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Our Subscribers Say...
I think Credit Today is fantastic. You cover many practical topics in the credit field that I use regularly. Just one recent example—a conversation on the ListServ about preferential payments—gave me tips that I used in an actual case. The specific information I picked up from this one discussion saved me $10,000, enough to cover my membership for many years!
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Manager of Credit & Collections, ASSA Abloy Americas Division, New Haven, CT
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Credit Manager, Big Lots Stores, Inc., Wholesale Division
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Fort Worth, Texas
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UCC Computer Searches--Make Them Flexible
When an auto shop asked for a loan, the bank began a UCC search to see if there were prior liens against the shop's inventory, accounts, etc.
The bank set tight search parameters asking the clerk to search only for the shop's exact corporate name--Thriftway Auto Supply, Inc. No liens were found, and so the bank gave the shop the loan.
Soon after, the shop filed Chapter 7 bankruptcy--liquidation. The bank went in to retrieve its secured items, only to find that a second bank claimed it had first priority on those same items.
It seems that two years earlier, the second bank had extended credit to the shop and had filed its security interest under a slightly different name. Instead of using the full corporate name--Thriftway Auto Supply, Inc., the second bank filed its claim under the shop's trade name--Thriftway Auto Stores.
The first bank claimed the second bank's filing was invalid because it was "seriously misleading."
The second bank denied that its filing was seriously misleading. It argued that the first bank's search was "not reasonably diligent," and that its security filing could have been found easily if the first bank hadn't set such strict search parameters.
Seriously Misleading or Lack of Diligence?
The court said "[T]he UCC…strongly favor[s] the simplicity and clarity of using a debtor's legal name on a financing agreement to be filed with a county clerk's office; however, in certain circumstances, the use of a debtor's trade name is sufficient if a subsequent creditor could reasonably find the listing, either because the particular indexing system provides an inquirer with flexibility or the trade name is very close to the legal name of the debtor."
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The court concluded that the second bank's failure to use the shop's true legal name was not seriously misleading for two reasons: 1) The differences between the two names was "slight." 2) The second bank clearly showed that "the trade name could be found by using only a slightly broader search than the one" used by the first bank. Such a search would not have forced the first bank to "search under any and all trade names before assuring themselves that they have discovered prior interests." Rather the second bank's filing was "easily retrievable with a minimally expanded search based on [the shop's] legal name."
The court ruled that the first bank's search was not reasonably diligent, "because it would not have taken a prognosticator or a magician to find" the filing in the electronic indexing system. It would have taken only "minimal creativity to find it."
In re Thriftway Auto Supply, Inc., 159 BR 948 (W.D. Okla. 1993)
Comment - The court said, "Given the commercial reality that financing agreements may be misfiled or misnamed, despite all best efforts, a search should be required to at least take advantage of the flexibility offered by a computer system to find all potential filings with similar names…To not take advantage of the flexibility offered by an electronic indexing system is not diligent." Therefore, when you ask for a UCC search, don't limit your search to too small a field. Use the root words of the company's name to make certain there are no filings under similar - but not "seriously misleading" - names. Too fine a search may leave you unprotected.
Editor's Note: The above article originally appeared in the Credit & Collection Manager's Letter, a newsletter purchased by Credit Today in 2006. This article originally appeared prior to 2000.
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Outlook 2012
This month's survey explores...
- What the top problems are facing credit execs currently, and
- What the top improvement initiatives are.
Click here to participate!
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February 2012
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