Source: https://www.cscglobal.com/blog/experts-corner-court-struggles-with-ucc-standard-search-logic/
Timestamp: 2019-04-19 10:18:39+00:00

Document:
As a general rule, a UCC financing statement that fails to sufficiently provide the name of the debtor is seriously misleading as a matter of law. There is one exception. Under § 9-506(c), if a search of the filing office records under the debtor’s correct name, using the jurisdiction’s standard search logic, would disclose the record, then the insufficient debtor name does not make the record seriously misleading.
The rules seem simple enough, but what happens if the operation of the filing office’s standard search logic isn’t clear or doesn’t exist? A court recently confronted that situation but was unable to resolve the issues in the recent case of In re: Patriot Electric and Mechanical, Inc., 2014 Bankr. LEXIS 1962 (Bankr. D.Md. May 1, 2014).
In February 2007, Patriot Electric, Inc. (the “Debtor”) entered into two secured loans with a predecessor to Manufacturers and Traders Trust Company (collectively “M&T”). In both cases, the Debtor granted M&T a blanket security interest in all of its assets.
On November 22, 2010, the Debtor changed its name to “Patriot Electric and Mechanical, Inc.” by filing amended Articles of Incorporation. M&T received correspondence and other information from the Debtor that reflected the new name, but it does not appear that the Debtor notified M&T directly.
M&T timely filed continuation statements in September 2011. Each continuation statement included the text “Debtor Name: PATRIOT ELECTRIC, INC.” in the Optional Filer Reference Data field of the UCC3 form, a space reserved for the filer’s own use. M&T never amended the financing statements to reflect the Debtor’s new name.
In 2013, the Debtor filed a Chapter 11 bankruptcy petition. The Debtor remained in control of its affairs as Debtor-in-Possession (“DIP”) under the bankruptcy code. As DIP, the Debtor has the same rights and powers as a hypothetical lien creditor. The Debtor used its DIP powers to bring an adversary action to avoid M&T’s blanket security interests. The Debtor asserted that M&T’s security interest was unperfected because the financing statements did not sufficiently provide the registered organization name of the debtor as required by UCC § 9-503(a)(1).
The parties stipulated that the financing statements filed under the Debtor’s former name did not satisfy the requirements in § 9-503(a)(1). The court, therefore, turned to whether a § 9-506(c) search on “Patriot Electric and Mechanical, Inc.” would disclose the records.
The court, however, had trouble determining exactly what search criteria would satisfy the requirements of § 9-506(c). SDAT, the central filing office for Maryland, does not conduct UCC searches. Searches are only available online through the SDAT website. The instructions for the SDAT search system direct users to “Enter as much or as little of the name that you are certain of, but what you enter must be the beginning of the name as it appears in this file.” The instructions include examples of how to modify the debtor name when entering it in the search system to achieve the best results.
The “proper” search logic, according to the court, would not disclose the M&T financing statements if the searcher entered the full correct name of the Debtor, modified in compliance with the SDAT instructions. Yet the same search logic would disclose the M&T records if the searcher entered a truncated version of the Debtor’s name.
Both debtor name search variations would comply with the instructions for the SDAT search system. Nevertheless, neither search string exactly matched the correct name of the Debtor required by § 9-503(a)(1).
Not surprisingly, the parties interpreted the requirements of § 9-506(c) differently. M&T argued that the plain language of the SDAT instructions provided that a truncated name search would be sufficient. Thus, if a search under the partial name disclosed the records, then the records would be effective under § 9-506(c).
The Debtor, however, focused on the plain text of § 9-506(c), which requires the search to be conducted under the debtor’s “correct name.” According to the Debtor, only a search of the full correct name would satisfy § 9-506(c). As noted earlier, even searching by the full debtor name requires using a name variation under the SDAT search instructions.
Ultimately, the court could not decide which interpretation to apply so it certified the question to the Maryland Court of Appeals, the highest court in the state. The Court of Appeals is scheduled to hear the case in January 2015, so the final decision will not be available for several months.
The bankruptcy court did make some questionable oversights and assumptions prior to certifying the issue to the state court. The court failed to even mention that § 9-507(c) might apply to this situation. Under § 9-507(c), a financing statement remains effective to perfect the security interest in collateral acquired by the debtor before and within four months after the debtor changes its name. Depending on the collateral involved, the search logic issue might be irrelevant if § 9-507(c) controls the outcome.
Another issue is that the court seemed very concerned that the continuation statements filed by M&T failed to provide the new name of the Debtor. Yet Article 9 does not require any debtor name on a continuation statement. Moreover, the former name was listed in the space reserved for the filer’s own use, not in the amendment portion of the form. The court may need to clarify its comments on the continuation debtor name after the Maryland Court of Appeals responds.
While the core issues of this case remain unresolved, there are some important takeaways for those who file or search the UCC records. The most important of these is that secured parties should never rely on a filing office’s standard search logic for perfection when the financing statement fails to sufficiently provide the debtor name. As demonstrated with the SDAT system, it may not be clear how the search logic works or whether the filing office even has adopted a standard search logic. The secured party can avoid the search logic issues entirely by simply making sure the debtor name is correct in the first place.
Searchers should be careful about filing office search logic as well. It is possible that searching only under the exact name of the debtor could miss active and effective financing statements that provide a name variation. It all boils down to how the search logic works.
This case also illustrates the need for secured parties to keep track of debtor name changes. The burden is on the secured party to comply with the strict time limitations for filing an amendment following a name change, even if the debtor provides no notice. Fortunately, third-party vendors, including Corporation Service Company (“CSC”), offer tracking services that can identify these changes while the secured party still has time to act.
CSC will continue to monitor this case and will provide updates after the Maryland Court of Appeals addresses the issues certified by the bankruptcy court.

References: § 9
 § 9
 § 9
 § 9
 § 9
 § 9
 § 9
 § 9
 § 9
 § 9
 § 9
 § 9
 § 9