Importance of Correctness in Filing Collateral Forms
Jack Burkett, Deputy General Counsel, IBAT
Reprinted from Interstate Capitol Comments, a publication of ICBA of New Mexico
A recent case in Kansas, Pankratz Implement v. Citizens National Bank underlines the importance of correctness in filing forms related to collateral.
On March 19, 1998, Rodger House, a Kansas resident, purchased a tractor from Pankratz Implement, a Kansas corporation. House executed a note and security agreement on the day of purchase in favor of Pankratz, which in turn assigned the note and collateral to Deere and Company. Deere filed the financing statement, commonly known as a UCC-1, on March 23, 1998, with the Kansas Secretary of State. House’s name as debtor was designated on the filing as “House, Roger.” (The “d” in Rodger was missing.)
On April 8, 1999, House executed a note and security agreement for a loan from Citizens, a Kansas bank, in which the collateral secured was “all equipment owned and thereafter acquired”. Citizens filed its financing statement with the correct name of the debtor. “House, Rodger.”
House filed for bankruptcy in 2002. Deere re-assigned its note and security interest back to Pankratz. Pankratz filed suit to determine whether it or Citizens had a prior security interest in the tractor. The district court held for Pankratz because it had perfected its security interest first.
The Court of Appeals reversed, holding that, although Pankratz filed first, its financing statement was “seriously misleading,” and therefore ineffective, while Citizens’ financing statement used the correct name, and was therefore the only one on file. The opinion contains a good discussion of UCC 9-503, Name of Debtor and Secured Party, and 9-506, Effect of Errors or Omissions. The Court focused particularly on UCC 9-506(c), which states that if a search of the records of the filing office under the debtor’s correct name, using the filing office’s standard search logic, would disclose a financing statement that fails to provide the name of the debtor in accordance with Section 9.503(a), the name provided does not make the financing statement seriously misleading. In this Kansas case, however, the system used by the state filing office was the “standard search logic,” which would NOT have found the incorrect filing and not the “temporary internet search logic,” which does an expanded search and would have found “Roger” by using the correct legal name. There was a warning on the Kansas temporary internet search system which stated that the internet search was not to be used for doing a lien search at the Secretary of State’s UCC Filing Office.
Burkett’s Comment: Although a search system that fails to detect a first name that is one letter less than the legal name seems harsh, the standard search logic system is designed so that creditors do not have to conduct multiple searches using variations of the debtor’s name, and we believe that produces a fair result. Also note that the filing under the incorrect name took place before the Customer Identification Program. Now with CIP in place, it is all the more important to get the debtor’s name right.
