As bankers well know, perfecting a security interest protects your collateral against anyone else who might claim it. Article 9 of the UCC offers several ways to perfect, but the most common is filing a financing statement (a UCC-1) with the appropriate filing office. Done correctly, that one-page form puts the world on notice and makes your interest effective against third parties. Done incorrectly, it can leave you unperfected and standing behind other creditors. One common misstep is failing to use the debtor’s correct name. A recent Delaware decision shows just how costly that mistake can be.
In order for a financing statement to be effective, it must correctly state the name of the debtor. Under the version of Article 9 adopted in South Dakota, for an individual who holds a driver’s license issued by the state, the filing must use the debtor’s name exactly as it appears on that license. Use the wrong name, and the filing will be treated as “seriously misleading,” leaving your interest unperfected and vulnerable to the claims of third parties. Note that a narrow safe harbor exists if the filing office’s search logic would still reveal the flawed filing, but this should not be counted upon.
The debtor here was Prakazrel Samuel Michel, better known as “Pras” of the 1990s hip-hop group the Fugees. Years of success left him with a valuable stream of music royalties, and in 2022 he borrowed against them. A company that invests in music assets (“Lender”) provided Pras with a loan secured by those royalty rights. Lender took a security interest in the royalties and filed a UCC-1 to perfect that interest. The catch was that Pras had developed a practice of signing his name as “Samuel Prakazrel Michel,” and he had signed each of the royalty agreements and Lender’s loan documents that way. This led to Lender using that name on its financing statement. Unfortunately for Lender, Pras’ Florida license reads “Prakazrel Samuel Michel,” the first and middle names flipped. And like South Dakota, Florida requires that a financing statement list an individual’s name exactly as it appears on their state-issued driver’s license.
The mistake proved fatal for the perfection of Lender’s interest. Soon after this transaction, Pras sold those same royalty rights to a different music company (“Company”). Company’s counsel ran UCC searches under Pras’ correct legal name but, of course, found nothing.
Following a lawsuit brought by Lender against Pras, Company squared off with Lender, seeking a determination that its interest was superior. When the dispute reached a Delaware court, Company ultimately won. The Court found that because Lender’s filing did not match Pras’ name as written on his driver’s license, it was seriously misleading and, as a result, Lender’s interest remained unperfected. Company, on the other hand, completed its financing statement correctly, so it held a perfected interest.
The takeaway is simple. When your borrower is an individual with a driver’s license, copy their name straight from that license onto the financing statement. Be careful not to use the name the debtor signs with, the name they have used on any other contracts you have seen, the name they use around town, or even the name they go by to sing, perform, or act! A quick look at a borrower’s driver’s license is an easy habit that can save lenders from a costly surprise.
To talk through the finer points of Article 9 or specific secured transaction questions, reach out to our Financial Institutions team. Contact a lawyer at 605-336-2880, [email protected], or find a specific attorney here.