Opinion ID: 2153421
Heading Depth: 1
Heading Rank: 4

Heading: pertinent cases

Text: We reach this conclusion aware that relevant case authority is limited and conflicting. On the one hand, there is a line of cases which apply the good faith approach taken here today. In In re Vieths, Inc, 9 UCC Rep Serv 943 (ED Wis, 1971), the debtor was an individual named Kuhn who did business under the trade name Vieth's. The financing statement was filed under the name Kuhn only. At a later time, debtor incorporated his business as Vieth's, Inc., and transferred the collateral to the corporation. The secured party knew of these transactions, but did nothing to remedy this creation of a secret lien. The referee held that because the secured party, a bank, had full knowledge of the incorporation and transfer of assets which resulted in a secret lien, it was required to file a new financing statement under the corporation's name in order to preserve its perfected lien. In In re Kalamazoo Steel Process, Inc, 503 F2d 1218 (CA 6, 1974), both parties entered the security agreement with the intention of taking on another name at a later time. However, the financing statement was filed under the name of the debtor at the time of the security agreement, and did not reflect the intended name change. Relying heavily on the good faith obligation laid out in MCLA 440.1203, the Sixth Circuit held that the secured creditor had not perfected its interest: In the present case, once the debtor changed its name from Roman Industrial Corporation to Kalamazoo Steel Process, a diligent search of the index of financing statements in the office of the Secretary of State would not have disclosed the prior lien. We are persuaded that H.O.U. lost its perfected security interest in the collateral of the debtor when its name was changed to Kalamazoo Steel Process. When a secured party has knowledge at the time the security agreement is executed that the debtor intends to change its name, and the new name is known to him, the secured party must act in good faith to insure that the filing under the Code not only discloses the current and correct name of the debtor but also reflects the pending name change of which the parties are aware. 503 F2d 1218, 1221-1222. Kalamazoo in this quotation elucidates the reason and the conclusion of the opinion: 1. A substantial change in name vitiates notice because the index system cannot work to give notice. 2. A secured person who has knowledge of such change must in good faith insure a filing that does give notice. It so happened that in Kalamazoo the secured party had knowledge at the time of execution of the original security agreement, but that fortuitous situation changes neither the reason nor the necessary conclusion therefrom. Consequently, the rule can validly be stated that whenever a secured party has knowledge of a change in name of the debtor so substantial that the index will not disclose the filing that would give notice, the secured party must in good faith attempt to insure a new or amended filing that will give notice. Finally, In re Conger Printing Co, Inc., 18 UCC Rep Serv 224 (D Or, 1975), involved the sale of a business where the seller and the secured party agreed to surrender the name of the corporation to the debtor and that the debtor could incorporate the business and transfer the collateral and the name to the new corporation. The financing statement listed the corporate name as the secured party and the personal name of the buyer as the debtor. The secured party knew that the buyer intended to transfer the collateral and assume the corporate name, but did not have knowledge that these transactions actually took place. The court found that the secured party's interest was not perfected: The secured party had a duty to anticipate in the financing statement that the authorized transfer [of collateral to the new corporation] may be made, to inquire if it had been made, and to file a financing statement designating the bankrupt [corporation] as the ultimate debtor. This duty neither ceased nor was satisfied when he filed the financing statements which named only an interim debtor. Under these circumstances, the secured party could not escape this responsibility which is imposed by ORS 71.2030 and ORS 79.4020(1) by filing the initial financing statement with the county in the name of Mr. Lavell [the buyer], and by later closing his eyes, when he had a duty to look and a duty to insure that the financing statements were not misleading. 18 UCC Rep Serv 224, 229. Kalamazoo Steel Process and Conger Printing are somewhat distinguishable from the instant case in that the secured parties knew of the intended name change at the time of the filing of the financing statements. However, we can see no reason why the policy of preventing secret liens manifest in MCLA 440.9402; MSA 19.9402 and the good faith obligation set out in MCLA 440.1203; MSA 19.1203 should not require the same result where the secured party has actual knowledge of a subsequent change in the debtor's name, and where that name change is seriously misleading. [7] My Brother FITZGERALD relies on another line of authority which we do not believe carries out the intent of MCLA 440.9402; MSA 19.9402 and MCLA 440.1203; MSA 19.1203. In re The Grape Arbor, Inc, 6 UCC Rep Serv 632 (ED Pa, 1969), involves a change in the debtor's name which occurred after the filing of the financing statement. The secured creditor did not refile or amend the financing statement, and yet the court held that its security remained perfected. However, in that case, the secured party was unaware of the debtor's name change, making it clearly distinguishable from the instant case. The leading case supporting defendant's position is In re GAC, 11 UCC Rep Serv 412 (WD Mich, 1972). In this case, the court held that the secured party was under no duty to refile its financing statement even where it was aware of the debtor's name change. The rationale of the court in GAC is unpersuasive, however, for reasons outlined in a recent law review analysis of the case. [8] The court reasoned first that the secured party should not be burdened with the requirement of proving a negative, i.e., lack of knowledge. However, this argument is easily met by requiring that the party seeking to avoid the security interest carry the burden of proving the actual knowledge of the secured party. Second, the court argued that it might be impossible to obtain a new financing statement, since the debtor must sign such a statement, and might be uncooperative. However, the good faith standard would protect the secured party in such a situation, for if there was a good faith effort by the secured party to refile, its perfected security interest would be preserved, whether this effort was successful or not. Finally, the court asserted that inquiring parties were under a duty to inquire about any prior name change of debtor. Such an assertion is contrary to the central concept that it is the financing statement which is intended to put file searchers on inquiry. There should be no requirement to search outside the filing office unless there is something in the filing which would put the interested party on notice of the need for further inquiry. See The Effect of Errors & Changes in the Debtor's Name on Article Nine Security Interests, fn 7 supra; White & Summers, Handbook of the Law Under the Uniform Commercial Code (1972), § 23-16, p 833; Coogan, Public Notice under the Uniform Commercial Code & Other Recent Chattel Security Laws, Including Notice Filing, 47 Iowa L Rev 289, 318, fn 100 (1962); In re Kalamazoo Steel Process, Inc, supra, at 1224. In re Pasco Sales Co, Inc, 77 Misc 2d 724; 354 NYS2d 402; 14 UCC Rep Serv 1059 (1974), follows GAC in holding that there is no duty on the part of the secured party to refile even where it had knowledge of the name change, and is subject to the same criticism outlined above. It is also notable that the court apparently did not consider the possible effect of the good faith provision in § 1-203, for this provision is not even mentioned in the opinion. The GAC approach is at odds with the notice requirements of MCLA 440.9402; MSA 19.9402; the rule of liberal construction mandated by MCLA 440.1102; MSA 19.1102; and the duty of good faith imposed by MCLA 440.1203; MSA 19.1203. We unequivocally reject that approach. My Brother FITZGERALD suggests that we leave it to the Legislature to remedy the problem of the secret lien created by a change in the debtor's name. Specifically, he points to an amendment to article 9, 9-402 of the UCC proposed by the drafters of the code in 1972: Where the debtor so changes his name or in the case of an organization its name, identity or corporate structure that a filed financing statement becomes seriously misleading, the filing is not effective to perfect a security interest in collateral acquired by the debtor more than four months after the change, unless a new appropriate financing statement is filed before the expiration of that time. UCC Rep Serv, Current Materials, Uniform Code, Appendix-Article 9, Revised Article 9 of the Uniform Commercial Code (1972), pp 130-131. In response, it should be noted that this proposal is much broader than the good faith approach outlined here. Under the terms of the 1972 proposal, all secured creditors would in effect be required to determine every four months whether its debtor had changed its name, identity, or corporate structure, and refile or amend the financing statement if there was such a change. Under the good faith approach, the only duty imposed falls upon secured creditors with actual knowledge of a seriously misleading name change. Only in these circumstances is the secured creditor obliged to attempt to refile or amend its financing statement. The 1972 proposal, which would place a burden on all secured creditors to check for changes in the names of their debtors, is clearly beyond the present scope of MCLA 440.9402; MSA 19.9402. The good faith approach, however, is required by the purposes and mandates of MCLA 440.9402; MSA 19.9402 and MCLA 440.1203; MSA 19.1203 as they presently stand. In taking this approach, we simply fulfill our duty to interpret the intent of the drafters of the code through an examination of the language of the statutes before us. There is no interference here with the right of the Legislature to expand the duty of secured creditors by enacting the 1972 proposal. In point of fact, however, the Legislature has for the time being seemingly rejected the more burdensome approach of the 1972 proposal. The Legislature recently passed 1976 PA 27 which amended various sections of article 9. While the 1972 proposed amendment to MCLA 440.9402; MSA 19.9402 was originally part of 1976 PA 27, it was deleted from the enactment before passage.