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What’s in a Name? Naming Conventions, Securing Your Security, and the Art of Further Complicating the Complicated
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What’s in a Name? Naming Conventions, Securing Your Security, and the Art of Further Complicating the Complicated

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A bit of background information is necessary:  Article 9 of the Uniform Commercial Code (UCC) governs contracts which purport to create security interests in personal property.  Among other useful purposes, Article 9 was intended to simplify and clarify the process by which a lender could perfect a security interest in personal property, by making the process cheaper, more efficient, transparent, and uniform.  Amendments to Article 9 over the last twenty-five years or so reflect the drafters’ intent to further streamline the process and incorporate advances in technology.

Prior to 2010, Article 9 simply required a secured party to use the “name of the debtor” on its financing statement.  That may sound simple enough, but problems such as nicknames, changing names due to marriage, etc., and cultural differences in naming conventions have vexed secured parties for decades.  For instance, a court in one jurisdiction found “Mike” was sufficient to identify an individual debtor whose actual name was “Michael,” while a court in another jurisdiction arrived at the opposite conclusion.[1]

This brings us to the latest round of revisions.  The proposed 2010 Amendments provide states with two options for determining the individual debtor’s correct name for financing statement purposes, both of which refer to the debtor’s state-issued driver’s license.

Alterative A provides that a secured party has a perfected security interest “only if” the debtor’s name on the financing statement matches the debtor’s name as it appears on the debtor’s state-issued driver’s license or state ID card.   If the individual debtor does not have a driver’s license or ID card, then the secured party should use the individual’s first personal name and surname.

Alternative B is commonly referred to as the “safe harbor” alternative. The provision allows for filing against the “name of the debtor” as provided under current Article 9, but provides a safe harbor for using the name designated on a state issued driver’s licenses or state ID card.

In theory, this section could make perfecting a security interest easier … but only when debtors have names of a reasonable length free of punctuation or letters not found in the 26-letter English alphabet, and as long as the debtor never changes (or corrects) his or her name as it appeared on the state-issued driver’s license on the day the security interest was perfected.  

Driver’s license formats vary from state to state according to state law and traditional practice in the states’ DMVs.  For instance, some states use punctuation in drivers’ names while others don’t. Some states truncate letters at the end of longer names on drivers’ licenses. Some states show a driver’s last name first, while others put first names first.  The list of differences goes on. 

Then there’s the fact that drivers’ licenses expire at some point.  What happens if the debtor changes or corrects the spelling of her name on the new license?  Does the debtor have an affirmative duty to notify the lender?  Does the lender need to amend the original financing statement?  The answers are not yet clear.

More than half of U.S. states have adopted one of the alternative versions, and the 2010 Amendments are slated to take effect on July 1, 2013. 

To be on the safe side, at a minimum secured parties will need to list the debtor’s name as it appears on his driver’s license, along with any name variation that the debtor may be known by or may commonly use.  Lenders should take steps to determine how the changes in the law will affect their practices and adopt procedures to eliminate risk where possible.

If you are a lender or other secured party, be sure to seek the advice of experienced legal counsel before the 2010 Amendments take effect.  The attorneys at Glass & Goldberg are committed to helping you minimize risk and manage uncertainty, and can help structure your policies and procedures to meet your goals.

Glass & Goldberg provides high quality and cost-effective legal services and advice for clients in all aspects of business litigation and transactional law.  Call us at (818) 888-2220, email us at info@glassgoldberg.com, or visit us on the web at www.glassgoldberg.com to learn more about the firm and to sign up for future newsletters.

[1] See In re Erwin, 50 UCC Rep Serv 2d 933, 2003 Bankr. LEXIS 692 (Bankr. D. Kan., June 17, 2003) and In re Larsen, 2010 WL 909138, 72, UCC Rep.2d 187 (Bankr. S.D. Iowa 2010)

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