#23 - Changes of Name, Identity, and Use Flashcards
4 Problems with Collateral that Affect Perfection
1) Debtor changes name
2) Substitution of new debtor
3) Changes affecting the description of collateral
4) Conversion of collateral into proceeds (distinguish barter and cash)
General Rules
1) A financing statement remains effective even after disposition (sale) of the collateral. 9-507a. Recall that 9-315a provides that the sec int continues (attachment) even after disposition of collateral.
2) For all the info in the financing statement EXCEPT the debtor’s name, a change that makes the financing statement seriously misleading does not affect the effectiveness of the financing statement 9-507(b)
Changes of Debtor’s Name under 9-507(c)
If a change in debtor’s name makes the financing statement seriously misleading:
- Financing statement is effective as to existing collateral and collateral acquired for the next 4 months 9-507(c)(1)
- Financing statement is not effective for collateral acquired more than 4 months after the name change 9-507(c)(2)
- If the secured creditor files an amendment after the 4 month period has ended, the amendment is effective, but the secured creditor’s prio is only from the date of amendment. Comment 4 to 9-507
Substitution of a New Debtor 9-508
New debtor is bound by the security agreement, and the original financing statement is good to perfect the security interest. 9-508(a)
If a change in the debtor (merger, change in business structure for example) makes the name seriously misleading, the 4 month rule applies:
- Secured creditor stays perfected in all property owned on the date the new debtor became bound and all property acquired for the next 4 months. 9-508(b)(1).
- But the secured creditor must file a new INITIAL financing statement that lists new debtor’s name in that 4 month period to remain continuously perfected. 9-508(b)(2).
Difference between Debtor and Obligor
Debtor = a debtor is anyone that has an interest in collateral. UCC § 9-102(a)(28). This interest is one of ownership, such as when a person owns investment property, like Apple stock, or a piece of farming equipment.
Obligor = An obligor is anyone that quote “owes payment or other performance of an obligation,” unquote. UCC § 9-102(a)(59). In other words, an obligor is responsible for paying back the debt incurred from a creditor. Think of someone guaranteeing a loan, like a parent co-signing for a car loan. This obligor doesn’t necessarily need to be responsible for the whole of an obligation. An obligor may take on the responsibility for just part of a payment or other performance of the obligation.
There is a difference between a debtor and an obligor: a debtor needn’t have an obligation of payment or other performance, although debtors are also commonly obligors too.
A merger of corporate entities is a common example of a new debtor or a change in business structure from 1 type of business entity to another is an example of a new debtor or a change in business structure from 1 type of business entity to another is another example of when the debtor changes. Going from partnership to corporation, for example.
Example of Seriously Misleading Name
Commonly see seriously misleading issues with LLC changes to Corporation or vice versa. It became a new debtor with the way the name changed “Odinet Investments LLC > Odinet Enterprises Inc.”
The change from “investments” to “enterprises” is what makes it seriously misleading. Changing one of the words there changes it.
Changes in Collateral
Distinguish between changes in use of collateral and changes in identity of collateral.
Change in Use = Say you have car on a dealer’s lot used as inventory but then changed to use as equipment. That’s a change in use.
Change in Identity = trading car for boat. That changes identity of collateral because now the proceeds of the car take the form of boat.
What happens if we have these changes in either use or identity of the collateral? The problem is that the financing statement says 1 thing and now it may be inaccurate. How does it make the financing statement seriously misleading?
Here’s a rule in 9-507b = a change in the use of the collateral doesn’t make financing statement seriously misleading.
Changes Affecting Description of Collateral 9-507(b)
This is about use of the collateral
Changes in use do not make the financing statement seriously misleading 9-507(b).
- For example, automobile parts become an automobile in inventory “Same Office”
BUT if the change requires that the collateral be perfected in a different office or by a different method, then the secured creditor becomes unperfected.
- For example, a change from automobile inventory to automobile certificate of title is DIFFERENT OFFICE.
Conversion of Collateral into Proceeds
This is about IDENTITY of the collateral
Distinguish:
1) Barter (no cash is exchanged)
2) Cash then used to buy other property (“CASH IN THE MIDDLE”)
3) Cash (“I sold you the pen for $10 and now I just have $10)
Change in Identity: Conversion of Collateral into Proceeds (BARTER! No cash exchanged)
Within description: financing statement description still indicates collateral; financing statement effective 9-315d1
Same office: financing statement description no longer describes collateral, but the filing office is the correct office for new collateral; financing statement still effective. 9-315d1
Different Office: financing statement description no longer describes collateral, and the filing office is the wrong office; secured party must refile in correct office within 20 days to maintain perfection 9-315d3
- New authorization not needed. 9-509b2
Change in Identity: Conversion of Collateral into Proceeds (Cash used to buy other property / Collateral to Cash Proceeds to Noncash Proceeds)
Within description: if financing statement description includes new collateral, then you’re fine, financing statement still effective
Same office and different office: financing statement does not include new collateral; secured party must file financing statement (in correct office) to cover new collateral within 20 days of receipt of new collateral to maintain perfect. 9-315d3
New authorization not needed. 9-509b2
Change in Identity: Conversion of Collateral into Proceeds (Collateral to Cash Only no new property)
Secured party has continuous, perpetual perfection in identifiable cash proceeds 9-315d2.
AND remember there are value tracing rules like the lowest intermediate balance rule for that
Relevant Art 9 Provisions - Maintaining Perfection through Changes of Name, Identity, and Use
9-507 = debtor name changes or description of collateral changes (change in use)
9-508 = debtor becomes “new debtor”
9-509 = new authorization not needed for maintaining perfection when collateral changes
9-315(d) = collateral changes (change in identity)
- (d)(1) = barter, within description or same office
- (d)(2) = continuous perfection in cash proceeds
- (d)(3) = barter, different office; collateral to cash to non-cash proceeds, same and different office
