Summary of Significant Judicial Developments Affecting Asset-Based Lending: Part One

Secured Lender, The, Jan/Feb 2006 by Helfat, Jonathan N, Kohn, Richard M

Attachment, Perfection and Priority

Pankratz Implement Co. v. Citizens Nat'1 Bank, 102 P.3d 1165 (Kan. Ct. App. 2004) (Minor misspelling of debtor's name on a financing statement may render it "seriously misleading" and thus ineffective.)

In March 1998, an individual debtor purchased a tractor from Pankratz Implement Company. The debtor granted Pankratz a security interest in the tractor. Pankratz assigned its security interest in the tractor to Deere and Company. To perfect its security interest, Deere filed a Uniform Commercial Code financing statement with the Kansas secretary of State. The financing statement, however, misspelled the first name of the debtor, referring to the debtor as "Roger" as opposed to "Rodger".

The following month, the debtor entered into financing arrangements with Citizens National Bank. In connection therewith, Citizens was granted a security interest in all of the debtor's equipment, including the tractor. To perfect its security interest, Citizens filed a UCC financing statement with the Kansas secretary of State, in which it correctly spelled the first name of the debtor as "Rodger".

In June 2002, the debtor filed for bankruptcy. A few weeks later, Deere reassigned its security interest in the tractor, including all perfection documents, to Pankratz. In October 2002, the bankruptcy court lifted the automatic stay to permit the sale of the tractor to satisfy Pankratz's outstanding debt. In December 2002, Pankratz sought declaratory relief to determine the effectiveness of the financing statement originally filed by Pankratz and, by implication, the priority of its security interest relative to the security interest of Citizens. Both Pankratz and Citizens moved for summary judgment. The lower court granted summary judgment in favor of Pankratz because Pankratz perfected its security interest in the tractor before Citizens perfected its security interest. Citizens appealed the lower court's holding, arguing that Pankratz's financing statement was ineffective because it was "seriously misleading" pursuant to K.S.A. 2003 Supp. 849-506. That section states, in pertinent part:

(a) Effect of errors or omissions. A financing statement substantially satisfying the requirements of this part is effective, even if it has minor errors or omissions, unless the errors or omissions make the financing statement seriously misleading.

(b) Financing statement seriously misleading. Except as otherwise provided in subsection (c), a financing statement that fails sufficiently to provide the name of the debtor in accordance with K.S.A. 2003 Supp. 84-9-503(a) and amendments thereto, is seriously misleading. (c) Financing statement not 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, if any, would disclose a financing statement that fails sufficiently to provide the name of the debtor in accordance with K.S.A. 2003 Supp. 84-9-503(a) and amendments thereto, the name provided does not make the financing statement seriously misleading. 102 P.3dat 1167.

The effectiveness of Pankratz's financing statement turned on whether it was "seriously misleading." In addressing this issue, the court first noted that it would seem "harsh" to hold that the absence of the letter "d" from the debtor's first name would render the financing statement seriously misleading. Id. Nonetheless, the court recognized that the financing statement would be seriously misleading if, pursuant to K.S.A. 2003 Supp. 84-9-506(c), a reasonably diligent searcher would not find it using the filing office's standard search logic.

In support of his argument that the misspelling of the debtor's first name did not render his financing statement seriously misleading, Pankratz demonstrated that, by using the search logic provided by the UCC electronic filing system on the official web site of the State of Kansas, www.accesskansas.org - Pankratz's financing statement would be revealed. Thus, Pankratz argued, the misspelling of the debtor's name was merely a "minor error" under K.S.A. 2003 Supp. 84-9-506(a).

Citizens, on the other hand, argued that the misspelling of the debtor's first name rendered Pankratz's financing statement seriously misleading. In support, Citizens put forth evidence that the search logic utilized by www.accesskansas.org was not analogous to the standard search logic utilized by the filing office, and was merely intended to establish a more flexible approach than the standard search logic in order to identify UCC filings under former Article 9. Because former Article 9 employed different filing requirements than revised Article 9, a search conducted using the search logic provided by www.accesskansas.org would not necessarily yield the same search results as a search conducted using the standard search logic. Thus, Citizens argued, Pankratz's financing statement was seriously misleading because it would not be revealed using the standard search logic.