Search Logic from MARS

Journal Issue

May 2002

Column Name

Journal HTML Content

"The life of the law has not been logic: it has been experience."<a href="#1" name="1a">1</a>

</center>

Unfortunately, Justice Holmes's famous statement may not be valid under Revised Article
9, for while he had certainly never heard of computers or search logic, both will
impact the interpretation of the revised UCC provisions. Here is the problem: while
§9-705<a href="#2" name="2a">2</a> seems to preserve security interests properly perfected under old Article
9,<a href="#3" name="3a">3</a> §9-703(b) establishes a one-year grace period in which to meet the
requirements of Revised Article 9.<a href="#4" name="4a">4</a>

Section 9-705 says, in effect, that if a financing statement was sufficient
to perfect a security interest under the old Article 9 rules, even if it does not
comply with the revised name and collateral description requirements of Revised Article
9, it remains valid under Revised Article 9. If, however, it would be deemed
seriously misleading under the case law construing old Article 9 in the jurisdiction
of filing, then you have until June 30, 2001, in most jurisdictions, to file
a corrective amendment.<a href="#5" name="5a">5</a>

If your documentation lists the exact legal name of the debtor as now required by
Revised Article 9,<a href="#6" name="6a">6</a> no action is required. Where the debtor is a registered
organization,<a href="#7" name="7a">7</a> the documents should reflect the correct corporate name, and if they
do, no action will be necessary.<a href="#8" name="8a">8</a> If, however, the financing statement contains
anything but the exact legal name of the debtor (including punctuation and spaces in
some cases), whether an organization or individual, an amendment will have to be
filed or the perfection will lapse irretrievably on July 1, 2002.<a href="#9" name="9a">9</a>

If the name in the financing statement varies from the legal name of the debtor,
the need for action will depend on the construction the jurisdiction's courts have given
old Article 9's seriously misleading language, the search logic (or logics) available
to search the filing office's existing database, and how similar the name in the filed
financing statement is to the legal name of the debtor. The law in this area is not
going to be made in cases where transactional lawyers carefully reviewed the
documentation and prepared the financing statements and other documents where there are
millions of dollars involved. It is going to be made in the small business and farm
cases where the debtor uses a nickname or trade name, or the creditor filed under
old Article 9 against a trade, nickname or incomplete name—anything but the debtor's
full legal name.

The courts developed a variety of analyses under old Article 9's §9-402 as
to what sufficed to properly list the name of the debtor.<a href="#10" name="10a">10</a> As Prof. Zekan notes,
about the only rule that the courts agreed upon was that a filing in the debtor's
legal name was always sufficient. Further, the courts were "in general agreement that
the dispositive question to determine a financing statement's legal sufficiency with
respect to the debtor's name is 'whether a...search under the debtor's...name would
uncover the filing.'"<a href="#11" name="11a">11</a>

Although Prof. Zekan details the wide variety of analytical approaches developed by
the courts, the common thread is the reasonably diligent searcher test that asks what
the hypothetical diligent searcher would have found or searched.<a href="#12" name="12a">12</a> The rulings are
typified by two opinions by the Tenth Circuit. In one, a filing under the name
"Hilton Inn" was found ineffective to perfect a security interest in the property of
a partnership named "Beacon Realty Investment Company of Salina," which did business
under the trade name Hilton Inn.<a href="#13" name="13a">13</a> The court essentially concluded that a financing
statement filed in the debtor's trade name, which bore no similarity to the
partnership's name, was insufficient. Although there is contrary authority, the majority
rule is that a trade name filing that bears no resemblance to the debtor's legal name
is ineffective.<a href="#14" name="14a">14</a> However, the court upheld a filing in the trade name "Thriftway
Auto Stores" where the debtor's actual corporate name was "Thriftway Auto Supply
Inc."<a href="#15" name="15a">15</a> The court stated:

A creditor or other interested party should behave in a reasonably prudent manner
by conducting a reasonably diligent search. In this particular case, the name
used by Star was substantially similar to the debtor's true legal name in that
it contained the two most unique and descriptive words in the debtor's true legal
name, "Thriftway" and "Auto." A reasonably prudent creditor conducting a
reasonably diligent search would have formulated a search aimed at revealing
filings under substantially similar names.<a href="#16" name="16a">16</a>

Thus a filing in the trade name or even an incomplete form of the legal name may
be effective under the state interpretation of the old law.<a href="#17" name="17a">17</a> The problem will be
demonstrating that the financing statement that lists anything but the legal name would
be discovered by a reasonably diligent searcher may prove tricky. In effect, Revised
Article 9 grafts onto the existing legacy electronic filing systems' new search logic
or logics.

An "Article 9 Filing Project," made up by interested parties and representatives
of the various state filing offices, drafted Model Administrative Rules (MARS) for
the International Association of Corporation Administrators (IACA).<a href="#18" name="18a">18</a> The MARS
contain a detailed description of a standard search logic. As of this writing, the
majority of states have adopted some form of MARS, although some have modified the
search logic rule in minor respects.<a href="#19" name="19a">19</a> The MARS search language is much stricter than
the old manual search system and, as has been discussed in this column before, will
not find financing statements that do not exactly match the name for which the search
is made.<a href="#20" name="20a">20</a> In effect, the model search logic ignores spaces, punctuation and many
organizational forms indications (e.g., Inc., etc.) in the name being searched and
returns only filings that are exact matches for that name.<a href="#21" name="21a">21</a>

The model search logic does not follow the reasonably diligent searcher standard that
most courts applied in some form since there is no human judgment involved in it at
all. Moreover, most states have modified the MARS search logic in some way. Thus
the first problem for creditors is that using the standard search logic in the filing
office<a href="#22" name="22a">22</a> will not return anything but exact matches for the name searched. For
example, a search under most variations of the MARS search logic in the name of a
corporation named Argus Inc. will return only organizations such as Argus Inc.,
Argus L.L.C., Argus LLC, Argus Co., etc. It would not return a filing
in the name of Argus Tapes and Records, yet most reasonably diligent searcher tests
would find that the latter name sufficiently identifies the debtor to place creditors
on notice. Likewise, a search for Thriftway Auto Supply Inc. would not return a
filing in the name of Thriftway Auto Supply, the trade name filing held effective
under Oklahoma's old Article 9.<a href="#23" name="23a">23</a>

If the only search logic available is based on MARS, it will be virtually
impossible to find financing statements that differ from the debtor's name in even the
most minor way. Therefore, most states have adopted alternative search logic<a href="#24" name="24a">24</a> rules
that allow more liberal but often inconsistent search methods. For example, the Kansas
Secretary of State offers as an official search (for a fee) a more liberal search
logic via the Internet. Under the Internet search logic, a search for "Argus" would
return not only the various Argus organizations, but any organization that begins with
Argus, including Argus Tapes and Records. But a search for Thriftway Auto Supply
Inc. would not return Thriftway Auto Stores because the match is not exact.
However, a search for simply Thriftway Auto, or simply Thriftway, would return
Thriftway Auto Stores.<a href="#25" name="25a">25</a>

Searching individual names will be equally inconsistent and confusing. A MARS-based
standard search logic search for Pearson will return only organizations that begin with
that name. But a search under the Internet search logic will produce not only the
organizations but all individuals with the last name of Pearson. Likewise, a standard
search for John Pearson will return any financing statement listing individuals named John
Pearson, regardless of middle name, but a search for John K. Pearson will return
only the filings where the John Pearsons' middle names begin with K. And none of
the search logics would return a filing in the name of Bubba Pearson if the search
is done in the name of John Pearson. A search for Kenneth Pearson would not return
John Kenneth Pearson.

While it would be impossible to begin to describe the errors in spelling, spacing,
punctuation or even listing the wrong first or middle name, it is safe to say that
creditors will probably find ways to misstate the debtor's name in a financing statement
that cannot be imagined now.

However, it is clear that, under the reasonably diligent searcher test, if
whatever search logic is used does not return the financing statement, it is not
preserved under §9-705, and an amendment is necessary under §9-703 before
the one-year grace period expires or the effectiveness of the financing statement
lapses. Counsel is thus faced with a complex problem requiring consideration of the
name used in a financing statement, the rule in the jurisdiction of filing on how
close the financing statement has to be to the legal name, and the search logic
or logics available to access the existing filing data base. This may lead to a
"clean-heart-and-empty-head" approach where counsel searches in the legal name of
the debtor under the standard search logic; if it does not return the client's
filing, the only safe course is to amend the financing statement within one year
of the effective date.

And if Justice Holmes were still alive, he'd have to amend his statement about
the law, for the life of the UCC law is not going to be experience, but search
logic.

<hr>
<h3>Footnotes</h3>

<a name="1">1</a> Holmes, Oliver Wendell Jr., The Common Law at 1 (<a href="http://plague.law.umkc.edu/Books/Holmes/claw_c.htm" target="window2">http://plague.law.umkc.edu/Books/Holmes/claw_c.htm</a>). <a href="#1a">Return to article</a>

<a name="2">2</a> All citations to Code sections refer to Revised Article 9 2000 unless otherwise indicated. <a href="#2a">Return to article</a>

<a name="3">3</a> Subsection (b) provides:

<blockquote>
Pre-effective date filing. The filing of a financing statement before this act takes effect is effective to perfect a security
interest to the extent the filing would satisfy the applicable requirements for perfection under this act. <a href="#3a">Return to article</a>
</blockquote>

<a name="4">4</a> Subsection (b): provides:

<blockquote>
Continuing priority over lien creditor: perfection requirements not satisfied. Except as otherwise provided in §9-705 and
amendments thereto, if, immediately before this act takes effect, a security interest is enforceable and would have priority over the
rights of a person that becomes a lien creditor at that time, but the applicable requirements for enforceability or perfection under
this act are not satisfied when this act takes effect, the security interest:

<blockquote>
(1) is a perfected security interest for one year after this act takes effect;
 (2) remains enforceable thereafter only if the security interest becomes enforceable under §9-203, before the year
expires; and
 (3) remains perfected thereafter only if the applicable requirements for perfection under this act are satisfied before
the year expires. <a href="#4a">Return to article</a>
</blockquote>
</blockquote>

<a name="5">5</a> Note that some states have extended this deadline if they adopted a nonuniform effective date. <a href="#5a">Return to article</a>

<a name="6">6</a> §9-521(a) ("Uniform Form of Written Financing Statement"). <a href="#6a">Return to article</a>

<a name="7">7</a> §9-102(70). Essentially, a registered organization is an entity formed under the laws of one of the states, the District of
Columbia or federal law that must register with the jurisdiction of organization. <a href="#7a">Return to article</a>

<a name="8">8</a> Care should be taken that the organization name is not abbreviated in any way on the financing statement. <a href="#8a">Return to article</a>

<a name="9">9</a> Some states have adopted an effective date other than July 1, 2001. If so, the grace period will generally extend one year from
the effective date. <a href="#9a">Return to article</a>

<a name="10">10</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…, Julianna J., "The Name Game—Playing to Win Under §9-402 of the Uniform Commercial Code," 19 Hofstra L. Rev. 365
(1990)</a>. <a href="#10a">Return to article</a>

<a name="11">11</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…; at 383</a> (citation omitted). <a href="#11a">Return to article</a>

<a name="12">12</a> As Prof. Zekan notes, even the cases following the holding in <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… v. Citizens Bank (Matter of Glasco Inc.), 642 F.2d
795, 31 UCC Rep. Serv.16 (5th 1981)</a>, generally referred to as the Glasco approach, are based on the premise that a
reasonably diligent searcher would check for filings under a trade name generally used by the debtor. <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…; at 390</a>. Although Glasco and
its progeny have been harshly criticized by both commentators and courts alike, they remain the test in many jurisdictions. <a href="#12a">Return to article</a>

<a name="13">13</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… v. Salina Coffee House Inc., 831 F.2d 1531, 4 UCC Rep.Serv.2d 1225 (10th Cir. 1987)</a>. <a href="#13a">Return to article</a>

<a name="14">14</a> Revised Article 9 codifies the rule that a filing in the trade name alone is ineffective. §9-503(c). <a href="#14a">Return to article</a>

<a name="15">15</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… National Bank & Trust Co. v. Star Automotive Warehouse Inc. (In re Thriftway Auto Supply Inc.), 39 F.3d 1193
(table only) (unpublished opinion)</a>, <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… UCC Rep.Serv.2d 982 1994 WL 637047 at 1 (10th Cir. 1994)</a>. <a href="#15a">Return to article</a>

<a name="16">16</a> Id. at *3 (emphasis added). The court obviously liked the word "reasonably." <a href="#16a">Return to article</a>

<a name="17">17</a> Section 9-503 requires the registered organizational name of the debtor as listed on the public record of the debtor's jurisdiction of
organization or, in other cases, the debtor's individual or organization name. However, §9-521(a) requires the debtor's exact full legal
name in the financing statement. <a href="#17a">Return to article</a>

<a name="18">18</a> See <a href="http://www.iaca.org/sts/" target="window2">http://www.iaca.org/sts/</a> for a PDF copy of the model rules. <a href="#18a">Return to article</a>

<a name="19">19</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…, Carl R., Uniform Commercial Code Revised Article 9 Alert (Ernst Publishing Co. LLC, 2001</a>). A revised version
was due out in March 2002. The work contains a state-by-state analysis of the search logic. A number of states have not adopted any
rules on search logic, leaving the question open as to exactly how the existing data base can be searched. See, also, <a href="http://www.ernst.cc/" target="window2">http://www.ernst.cc/</a>. <a href="#19a">Return to article</a>

<a name="20">20</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…, G. Ray, "Using the Strong-arm Power to Attack Name Errors Under Revised Article 9," 20 Am. Bankr. Inst. J. 22
(October 2001)</a>. <a href="#20a">Return to article</a>

<a name="21">21</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…; at 23</a>. <a href="#21a">Return to article</a>

<a name="22">22</a> A financing statement is not deemed seriously misleading if a search of the records of the filing office under the debtor's correct name
using the filing office's standard search logic would disclose a financing statement that does not include the debtor's name as required by
§9-503. 9-506(c). <a href="#22a">Return to article</a>

<a name="23">23</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… National Bank & Trust Co. v. Star Automotive Warehouse Inc. (In re Thriftway Auto Supply Inc.), supra, fn.15</a>. <a href="#23a">Return to article</a>

<a name="24">24</a> Or logics. North Carolina offers no less than seven search logics accessing the same database, but often producing different results (based
on the author's conversation with Lexis Nexis Document Solutions Inc. Vice President Trish Bogenrief). <a href="#24a">Return to article</a>

<a name="25">25</a> Based on the author's conversation with Kansas Deputy Secretary of State Kathy Sachs. <a href="#25a">Return to article</a>

Journal Authors

John K. Pearson

Journal Date

Wednesday, May 1, 2002 - 12:00

Bankruptcy Rule

2002