Recent Decision Reinforces the Importance of an Accurate UCC Financing Statement

Creditors have long known the importance of filing an accurate UCC financing statement. Nearly any error on such a financing statement can lead to the loss of the creditor’s priority to a subsequent creditor.

This message, however, was dramatically reinforced by the Bankruptcy Court for the District of Nebraska’s recent decision in the case of In re EDM Corporation ¹. In that case, the court was required to determine the priority of two lenders that had loaned funds to a single debtor, EDM Corporation. The first lender, Hastings State Bank, made a number of loans to the debtor and filed a financing statement to perfect its security interest in the debtor’s property. Hastings’ financing statement, however, identified the debtor as “EDM Corporation d/b/a EDM Equipment” rather than “EDM Corporation,” the debtor’s correct legal name.

Over four years after Hastings filed its financing statement, Huntington National Bank issued a revolving credit note to the debtor and received a security interest in the debtor’s property. To perfect that security interest, Huntington filed a financing statement that correctly identified the debtor as “EDM Corporation.” Prior to Huntington’s loan to the debtor, it searched the records of the Nebraska Secretary of State for financing statements related to the debtor EDM Corporation. This search, however, did not disclose Hastings’ financing statement due to the inclusion of the suffix “d/b/a EDM Equipment” in Hastings’ financing statement.

The issue before the court was whether Hastings’ financing statement was sufficient to perfect its security interest in the debtor’s property. Huntington argued that Hastings’ financing statement was seriously misleading under §9-506 of the UCC and was therefore insufficient to perfect its security interest. Hastings, however, argued that its financing statement contained the debtor’s correct name, EDM Corporation, and therefore sufficiently identified the debtor. After weighing each party’s arguments, the court found in favor of Huntington, explaining that Hastings’ financing statement was seriously misleading and was not sufficient to perfect its security interest. The court first noted that Hastings’ financing statement misidentified the debtors name by adding a suffix that was not a part of the debtor’s corporate name. Even more importantly, the court explained that a search for the debtor’s legal name “EDM Corporation” using the Nebraska Secretary of State’s standard search engine would not have disclosed Hastings’ financing statement. For that reason, the court held that Hastings’ financing statement was seriously misleading and was not sufficient to perfect its security interest in the debtor’s property.

This decision reinforces the need for creditors to be extremely vigilant when preparing financing statements. Creditors must always ensure that they are using the debtor’s correct legal name. In addition, creditors must be careful to avoid using extraneous terms to identify the debtor. Such terms are not likely to be discovered using a search of the Secretary of State’s records and can therefore lead to a judicial finding that the financing statement is ineffective. As the above case demonstrates, following these guidelines when filing a financing statement may avoid later challenges to a creditor’s security interest.

¹ 2009 Bankr. LEXIS 202 (Bankr. D. Neb. Feb. 10, 2009).

Posted by: Matthew J. Horwitz

Categories: Bankruptcy & Banking Law