Continuation Statements and "Harmless" Errors
When two banks merge, can the confusion of names make continuation statements invalid? This was the question posed to district court. The problem arose when a bank granted mortgages for several plots of farm land. The bank also took multiple security interests in the mortgagee's other properties and properly perfected those security interests.
A short time later, the bank merged with another bank that acquired all the assets, rights, franchises, and interests of the original bank. This new bank decided to file several continuation statements to preserve the security interests taken in the farm property. Under the secured party(ies) area, the new bank placed its own name followed by the word "formerly" and the name of the bank that originally held the security interests. A year later, the property owner entered into bankruptcy, and the trustee for the estate claimed that the security interests were invalid. He said the original bank had been the one to sign the underlying financing statements, and so only that same bank could file and sign the continuation statements. He said, "A continuation statement signed by a person other than the secured party of record must be accompanied by a separate written statement of assignment signed by the secured party of record." Since there was no note attached to the continuation statement explaining why the name on the continuation was different from that on the original financing statement, the trustee claimed the security interest was lost. The bank argued that the original bank could not file the continuation statements since it ceased to exist when the merger was complete. It said the relationship between the two banks was quite clear on the continuation statements and argued that the security interests should remain intact. The court agreed. It said although the section of UCC covering continuation statements does not contain a "harmless error" provision, that provision is present in the area covering financing statements. It noted several cases where courts have applied the "harmless error" provision to continuation statements as well. It said, "There would seem no good reason why minor continuation statement errors of a formal nature, not seriously misleading, should deprive a perfected security interest of continuing effectiveness." The court noted that continuation statements are indexed according to the debtor's name, not by the secured party. Therefore, a "creditor searching the files would not be misled by the manner in which the continuation statements were filed." It said that the bank made it clear that there had been a name change since the original financing statement and said, "It is difficult to accept that a creditor would be unable to make the connection" between the original bank and the new, merged bank. Therefore, the security interest remained intact. In re Kruckenberg, 160 B.R. 663 (D. Kan. 1993) Comment: When companies merge, there can be some confusion about filing papers under the proper names. If your company is involved in a merger, make certain that anyone attempting to do a UCC search can tell that there has been a change. Attaching the proper explanation of the change of name would be the safest route. Even though the courts will probably apply a "harmless error" provision when reviewing such documents, it's safer not to have any errors--no matter how harmless--when dealing with security interests. 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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