What happens to a security interest when the debtor changes its trade name?

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"We had a secured interest in that collateral," said Keith Johnson of People's Bank. "And now that you went and sold it, we have a right to the proceeds."

"When I sold it, you were no longer a secured creditor," replied Roger Mason, president of Western Enterprises.

"How do you figure that?" asked Johnson.

"Your secured interest had to do with the loans you made to me when I started my business," replied Mason. "And, yes, at that point, I executed security agreements that gave your bank an interest in all my machinery, equipment, fixtures, accounts receivable, and inventory."

"That's right," said Johnson. "And we were also given a right to the proceeds of any sale of the listed collateral. The financing statements we filed perfected that security interest."

"But you're forgetting one very important thing," answered Mason. "I subsequently incorporated the business, changed the name to Western Enterprises, and transferred the assets securing the loans to the corporation. And you agreed to allow the transfer of the collateral to Western in exchange for assumption of my loans."

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"That may be," muttered Johnson. "But when your new company failed to file new financing statements as called for in the loan assumption agreement, we did, listing Western as the debtor for the loans. That means we were still a secured creditor when Western sold that piece of machinery used to secure the loan."

"But I never signed the new financing statement," replied Mason. "It's like starting all over. And since you're no longer a secured creditor, you had no right to that collateral."

Is Mason correct? Click "next" for the result.

No.

A secured creditor does not have to refile or amend a financing statement to preserve its interest in collateral just because a debtor changes its trade name, provided there has not been an addition of any new collateral.

Here, the Bank's failure to get Western's signature on a new financing statement did not destroy its security interest in the collateral. The Bank is entitled to recover the collateral or to receive damages. If new collateral had been added when the agreement was changed, Western's signature would have been required to perfect the Bank's security interest.

Editor's Note: For hundreds of other case studies like this, check out Credit Today's Legal and Bankruptcy Portals. This column originally appeared in the Credit & Collection Manager's Letter, a newsletter purchased by Credit Today.