CASWELL BELL & HILLISON LLP
FRESNO, CALIFORNIA

FINANCING STATEMENTS – GET THE NAME RIGHT

The days of the conditional sales agreement are long past.  In its place is the Uniform Commercial Code, which regulates, among other things, situations in which a lender or a seller seeks to enforce a lien (security interest) in personal property. 

Note – The following discussion does not apply to liens on real property.

A security interest in personal property has two components.  First, it is said to “attach” when the lien is enforceable against the debtor.  Second, it is said to be “perfected” when the lien is enforceable against other creditors.  The dispute over perfection was at issue in Corona Fruits & Veggies, Inc. v. Frozsun Foods, Inc. (2006) 143 Cal.App.4th 319.  In this case, two creditors were competing over the debtor’s remaining assets, when there were not enough funds to pay everyone in full. 

In Corona Fruits, one creditor went unpaid, because it did not correctly state the name of the debtor in its financing statement.  This turned out to be a costly mistake. 

The first creditor, Corona Fruits, was owed $230,482 by the debtor.  Corona Fruits had leased farm land to the debtor, who was a strawberry farmer.  Some of the documents in the transaction were signed by the debtor as “Armando Munoz Juarez.”  Other documents were simply signed, “Armando Munoz.”  Corona Fruits advanced money for payroll and farm production expenses.

The second creditor was Frozsun Foods, to which the debtor was selling his processed strawberries.  Frozsun Foods was owed $19,648.  Admittedly, the advances made by Frozsun Foods were junior in time to those of Corona Fruits.  Even more, Corona Fruits advanced the funds that were needed to produce the strawberries.

However, the junior creditor prevailed, because it had correctly listed the debtor’s name in the UCC-1 Financing Statement.  Explained the court, “Substantial evidence supports the finding that the debtor’s true last name was ‘Juarez’ and not ‘Munoz’.” 

The court pointed out the importance of reviewing a driver’s license or other official identification card for the debtor, to confirm his name.  In this case, “Debtor provided appellants with a photo identification card and green card bearing the name Armando Munoz Juarez.”

Such photo identification will prevail over contrary naming conventions.  In an interesting argument, Corona Fruits claimed it was entitled to priority since “the debtor name requirement is governed by the naming convention of Latin American countries because the debtor is from Mexico.”  The argument was not successful:  Held the court, “We reject the argument because the strawberries were planted in and the debt obligation arose in Santa Barbara County, not Mexico.” 

The court explained that, “In most Latin American countries, the surname is formed by listing first the father’s name, then the mother’s name.  This is exactly opposite Anglo-American tradition.” 

The court added that, “Debtor’s last name did not change when he crossed the border into the United States.  The ‘naming convention’ is legally irrelevant for UCC-1 financing statement purposes, and, if accepted, would seriously undermine the concept of lien perfection.” 

Thus, the junior creditor prevailed, because it had correctly listed the debtor’s name on the financing statement filed with the California Secretary of State.  A painful lesson, but one that highlights the objective nature of the Uniform Commercial Code.

For more information about the Uniform Commercial Code, contact our attorneys.

© Caswell Bell & Hillison LLP          Attorneys and Lawyers, Fresno, California