In re Wardcorp.,
133 B.R. 210 (Bkcy S.D. Ind. 1990)
RICHARD W. VANDIVIER, Bankruptcy Judge.
This matter comes before the Court on the Motion for Partial Summary Judgment filed by the Debtor on March 3, 1989, and on the Motion for Summary Judgment filed by Transamerica Commercial Finance Corporation ("Transamerica") on March 1, 1990. The matters were heard on March 21, 1990. The Court now grants the Debtor's motion and denies Transamerica's motion on the following findings of fact and conclusions of law.
Findings of Fact
The issue in this case is whether a financing statement filed by Transamerica was sufficiently accurate to perfect its security interest in the Debtor's assets. The underlying facts are essentially undisputed.
On October 29, 1985, the Debtor entered into a security agreement with Transamerica, then known as Borg-Warner Acceptance Corporation, by which it gave Transamerica a security interest in its inventory, equipment, accounts receivable, contract rights and general intangibles. Transamerica filed a financing statement with the Secretary of State covering this collateral on November 19, 1985. The Debtor's name was listed as "Ward Corporation, Inc., DBA Wills Furniture and Appliances", and three addresses were given. The legal name of the Debtor is "Wardcorp, Inc." On February 17, 1988, Transamerica filed an amendment to its financing statement to correct the Debtor's name.
The Debtor filed for relief under Chapter 11 of the Bankruptcy Code, and on December 13, 1988, Transamerica initiated this adversary proceeding by filing its Complaint to Determine Secured Status. Transamerica named as defendants the Debtor and other parties who may assert an interest in the collateral in which Transamerica claims a security interest.
The Debtor asserts that Transamerica's initial filing under "Ward Corporation, Inc., DBA Wills Furniture and Appliances" did not give subsequent creditors searching the files adequate notice of its security interest, and thus its security interest was unperfected (at least until the amendment of February 17, 1988, changing the Debtor's name to its correct legal name). Transamerica contends that its error in naming the Debtor was minor and not seriously misleading, and that its original financing statement perfected its security interest.
There has apparently been much confusion over the Debtor's name. The Debtor's name appears as Wardcorp, Inc., Ward Corporation, Inc., Ward Corp, Inc. on various financing statements. Some of the Debtor's checks have its correct name, but others bear the name Ward Corp, Inc., as does an insurance policy. A 1985 balance sheet names the Debtor as Ward Corporation. The Debtor's name is shown as Ward Corporation, Inc. at the beginning of its security agreement with Transamerica, but is handwritten as WARDCORP, INC. in the signature block.
UCC filings and searches in the Secretary of State's office are conducted by a staff of eight. There are about four million items on file, with about 300 new filings each day. The staff gets about 300 search requests a day. The financing statements are filed in an order similar to that of a phone book. Ward Corporation, Inc. would come before Wardcorp, Inc., with other names beginning with Ward and names beginning with Warda- and Wardb- between.
UCC searches under variations of the Debtor's name do not yield consistent results because the clerk in the Secretary of State's office has some discretion. A search for "Wardcorp, Inc.", properly executed by the clerk, will turn up all filings under that exact name, but will not necessarily disclose filings under Ward Corp, Inc. or Ward Corporation, Inc. The clerk may choose to note on the face of the request form that there are such filings, but is not required to do so. If a search is conducted for "Wills Furniture and Appliances", the clerk may or may not note filings under "Wills Furniture and Appliance" or "Wills Furniture and Appliances, Inc." Addresses play no official part of a search, but a clerk may consult them in the exercise of his or her discretion. Some abbreviations are recognized, such as Corp. for Corporation and Inc. for Incorporated. But the only certainty is that a party will get filings under the exact name and spelling given, assuming no error by the clerk.
When there are multiple debtors or DBA's listed on a financing statement, the Secretary of State's office makes copies of the filing and files one under each of the names. Thus, a financing statement with the debtor shown as "Ward Corporation, Inc., DBA Wills Furniture and Appliances" would be filed under both names and would turn up in a search of either name. A party requesting a search may make a special request for name and spelling variations and cross references. The clerk will check all variations specifically given. If no specific variations are provided, the clerk would then search under reasonable variations of the name given, as determined by the clerk's discretion. A search request for Wardcorp, Inc. and unspecified variations may or may not turn up Ward Corporation, Inc. Not many search requests ask for name variations.
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Transamerica concedes that it filed under the wrong name and that it had several documents in its files that showed the Debtor's correct name. But Transamerica argues that the names are so similar that the filing was not seriously misleading, and that a reasonably diligent searcher would have found the filing. It points to the fact the Debtor signed the security agreement with the name "Ward Corporation, Inc.", apparently not noticing the difference in the names, and that when Debtor's counsel requested the Secretary of State to reserve the name "Ward Corporation, Inc.", the request was refused because the name was too similar to "Wardcorp, Inc." Moreover, out of about fifteen creditors, about ten, including Transamerica, filed under the Debtor's trade name, either alone or with some variation of its legal name. A reasonably diligent searcher should be expected to use more than just a debtor's exact legal name and spelling. AT & T's search request did not request name variations or filings under the Debtor's trade name. If AT & T and other creditors had requested name and spelling variations, it may have found Transamerica's first filing, and if they had searched under Wills Furniture and Appliances, it would have found the first filing.
Transamerica therefore argues that a creditor's search is not reasonable unless it takes advantage of the flexibility allowed by the Secretary of State's office, and that since a reasonably diligent searcher would have found Transamerica's first filing, its filing was not seriously misleading and was adequate to perfect its security interest.
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Interpretation of this section of the UCC is anything but uniform, and courts have differed widely on the sufficiency of filing under a debtor's trade name or a variation of a debtor's legal name. See Sufficiency of Designation of Debtor or Secured Party in Security Agreement or Financing Statement under UCC Section 9-402, 99 ALR3d 478. The rule seems to be that an error in the debtor's name is seriously misleading if it would prevent the reasonably diligent searcher from discovering the financing statement. There are variances, however, in what is expected of a reasonably diligent searcher.
In this case, the issue of sufficiency is actually two sub-issues. First, whether "Ward Corporation, Inc." is similar enough to "Wardcorp, Inc." that a filing under the former is sufficient to put a reasonably diligent searcher on notice of Transamerica's security interest. If so, the inquiry ends. If not, that designation is of no effect, and might as well have been omitted. The question then is whether filing under the Debtor's trade name alone would be sufficient to perfect the security interest.
The leading case in Indiana on errors in a debtor's legal name is Citizens National Bank v. Wedel, 489 N.E.2d 1203 (Ind.App.1986), in which a bank's financing statement showing the debtor as "Post, Inc." rather than its legal name, "The Post, Inc.", was held sufficient. The court held that the question of whether an error in the debtor's name is a minor one and not seriously misleading is one of law, not of fact, and, somewhat incongruously, that the test of sufficiency of a financing statement is whether, under all the facts, the filing would have given a file searcher notice to justify placing a duty upon him to make further inquiry concerning the possible security interest. Id. at 1206. This point of potential confusion will be discussed later.
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The section excusing minor errors applies to all the contents of a financing statement, not just to the debtor's name. See Ind.Code 26-1- 9-402(1) and (8). It makes sense not to invalidate a financing statement if there is some small error, for instance, in the debtor's address or the secured party's name. A searcher finding such a financing statement is put on notice of a possible security interest and should have the duty of further inquiry. However, there can be less tolerance of errors in a debtor's name, since such errors may prevent a searcher from discovering the financing statement. If a searcher cannot find it, the searcher cannot be burdened with the duty of further inquiry. The Secretary of State's rules caution creditors that the debtor's name is the primary indexing tool and inaccuracies may compromise the validity of a filing, and direct creditors to a means of verifying corporate names. Any rule that would burden a searcher with guessing misspellings and misconfigurations of a legal name or that would make a searcher dependent on the discretion of the clerk conducting the search would not provide creditors with the certainty that is essential in these commercial transactions. Thus, the Court believes that under Indiana law, an error in a debtor's legal name is minor and not seriously misleading only if a properly executed search of the correct legal name by the Secretary of State's office would disclose the filing without depending on the discretion of the clerk conducting the search. See In re Tyler, 23 B.R. 806, 809-10 (Bankr.S.D.Fla.1982) (where searching system would not produce filing under "Tri-State Moulded Plastics, Inc. " in search for correct name of "Tri-State Molded Plastics, Inc.", inaccuracy was seriously misleading).
In this case, a search under the Debtor's correct legal name, Wardcorp, Inc., even with a special request for unspecified name variations, would not have reliably produced Transamerica's first filing under Ward Corporation, Inc. It would have been up to the discretion of the clerk finding the filing to note or produce it. Moreover, since it is not in close proximity to filings under the correct legal name, being separated from them by other filings under Ward and filings beginning with Warda- and Wardb-, the clerk may not have even run across it in searching under the correct legal name. Even if Wedel can be read as requiring a creditor to make special requests for searches under minor name variations (with and without the initial article in that case), a creditor in this case, dealing with Wardcorp, Inc., could not have been expected to specifically request a search under a name as different as Ward Corporation, Inc. The Court concludes that, even under a broad reading of Wedel, Transamerica's filing under Ward Corporation, Inc. was not a minor error, but was seriously misleading, and thus ineffective to perfect its security interest.
Transamerica may yet prevail, however, if its filing under the Debtor's trade name was sufficient to perfect its security interest. The uncontradicted evidence was that the trade name was correctly listed, that the financing statement was correctly filed under the trade name, and that a search under the trade name would have disclosed Transamerica's security interest, without depending on the discretion of the clerk conducting the search. The issue is whether searching under the trade name as well as the legal name is part of a reasonably diligent searcher' burden.
There appears to be no Indiana authority on this issue, and cases from other jurisdictions are conflicting. In In re Glasco, Inc., 642 F.2d 793 (5th Cir.1981), the court, over dissent, found filing under a debtor's trade name alone sufficient to perfect a security interest. The court held that under Florida law, each case must be judged by its own facts, and that in this case, where the debtor conducted all its business under "Elite Boats, Division of Glasco, Inc.", any reasonably prudent creditor would have requested the Secretary of State to search under both "Elite Boats" and "Glasco, Inc." Id. at 796. This case was followed in Willson v. Habersham Bank, 111 B.R. 368 (N.D.Ga.1990), with the court holding that under Georgia law, a filing under the debtor's trade name of "Cornelia Car City" rather than its legal name of "Simpson Motor Company" was sufficient, where the debtor did business under only its trade name.
On the other hand, in Pearson v. Salina Coffee House, Inc., 831 F.2d 1531 (10th Cir.1987), the court held that under Kansas law, filing under a trade name rather than an undisclosed partnership name was insufficient to perfect a security interest. Citing numerous cases rejecting the use of trade names which vary significantly from a debtor's legal name, id. at 1535 n. 8, and rejecting Glasco, id. at 1535, the court found that clarity and certainty in lien perfection requirements would be lost if equitable exceptions are created to permit filing under trade names in some cases. Id. at 1536. Creditors then would have the burden of always searching under any and all trade names a debtor may have used, since they would not know how a court may balance the equities in some future litigation. Id. In In re Swati, Inc., 54 B.R. 498, 500 (Bankr.N.D.Ill.1985), the court found that filing under the trade name of "King's Plaza Hotel" rather than the legal name of "Swati, Inc." was insufficient. The court reasoned that approving filing under names other than a debtor's legal name would frustrate the UCC policy of certainty in commercial lending activities. Id. at 503. Putting the extra burden of searching under trade names on subsequent creditors is contrary to the implied policy of the UCC that those seeking to perfect a security interest bear the burden of proper filing. Id.
Cases holding filings under trade names alone to be insufficient appear to be in the majority, but the question is which line of reasoning represents Indiana law. Wedel held that the test of sufficiency of a financing statement is whether, under all the facts, the filing would have given a file searcher notice to justify placing a duty upon him to make further inquiry concerning the possible security interest. 489 N.E.2d at 1206. Out of its full context this might offer some support for the minority position, if this is interpreted to mean that a court must consider such facts as how well known a debtor's trade name was and how much business was conducted under a debtor's various names in determining whether a subsequent creditor should have searched under more than just the legal name.
The Court believes Indiana would follow the majority of jurisdictions in findings that placing on the filing creditor the burden of ascertaining and filing under a debtor's legal name is necessary to effectuate the UCC's policy of certainty and simplicity in these commercial transactions. Such a requirement makes the process of perfection more certain, since it does not depend on a post hoc balancing of equities, and its makes searching the records more simple, since a subsequent creditor can determine with confidence the status of would-be collateral by one search under one unique name.
Of course, creditors may want to file and search under trade names as well as legal names for any number of reasons, including avoidance of this type of litigation, and Indiana law accommodates such desires. But filing under just a debtor's legal name is sufficient to perfect a security interest, Ind.Code 26-1-9-402(7), and searching under the legal name should sufficiently disclose it.
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