A security interest generally arises pursuant to a contract between a debtor and a secured party and impacts the rights of third parties to the collateral. Secured parties generally perfect their security interest by filing a UCC financing statement, which provides notice to third parties of the security interest. However, post-closing made by the debtor could affect notice to third parties of a secured parties’ interest.
Secured parties, to maintain their perfected security interest, are responsible for taking action in the event of post-closing changes. Lack of knowledge is not a defense for non-compliance.
Given the detrimental risk to secured parties, an occasional review for post-closing changes that require secured parties to take action to protect their interest is necessary. This article highlights a few of those post-closing changes.
Debtor Name Change
Does a name change render the filed financing statement seriously misleading rendering it ineffective?
- Types of Changes: For a registered entity, by amendment of articles or other formation documents. For an individual, a driver’s license change.
- General Rule: Debtor name on a financing statement must strictly comply with the requirements of the Uniform Commercial Code, Article 9, §9-503(a) or the name renders the financing statement seriously misleading.
- Savings Clause: If a search of the correct debtor name would disclose the record, then the insufficient name provided on the record does not render the financing statement seriously misleading §9-506(c).
Require a §9-506(c) search on new debtor name. If record is not disclosed by search, the secured party must take action under §9-507(c).
Best Practice: File an amendment to add the new debtor name to the financing statement, even if the difference in debtor name appears minimal.
New Debtor Becomes Bound by Security Agreement
This tends to happen in the following circumstances:
- Merger; or
- Changes in structure (i.e. sole proprietor incorporates the business, which remains bound by security agreement entered into by sole proprietor).
Generally, the new debtor name is sufficiently different from the original debtor name that the filed financing statement becomes seriously misleading with respect to the new debtor name.
Best Practice: File a new financing statement under the name of the new debtor within 4 months after the new debtor becomes bound and keep the original financing statement active.
Change in Governing Law
If a registered entity re-organizes in a new state, an individual moves his or her principal residence to a different state after it becomes bound by a security agreement, or the collateral is transferred to a party located in a different state may cause the law of new state to govern perfection and priority.
Best Practice: Secured party should perfect in the new jurisdiction either before, or as soon as possible after the debtor relocates and keep the original financing statement active.
This document is intended for informational purposes only and is not legal advice or a substitute for consultation with a licensed legal professional in a particular case or circumstance.