Another Court Declares Bank UCC Filing Ineffective – This Time For Incorrect Location of Debtor’s Name On UCC Filing Form

08.14.17

Earlier this year I discussed with you a recent court case declaring a UCC financing statement ineffective because the debtor’s middle name was misspelled. Now, in another UCC financing statement case, the United States Bankruptcy Court, Eastern District, Wisconsin, in Bruce A. Lanser, Trustee v. First Bank Financial Centre, 568 B.R. 797 (March 17, 2017), declared a bank’s UCC financing statement ineffective because the name of the debtor was placed on the wrong line of the filing form. In this case, the name of the debtor, who is an individual, was placed on the organization debtor line rather than the individual debtor line of the UCC financing statement. 

The bank made a loan to Voboril Financial, LLC. The loan was guaranteed by Stephen R. Voboril (“Stephen” in this article) who then executed a security agreement granting the bank a security interest in a promissory note payable to Stephen in the amount of $104,000. The bank filed a UCC financing statement to perfect its security interest in the promissory note, and in doing so mistakenly placed Stephen’s name, who as the owner of the collateral is the ​“debtor” for UCC filing purposes, on the organization line rather than on the individual line in the debtor’s name section of the form. In effect, the bank identified the debtor on the UCC financing statement as an organization rather than as an individual by placing it on the organization line rather than on the individual line in the debtor’s name section. 

This misidentification meant that a search of the UCC records in accordance with DFI’s search procedures would not reveal the UCC financing statement filed against Stephen because DFI maintains a separate database for each type of debtor. DFI stores the names of individual debtors in files that include only the names of individuals and not the names of organizations, and it stores the names of organizations in files that include only names of organizations and not the names of individuals. In this case, DFI entered the filed UCC financing statement into the database that contains the names of organizations because the debtor’s name placed on the UCC financing statement was identified as an organization. DFI search logic depends on whether the name searched is identified as an individual or an organization. Consequently, a search request in this case specifying Stephen as an individual would not locate the UCC financing statement filed against Stephen where he is identified as an organization. 

Wisconsin law creates a ​“safe harbor” that may help save a UCC financing statement containing an incorrect name of a debtor if a searcher can nevertheless find the filing in the ordinary course of a search. Unfortunately, DFI enters the name in its database exactly as it is set forth in the filed UCC financing statement even if it appears that the name of the individual has been included in the field designated for an organization. DFI’s search of the name ​“Stephen R. Voboril” stored in the individual name files would not disclose the financing statement filed against Stephen R. Voboril and stored in the organization name files, and therefore the ​“safe harbor” was not available. As a result, the bank’s security interest in the promissory was not perfected and not protected from a claim by the trustee in the bankruptcy who has the legal power to avoid an unperfected security interest. As a side note, the bank could have perfected its security interest in the promissory note by taking possession of the note (as an ​“instrument” under the UCC), but apparently it did not do so in this case. 

Like the earlier case in which a UCC financing statement was declared ineffective because the debtor’s middle name was misspelled, in this case we have a similar circumstance where the correct name of the debtor owning the collateral was simply put on the wrong line on the UCC financing statement form making the UCC financing statement ineffective. According to the Court ​“following the Wisconsin filing office rules, a filer must correctly designate a debtor as either an individual or an entity because that determines the name’s database and the applicable search logic of the filing office.” Clearly, great care must be taken when identifying debtor names in UCC financing statements. The smallest of mistakes can lead to substantial losses.

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