleading. In order to prevail under subsection (c), the trustee must prove that 'Mike Erwin' is not debtor's 'correct name.' It is on this legal issue that the trustee's lien avoidance fails.

An examination of the definition of 'name' is revealing. [Footnote omitted.] Black's Law Dictionary defines 'name' as:

A word or phrase identifying or designating a person or thing and distinguishing that person or thing from others. [Footnote omitted.]

Following the definition appear a number of types of names: alias, assumed name, corporate name, distinctive name, fictitious name, full name, generic name, legal name, nickname, street name, and tradename. This listing indicates that the various types of names are more specific subcategories and subsumed within the term 'name.' Until the legislature specifically mandates that a 'legal name' or 'full name' be used in financing statements or otherwise expressly precludes the use of 'nicknames,' the Court must give the term 'name' its common and ordinary meaning. And in the absence of any further guidance in the type of individual debtor name required under § 9- 503(a)(5)(A), the Court can only conclude that Mike Erwin, whether it is characterized as a nickname or not, is a 'correct name.' [Footnote omitted.]

The trustee's urging of a narrow interpretation of a debtor's individual name to mean 'legal name' is inconsistent with other provisions in the code. As noted previously, the purpose of financing statements is to impart notice to third parties. Financing statements continue to be indexed by the debtor's name [Footnote omitted.] and the filing office may refuse to file a financing statement due to the lack of 'a name for the debtor.' [Footnote omitted.] Indeed, an individual debtor's last name is the critical 'name' for a financing statement. [Footnote omitted.] The ability to search and retrieve financing statements is also accomplished by the 'name of the debtor' and as is apparent in this case, a search can be made by the last name of the debtor only. [Footnote omitted.]

The trustee advances the following propositions and, at least implicitly, advocates the following interpretation of § 9-506: (1) a financing statement using any name other than an individual debtor's legal name is seriously misleading; (2) a debtor's 'name' and 'correct name' is the debtor's full legal name; and (3) there can be only one 'correct name' of a debtor. The trustee makes several arguments to support these positions.

Section 9-521 and Approved Form UCC1

[The court rejects the trustee’s argument based on the form in new section  9-521 because the form is optional.]

Other than the § 9-521 approved form, the phrase 'debtor's exact full legal name' does not appear anywhere in the code provisions dealing with perfection by filing a financing statement. Nor is there any code provision equating or defining the debtor's name as debtor's 'exact full legal name.' The record in this case is clear that a searcher using only 'Erwin' or 'ErwinM' would have found the Bank's financing statements. If § 9-506(c) is to be accorded its plain meaning (if search logic finds debtor, name is sufficient and financing statement is not seriously misleading) and if a filing can only be refused when individual's last name is missing, § 9- 516(b)(3)(C), the Court must reject the argument that the use of an individual debtor's full legal name is required and that the failure to use the full legal name in the financing statement automatically renders it seriously misleading.

The Bankruptcy Petition Name

Next, the trustee appears to claim that he is entitled to rely on the name of the debtor used in the bankruptcy petition as the debtor's 'correct name,' particularly where the debtor does not list any other names used by the debtor. The trustee is correct that Fed. R. Bankr.P. 1005 requires the debtor to disclose all names he has used in the six years preceding the filing, but the failure of this debtor to do so should not govern whether the Bank's lien may be avoided. The Court believes the purpose of disclosing other names (including married, maiden and trade names) used by the debtor within the previous six years is to uncover debtors who have previously received a discharge and are not entitled to a second discharge [Footnote omitted.] and to alert creditors who may have done business with a debtor under a name different from his correct legal name. Furthermore, it has been the Court's experience that common derivations of proper first names like in the instant case, are rarely disclosed in this section of the bankruptcy petition. The Court concludes that the name used in an individual debtor's bankruptcy petition is not necessarily the sole 'correct name' of the debtor for purposes of § 9-503 and § 9-506.

Nicknames the Equivalent of Trade Names

[The court rejects the trustee’s argument that a nickname is the equivalent of a trade name and thereby rendered insufficient by new sections 9-503(b)(1) and (c) because nicknames are distinguishable from trade names and the use of nicknames is not addressed by new section 9-503(a).]

Conclusion

Section 9-503(a) does not require an individual's full legal name for a sufficient debtor name on a financing statement. A financing statement where the name of the individual debtor complies with § 9-503(a) is not, as a matter of law, seriously misleading under § 9-506(b). A financing statement that contains a nickname for the debtor's first name may be a 'correct name,' and using the search logic standards, is not seriously misleading under § 9- 506(c). Because Kansas' search logic rules make it clear that some aspect of human judgment remains in requesting searches for financing statements made by individual debtors, a vestige of the reasonably diligent searcher rule survives the enactment of revised Article Nine, at least as to individual debtors. The Court concludes that a reasonably diligent searcher would have requested searches not only for 'Michael A. Erwin,' but also for 'Erwin' or 'Erwin, M.' As the record shows, these latter two requests would have yielded the Bank's financing statement. The Bank's 1999 financing statement satisfied the provisions of revised Article Nine and the Bank has been continuously perfected since 1999. The Bank is entitled to summary judgment on the trustee's lien avoidance action and its motion is GRANTED. * * *