In re Kinderknecht

308 B.R. 71 (10th Cir. BAP 2004)

OPINION

Thurman, Bankruptcy Judge.

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I. Background

It is undisputed that the debtor's legal name is "Terrance Joseph Kinderknecht." In addition, it is undisputed that the debtor is informally known as "Terry." The debtor granted Deere security interests in two farm implements. Deere promptly filed financing statements in the appropriate place, listing the debtor as "Terry J. Kinderknecht."

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In its Memorandum Opinion, Clark v. Deere & Co. (In re Kinderknecht), [Footnote omitted.] the bankruptcy court concluded that Deere's financing statements were sufficient to perfect its interests in the debtor's property even though Deere listed the debtor in its financing statements by the debtor's nickname.

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The trustee timely appealed the bankruptcy court's Judgment to this Court. After the trustee's appeal was submitted, the Court granted the Secretary of State leave to appear and file a Brief as Amicus Curiae. Under Kansas law, the Secretary of State is charged with maintaining the data base used to track the filing of financing statements in Kansas, and with promulgating "standard search logic" for conducting searches of that data base. [Footnote omitted.] Like the trustee, the Secretary of State advocates reversal of the bankruptcy court's Judgment.

II. Discussion

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We must determine, therefore, whether the bankruptcy court erred in holding that Deere's financing statements, listing the debtor by his nickname, were sufficient to perfect its interests in the debtor's property. We review this legal issue de novo, and therefore, give "no form of appellate deference" to the bankruptcy court's conclusions. [Footnote omitted.] For the reasons stated below, we conclude that the bankruptcy court erred in holding that Deere's financing statements were sufficient and served to perfect its interests in the debtor's property. For a financing statement to be sufficient under Kansas law, the secured creditor must list an individual debtor by his or her legal name, not a nickname.

It is undisputed in this case that whether Deere's interests were perfected on the debtor's petition date depends on Kansas law. It is also undisputed that the applicable law is stated in Article 9 of the Kansas Uniform Commercial Code, as revised and adopted by the Kansas Legislature in 2000. The relevant portions of Revised Article 9, as adopted in Kansas, are as follows.

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The Official UCC Comment [Comment 2 to new section 9-503] accompanying this section provides:

Together with subsections (b) and (c), subsection (a) reflects the view prevailing under former Article 9 that the actual individual or organizational name of the debtor on a financing statement is both necessary and sufficient, whether or not the financing statement provides trade or other names of the debtor[.] [Footnote omitted.] * * * Prior to [the adoption of new Article 9], courts struggled with whether names, such as trade names, in a financing statement sufficiently provided the name of the debtor. [Footnote omitted.] UCC § 9-503 * * * is meant to "clarify when a debtor's name is correct and when an incorrect name is insufficient." [Footnote omitted.]

Although § 84-9-503 specifically sets parameters for listing a debtor's name in a financing statement when the debtor is an entity, it does not provide any detail as to the name that must be provided for an individual debtor--it simply states that the "name of the debtor" should be used. [Footnote omitted.] This could be construed, as it was by the bankruptcy court, as allowing a debtor to be listed in a financing statement by his or her commonly- used nickname. [Footnote omitted.] But, we do not agree with that interpretation because the purpose of § 84-9-503, as well as a reading of that section as a whole, leads us to conclude that an individual debtor's legal name must be used in the financing statement to make it sufficient under § 84-9-502(a)(1).

As discussed above, § 84-9-503 is new, and it was enacted to clarify the sufficiency of a debtor's name in financing statements. The intent to clarify when a debtor's name is sufficient shows a desire to foreclose fact-intensive tests, such as those that existed under the former Article 9 of the UCC, inquiring into whether a person conducting a search would discover a filing under any given name. Requiring a financing statement to provide a debtor's legal name is a clear cut test that is in accord with that intent.

Furthermore, § 84-9-503, read as a whole, indicates that a legal name should be used for an individual debtor. In the case of debtor-entities, § 84-9-503(a) states that legal names must be used to render them sufficient under § 84-9-502(a). Trade names or other names may be listed, but it is insufficient to list a debtor by such names alone. A different standard should not apply to individual debtors. The more specific provisions applicable to entities, together with the importance of naming the debtor in the financing statement to facilitate the notice filing system and increase commercial certainty, indicates that an individual debtor must be listed on a financing statement by his or her legal name, not by a nickname.

Our conclusion that a legal name is necessary to sufficiently provide the name of an individual debtor within the meaning of § 84-9-503(a) is also supported by four practical considerations. First, mandating the debtor's legal name sets a clear test so as simplify the drafting of financing statements. Second, setting a clear test simplifies the parameters of UCC searches. Persons searching UCC filings will know that they need the debtor's legal name to conduct a search, they will not be penalized if they do not know that a debtor has a nickname, and they will not have to guess any number of nicknames that could exist to conduct a search. [Footnote omitted.] Third, requiring the debtor's legal name will avoid litigation as to the commonality or appropriateness of a debtor's nickname, and as to whether a reasonable searcher would have or should have known to use the name. [Footnote omitted.] Finally, obtaining a debtor's legal name is not difficult or burdensome for the creditor taking a secured interest in a debtor's property. Indeed, knowing the individual's legal name will assure the accuracy of any search that creditor conducts prior to taking its secured interest in property.

Additionally, we note that although use of the Official Forms is not mandated, the language in the Financing Statement Form set forth in § 84-9-521 expressly states that the preparer should include the "DEBTOR'S EXACT FULL LEGAL NAME." [Footnote omitted.] This Form, which is meant to "reduce error," indicates to us an intent to increase certainty in the filing of financing statements by requiring a debtor's legal name. [Citing to Official Comment 2 to new section 9-503.] Our holding in this case will foster that intent.

By using the debtor's nickname in its financing statements, Deere failed to provide the name of the debtor within the meaning of § 84-9- 503(a), and its financing statements are not sufficient under § 84-9- 502(a). Because the financing statements do not "sufficiently ... provide the name of the debtor" under § 84-9-503(a), they are "seriously misleading" as a matter of law pursuant to § 84-9-506(b). [Citing to Official Comment 2 to 9-503.] Furthermore, the undisputed facts in this case show that § 84-8-506(c) does not apply in this case. That section saves a financing statement from being "seriously misleading" if a search of UCC filings "under the debtor's correct name, using the filing office's standard search logic, ... would disclose a financing statement that fails sufficiently to provide the name of the debtor" in accordance with § 84-9-503(a). Included in the record before us are the results of a UCC search conducted by Deere's counsel in Kansas's official and unofficial UCC search systems. [Footnote omitted.] Under both systems, she found no matches for the debtor's legal name "Terrance," but numerous matches for his nickname "Terry" and the initial "T." Thus, a search of the debtor's "correct name" did not disclose a financing statement, and therefore, § 84-9-506(c) does not apply. The result of Deere's UCC searches underscores the need for a clear-cut method of searching a debtor's name in UCC filings. The logical starting point for a person searching records would be to use the debtor's legal name. When a UCC search of the debtor's legal name does not provide any matches, parties in interest should be able to presume that the debtor's property is not encumbered, and they should not be charged with guessing what to do next if the legal name search does not result in any matches. Deere's financing statements, being seriously misleading, do not perfect its interest in the debtor's property and, therefore, the bankruptcy court erred in refusing to avoid its interests as against the trustee as a hypothetical lien creditor under 11 U.S.C. § 544(a)(1). [Footnote omitted.]

III. Conclusion

For the reasons stated herein, the bankruptcy court's Judgment is REVERSED.