Post-filing Changes and Their Impact on the Continued Perfection of Security Interests New Rules and Clarifications Under Revised Article 9

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Mar 2002

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Most secured creditors experience some measure of relief once their financing statements
are filed and their security interests are properly perfected. These parties, however,
must remain ever mindful of the possibility that their debtors may subsequently undergo
or undertake certain changes that can effectively strip the secured parties' perfected
status. Such changes include (a) changes in the debtor's name, (b) changes in the
debtor's location, (c) changes in the location of collateral and (d) "organizational
changes" by the debtor (e.g., mergers, incorporations, re-incorporations in
different jurisdictions, etc.).

Before the recent revisions, Article 9 of the Uniform Commercial Code (old
Article 9) set forth specific rules addressing (to varying degrees) each of these
scenarios. As is more fully discussed below, the latter rules have been clarified,
and in some instances significantly modified, under revised Article 9.

<h3>Changes in the Debtor's Name</h3>

Revised Article 9 retains the same basic rules regarding debtor name changes that
existed under old Article 9. Thus, as was the case under old Article 9,<a href="#1" name="1a">1</a> if
a debtor's name change does not render a financing statement filed under the debtor's
old name "seriously misleading," the financing statement remains effective, and the
secured creditor need not undertake any responsive steps.<a href="#2" name="2a">2</a> If the debtor's name change
renders an existing filing "seriously misleading," the existing financing statement will
remain effective with respect to collateral acquired by the debtor either prior to the
name change or within four months after the name change.<a href="#3" name="3a">3</a> It will not be effective,
however, with respect to collateral acquired by the debtor more than four months after
the debtor's name change unless, prior to the expiration of such four-month period,
the secured creditor files an "amendment to the financing statement" (correcting the
seriously misleading reference to the debtor's old name).<a href="#4" name="4a">4</a>

While old Article 9 contained a similar four-month "grace" period, it provided for
the filing of "a new appropriate financing statement" during the grace period.<a href="#5" name="5a">5</a> Old
Article 9's reference to a "new appropriate financing statement" prompted some parties
to argue (with little apparent success) that financing statements rendered seriously
misleading as a result of a name change could only be corrected by the filing of a
new <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…; financing statement rather than a <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…; amendment.<a href="#6" name="6a">6</a> Under the language
of revised Article 9, it is clear that <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…; amendments are the appropriate method
for responding to seriously misleading name changes.<a href="#7" name="7a">7</a>

Although it does not materially alter old Article 9's four-month grace period for
"seriously misleading" changes in a debtor's name, revised Article 9 does provide
additional guidance on when a change in a debtor's name will be considered "seriously
misleading." Under old Article 9, this question was left to judicial interpretation.
Pursuant to the provisions of §9-506(b) and (c) of revised Article 9, a
name change is deemed seriously misleading unless a search by the relevant filing office
under the debtor's new name—using the filing office's "standard search logic"—would
disclose a financing statement filed under the debtor's old name. As several
commentators have suggested,<a href="#8" name="8a">8</a> the latter standard may be considerably less forgiving than
the construction of the "seriously misleading" standard adopted by many courts under old
Article 9.<a href="#9" name="9a">9</a> Accordingly, secured creditors engaging in transactions under Revised
Article 9 may have to monitor possible name changes by their debtors with increased
vigilance.

<h3>Changes in the Debtor's Location</h3>

Under old Article 9, the appropriate jurisdiction within which to file a financing
statement perfecting most forms of intangible collateral (such as accounts and general
intangibles) was determined by where the debtor maintained its place of business or,
if the debtor had more than one place of business, where the debtor maintained its
chief executive office.<a href="#10" name="10a">10</a> Consequently, when a debtor changed its place of business
or its chief executive office, a financing statement filed in the debtor's original
place of business could be rendered ineffective.

Under Revised Article 9, this is no longer the case with respect to a broad
category of debtors—namely, those debtors that are "registered organizations" (i.e.,

corporations, limited partnerships, limited liability companies, and other organizations
organized "solely under the law of a single state...and as to which the
state...maintain[s] a public record showing the organization to have been
organized.").<a href="#11" name="11a">11</a> Specifically, in the case of these latter entities, the appropriate
place to file a financing statement under revised Article 9 (for both tangible and
intangible forms of collateral) is the state in which the debtor is "registered."<a href="#12" name="12a">12</a>
Thus, when a debtor that is a registered organization moves its chief executive office
to another jurisdiction, the appropriate place to file a financing statement remains the
state in which the debtor is registered, and, assuming the secured creditor has filed
a financing statement in the latter jurisdiction, it need not undertake any additional
action to preserve its perfected status.

The same is not true, however, with respect to those debtors that are not
registered organizations. In the case of debtors of the latter type, revised Article
9 provides that the proper jurisdiction within which to file a financing statement is
the debtor's place of business/chief executive office (or, if the debtor is an
individual, his or her residence).<a href="#13" name="13a">13</a> Accordingly, location changes by such
"non-registered" debtors will continue to pose potential problems for secured creditors
under revised Article 9.

Indeed, revised Article 9 may make matters more difficult for those secured
creditors lending to commercial debtors operating as sole proprietorships, as the proper
jurisdiction to file a financing statement with respect to such debtors is now their
place of residence (rather than where they maintain their place of business/chief
executive office as was the case under old Article 9).<a href="#14" name="14a">14</a> Thus, under revised
Article 9, secured creditors lending to sole proprietors will have to monitor the
location of the debtor's residence, even though they may customarily interact with the
debtor only at his or her place of business.

When a "non-registered" debtor relocates to another jurisdiction, revised Article
9 imposes essentially the same re-filing obligations upon the secured creditor that
existed under old Article 9. Specifically, in such circumstances, the secured party
is generally required to file a financing statement in the jurisdiction to which the
debtor has relocated within four months of the debtor's relocation.<a href="#15" name="15a">15</a> If the secured
creditor fails to do so, its security interest will be deemed unperfected
"prospectively" with respect to any party obtaining an interest in the debtor's collateral
after the expiration of such four-month period and "retroactively" with respect to
"purchasers for value"<a href="#16" name="16a">16</a> who acquire interests in the collateral during the four-month
period following the debtor's relocation.<a href="#17" name="17a">17</a> If, however, the secured creditor
re-files in the debtor's new jurisdiction within four months of the debtor's
relocation, its security interest will be considered continuously perfected—at least with
respect to collateral acquired by the debtor before its relocation.<a href="#18" name="18a">18</a> In the case
of collateral acquired by the debtor during the four-month grace period following the
debtor's relocation, the Official Comment to Revised U.C.C. §9-316 suggests
that a timely re-filing by a secured creditor in the new jurisdiction may not
necessarily protect its position against intervening interest-holders.<a href="#19" name="19a">19</a> The uncertainty
surrounding this latter issue could present very significant problems for inventory and
receivables lenders who rely heavily on after-acquired collateral.

<h3>Changes in the Location of Collateral</h3>

Under old Article 9, the collateral's physical location determined the proper
jurisdiction within which to file a financing statement for most forms of tangible
collateral (including inventory and equipment).<a href="#20" name="20a">20</a> As indicated above, revised
Article 9 rejects this approach and, except for titled goods and certain specialized
types of collateral, makes the debtor's location the sole determinant for the
appropriate jurisdiction within which to file a financing statement for both tangible
and intangible collateral.<a href="#21" name="21a">21</a> Accordingly, changes in the location of collateral will
ordinarily not threaten the continued perfection of a security interest under revised
Article 9.

<h3>Organizational Changes by the Debtor</h3>

In addition to name changes and relocations, debtors may also undergo different
"organizational changes" after a secured creditor has properly filed its financing
statement. Such organizational changes can come in a variety of forms, including (a)
conversions from a sole proprietorship or general partnership to a corporation or limited
liability company, (b) re-incorporation or re-registration in a new jurisdiction, and
(c) corporate mergers.<a href="#22" name="22a">22</a>

In contrast to old Article 9's rather limited treatment of this subject,<a href="#23" name="23a">23</a>
revised Article 9 contains detailed rules addressing the impact of such organizational
changes on the continued perfection of a secured creditor's security interest. In order
to create a conceptual framework for these rules, revised Article 9 treats
organizational changes of a debtor as a transfer of the debtor's assets to a "new
debtor."<a href="#24" name="24a">24</a> The extent to which this deemed "transfer" impacts the continued perfection
of a secured creditor's security interest then depends principally on the following
considerations: (a) whether the "new debtor" is located in the same or a different
jurisdiction than the original debtor, and (b) whether the collateral in question was
acquired before or after the debtor's organizational change.

If the "new debtor" is located in the same jurisdiction as the original debtor
(e.g., if the original debtor merges into another corporation and the surviving
corporation is incorporated in the same jurisdiction as the original debtor), then a
secured creditor of the original debtor will remain perfected with respect to collateral
acquired by the original debtor before the organizational change.<a href="#25" name="25a">25</a> Assuming its
security interest extends to after-acquired property, the secured creditor's security
interest will also remain perfected with respect to property acquired after the original
debtor's organizational change, provided that the name of the "new debtor" (e.g.,
the name of the surviving company in a corporate merger) does not render the secured
creditor's financing statement under the original debtor's name "seriously misleading."<a href="#26" name="26a">26</a>

If, however, the new debtor's name renders financing statements under the name of
the original debtor's name seriously misleading (as often may be the case), then a
secured creditor's security interest will not remain perfected with respect to collateral
acquired more than four months after the organizational change unless the secured creditor
files an appropriate financing statement under the new debtor's name before each
four-month period expires.<a href="#27" name="27a">27</a>

Different rules apply if the "new debtor" is located in a different jurisdiction
than the original debtor. In such circumstances, the secured creditor's lien against
collateral owned by the original debtor prior to the debtor's organizational change will
continue to be perfected, provided that the secured creditor files an appropriate
financing statement in the jurisdiction of the new debtor within one year of the
debtor's organizational change.<a href="#28" name="28a">28</a>

If the secured creditor fails to timely undertake such action, its security interest
will be considered unperfected "prospectively" with respect to any parties obtaining
interests in the collateral after the expiration of the one-year period following the
organizational change and "retroactively" with respect to a purchaser for value who
acquires an interest in the collateral during such one-year period.

In the case of property acquired by the new debtor after an organizational change,
a secured creditor of the original debtor is not afforded any type of grace period
within which to re-file. Instead, the secured creditor's lien on such property will
remain unperfected until the secured creditor files an appropriate financing statement
against the new debtor in the new jurisdiction, in which event the latter statement
will only operate "prospectively" with respect to parties that acquire interests in such
property after the financing statement is filed.<a href="#29" name="29a">29</a>

<h3>Conclusion</h3>

In certain respects, revised Article 9 has reduced the ongoing monitoring
obligations of those secured creditors who perfect by filing. In particular, the
elimination of collateral location as a determinant of the proper jurisdiction within
which to file a financing statement has freed secured creditors from the concern that
their perfected status may be jeopardized in the event their debtors surreptitiously
move collateral to another jurisdiction. In addition, the clarification that revised
Article 9 has brought with respect to organizational changes by a debtor should
diminish the uncertainty and confusion that secured creditors previously experienced when
confronted by such changes.

Nevertheless, revised Article 9 continues to impose significant monitoring
responsibilities upon secured creditors, and these parties (and their counsel) must
be fully familiar with the intricacies of revised Article 9's new rules and
clarifications if they hope to avoid the many traps and pitfalls that can arise when
a debtor undergoes changes after a security interest has been perfected by filing.

<hr>
<h3>Footnotes</h3>

<a name="1">1</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…. §9-402(7) (1972)</a>. <a href="#1a">Return to article</a>

<a name="2">2</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…. §9-507(c) (1999)</a>. <a href="#2a">Return to article</a>

<a name="3">3</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…. §9-507(c)(1) (1999)</a>. <a href="#3a">Return to article</a>

<a name="4">4</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…. §9-507(c)(2) (1999)</a>. <a href="#4a">Return to article</a>

<a name="5">5</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…. §9-402(7) (1972)</a>. <a href="#5a">Return to article</a>

<a name="6">6</a> See, e.g., <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… Record Outlet Inc. v. Mellon Bank, 894 F.2d 631 (3rd Cir. 1990)</a>. <a href="#6a">Return to article</a>

<a name="7">7</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…. §9-507(c)(2) (1999)</a> expressly provides for the filing of "an amendment to the financing statement which renders
the [original] financing statement not seriously misleading..." <a href="#7a">Return to article</a>

<a name="8">8</a> See Pearson, J., "A Bubba by Any Other Name...Individual <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… Under Revised Article 9," 12 Norton Bankr. L.
Adv. 1 (December 2001)</a>; <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…, R., "Using the Strong-arm Power to Attack Name Errors Under Revised Article 9," 20 Am.
Bankr. Inst. J. 22 (October 2001)</a>. <a href="#8a">Return to article</a>

<a name="9">9</a> See, e.g., <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… v. Dakota Bank and Trust Co. (In re Knudson), 929 F.2d 1280, 1283 (8th Cir.
1991)</a> (holding that under old Article 9, a financing statement was not seriously misleading if a third-party searcher searching under
the debtor's correct name would be "reasonably likely" to find the financing statement). <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=…. §9-103(3)(e) (1972)</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=…. §9-102(70) (1999)</a>. <a href="#11a">Return to article</a>

<a name="12">12</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…. §9-301(1) (1999)</a>; <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…. §9-307(e) (1999)</a>. <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=…. §9-301(1) (1999)</a>. <a href="#13a">Return to article</a>

<a name="14">14</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…. §9-307(b)(1) (1999)</a>. <a href="#14a">Return to article</a>

<a name="15">15</a> Cf. <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…. §9-103(3)(e) (1972)</a> with <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…. §9-316(a)(2) (1999)</a>. <a href="#15a">Return to article</a>

<a name="16">16</a> Old Article 9 also made the secured creditor's lien retroactively unperfected with respect to "purchasers" but did not contain the
qualifying language "for value." See <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…. §9-402(7) (1972)</a>. <a href="#16a">Return to article</a>

<a name="17">17</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…. §9-316(b) (1999)</a>. For an insightful discussion regarding the bankruptcy avoidance implications of this rule,
see <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…, I., and Hillinger, M., "2001: A Code Odyssey (New Dawn for the Article 9 Secured Creditor)," 106 Com.
L.J. 105, 133-135 (Summer 2001)</a>. <a href="#17a">Return to article</a>

<a name="18">18</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…. §9-316(b) (1999)</a>. <a href="#18a">Return to article</a>

<a name="19">19</a> Comment 2 to <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…. §9-316(b) (1999)</a> provides that "[t]his section addresses security interests that are perfected
(i.e., that have attached and as to which any required perfection step has been taken) before the debtor changes its location. It does
not apply to security interests that have not attached before the location changes." <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=…. §9-103(1) (1972)</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=…. §9-301 (1999)</a>. <a href="#21a">Return to article</a>

<a name="22">22</a> See <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…. §9-203(d) (1999)</a>. <a href="#22a">Return to article</a>

<a name="23">23</a> See <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…. §9-402(7) (1972)</a>. <a href="#23a">Return to article</a>

<a name="24">24</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…. §§9-102(56)</a> and 9-203(d) (1999). <a href="#24a">Return to article</a>

<a name="25">25</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…. §9-507(a) (1999)</a>. <a href="#25a">Return to article</a>

<a name="26">26</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…. §9-508(a) (1999)</a>. <a href="#26a">Return to article</a>

<a name="27">27</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…. §9-508(b) (1999)</a>. <a href="#27a">Return to article</a>

<a name="28">28</a> <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…. §9-316(a)(3)</a> and (b) (1999); Comment 2, <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… 4 to U.C.C. §9-316 (1999)</a>; see,
also, Comment 3 to <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…. §9-507 (1999)</a>. <a href="#28a">Return to article</a>

<a name="29">29</a> Comment 2, <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… 5 to U.C.C. §9-316 (1999)</a>. <a href="#29a">Return to article</a>

Journal Authors

David D. Farrell

Journal Date

Friday, March 1, 2002 - 12:00

Bankruptcy Rule

2002