A recent decision of the Eighth Circuit Court of Appeals serves as a valuable reminder of the potentially harsh consequences of using an incorrect name on an UCC-1 Financing Statement.  In Hastings State Bank v. Stalnaker (In re EDM Corp.), the Court of Appeals upheld the bankruptcy court’s ruling that a lien was not properly perfected because of the inclusion of the debtor’s “doing business as” name on a UCC-1 financing statement.  As a result, the lender, Hastings State Bank, lost its first priority lien position in the collateral.

The legal corporate name of the debtor in the Hastings case was “EDM Corporation.” but for several years the debtor had also operated under the trade name of “EDM Equipment.”  Hastings State Bank filed a financing statement identifying the debtor as “EDM Corporation d/b/a EDM Equipment.”  Two subsequent lenders searched the UCC records for “EDM Corporation” but the search logic did not reveal Hastings financing statements.  None of these two subsequent lenders searched the UCC records for “EDM Corporation d/b/a EDM Equipment” and both filed financing statements using only the debtor’s legal name “EDM Corporation.”  After the debtor filed bankruptcy, the bankruptcy court determined that Hastings State Bank had not perfected its security interest and the subsequent lenders had priority in the proceeds of the collateral.

According to the court the financing statement filed by Hastings did not provide the legal name of the debtor as required by §9-502 of the UCC and it was seriously misleading under §9-506 of the UCC.  Hastings failed in its obligation to discover and use the debtor’s correct name.  As a result, the purpose of filing a financing statement, i.e. to let other creditors know of the existence of a lien, was not met by Hastings’ financing statement.  The court noted that the proper way to include the trade name on the UCC-1 was to list it as other or additional names on the form “but not in place of, or as part of, the debtor’s organizational name.” 

It is a common mistake to incorrectly fill in a debtor’s name on a financing statement. To avoid the serious consequences faced by Hastings State Bank, lenders would be well-advised to remind their loan officers of the importance of determining the proper legal name of a borrower and of making sure UCC-1 financing statements are properly filled out.  A quick check of the Secretary of State corporate records could make all the difference to recovering on a defaulted loan versus having to recognize a total loss!