How to Name an Individual Borrower in a Financing Statement

Introduction

On July 1, 2013, various amendments to Virginia’s Uniform Commercial Code will become effective. One of the most important for lenders to know about is the requirement that if the borrower is (a) an individual, (b) whose principal residence is in Virginia, and (c) who holds an unexpired Virginia driver’s license or Virginia DMV-issued I.D. card, then a financing statement covering the borrower must contain his name as it is printed on the most-recently issued unexpired driver’s license or I.D. card (the “New Naming Rule”).[1] The New Naming Rule is an amendment to Virginia Code § 8.9A-503(a)(4), and it creates greater certainty for lenders and lien searchers regarding how an individual borrower should be named in a financing statement. However, it also means that lenders will need to exercise greater care in completing financing statements, as well as monitor changes to the borrower’s driver’s license or I.D. card. 

Discussion

Under current Virginia law, using the name listed on the borrower’s driver’s license or identification card issued by her state of residence is a proper, though not necessary, way to name her in a financing statement. However, starting July 1, 2013, § 8.9A-503(a)(4) will state that –

“[a] financing statement sufficiently provides the name of the debtor … subject to subsection (g), if the debtor is an individual to whom the Commonwealth has issued a driver's license or identification card pursuant to Title 46.2 that has not expired, only if it provides the name of the individual which is indicated on the driver's license or identification card.” (emphasis added)  

The “subsection (g)” referenced in the quote above states that “[i]f the Commonwealth has issued to an individual more than one driver's license or identification card of a kind described in subsection (a)(4), the one that was issued most recently is the one to which subsection (a)(4) refers.”    

An initial issue is whether the New Naming Rule requires lenders to revise the financing statements they’ve filed prior to July 1, 2013. The correct answer appears to be “no” – i.e., only financing statements and continuation statements (including continuation statements relating to filings that were made before July 1, 2013) filed on or after July 1, 2013, have to comply with the New Naming Rule. However, some commentators have suggested that financing statements filed before July 1, 2013, will remain effective only as to collateral the borrower obtains by November 1, 2013, unless the financing statement is amended to comply with the New Naming Rule by November 1, 2013. Thus, there is at least the possibility of dispute on this point, and a lender may therefore want to consider amending any existing financing statements that (a) do not comply with the New Naming Rule, and (b) are intended to cover collateral obtained after November 1, 2013. 

The New Naming Rule provides relief to those who have wanted greater certainty as to how to properly name a borrower who is an individual in a financing statement – and disputes over naming issues have generated a lot of litigation. However, that certainty will bring with it the need for greater care when completing a financing statement. The lender will have to be certain that the borrower’s principal residence is in Virginia and that the lender has the borrower’s most recent unexpired Virginia driver’s license or Virginia DMV-issued I.D. card.[2] Further, the lender will have to be careful that the borrower’s first, last, and middle names, as well as any suffixes (e.g., “Jr.”), as shown on the license or I.D. card, are entered in the appropriate boxes in the financing statement, regardless of the order in which they appear on the drivers’ license or I.D. card. 

Further, the New Naming Rule also means that after the financing statement has been filed, lenders will have to stay on top of changes to the status of the borrower’s driver’s license or I.D. card. For example, (a) the driver’s license or I.D. card might expire without the borrower obtaining a new one, meaning that the New Naming Rule no longer applies (“Example A”), or (b) the borrower may obtain a new license or I.D. card with a different name on it (e.g., if the borrower gets married and takes a different last name”) (“Example B”). 

In Example A, if the name shown on the filed financing statement (i.e., the name taken from the now-expired license or I.D. card) is so different from the borrower’s “individual name” or “surname and first personal name” – the phrases used in § 8.9A-503(a)(5) – that the standard search logic used by the Virginia State Corporation Commission (“SCC”) will not disclose the financing statement, then the financing statement will be effective only as to collateral the borrower obtained before the license or I.D. card expired and during the four months thereafter.  Of course, if the collateral turns over frequently, such as may be the case with inventory, then the loss of the financing statement’s effectiveness could be devastating to the lender. The lender can maintain the financing statement’s effectiveness only by filing an appropriate amendment within the four-month period. This scenario suggests that at a minimum, the lender should calendar the expiration date of the borrower’s license or I.D. card and follow up to confirm that the borrower timely obtains a new license or I.D. card with the same name on it as the old one.

Likewise, in Example B, if the name listed on the borrower’s new license or I.D. card – which is the only license or I.D. card that matters, since it is the one that was “issued most recently” – is so different from the name on the financing statement that the name on the financing statement will not be disclosed by the SCC’s standard search logic, then the financing statement will be effective only as to collateral obtained prior to issuance of the new license or I.D. card and for four months thereafter. The danger to lenders that this not-unlikely scenario presents – again, particularly where the collateral turns over frequently – recommends putting procedures in place to monitor changes to the borrower’s license or I.D. card.

Conclusion

The New Naming Rule grants a welcomed certainty as to how an individual is to be named in a financing statement, but it does so at the price of requiring lenders to be very diligent when completing a new financing statement and very vigilant in monitoring changes to the status of the borrower’s driver’s license or I.D. card. A lender may be well advised to review its procedures to ensure that the financing statements it files starting July 1, 2013, are going to comply with, and last over time, under the New Naming Rule.

Statutory changes made to fix old issues often generate new issues, and the New Naming Rule is doubtless no exception. This article is not an exhaustive review of all the new issues that might arise, and it is not intended as advice for any particular situation. Obtaining the advice of the Bank’s counsel is recommended if and when questions arise as to the effect of the New Naming Rule. 

[1] An exception to the rule is that a record of a mortgage is effective as a financing statement filed as fixture filing or covering as-extracted collateral or timber to be cut if, in addition to meeting other UCC requirements, the record provides the debtor’s “individual name” or “surname and first personal name.”

[2] A driver’s license issued by another state, a passport, a military I.D. card, etc. will not do. If the borrower has her principal residence in Virginia but does not have an unexpired Virginia license or Virginia DMV-issued I.D. card, then the New Naming Rule does not apply, and § 8.9A-503(a)(5) provides that the name on the financing statement is sufficient “only if it provides the individual name of the debtor or the surname and first personal name of the debtor.”


Spotts Fain publications are provided as an educational service and are not meant to be and should not be construed as legal advice. Readers with particular needs on specific issues should retain the services of competent counsel.