Part V Perfecting an Article 9 Security Interest

Chapter 14 The Nitty Gritty Of Filing

A. The Filing System and the Debtor's Name

1. How the System Works

Understanding the perfection by filing scheme requires knowing a fair amount about the filing system and how it actually works. In Chapter 13 (Overview of Perfection by Filing) we saw that Article 9 employs a notice filing scheme according to which third parties are given only enough notice to lead them to inquire further. It was explained in that chapter that new Article 9 further reduces the formal requirements regarding the contents of a financing statement.

Thus, under new section 9-502, a financing statement must contain only the debtor's name, the secured party's name and a description of the collateral. Even though a third party must go through the debtor to obtain the specifics of a security interest, see subpart D (1) below, the debtor's address is not required for a financing statement to be sufficient (although, as explained further in subpart C a filing officer is required to reject a financing statement that does not contain the debtor's address). We also saw in Chapter 13 that to facilitate electronic filing the debtor's signature is no longer required.

The debtor's name is the key to filing and searching under Article 9. The filing office assigns each financing statement a file number and indexes the statement using the debtor's name.  A list of file numbers corresponding to any financing statements that have been filed against a debtor is indexed according to the debtor's name.  A search under the debtor's name will lead a searcher to the financing statements indexed under that name.  See new 9-519(c).[1]  

To illustrate, where the correct name for a debtor is "John Smith" any financing statements using that name will be indexed alphabetically with the names beginning with "S."  According to the proposition that searching is the flip side of filing, a searcher contemplating extending credit to this debtor should search (or request a search) under the name "Smith."  Filing offices must have the capability for retrieving statements filed under the name "Smith."

Financing statements could be indexed otherwise than according to the debtor's name.  For example, the secured party's name could be used instead of the debtor's.  More interesting, as we will discover in Chapter 17 (Perfection as to Goods Subject to Certificate of Title Legislation), certificate of title legislation uses the vehicle identification number and the federal copyright office uses the description contained in a copyright registration.

For reasons that will appear in Chapter 20 (Perfection as to Fixtures and Other Real Estate-Related Collateral), certain real estate-related filings may be done using a record owner's name or the secured party's name or even a description of the real estate, in addition to the debtor's name.  However, the debtor's name remains central to the Article 9 filing (and searching) scheme.[2] 

For the system to work both the secured party and the searcher must use the same name.  If the secured party uses one name and a searcher another the scheme will break down.  As it happens, deciding upon the correct name can be more difficult than might be expected.  Naming conventions produce complications that can be compounded by the relative ease with which a name can be changed.  The name change issues are deferred until Chapter 23 (Continuing Perfection -- The Need to Reperfect (Or Refile)).  Here it is important to come to grips with the reality that most persons, natural and artificial, have legal names and also may go by and be known to others by names that are not legal names.

2. Choosing the Correct Name for the Debtor

In the earlier example ("John Smith") it was assumed that the correct name to use on the financing statement was "Smith."  But, why the last name? What effect does the first name have on the indexing?  What if the debtor is a corporation and not an individual?  What if the debtor is a business and uses a trade name?  How are secured parties and searchers to know what to do?  The answer to these questions is that there are rules for deciding which name is the debtor's correct name for purposes of the filing system.

Under former section 9-402(7), a financing statement sufficiently showed the name of the debtor if it gave the individual, partnership or corporate name of the debtor, whether or not it added trade names or the names of partners.  New section 9-503 provides a more elaborate set of rules for determining the debtor's name.

a. Corporate and Other Organizational Debtors

New sections 9-503(a)(1), (a)(2) and (a)(3) deal with certain specifically identified organizational debtors, including especially debtors who are registered organizations. Under new section 9-503(a)(1), "a financing statement sufficiently provides the name of [a debtor who is a registered organization] only if the financing statement provides the name of the debtor indicated on the public record of the debtor's jurisdiction of organization which shows the debtor to have been organized. [Emphasis added.]

"Jurisdiction of organization" is defined in new section 9-102(a)(50) to mean, with respect to a registered organization, the jurisdiction under whose law the organization is organized. Consequently, the name to use for a corporate debtor or a debtor who is a limited partnership or a limited liability company is the name appearing on the public record recognizing the creation of the debtor entity.

b. Trade Names

New sections 9-503(b) and (c) deal with the use of trade names.  New section 9-503(b)(1), indicates that the use of a trade name does not render a financing statement ineffective.  New section 9-503(c), more importantly, provides that a trade name is not sufficient.  Together these sections adopt what had become the prevailing view under former Article 9 that a trade name is neither necessary nor sufficient although a trade name may be added without adverse effect.   See, e.g., In re Wardcorp., Inc., 133 B.R. 210 (Bkcy S.D. Ind. 1990).

c. Individual Debtors

New section 9-503(a)(4) deals with individual debtors and with organizational debtors not covered in new sections 9-503(a)(1), (a)(2) or (a)(3). New section 9-503(a)(4)(B) acknowledges that certain debtors do not have names. However, it is difficult to imagine an individual debtor who has no name.

Under new section 9-503(a)(4)(A), if an individual debtor has a name the financing statement sufficiently shows the debtor's name only if the individual name is used. Thus, under new section 9-503(a)(4)(A) the name to use for a consumer debtor is the debtor's individual name. The same is true for a sole proprietorship.

The simple sounding rule governing what name to use for an individual is, however, more easily stated than applied. The difficulty is two-fold: An individual may use or be known by a name other than the individual's complete legal name including, a nickname; and, new section 9-503(a)(4)(A) gives precious little guidance as to when a financing statement sufficiently provides an individual debtor's name. See Warner, Using the Strong-Arm Power to Attack Name Errors Under Revised Article 9, American. Bankruptcy Institute J., Oct. 2001, at 22.

Under new section 9-506(c), dealt with more fully in subpart A (3) below, a financing statement is effective even though it fails sufficiently to provide the debtor's name if the financing statement would be disclosed under a search using the debtor's correct name. Consequently, the ultimate test of whether the name used in a financing statement is sufficient is whether the financing statement would turn up in a search under the debtor's correct name. But, that test requires deciding what is a debtor's correct name, i.e., the name required by new section 9-503(a).

The question as to an individual debtor is whether new section 9-503(a)(4)(A) requires the use of the debtor's legal name. This question was answered in the negative in the case of In re Erwin, 50 UCC Rep. Serv. 2d 933 (Bkcy D. Kan. 2003). In Erwin, a bankruptcy court, applying Kansas law, held that a financing statement using the name "Mike Erwin" was effective to perfect a security interest created by a debtor whose legal name was "Michael A. Erwin." Under this decision, a name other than the debtor's legal name sufficiently provides the name of an individual debtor within the meaning of new section 9-503(a)(4)(A).

The decision also means that the correct name for purposes of applying new section 9-506(c) can be a name other than the debtor's legal name, specifically, on the facts of Erwin, "Mike Erwin" (or perhaps some other variation on the debtor's legal name). The court acknowledged that the effect of its decision was to place on searching creditors the burden of coming up with a name or names that the debtor Michael A. Erwin might use or be known as.

The court in Erwin did not actually decide whether a financing statement that gave the debtor's name as "Michael A. Erwin" would sufficiently provide the debtor's name under new section 9-503(a)(4)(A), but its reasoning suggests that if such a financing statement would not be disclosed in a search under the name "Mike Erwin" then the financing statement would have failed to sufficiently provide the debtor's name.

What this means is that a filing creditor must decide that a name other than the debtor's legal name must be used (or whether it should file under multiple names in the hope that one of them will be sufficient). To this extent, although the Erwin decision on its face appears to shift the burden from the filing to the searching creditor this may not be so.

In direct contrast to In re Erwin is the decision in the case of In re Kinderknecht, 308 B.R. 71 (B.A.P. 10th Cir. 2004). There a bankruptcy appellate panel, also applying Kansas law, reversed a bankruptcy court decision that had agreed with Erwin and concluded that a financing statement using the name "Terry J. Kinderknecht" did not perfect a security interest created by a debtor named "Terrance Joseph Kinderknecht." For the Kinderknecht court, even though new section 9-503(a)(4)(A) does not expressly so require, only the debtor's legal name is sufficient to satisfy that section.

As the court notes, reading "individual name" as it appears in new section 9-503(a)(4)(A) to mean the debtor's legal name is consistent with new sections 9-503(b)(1) and (c) providing, as explained in subpart A (2)(b) above, that a trade name is neither necessary nor sufficient as to an organizational debtor. That reading also finds support in Official Comment 2 to new section 9-503 indicating that only one name should be sufficient and in the fact that the recommended (but not mandated) form in new section 9-521 requires the debtor's exact legal name.

Perhaps most importantly, as the court also notes, reading new section 9-503(a)(4)(A) to require that a financing statement filed against an individual debtor must give the debtor's legal name makes the task of deciding which name to use in a financing statement and under which name to conduct a search easier.

However, equating individual name with legal name does not make the decision as to which name to use quite as easy as the court in Kinderknecht suggests. In Kinderknecht that the debtor's legal name was "Terrance Joseph Kinderknecht" was not in dispute. That will not always be so, especially where new section 9-503(a)(4)(A) is understood to mandate the use of the debtor's legal name.

By contrast to a registered organization there is no uniformly agreed upon source for determining an individual's legal name. Although resorting to a debtor's birth certificate or passport or social security registration may not always be convenient, one or more of these documents may emerge as the authoritative source of an individual debtor's legal name.

There also will be the question whether the debtor's complete legal name is necessary or whether something less will suffice. Thus, "Terrance Kinderknecht" and "Terrance J. Kinderknecht" are not nicknames in the usual sense of that term but neither is what the parties in Kinderknecht agreed was the debtor's legal name. Should either or both nonetheless suffice to satisfy new section 9-503(a)(4)(A)? Given the relative frequency of the use of abbreviated names on bank accounts and other legal documents the answer arguably should be in the affirmative.

The importance of this last question is diminished somewhat by the fact, as noted earlier, that a financing statement that does not sufficiently provide the debtor's name may still be effective under new section 9-506(c). Thus, on the facts of Kinderknecht, the financing statement using the name "Terry Kinderknecht" would not have been disclosed by a search under the debtor's legal name. Therefore, the court did not have to decide whether the financing statement would have been effective if it would have turned up in a search using the debtor's legal name. As is explained more fully in subpart A (3) below, new section 9-506(c) should save a financing statement under those circumstances.

Of course, the central question for an Article 9 attorney is what creditors should be advised to do with regard to individual debtors in light the uncertainties associated with the meaning of the phrase sufficiently provides the debtor's name in new section 9-503(a)(4)(A). The not altogether satisfying answer to this question is that until the meaning of the section has been definitively clarified by the drafters of Article 9, individual state legislatures or the agencies charged with administering the filing systems, or the courts, the wisest course of action for a filing creditor is to use the debtor's full legal name, determined by reference to some authoritative document such as a birth certificate and also provide names that the debtor is known by or has used, such as a nickname.

As for searching parties, they also should use the debtor's legal name, again determined by reference to some authoritative document, and also have a search conducted using other names that the debtor may be known by as well. The extent to which a creditor, either as a filing or searching party, takes these precautions will depend on that creditors assessment of the need to do so given what is at stake. The greater the dollar amount involved the more cautious a creditor will wish to be.

d. Partnership Debtors

Certain organizational debtors, such as partnerships, may not have names.  Under new section 9-503(a)(4)(B) if the debtor does not have a name the financing statement sufficiently shows the name of the debtor only if "the names of the partners, members, associates, or other persons comprising the debtor" are used.  To illustrate, if a partnership does not have a name then the names of all the general partners must appear on the financing statement.  New section 9-503(e) expressly provides that more than one debtor's name may appear on a financing statement (in which case the financing statement will be indexed under each name on the financing statement).

General partnerships may have names under assumed name or a partnership statute such as the Revised Uniform Partnership Act (RUPA).  Where this is so then under new section 9-503(a)(4)(A) the partnership name should be used.

It should be noted that the fact that a general partnership has a name does not make it a registered organization to which the rule of new section 9-503(a)(1) would apply.  As seen in Chapter 13 (Overview of Perfection by Filing), an organization is a "registered organization" only if the definition in new section 9-102(a)(70) is satisfied.  For the most part, only limited partnerships and other such limited liability entities qualify as registered organizations.  See Official Comment 2 to new 9-503.  A limited partnership will have a name and as noted above under section 9-503(a)(1) it is that name that must be used in the financing statement.

e. Who Is the Debtor

The rules governing the name to use in a financing statement require knowing who is the debtor.  It is that debtor's name that must appear on the financing statement.  Ordinarily who the debtor is will be clear.  But, as defined in new section 9-102(a)(28), a debtor is the person who owns the collateral.  Consequently, the debtor may be someone other than the person who is the "obligor" (defined separately in new section 9-102(a)(59)) on the secured debt.

General partnerships can incur debts and own property and be debtors under Article 9.  However, the general partners, who may be ultimately liable for partnership debts secured by partnership property, are not debtors as defined in new Article 9.  Nonetheless, under new section 9-503(a)(4)(B), if the partnership does not have a name then the names of the general partners, who are not debtors under new Article 9, must appear on the financing statement.

In Chapters 8 (The Specifics of Enforceability -- A Security Agreement Authenticated by the Debtor or Its Equivalent) and 9 (The Specifics of Enforceability -- After-Acquired Property, Future Advances, Transferred Collateral and Proceeds and the New Debtor Problem), we saw that there can be similar difficulties deciding who is the debtor as the person who must authenticate a security agreement.

3. Errors in the Debtor's Name

It is necessary now to backtrack to the opening proposition that both filing and searching are done using the debtor's name. Suppose a creditor uses the required name but makes a mistake of some kind as to the name.

Under former section 9-402(8) a financing statement that substantially complied with the requirements of Article 9 was effective even though it contained minor errors so long as the errors were not seriously misleading. Technically, a creditor was protected under former section 9-402(8) only as to minor errors but that limitation received relatively little attention. Decisions interpreting former section 9-402(8) indicated that an error was seriously misleading if it was such as to prevent a searcher who conducted a proper search from discovering the financing statement.

New section 9-506 is the successor to former section 9-402(8). Under new section 9-506(a), a financing statement substantially satisfying the requirements of Part 5 (Filing) of new Article 9 is effective even if it has minor errors or omissions, unless the errors or omissions make the financing statement seriously misleading. New section 9-506(b) indicates that a financing statement that fails sufficiently to provide the name of the debtor as required by new section 9-503(a) is seriously misleading except as otherwise provided in new section 9-506(c).

Under new section 9-506(c) an error in the debtor's name is not be seriously misleading if, despite the error, the financing statement would be discovered in a search of the records of the filing office under the debtor's correct name, using the filing office's standard search procedures.

New section 9-506, by its terms, requires that a financing statement substantially comply with Part 5 and that the error be minor. However, insofar as the debtor's name is concerned, these requirements appear to be subsumed into the more general requirement that a financing statement not be seriously misleading. So, new section 9-506(c) is the key section with respect to errors as to the debtor's name and it will be helpful to quote the language of that provision. New section 9-506(c) provides:

By this language, a financing statement's effectiveness is to be tested by reference to the debtor's correct name, meaning the name that satisfies new section 9-503(a). Where the correct name of the debtor is clear, as would be the case as to a registered organization whose name appears on the public record, the application of new section 9-506(c) should be reasonably straightforward.

Thus, if there is an error in the debtor's name such that the financing statement does not sufficiently provide the debtor's name as required by new section 9-503(a), the financing statement is still effective to perfect a security interest created by the debtor if the financing statement would turn up in a search done under the debtor's correct name using the standard search procedure of the particular filing office.

For example, if debtor's legal name is Super Fine Products, Inc. and the financing statement uses the name Super Fin Products, Inc. the error in the name is harmless so long as the financing statement would be disclosed by a search conducted under the name Super Fine Products, Inc. using the standard search procedure of the particular office in which the filing was made.

The situation is less clear where the debtor's correct name is uncertain. As discussed in subpart A (2)(c), the problem is especially acute where individual debtors are concerned. The court in the case of In re Kinderknecht, 308 B.R. 71 (B.A.P. 10th Cir. 2004), explored in subpart A (2)(c), held that where a debtor is an individual the correct name is the debtor's legal name. Because the financing statement in that case did not use the debtor's legal name the financing statement failed to sufficiently provide the debtor's name as required by new section 9-503(a) as a matter of law.

The courts holding also meant that the financing statement could be saved by new section 9-506(c) only if a search under the debtor's legal name would disclose the financing statement. The evidence offered by the trustee in bankruptcy established that the financing statement did not show up in a search under the debtor's legal name in the particular filing office using that offices search procedures so the failure of the secured party to use the debtor's legal name could not be forgiven under new section 9-506(c).

The court in Kinderknecht was not faced with the question of whether the financing statement would have been effective if it would have been found using the debtor's legal name. New section 9-506(c) indicates that even if a financing statement does not sufficiently provide the debtor's name, i.e., does not use the name required by new section 9-503(a), the financing statement can still be effective to perfect a security interest if a search under the correct name, using the search procedures of the particular filing office, would disclose the financing statement. Thus, in Kinderknecht, if the financing statement would have been found using the debtor's legal name then the financing statement would have been effective even though the financing statement did not give the debtor's legal name.

It is important to understand that Kinderknecht did not, and could not properly, decide that a financing statement that failed to use the debtor's legal name was fatally defective irrespective of whether it would have been found in a search done under the debtor's legal name. As is illustrated by the cases requiring the application of new section 9-506(c), the likelihood that a financing statement using a nickname or some other variant of the legal name will be found is diminished by the fact that most filing offices have been computerized and the search procedures of these offices may well not generate variations of the name given by the searching party such as will locate the financing statement. But, it certainly is conceivable that a financing statement that uses a name other than the debtor's legal name will turn up in a search done using the debtor's legal name.

It also should be understood that, as was explained in subpart A (2)(c), not all courts have held that individual name means the debtor's legal name. In the case of In re Erwin, 50 UCC Rep. Serv. 2d 933 (Bkcy D. Kan. 2003), also considered in subpart A (2)(c), it was held that a name other than the debtor's legal name, such as a nickname, can sufficiently provide an individual debtor's name. Where the language "sufficiently provides" is given such a meaning it is the name other than legal name that is the correct name for purposes of applying new section 9-506 and a financing statement giving the debtor this other name can be effective even though a search conducted under the debtor's legal name would not disclose the financing statement.

Even if courts were to agree that the correct name for an individual debtor is the debtor's legal name will suffice the difficulties of ascertaining that name and deciding whether something less than the complete legal name will suffice remain. These difficulties were considered in subpart A (2)(c). Of course, not all cases involving individual debtors will pose such difficulties.

In Pankratz Implement Co. v. Citizen National Bank, 33 Kan.App.2d 279 (Kan. App. 2004), for example, the court held that a financing statement giving the debtor's name as "Roger House" rather than the debtor's legal name of "Rodger House" did not sufficiently provide the debtor's name as required by new section 9-503(a)(4)(A). The decision turned on evidence that a search in the filing office where the financing statement was filed under the name Rodger House using the particular filing offices search procedures would not disclose the financing statement.

In determining that "Rodger House" and not "Roger House" was the correct name to use in applying new section 9-506(c) the court relied on the decision in Kinderknecht that the debtor's legal name is required as to an individual debtor. However, Pankratz was not a case involving the use of a nickname or some variation on the debtor's legal name. Rather, the secured party had attempted to use a name that would have satisfied the legal name requirement and then misspelled the name. The new section 9-506(c) question was whether the financing statement containing the misspelled debtor's name would be found in a search under the name correctly spelled and the evidence established that it would not.

On appeal to the Kansas Supreme Court, the secured party in Pankratz argued that there was only a minor error in the name and that there was no need to test the name used under new section 9-506(c). In Pankratz Implement Company v. Citizens National Bank, 130 P.3d 57 (Kan. 2006) the court rejected the argument, concluding that under 9-506(b) an error in the debtor's name is seriously misleading essentially as a matter of law and the filing can be saved only if the financing statement would be disclosed in a search employing the standard search logic of the particular filing office using the correct name as provided for in new section 9-506(c).

In its opinion the court emphasized that standard search logic as used in new section 9-506(c) means the formal search logic of the particular office and does not include any alternative searching process that the filing office might provide, for example, during a transition from former Article 9 to new Article, or that might be available through sources other than the particular filing office.

New section 9-506(d) makes clear that the correct name for the debtor in new debtor situations is the name of the new debtor. As explained in Chapter 9 (The Specifics of Enforceability -- After-acquired Collateral, Future Advances, Transferred Collateral and Proceeds, and the New Debtor Problem), under new section 9-102(a)(56), a "new debtor" is a person who becomes bound as a debtor under a security agreement executed by another person.

It is worth noting that although information such as the debtor's address would aid searchers in determining whether a party to which the searcher is contemplating extending credit is or is not the debtor named in a financing statement turned up in a search, under new Article 9 a financing statement need not include the debtor's name to be sufficient under new sections 9-502 or 9-503.

The next several problems illustrate the basic rules governing the requirement that a financing statement provide the debtor's name.

Problem 14.1    (interactive)

An individual whose name as it appears on her birth certificate is "Donna Joann Smith." owns and operates a business as a sole proprietorship. Donna does business under the name "Donna's Desert Treasures." Donna is known to her customers and to many of her suppliers as Donna Smith. She maintains a bank account for personal and business use under the name Donna J. Smith.

What name does new section 9-504(a)(4)(A) require be used in a financing statement under new Article 9?

What name would you advise a secured party to use in the financing statement on the facts of Problem 14.1? Donna Smith? "Donna's Desert Treasures"? Donna's legal name? Explain.

So, what is Donna's legal name? "Donna Smith"? "Donna's Desert Treasures"? Explain.

Under what name should a potential lender conduct a search on the facts of Problem 14.1?

How would the financing statement be indexed (under what letter)?

Problem 14.2    (interactive)

Assume the facts of Problem 14.1, but assume further that Donna Smith, a sole proprietor in Problem 14.1, has incorporated her business under the name "Donna's Desert Treasures, Inc." 

What name is a secured party be required to use in the financing statement under new Article 9? 

What language of new section 9-503 supports your conclusion? 

What name should a lender search under (or request a search under)? 

Where do you find the correct name for a corporation (or least confirm it)? 

What if the corporate name is "Desert Treasures, Inc." and the corporation does business under the name "Donna's Desert Treasures"? This might happen, for example, if Donna Smith, the sole proprietor, were bought out by a corporation called "Desert Treasures, Inc."  What name should be used in the financing statement under this change of facts? 

Would the financing statement be indexed in the Ds or Ts?

Problem 14.3     (interactive)

Donna Smith in Problem 14.1 recently took on a partner, Jane Jones. The partnership does not have a name but continues to do business as "Donna's Dessert Treasures."  What name (or names) should appear on the financing statement under new Article 9?  What name should be used in the financing statement if Donna and Jane had filed a statement of partnership authority under the section of the RUPA set out below?

§ 29-1023. Statement of partnership authority

A. A partnership may file a statement of partnership authority that:

1. Shall include:

(a) The name of the partnership.

(b) The street address of its chief executive office and of one office in this state, if there is one.

(c) The names and mailing addresses of all of the partners or of an agent appointed and maintained by

the partnership for the purpose of subsection B of this section.

(d) The names of the partners authorized to execute an instrument transferring real property held in the name of the partnership.

Problem 14.4     (interactive)

Donna Smith, Joe Jones, and Mary Brown are engaged in a joint land development venture but they have never registered as a partnership or other legal entity. 

What name or names do you use on the financing statement?  Under what name or names should a potential lender search?

Problem 14.5     (interactive)

Jane Jones, an individual, purchases property on credit and gives the creditor an interest in the property to secure its unpaid price.  Jane's close friend, Donna Smith, cosigns the debt instrument. 

Who is the debtor for purposes of deciding what name to use in the space for the debtor's name on the financing statement?

Problem 14.6    (interactive)

Jane Jones operates a technology consulting business out of her home.  She has incorporated her business under the name "J & J, Inc."  Jane purchases a computer from Selma Seller on credit secured by an interest in the computer. 

What name should you use on the financing statement? 

On what does the decision as to what name to use in the financing statement depend? 

Suppose, as is likely, that the J & J, Inc. is buying the computer.  What name should Selma use on the financing statement? 

What name should Selma use if Jane Jones is acquiring the computer for use by J & J, Inc.? 

Suppose Jane bought the computer for personal use in her home.  What name should Selma use now? 

What name should Selma use if Jane Jones were a sole proprietorship acquiring the computer for use in her business?

Problem 14.7   (interactive)

Wilma Wife purchases a stereo system from Dan Dealer on credit and Dan takes an interest in the system to secure the unpaid purchase price.  Wilma then gives the stereo to Harvey Husband as a gift. Whose name should appear on the financing statement? 

Suppose Wilma simultaneously purchases the stereo and executes a deed of gift to Harvey. 

Whose name should appear on the financing statement? Who should sign or otherwise authenticate the security agreement? What would you advise?

Suppose the facts are that Wilma Wife purchases a stereo in a community property state such as Arizona (putting aside any simultaneous or subsequent transfer to Harvey Husband). What name (or names) should be used on the financial statement? 

Whose name should go on the financing statement if Wilma acquires the stereo as separate property and gifts the stereo to Harvey?

Problem 14.8    (interactive)

Second Bank lends to Donna Smythe, a sole proprietorship doing business as "Donna's Desert Treasures."  Donna Smythe signs a security agreement giving Bank an enforceable security interest in Donna Smythe's equipment.  Second Bank submits a financing statement showing the debtor's name as "Donna Smith."  The filing office indexes the statement under the name on the financing statement. 

Is Second Bank's security interest perfected under new Article 9?  Please explain your answer.

As earlier noted, as to an individual debtor, the debtor's last name is used for indexing a financing statement. Consequently, a financing statement must make clear which is the last and which is the first name. New section 9-516(b)(3)(C) indicates what should happen if there is uncertainty as to which is the first and which is the last name.

You may consider the matter further and apply new section 9-516(b)(3)(C) in the next problem.

Problem 14.9   (interactive)

Second Bank lends to John Paul and obtains an enforceable security interest.  The financing statement submitted by Second Bank does not make clear which is the debtor's first name and which is the last. 

What happens now? 

The proper question is what should happen given that the financing statement fails to indicate which is the first and which is the last name.  What answer is given by new section 9-516(b)(3)(C)?

B. Information In Addition to the Debtor's Name 

1.  Generally

In Chapter 13 (Overview of Perfection by Filing) we saw that under new section 9-502(a), in addition to the debtor's name, a financing statement must provide the secured party's name and indicate the collateral covered by the financing statement.  Keep in mind the observation made earlier that the filing system reflects an attempt to balance the obligations (and hence burdens) imposed on filing parties and the information available to searching parties and what action it takes to get the information.

An additional reality is explored here, namely, the burdens imposed on parties who have properly filed to respond to inquiries from searching parties.  For reasons that probably are apparent, a description of the collateral probably is the most important information in addition to the debtor's name that must be included in a financing statement.

2. Indication of the Collateral

At first glance there would seem to be no mystery about why a description is required. How else would a potential lender know what is subject to a perfected security interest?  But, recall that Article 9 employs a "notice filing " scheme.  Under that scheme searchers are only put on inquiry notice that another party may have a security interest in property the searcher is considering as collateral.

Consequently, Article 9 does not require a description that allows a potential creditor (or a court) to know with precision what is subject to a claimed security interest and a perfected one at that.  To this extent the description of the collateral in the financing statement need not be as precise as that required for a security agreement.

Former sections 9-402(1) and (3) essentially required a description of collateral by item or type.  A description by type employed the classification of collateral that emerged from former sections 9-105, 9-106, 9-109.  Thus, a financing statement might describe intangible collateral as "accounts," as defined in former section 9-106, or goods as "equipment" as defined in former section 9-109(2).  A description "by item" was a description of a specific item (or items) of property, for example, by serial number.

As noted in Chapter 8 (The Specifics of Enforceability -- A Security Agreement Authenticated by the Debtor or Its Equivalent), in simple situations, especially those involving one or two items, a description by specific item in both the security agreement and the financing statement was both practicable and desirable.  Even though the clear intent of the notice filing scheme employed by former Article 9 was that descriptions in financing statements need only put a searcher on inquiry notice, the requirement that a financing statement describe collateral by item or type occasionally caused problems as to descriptions that were quite specific but technically were not by item or type.  See In re Cilek, 115 B.R. 974 (Bkcy W.D. Wis. 1990) (concluding that a describing collateral as all the motorcycles of a specified brand financed by the creditor was not sufficient).

New section 9-502(a)(3) provides that a financing statement is sufficient only if it "indicates the collateral covered by the financing statement."  The section thereby eliminates the "by item or type " requirement of former section 9-402.  Of course, except as explained below, the new provision does not bar the use of such descriptions in a financing statement.

New section 9-504 adds two of what the drafters refer to as "safe harbors" to the description requirement.  See Official Comment 2 to 9-504.  The first such safe harbor is that new section 9-504(1) incorporates new section 9-108.  We examined new section 9-108 as it affects the adequacy of descriptions in security agreements in Chapter 8 (The Specifics of Enforceability A Security Agreement Authenticated by the Debtor or Its Equivalent).  We there noted that the gist of new section 9-108(b) is that a description is adequate to the extent that it permits an objective determination of the property subject to the security interest.

New section 9-108 specifically authorizes the use of descriptions by item and also, except in certain consumer situations and as to commercial tort claims, descriptions by type.  See new 9-108(b)(3) and 9-108(e) and Chapter 8 (The Specifics of Enforceability A Security Agreement Authenticated by the Debtor or Its Equivalent) and Official Comment 5 to 9-108.  Thus, under new section 9-504(1) an "indication" of collateral that satisfies the "description" requirement of new section 9-108 is sufficient under new section 9-502(a)(3).

However, something less than is necessary to satisfy the description requirement of new section 9-108 may be sufficient as an "indication" of the collateral.  In particular, new section 9-108(c) bars the use in security agreements of super generic descriptions such as all the debtor's personal property" or "all the debtor's assets."  But, under new section 9-504(2) such super generic descriptions are explicitly authorized for a financing statement.  This is the other intended safe harbor.

Interestingly, new section 9-504 read together with new section 9-108(e) appears to leave open the possibility that a description by type in a financing statement of consumer goods or investment property would not be sufficient in a consumer transaction. Thus, new section 9-504(2) supercedes the super generic description limitation in new section 9-108(c), but it otherwise incorporates new section 9-108, including the limitation on descriptions by type as to consumer goods and investment property in consumer transactions, without qualification. The same problem may exist as to a commercial tort claim, as defined in new section 9-102(a)(13) because of new section 9-108(e)(1) under which a description of such collateral by type is not sufficient. See Official Comment 5 to 9-108.

You may explore the indication of the collateral requirement in new sections 9-502(a)(3) and 9-504 in the next two problems.

Problem 14.10     (interactive)

Dan Debtor is a retailer of motorcycles.  Ready Lender finances a substantial part of Dan's inventory.  Dan sells several brands of motorcycles.  Ready finances only motorcycles acquired from Honda.  Ready files a financing statement describing the collateral as "all Honda motorcycles for which Ready Lender provides financing." 

Is Ready's security interest perfected under former Article 9?  Would the security interest be perfected under new Article 9?

Problem 14.11    (interactive)

Southwestern Bank lends to Delia Debtor to finance a personal vacation.  Southwestern takes a security interest in Delia's stereo system used in Delia's home.  Delia signs a security agreement describing the stereo system by make, model and serial number.  Southwestern files a financing statement describing the collateral as "Consumer Goods." 

Is Southwestern 's security interest in the stereo system perfected under new Article 9?  Before answering you should consult not only new section 9-504 but also new sections 9-102(a)(26) and 9-108(e)(2). 

Suppose the financing statement described the collateral as "all Debtor's personal property." Is the security in the stereo system perfected under new Article 9?

Even though a financing statement is not required by new section 9-502 to contain the debtor's address, as is explained in subpart C below, a filing officer is supposed to reject a financing statement that does not contain the debtor's address and secured parties should, and routinely will, include the debtor's address (and that of the secured party as well) in any filing. Where the debtor has more than one address, for example, where an individual debtor owns a business, the question could arise as to which address should be included in the financing statement.

The answer lies in the reason for including the debtor's address, namely, to allow a third party to obtain the specifics of a security interest. As explained in subpart D (1) below, a third party cannot go directly to a creditor who has filed a financing statement for information, but must go through the debtor. Consequently, any address at which a third party may contact the debtor for the purpose of getting specifics should be sufficient.

Because the debtor's address is required only to allow searchers to seek details regarding a secured transaction, the debtor's address is not necessary to a sufficient indication of the collateral under new sections 9-108 and 9-504. In In re Grabowski, 277 BR 388 (Bkcy S.D. Ill 2002), for example, a creditor challenged an earlier filed financing statement on the ground that the statement gave the address of the debtor's farm equipment business rather than the debtor's residence address where it engaged in a farming operation and kept a farming equipment that was claimed both by the creditor raising the challenge and the creditor who had filed earlier.

The argument of the creditor making the challenge was that by giving the debtor's business address, the earlier filed creditor had not sufficiently described the farming equipment and had misled searchers because they reasonably could believe the equipment covered by the financing statement was only that used in the debtor's farm equipment business and not its farming operation. The challenge was rejected because the debtor's address was not a required part of the description of the collateral, the very general description of the collateral contained in the financing statement satisfied new section 9-504(2) (authorizing super-generic descriptions that would not pass muster in a security agreement), the debtor's business address was included only to enable third parties to contact the debtor and the debtor could in fact be contacted at the business address regarding farm equipment used in the debtor's farming operation.

A word of caution is in order. It is not uncommon to use the location of the collateral in describing the collateral in the security agreement. If a security agreement describes the collateral as that located at the debtor's address, then the debtor's address could limit what is covered by the security interest. Moreover, if a financing statement uses the debtor's address to describe the collateral it is at least arguable that this presents a different situation than that in Grabowski, supra, and that the security interest is perfected only as to collateral located at that address.

Two closing thoughts about descriptions in financing statements are in order.  Despite the breadth of the authorization found in new Article 9, a financing statement that indicates property to which a security interest has not attached cannot perfect a security interest in that property. See Official Comment 2 to new 9-504.  Moreover, as noted in Chapter 13 (Overview of Perfection by Filing), new section 9-509(b) to the contrary notwithstanding, authentication of a security agreement describing the collateral in relatively narrow terms, arguably, does not authorize the filing of a financing statement indicating the collateral in very broad terms, including the use of a super-generic description.

The next problem illustrates these final points.

Problem 14.12    (interactive)

Northeastern Bank lends to Dan Debtor and takes a security interest in Dan's inventory, existing and after-acquired.   The security agreement describes the collateral as "all Honda motorcycles for which financing is provided by Northeastern Bank."  Northeastern files a financing statement covering "all Debtor's inventory, existing and after-acquired." 

Does Northeastern have a perfected security interest in Dan's inventory of Yamaha motorcycles? 

Should the "composite document" doctrine aid the Northeastern here? 

Was Northeastern authorized to file the financing statement covering all of Dan's inventory?

3.  Name of the Secured Party or a Representative of the Secured Party

Former section 9-402(1) required that a financing statement contain the name of the secured party and an address of the secured party from which information concerning the security interest could be obtained.  New section 9-502(a)(2) requires the name of the secured party (or a representative) but under this section no address need be provided. 

One might think the point of naming the secured party is to allow searchers who are only put on inquiry notice by a financing statement to seek further information from the secured party.  That is certainly the impression created by former section 9-402(1).  Such is not the case, however.

As will be seen in subpart C below, the failure to include the address of the secured party in the financing statement will justify a rejection of the statement by a filing officer.  See new 9-516(b)(4).  But, under new Article 9, the inclusion of the address of the secured party is not aimed at facilitating further inquiry by creditors who learn of the filing.  Rather, as is explained in subpart D below, Article 9 does not contemplate direct inquiry by a searcher to a secured party and the reason for the address of the secured party is that it enables other creditors to send to the secured party notification required by certain priority rules.

So, what then is the purpose of requiring the name of the secured party in a financing statement?  The answer seems to be that being named as the secured party in a financing statement confers certain rights and imposes specific responsibilities.  New Article 9 is somewhat clearer on this point insofar as it refers to a "secured party of record."  See new section 9-511.  The rights and duties of a secured party of record are considered in later chapters.

C.  When a Filing is Effective

As was generally true under former section 9-403(1), under new section 9-516(a) "communication of a record to a filing officer and tender of the filing fee or acceptance of the record by the filing office constitutes filing." However, this general rule is subject to important qualifications. The starting place is new section 9-520(a) under which a filing office must refuse to accept a filing that is defective under new section 9-516(b) but must accept a filing that is not defective under new section 9-516(b). Despite this statement of what should happen a filing may be rejected when it should be accepted and may be accepted when it should be rejected. There must be rules for dealing with these variations of what should happen.

To begin with a filing can be effective only if it satisfies new section 9-502, including especially a correct name for the debtor. To illustrate, suppose a corporate debtor whose name is "Desert Solar, Inc." and who does business under the name "Super Solar," borrows from First Bank and gives First Bank a security interest in its inventory, existing and after-acquired, to secure the loan. Suppose further that First Bank submits a financing statement that is otherwise complete and proper under new section 9-502 but uses as the name for debtor "Super Solar, Inc." Whether the financing statement is accepted or rejected it is not effective to perfect First Bank's security interest because "Super Solar, Inc." is not the correct name for Desert Solar, Inc. under new section 9-503(a)(1) (and most likely would not be saved under new section 9-506(c)).

Suppose, however, that First Bank submits a financing statement that uses the correct name for the debtor, "Desert Solar, Inc.," but fails to include a mailing address for the debtor. The financing statement satisfies new section 9-502, but it is defective under new section 9-516(b), specifically, new section 9-516(b)(5)(A), which requires a mailing address for the debtor. Under new section 9-520(a) the filing office should reject the financing statement. If the filing office does reject the financing statement, the rejection is proper and under new section 9-516(b) "a filing does not occur with respect to a record that a filing office refuses to accept because [of a reason stated in new section 9-516(b)]."

If the filing office accepts the financing statement even though it should have been rejected the filing is effective under new section 9-520(c), which provides that "a filed financing statement satisfying Section 9-502(a) and (b) is effective, even if the filing office is required to refuse to accept it for filing under [new section 9-520(a)]." So, First Bank's financing statement, which uses the correct name for the debtor but fails to include the debtor's mailing address is effective to perfect First Bank's security interest (and, as will be seen further in Chapter 26 (Secured Party Versus Lien Creditor; Future Advances; Bankruptcy)) protects First Bank against a trustee in bankruptcy.

There is an exception to the rule that a financing statement that was accepted even though it should have been rejected is effective if it satisfies new section 9-502, namely, that new section 9-338 applies where the financing statement provides information that is incorrect under new section 9-516(b)(5), but that exception does not apply where, as is hypothesized, the financing statement is missing an address for the debtor rather than that it contains an incorrect mailing address for the debtor. See Official Comment 2 to new 9-520.

Suppose, however, that the financing statement submitted by First Bank uses the correct name for the debtor and provides a mailing address for the debtor, and is otherwise complete, but the mailing address is incorrect. In such a case, the financing statement is not defective under new section 9-516(b)(5) and the filing office is obligated to accept the financing statement. More than likely the financing statement will be accepted because there is no reason why the filing office would know the mailing address is incorrect and the filing office has no obligation to verify such information. See Official Comment 3 to new 9-516 and Official Comment 2 to new 9-520. As noted above, under new section 9-520(c) a filed financing statement that satisfies new section 9-502 is effective (even if the financing statement should have been rejected).

However, a financing statement that contains information required by new section 9-516(b)(5) that is incorrect could mislead a searching party and the exception to the general rule in new section 9-520(c) referred to above can apply. Suppose, for example, that a party, Ready Lender, does a search using the name "Desert Solar, Inc." and it finds the financing statement filed by First Bank. Suppose further that Ready Lender concludes because of the incorrect mailing address that the debtor named in the financing statement is not Desert Solar, Inc. and lends to Desert Solar. If Ready Lender's actions are reasonable then Ready Lender is protected (can have priority over First Bank) under new section 9-338, according to which "a security interest or agricultural lien [that] is perfected by a filed financing statement providing information described in Section 9-512(b)(5) which is incorrect at the time the financing statement is filed: (1) . . . is subordinate to a conflicting security interest in the collateral to the extent that the holder of the security interest gives value in reasonable reliance upon the incorrect information."

That Ready Lender's actions could be seen as reasonable may seem a stretch, but as explained in Official Comment 3 to new section 9-520 the requirement of a mailing address for a debtor is intended to assist the searching party to weed out "false positives" by eliminating debtors who are not the one to whom the searcher wishes to extend credit. On the other hand, Official Comment 2 to new section 9-338 indicates that situations where a purchaser is protected by new section 9-338 are likely to be rare.

In the unlikely event that a filing office rejects the financing statement submitted by First Bank the rejection is wrongful because there was no ground for rejection under new section 9-516(b). However, the filing is effective under new section 9-516(d), providing that "a record that is communicated to the filing office with the tender of the filing fee, but which the filing office refuses to accept for a reason other than one set forth in [new section 9-516(b)]" [emphasis added] the filing is effective.

Once again, there is an exception for reliance purchasers. Specifically, new section 9-516(d) states that a filing that is effective even though it was wrongfully rejected is not effective "as against a purchaser of the collateral which gives value in reasonable reliance upon the absence of the record from the files." For example, if the financing statement submitted by First Bank did not show up in a proper search by a party Ready Lender who then lends to Desert Solar in reasonable reliance on the absence of the financing statement from the system then the financing statement would not be effective against Ready Lender.

The exception to new section 9-520c for accepted filings and that in new section 9-516(d) for wrongfully rejected filings require that a purchaser have done a proper search. See Official Comment 2 to new 9-338 and Official Comment 3 to new 9-516. Moreover, the general rules of both new sections 9-520(c) and 9-516(d) are that the filings are effective to perfect a security interest and protect the filing party against a trustee in bankruptcy (who is not a purchaser).

The foregoing rules tend to favor the filing party but many of the difficulties that give rise to the problems the rules address can be avoided if the filing party uses care to be sure that required information is included and is accurate. Moreover, the filing party can respond to wrongful rejections in that the filing office is obligated to notify the filing party of a rejection. There is one case where such care by the secured party is not an answer. It can happen that a party submits a financing statement that uses the correct name for the debtor and is otherwise complete under new section 9-502 and does not omit information required by new section 9-516(b) and does not provide information required by new section 9-516(b)(5) that is incorrect but the filing office misfiles (incorrectly indexes) the financing statement.

New section 9-517 provides that such a filing is effective. In so doing Article 9 has placed the risk of a mistake by the filing office on the searching party even though as between the filing party and the searching party the latter is in a better position to detect such a mistake by following up to be sure the filing was accepted and correctly indexed. Of course, even though new section 9-517 favors the filing party it is good practice to follow up a submission and not rely on the Article 9 allocation of risk to protect the filing party's interest.

The operation of new sections 9-520(a) and (c) and 9-516(a), (b) and (d) and their interaction with new sections 9-502 and 9-506 may be explored in the next two problems.

Problem 14.13    (interactive)

Western Bank lends to Widget Corp., Inc., a widget manufacturer incorporated in Arizona.  Widget Corp. is doing business as "Super Widgets."  Western obtains a security interest in Widget Corp.'s inventory of widgets, existing and later acquired.  Western presents for filing a financing statement that names the debtor as "Super Widgets, Inc."  The financing statement is otherwise complete and proper.

If the financing statement is rejected (which is unlikely, right?) is the financing statement effective?

If Western Bank's filing were accepted (which is more likely since a filing office would not know the correct name), would it be effective?

If the financing statement was accepted and the day after the financing statement was submitted by Western Bank, Widget Corp., Inc. filed for bankruptcy would Western Bank be perfected (and protected against the trustee in bankruptcy)?

Problem 14.14    (interactive)

Assume the facts of Problem 14.13.  Assume further that the name used in the financing statement is "Widget Corp., Inc." but there is no mailing address for the debtor.

If the filing is tendered with the required filing fee and is accepted is the filing effective to perfect Western Bank's security interest? 

If the financing statement is rejected is it nonetheless effective?

Suppose that the financing statement contains a mailing address for the debtor but the address is incorrect. If Western's filing is rejected is it effective as against Friendly Finance Company who conducted a proper search under the name "Widget Corp., Inc."? 

Assume again that Western Bank submitted a financing statement using as the debtor's name "Widget Corp., Inc." and the financing statement provided a mailing address for the debtor, but the address is incorrect. Assume further that the financing statement is accepted for filing and the financing statement was disclosed to Friendly Finance who then lent to Widget Corp., Inc. Could Western Bank (who as will be seen in Part VI has priority under a first-to-file priority rule), end up being subordinated to Friendly Finance?

Is the financing statement containing an incorrect mailing address for the debtor effective to protect Western Bank against a trustee in bankruptcy? 

Is the financing statement containing an incorrect mailing address for the debtor effective to protect Western against Ready if the financing statement is rejected?

Suppose finally that Western Bank submits a financing statement using as the debtor's name "Widget Corp., Inc." and containing a correct mailing address for the debtor, but the filing office indexes the filing under the name "Super Widgets, Inc. "  Is the filing effective to achieve perfection and protect Western Bank against Friendly Finance who does a search under the name "Widget Corp., Inc." and then lends to Widget Corp., Inc. in reliance on the absence from the filing system of the financing statement filed by Western Bank?

The difficulties associated with rejections and acceptances just considered were compounded under former Article 9 because filing officers were under no specific obligation to make their decisions known in a timely fashion.  As noted earlier, new article 9 speaks to this problem in new section 9-520(b) by requiring a filing office to notify a filing party of any rejection and the reason for the rejection within two business days after the filing office receives the financing statement.

Section 9-519(h) more generally imposes a similar two-day time limit on the performance of all responsibilities regarding filing, indexing and searching and reporting information to searchers.  This limitation may help alleviate the difficulty created by the fact that a financing statement is effective when communicated to the filing office but may not show up in a search for some time.  The lag time, sometimes referred to as the basket phenomenon, should be less of a problem under new Article 9 because of the time limits imposed by new sections 9-520(b) and 9-519(h).

However, the difficulties for filers and searchers created by delays in action by filing officers and by the basket phenomenon have not been eliminated.  Noticeably absent from either section 9-520(b) or 9-519(h) is provision for a remedy for injury caused by failures of filing officers to act within the prescribed time limits.  New section 9-524 excuses certain delays by a filing officer, but does not indicate what remedy exists for an unexcused delay.

The immediate question for a creditor (or you as an advisor thereto) is how a creditor can best assure that it will not unknowingly extend credit when there is an earlier filed financing statement covering the collateral in which the creditor contemplates taking a security interest. This question is explored in the next problem.

Problem 14.15     (interactive)

Eastern Bank is lending Delia Debtor $20,000 and has been given a security interest in Delia's inventory. If nothing else has happened would you advise Eastern it is safe to close today and disburse the loan funds? 

Is there action that Eastern (or you on behalf of Eastern) should take the results of which would assist Eastern in knowing when it is safe to disburse the loan funds?  Explain. 

Could such action have been taken early enough to permit Eastern to close and disburse the loan funds today? 

Are the answers to the questions about when it is safe for Eastern to disburse funds clearer under new Article 9 than they would have been under former Article 9?

You should be aware of the fact that an earlier filed financing statement shows up in a properly conducted search does not mean your client cannot close a secured credit deal.  There are ways to "undo" the priority (including obtaining a termination of the earlier filing or a subordination agreement) and in a proper case there may be enough collateral to assure satisfaction of your client's claim even if it has a lower priority than that of another party.  These possibilities are considered in Part VI.

D.  The Incompleteness of the Filing System and What It Means to Creditors

In subpart C we considered several ways in which the Article 9 filing system might be viewed as being incomplete.  The problem of the "basket phenomenon," which as explained above has been addressed in new Article 9 but not entirely obviated, is one illustration.  The fact that financing statements can be effective even if they are rejected for filing or are accepted even though they defective in a way that should have led to a rejection obviously can cause problems for searching creditors.  But, perhaps the most telling incompleteness is one that results from the nature of the notice filing system itself.

1. Incompleteness Attributable to the Notice Filing Scheme

Under the "notice filing" scheme, the required public record need only put third parties on notice that they may be at risk and must make further inquiry.  However, Article 9 does not contemplate that third parties should go directly to a secured party for information needed to fully assess the risk.  As we saw, the secured party's address is not required for a financing statement to be effective and the absence of the secured party's address is a basis for rejection by a filing officer only because such information is needed to allow a new creditor to send notification required by certain special priority rules.

The question then is just how does a third party obtain complete information.  The short answer is that third parties must make requests for information through the debtor.  New section 9-210 provides the particulars of this scheme of indirectness.  New section 9-210 is long and involved. It is best understood by thinking through its application to specific situations.

You can get a sense of the basics of the scheme by considering the next problem.

Problem 14.16    (interactive)

Your client, Southwestern Bank, is considering lending to Dan Debtor and taking an interest in a valuable drill press that Dan has offered as collateral. 

What is the first step Southwestern should take under new Article 9? 

Suppose an otherwise complete financing statement describing the collateral as "Debtor's equipment, existing and after-acquired" shows up in a search.  Now what?  Explain by reference to new section 9-210.

As will be explored in Chapter 38 (Remedies for a Secured Party's Failure to Comply with Article 9), a third party has only that recourse for failure of a secured party to comply with a proper request for information as is spelled out in new section 9-625, including damages.

2. Other Ways In Which the System is Incomplete

There are other respects in which the filing system might be viewed as being incomplete.  For example, the filing system does not reveal whether pro-offered collateral actually exists.  Nor does it assure a creditor that the collateral is not in the possession of another creditor who has perfected by taking possession, see Chapter 15 (Perfection by Possession (Including Documents of Title)), or automatically, see Chapter 18 (Perfection by Doing Nothing -- Automatic Perfection), or whether a security interest perfected outside Article 9 (pursuant to a certificate of title law, Chapter 17 (Perfection as to Goods Subject to Certificate of Title Legislation), or federal law, Chapter 19 (Perfection Pursuant to Federal Law)) exists.  Consequently, a creditor should confirm that the collateral exists and is not in the possession of another creditor.

Where automatic perfection is a possibility (explained in Chapter 18 (Perfection by Doing Nothing -- Automatic Perfection)), a creditor must investigate for "secret liens." Where the collateral requires perfection outside Article 9, state and federal registries (and as explained in Chapter 19 (Perfection Pursuant to Federal Law), as to certain aircraft collateral, even international registries) must be checked.

One non-obvious way in which the Article 9 filing system is incomplete is its treatment of unauthorized or even fraudulent filings. As explained in Chapter 13 (Overview of Perfection by Filing), new section 9-518 allows the filing of a correction statement, but such a filing does not affect the effectiveness of the filing that is the subject of the correction statement and the drafters have decided that a more complete remedy is better left to the law outside Article 9 and the courts.

There are other risks against which the Article 9 filing system does not protect.  The risks include the possibility that the sheriff is in possession of the collateral pursuant to a valid writ and levy or that the debtor has filed bankruptcy.  A creditor should make sure the collateral is not in the possession of the sheriff and should check for bankruptcy filings wherever a particular debtor could file.  Learning whether a debtor has filed bankruptcy is a task complicated by the jurisdiction and venue rules of the federal bankruptcy statute.  These rules are beyond the scope of these materials and understanding them may require the assistance of a bankruptcy expert.

You may explore the foregoing aspects of the incompleteness of the filing system in the next problem.

Problem 14.17   (interactive)

Assume again the facts of Problem 14.16. 

What should Southwestern Bank do besides filing a financing statement right away, even before getting details of an outstanding security interest under new section 9-210?

E.  The Life of a Financing Statement

Even properly filed and complete financing statements are not effective forever.  Generally, a financing statement will lapse, cease to be effective, after a designated period of time unless further action is taken.  Under former 9-403(2) as adopted in Arizona the period was six years.  Under new section 9-515(a), which has been adopted without modification in Arizona, the period is five years.  To be effective beyond the five-year period a continuation statement must be timely filed.  New 9-515(c), (d).

On the other hand, a financing statement that has not lapsed is effective to perfect a security interest even if the debt has been paid unless a termination statement has been filed.  New 9-513.  These important realities about the life of a financing statement are best left for complete discussion in Chapter 23 (Continuing Perfection -- The Need to Reperfect (Or Refile)) and in Part VI.

CASE COMMENTARY

In re James Baker, __ F.Supp.2d __, 345 B.R. 261 (D. Colo. 2006)

Planned Furniture Promotions, Inc. v. Benjamin S. Youngblood, Inc., 374 F. Supp. 2d 1227 (M.D. Ga. 2005)

In re Snelson, 330 B.R. 643 (Bkcy E.D. Tenn. 2005)

Semmelman v. Mellor, 2006 WL 90094 (D. Minn. 2006)

Federal National Mortgage Association v. Okeke, 2006 WL 355241 (S.D. Tex. 2006)

First National Bank of Izard County v. Garner, 86 Ark. 213, 167 S.W.3d 664 (Ark. App. 2004)

Pankratz Implement Co. v. Citizens National Bank, 130 P.3d 57 (Kan. 2006)

Sunflower Bank, N.A. v. Kindsvater, 144 P.3d 81 (Kan. App. 2006) (Unpublished opinion)

In re Millivision, Inc., 474 F.3d 4 (1st Cir. 2007)