Cambria Fuel Oil Co. ("Old Cambria") sold its business to 306 Fuel Oil Corp. ("New Cambria") on November 1, 1988, and retained a security interest in the transferred assets. Old Cambria filed its only UCC-1 financing statement on November 18, 1988, listing the debtor as "306 Fuel Co.," after which, New Cambria changed its name to Cambria Petroleum Corp. on December 29, 1988. On the date of sale, New Cambria and Old Cambria also entered into an escrow agreement, which included a security interest subordination clause whereby Old Cambria agreed to subordinate its security interest to a new lender should New Cambria acquire additional financing. Moreover, the escrow agreement required New Cambria to notify Old Cambria of new financing if and when it was obtained, and provide a new, subordinate UCC-1 financing statement. New Cambria would then be allowed to file a simultaneously executed UCC-3 termination statement relating to Old Cambria. The UCC-3 was held in escrow by New Cambria's attorneys. On December 16, 1988, Ambassador Factors Division ("Ambassador"), a representative of Fleet Factors Corp., extended credit to New Cambria, purportedly secured by the same assets in which Old Cambria still held a security interest. Old Cambria was never notified of this loan transaction, was never provided with a subordinate UCC-1, and the escrowed UCC-3 was never released. Ambassador filed its own UCC-1 financing statement on January 5 and 6, 1989, perfecting its interest and naming New Cambria as the debtor. New Cambria subsequently defaulted on the Ambassador debt. Ambassador sued New Cambria, targeting the doubly-secured New Cambria collateral and assets of the defendant Bandolene companies. At trial, the court appointed a temporary receiver, who sold New Cambria's assets. The court awarded the entire net proceeds to Old Cambria, with interest, noting the valid, senior perfected security interest and concluding that Old Cambria had no duty to file a new financing statement upon the debtor's name change. The court also held the subordination agreement inoperative because New Cambria breached the agreement. On appeal, the trial court's reasoning was affirmed.
1) Whether Uniform Commercial Code §§ 9-402(7) and 1-203 require a secured party to refile a properly and accurately filed financing statement securing collateral when the creditor has knowledge or possible knowledge of an impending name change.
2) Whether Uniform Commercial Code §§ 9-402(7) and 1-203 require special notation of an impending name change by the debtor on the initially filed financing statement when the creditor has knowledge or possible knowledge of the impending name change.
Neither refiling nor special notation is required. Judgment of the Appellate Division affirmed.
The court held that a party is not required to refile a financing statement, or make any special notations on the original financing statement, based solely upon knowledge of an impending change in the debtor's name. UCC § 9-402(7) directs what action, if any, is required of a secured creditor when a debtor changes its name after the security interest has been perfected. If the change is seriously misleading, then the secured creditor must refile a financing statement within four months in order to maintain a perfected security interest in any collateral acquired after the change. A name change that is not seriously misleading requires no additional filing. Of course, a perfected security interest in collateral that is acquired prior to the change remains perfected without refiling.
Both competing creditors, Ambassador and Old Cambria, held security interests in collateral acquired prior to the filing of their financing statements. Therefore, when New Cambria changed its name, neither creditor was required to make an additional filing to maintain its perfected security interest. Moreover, because Old Cambria filed first, it had the senior security interest (see UCC § 9-312[a]), and the trial court correctly awarded the entire proceeds of the collateral to Old Cambria.
In a fallback claim, Ambassador argued that UCC § 1-203 imposes a duty of good faith on parties with knowledge of an impending name change. According to this argument, filers should note the upcoming change on the original financing statement in a way that would notify subsequent filers. In re Kalamazoo Steel Process, 503 F.2d 1218 (6th Cir. 1974), held that a party with knowledge of a future name change must either refile or note the change on the initial filing. In extended dicta, the court explicitly rejected this argument. First, Kalamazoo was decided before the most recent amendments to the UCC including § 9-402(7); thus, § 402(7) establishes all necessary refiling requirements. Furthermore, the definiteness, regularity, and predictability of the Code would be upset if the court were to impose a generalized duty of good faith requiring notation of a future name change on the original filing. Finally, since the trial court found no evidence that Old Cambria knew of a possible name change by New Cambria, the court did not reach the issue of whether the good faith imposed by § 1-203 is breached when the original filer has knowledge of an impending name change and an intent to deceive future filers.
The imposition of a § 1-203 good faith requirement on a secured party who might know of a debtor's impending name change is an issue which merits close attention. There is little case law on this subject, and the present case does not help to define its application nationally or even in New York. In the present case, appellant cites to and follows a line of argument expressed in Kalamazoo. In Kalamazoo, the Sixth Circuit held that a secured party with knowledge of an impending name change must either, (1) refile or, (2) note the impending change on its initial filing. However, the court in this case dismissed the Kalamazoo line of reasoning because it predates the enactment of § 9-402(7), which specifically states that a secured party does not have to refile upon a debtor's subsequent name change. For the same reason, the court also dismissed cases following Kalamazoo after the enactment of § 9-402(7).
Such a broad dismissal may not have been entirely warranted because § 9-402(7) only addresses Kalamazoo's first option. Although § 9-402(7) does expressly relieve a secured party from the obligation of refiling after a debtor's name change, it does not expressly relieve the secured party from the good faith obligation of noting on the original financing statement a debtor's impending name change of which it has knowledge. For this reason, two states have held, notwithstanding § 9-402(7), that a secured party who has knowledge of a debtor's impending name change must note the impending change on the original financing statement under § 1-203's good faith requirement. See Wollenberg v. Phoenix Leasing, Inc., 893 P.2d 4 (Ariz. Ct. App. 1994) (discussing a secured party who knew of a debtor's intent to transfer collateral but did not note it on original financing statement); Woods Div. of Hesston Corp. v. Bath Indus. Sales, Inc., 529 A.2d 1129 (Me. 1988) (holding that although § 9-402(7) does not require a secured party to file a new financing statement after the name change, it did not negate the good faith requirement with regard to the initial filing).
This decision solidly reaffirms that the UCC places a heavier burden on creditors to ensure that when they file they in fact assume the superior position. Creditors must investigate whether the assets they secure are assets in which another creditor holds a filed security interest. This investigation is difficult if a debtor has recently undergone a name change and a filed security interest in the same collateral is held under a previous name.
In this case, Old Cambria was the first secured creditor, and Ambassador argued that the good faith requirement of § 1-203 required Old Cambria to note the impending name change on its original financing statement.
UCC Scholars are divided regarding the use of equitable principles such as good faith. White and Summers disagree with its use when applied to § 9-402(7). They fear that extending such an application to creditors upon an initial filing when everything else at that time is correct allows "the sacred cow of equity [to] trample on the tender vines of commerce" James J. White & Robert S. Summers, Uniform Commercial Code § 22-15, at 803 (Hornbook 4th ed. 1995).
The mandate of good faith may seem an appropriate expectation and standard for contracting parties. It is worth noting, however, that the first creditor to file and perfect his security interest never engages in a relationship with the subsequent creditors of his debtor. It is difficult to envision how this non-relationship would naturally give rise to any kind of affirmative duty. Certainly, if creditors discover this sort of duty is essential to the protection of their interests, they can pressure the drafters of the UCC to provide an adequate springboard for such a claim.
The court in this case adopted the White and Summers approach that the imposition of a "general duty, not fairly precisely fixed in a particular section of the Uniform Commercial code, would upset the preference for definiteness, regularity and predictability in commercial dealings."
White and Summers have also expressed grave reservations about the application of "good faith, estoppel, and subrogation to create special rules of priority" James J. White & Robert S. Summers, Uniform Commercial Code § 24-19 at 895 (Hornbook 4th ed. 1995). The "important strength of Article 9 has been the rigidity and accompanying certainty of its priority rules. The saved costs that would otherwise be spent in negotiation and preparation of deals and in contention and litigation after the fact should not be underestimated. The courts should not believe that they serve society by taking in pitiful strays such as good faith, estoppel, and the equitable lien for these strays carry the lice that will infest us all." James J. White & Robert S. Summers, Uniform Commercial Code § 24-19 at 895 (Hornbook 4th ed. 1995). The court seems keenly aware of the pressures of commercial and judicial economy and will likely continue to stress the importance of reliance on the UCC, taking a very limited view on the role and application of good faith.
No case directly contradicts Wollenberg or Woods. Thus, it appears that courts are willing to find financing statements ineffective against subsequent creditors who are misled to believe that property is unencumbered when the secured party had knowledge of an impending name change. The present case is still very different from Wollenberg and Woods because the court noted that there was no finding of knowledge, bad faith or wrongful intent attributable to the secured party.
Because the court, in this case, declined to reach the issue of whether a secured party who files a financing statement with knowledge of a definite impending name change and an intent to deceive or defraud may ever be deemed to be acting in bad faith, it is unclear what New York courts will do when confronted with a such a situation. New York courts may follow the reasoning of Wollenberg and Woods when the secured party is shown to have knowledge or knowledge coupled with an intent to deceive. This could put secured parties in New York in a difficult position if they do, in fact, have knowledge of a debtor's impending change of name. Caution dictates that they note such impending changes on the original financing statement until New York courts address this issue (unless they are certain that a party will be unable to demonstrate that they had an intent to deceive or defraud).
The court refers to several law review articles and treatises in its analysis of the Uniform Commercial Code. William D. Hawkland addresses the issue of a name change and refers to the inefficacy of the filing "to perfect a security interest in collateral acquired by the debtor more than four months after the change, unless a new appropriate financing statement is filed before the expiration of the time." William D. Hawkland, Richard A. Lord & Charles C. Lewis, Uniform Commercial Code Series § 9-402:07, at 534 (1982). The court points out that this is not the present situation and, thus, the statute imposes no refiling requirement.
White and Summers discuss some situations that are not as clearly covered by the statute. Although the following situations are not presented in the instant case they may be relevant to future plaintiffs. "In cases involving mere corporate or other reorganization, we believe that 9-402(7) should normally save the filing, but we concede that the language is less than perfect." James J. White & Robert S. Summers, Uniform Commercial Code § 22-15, at 802 (Hornbook 4th ed. 1995) Another problem that White and Summers address is the creation and dissolution of partnerships. This problem is not directly addressed in the statute. Id. at 804.
The three law review articles cited in the opinion fail to find a duty to refile when the facts are the same as in the present case. F. Stephen Knippenberg, Debtor Name Changes and Collateral Transfers Under 9-402(7): Drafting From the Outside In, 52 Mo. L. Rev. 57 (1987); Note, The Effect of Errors and Changes In The Debtor's Name on Article Nine Security Interests, 1975 Duke L. J. 148 (1975); Gerald T. McLaughlin, "Seek But You May Not find": Non-UCC Recorded, Unrecorded and Hidden Security Interests Under Article 9 of the Uniform Commercial Code, 53 Fordham L. Rev. 953 1985) (explaining how it should be easy to "discover a prior security interest recorded on an earlier corporate name. . . [i]f the lender's attorney checks with the Secretary of State's office, he can usually discover prior names of a corporation").
For a discussion of the consequence of changing UCC § 9-402(7) see James J. White, Symposium, Reforming Article 9 Priorities in Light of Old Ignorance and New Filing Rules, 79 Minn. L. Rev. 529, 556 (1995).
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