In In re Bryant, (Bankr. M.D. Ga. June 7, 2021), the U.S. Bankruptcy Court for the Middle District of Georgia determined that a lender’s UCC-1 financing statements were "seriously misleading" under the Georgia Commercial Code. Because the financing statements identified the individual debtor with his middle name abbreviated, the court concluded that the financing statements were defective and, therefore, that the lender’s security interest had not been perfected.

‘Seriously Misleading’ UCC-1 Financing Statements

The Uniform Commercial Code requires that a financing statement meet certain standards in order for the lender to effectively perfect a security interest in an individual debtor’s collateral. One of these requirements is that the financing statement provide the debtor’s name. The comments to the Uniform Commercial Code indicate that the name requirement is "particularly important," because "financing statements are indexed under the name of the debtor and those who wish to find financing statements search for them under the debtor’s name."

Section 9-503 of the Uniform Commercial Code provides two alternative methods for a secured creditor to employ in order to identify its individual debtor. The first method distinguishes between: a debtor holding an unexpired driver’s license issued by the state where the financing statement is filed; and a debtor who does not hold an unexpired driver’s license issued by the relevant state. If the debtor has a validly issued and unexpired driver’s license, the lender is constrained to provide the individual debtor’s name as it appears on the driver’s license; on the other hand, if the individual debtor does not hold such a license, a financing statement will be sufficient if it provides either the debtor’s "individual name" or the debtor’s surname or family name and first personal name.

The second—and less stringent—method under Section 9-503 allows the secured creditor to identify the debtor under any of the three alternatives mentioned above, without regard to whether the debtor holds a driver’s license issued by the state where the financing statement is filed.

Section 9-506(b) of the Uniform Commercial Code provides that "a financing statement that fails sufficiently to provide the name of the debtor in accordance with Section 503(a) is seriously misleading." Subsection (a) of that section permits minor errors or omissions, unless such errors or omissions render the financing statement seriously misleading, and subsection (c) provides lenders yet another safe harbor: "if a search of the records of the filing office under the debtor’s correct name, using the filing office’s standard search logic, if any, would disclose a financing statement that fails sufficiently 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."

Georgia has adopted the more stringent approach set forth in UCC Section 9-503. Section 11-9-503 of the Georgia Code dictates that a financing statement is sufficient "if the debtor is an individual to whom this state has issued a driver’s license that has not expired, only if the financing statement provides the name of the individual which is indicated on the driver’s license." With respect to this approach, the comments to the Uniform Commercial Code provide that if the name appearing on the debtor’s driver’s license contains an error, the financing statement will not be considered to be "seriously misleading" so long as the financing statement provides the same name, error and all.

The ‘Bryant’ Decision

Darren Bryant, the debtor, an individual and farmer, filed a voluntaryChapter 12 bankruptcy petition on Oct. 7, 2020. Before the petition date, Bryant had executed various promissory notes and a commercial guaranty, which unconditionally guaranteed financial obligations owed by Big Boy Cattle LLC to the lender. Bryant had also signed various security agreements with respect to these obligations, each of which was purportedly secured by a first-priority lien in all of Bryant’s farm equipment, whether then-owned or later acquired, together with all replacements, substitutions and proceeds related thereto. The lender’s security interest was evidenced by financing statements filed by the lender in Coweta County, Georgia, in which the debtor was identified as "Darren E. Bryant" and "Darren E Bryant."

The lender filed a proof of claim in Bryant’s Chapter 12 case in the amount of $2,515,673.21. This total included a secured claim of $177,356.30. Copies of the lender’s as-filed UCC-1 financing statements were attached to the lender’s proof of claim. The lender also filed a motion for adequate protection on the basis that its loan collateral was depreciating; alternatively, the lender sought relief from the automatic stay on the basis that the Bryant’s bankruptcy case had been filed in bad faith. In this reported decision, the court addressed the lender’s requests for adequate protection and dismissal.

The trustee of Bryant’s bankruptcy estate objected to the lender’s motion on the grounds that the lender’s lien was invalid. Specifically, the trustee argued that the financing statements filed by the lender were seriously misleading under Sections 11-9-506(b) and 11-9-503 of the Georgia Commercial Code. The trustee argued that, because Bryant held an unexpired driver’s license issued by the State of Georgia on which his name appeared as "Darren Eugene Bryant," the lender’s abbreviation of Bryant’s middle name in the financing statements was, as a matter of Georgia law, "seriously misleading."

The lender, on the other hand, argued that Section 11-9-503(a)(4) required it to simply provide the name of the debtor "indicated on the driver’s license, not the full name of the debtor." The lender reasoned that, because it had inserted Bryant’s name (albeit not precisely) as the name appeared on Bryant’s Georgia driver’s license, it had complied with the dictates of the statute. The bankruptcy court disagreed with the lender, noting that the instructions on the UCC-1 form specifically direct the filer not to abbreviate any part of the debtor’s name.

The lender also pointed out that a search of Bryant’s name that included neither Bryant’s middle initial nor Bryant’s middle name nonetheless disclosed the lender’s recorded financing statements. It urged the court, therefore, that its financing statements were not seriously misleading. The bankruptcy court once again disagreed with the lender’s rationale. In response to this argument, the court took note of the fact that a search of the Georgia Superior Court Clerks’ records, using Bryant’s name as it appeared on Bryant’s driver’s license (Darren Eugene Bryant) would not have revealed the existence of the UCC-1 financing statements that the lender had filed. Consequently, the court found that the lender’s financing statements were seriously misleading.

The court agreed with the trustee’s arguments and held, for the purposes of the lender’s request for adequate protection (declining to make a final determination regarding the validity of the lender’s lien outside the context of this adversary proceeding), that the lender was not entitled to adequate protection payments based upon the outstanding questions concerning the validity of the lender’s lien. The court also disposed of the lender’s motion for relief, finding that the lender had failed to provide any evidence whatsoever that Bryant’s bankruptcy case had been filed in bad faith.

Takeaway

The bankruptcy court’s decision in Bryant provides a sobering cautionary tale for lenders that provide credit to individuals in states adhering to the first, more "stringent," approach under UCC Section 9-503. In order to avoid any issue as to the debtor’s "correct" name as it is eventually written into the UCC-1 form, lenders should obtain a copy of each individual debtor’s most recent driver’s license, fill out the debtor’s name precisely as it appears on the license, and cause the form to be duly recorded. To the extent that a debtor does not hold a valid driver’s license, lenders are well-advised to obtain one or more official forms of identification: should there appear any discrepancies in a debtor’s "official" name, it certainly will not hurt to file multiple UCC-1 financing statements that contain all variations of the debtor’s name.

Rudolph J. Di Massa, Jr., is a partner at Duane Morris. He is a member of the Business Reorganization and Financial Restructuring practice group and concentrates his practice in the areas of Commercial Litigation and Creditors' Rights.

Keri L. Costello, an associate at Duane Morris, practices in the area of Business Reorganization and Financial Restructuring with a focus on bankruptcy and creditors’ rights. Costello represents trustees, corporate debtors, creditors and creditor committees in Chapter 7 and 11 cases.

Reprinted with permission from The Legal Intelligencer, © ALM Media Properties LLC. All rights reserved.