Both MainSource Bank (MainSource) and LEAF Capital Funding, LLC (LEAF) made loans to Ronald Markt Nay (Debtor). The MainSource Loan was secured against personal property owned by the Debtor, which included, among other things, all present and future inventory, equipment, farm products, and instruments. The LEAF loan consisted of two loans, which were secured by two specific pieces of farm equipment owned by the Debtor.
Each lender filed UCC-1s with the Indiana Secretary of State, with MainSource filing in February, 2014 and LEAF filing two UCC-1s for the farm equipment in December, 2015.
The Debtor's name as it appears on his most recently issued unexpired Indiana state driver's license is "Ronald Markt Nay." LEAF's UCC-1s filed with the Indiana Secretary of State omitted the letter "t" from the Debtor's middle name and listed the Debtor's name on both of the UCC-1s as "Ronald Mark Nay."
On May 13, 2016, the Debtor commenced Chapter 11 bankruptcy proceeding and, shortly thereafter, MainSource initiated this adversary proceeding claiming that it has a first priority security interest in the two specific pieces of farm equipment and that LEAF's purchase money security interests are not properly perfected due to the error in recording the Debtor's name in the UCC-1s.
The court ruled that LEAF's inadvertent omission of the letter "t" from the Debtor's middle name invalidates LEAF's UCC-1s and as a result MainSource is entitled to judgment as a matter of law. Under Indiana Code § 26-1-9.1-506, a UCC-1 filing must meet the requirements of IC 26-1-9.1-501 through 25-1-9.1-527 to be an effective filing in the respective Secretary of State where the debtor is domiciled. In particular, where the UCC-1 fails sufficiently to provide the name of the debtor in accordance with IC 26-1-9.1-503(a) then it is deemed "seriously misleading," and is therefore a defective filing. Section 503(a) provides that "if the debtor is an individual to whom a driver’s license has been issued, a financing statement sufficiently provides the name of debtor only if it provides the name of the individual which is indicated on the driver’s license."
The court held that in reading section 503 with section 506, the only correct name of the Debtor under section 503 is the name on the Debtor’s driver’s license. The court reasoned that section 503 balances the interest of filers and searchers, meaning that searchers should not be expected to have to ascertain "nicknames, trade names, and the like by which the debtor may be known" and then perform a search based on that information. It explained that it is the lender's responsibility to provide the name of the debtor sufficiently in a filed UCC-1.
In addition, the court found that LEAF failed to establish that its UCC-1s were discoverable by searching under the Debtor's correct name using the standard search logic promulgated by the Indiana Secretary of State. Accordingly, LEAF could not rely on the safe harbor provision of IC 26-1-9.1-506(c) to prevent its UCC-1s from being found to be seriously misleading and ineffective.
Lending institutions should take extra care to use the debtor's correct name on UCC-1s. Even in cases where there is a potential error in the name on a debtor's driver's license, the name on that driver's license should be used if that is the standard required by the UCC. If there is any doubt over a debtor's correct name, the lender should also list other possible debtor names as additional debtors on the UCC-1. For more information, see Practice Note, UCC: Preparing and Filing Financing Statements.