A creditor that left the “d” out of the debtor’s first name, “Rodger House,” when it filed a financing statement, lost its priority because of the misspelling.

The failure to spell the debtor’s name correctly created a “seriously misleading” financing statement, because subsequent creditors would be unlikely to find the the applicable UCC statement utilizing the “standard search logic” referred to by state statute, a Kansas appellate court held.

The case is Pankratz Implement Company v. Citizens National Bank, No. 91,721 (Kan. App. 2004). [Link: http://www.kscourts.org/kscases/ctapp/2004/20041119/91721.htm]

In Pankratz, Kansas resident Rodger House purchased a tractor from Pankratz, a Kansas corporation, on March 19, 1998. House executed a note and security agreement in favor of Pankratz, which assigned the note and collateral to Deere and Company. Deere filed a UCC-1 financing statement on March 23, 1998, listing the debtor as “House, Roger.”

In April 1999, House executed a note and security agreement for a loan with Citizens Bank, pledging all equipment owned and acquired thereafter as collateral. Citizens filed its financing statement with the correct name of the debtor, “House, Rodger.”

House petitioned for bankruptcy in June 2002. In July 2002, Deere reassigned the House note and security agreement to Pankratz. In October of that same year, the federal bankruptcy court allowed the sale of the tractor to satisfy Pankratz’s security interest. Pankratz filed suit seeking declaratory relief to determine whether Pankratz or Citizens had priority.

“On its face, to hold that a missing “d” in a debtor’s first name renders a financing statement ‘seriously misleading’ seems harsh,” acknowledged the Court of Appeals for the State of Kansas.

The Kansas UCC statute provides that “[a] financing statement substantially satisfying the requirements…is effective, even if it has minor errors or omissions, unless the errors or omissions make the financing statement seriously misleading.”

The court’s decision turned on “whether a reasonably diligent searcher would find the prior security interest” applying the “standard search logic” called for under Kansas law.

Although the financing statement listing “Roger House” without a “d” could be located in a data base provided by the Kansas secretary of state, which applied “temporary Internet search logic,” the UCC-1 would not be found applying only “standard search logic” and therefore was seriously misleading, the court concluded.

Mandating the use of a debtor’s legal name simplifies the drafting of financing statements, creates clear parameters for UCC searches, and avoids creating a duty to search for debtor name variations and subsequent litigation, the court held.

The ruling places the burden on the filing creditor to list the debtor correctly. Searchers are under no obligation to conduct multiple searches using variations of the debtor’s name.