Mainsource Bank v. Leaf Capital Funding, LLC (In re Nay) - 563 B.R. 535 (Bankr. S.D. Ind. 2017)

Rule:

The Indiana Secretary of State's "standard search logic" is found in Administrative Rule 503. That rule begins with a notation that "search results are created by applying standardized search logic to the name presented to the filing officer by the person requesting the search" and goes on to set out the parameters utilized by the search engine in gathering search results for the particular name presented in the query. The standard search logic in Rule 503 establishes how words or things such as punctuation, spaces, initials, case of letters, and similar details are interpreted in generating a report. As regards the "correct name" to be searched, however, Rule 503 provides no authority.

Facts:

The Debtors Ronald Markt Nay and Sherry L. Nay were indebted to plaintiff MainSource Bank pursuant to various debt instruments, including, but not limited to, a certain promissory note, dated May 5, 2015. To secure repayment of the Note, among other collateral, the debtors executed and delivered Agricultural Security Agreements whereby the debtors granted to plaintiff a security interest in personal property owned by the former. The security interests granted to plaintiff by virtue of the Security Agreements were properly perfected by the filing of a financing statement with the Indiana Secretary of State in February 2014. About December 17, 2015, defendant LEAF Capital Funding made a loan to debtor, to finance the purchase of a Terex TA400 Dump Wagon and a Terex 3066C Dump Wagon as evidenced by a Finance Agreement. Defendant claimed that it had a first priority security interest by virtue of the filing of a financing statement the Indiana Secretary of State, filed in December 2015. The TA400 and the 3066C constituted "equipment" as that term was defined under applicable Indiana law. The LEAF UCCs or the Financing Statement each identify the debtor's name as "Ronald Mark Nay" while the actual name listed on his most recently issued unexpired Indiana driver's license, was "Ronald Markt Nay". The debtors commenced a chapter 11 bankruptcy case in May 2016. In September 2016, plaintiff initiated this adversary proceeding alleging causes of action against defendant for declaratory judgment and as an objection to defendant’s proof of claim. The Complaint sought a declaration that plaintiff has a first priority security interest in the subject equipment and further requested that the Court sustain plaintiff’s objection to defendant’s proof of claim.

Issue:

Was the defendant’s financial statement valid as a matter of law?

Answer:

No.

Conclusion:

The court held that the financing statement was fatally defected unless it could be established, under the safe harbor provision of 26-1-9.1-506(c), that its financing statement was otherwise discoverable by searching under the debtor's correct name using the standard search logic promulgated by the Indiana Secretary of State. The Indiana Secretary of State's standard search logic was found in Administrative Rule 503. As regards the correct name to be searched, however, Rule 503 provided no authority. In this case, the court agreed with the plaintiff, that the full correct name was not necessarily the correct name but, more importantly, whether the full correct name or some alternate name was permissible in conducting a search. The court agreed that it was not required because the statute itself provided that the correct name of the debtor was the name set out on his Indiana driver's license. As such, considering the plain language of the statute, given its ordinary meaning, and reading section 503 together with section 506, it seemed clear that the only correct name of the debtor under section 503 was the name on his Indiana driver's license, Ronald Markt Nay. Accordingly, the court held that plaintiff was entitled to judgment as a matter of law and as it was found that the security interests of defendant were unperfected, the court sustained the objection to defendant’s proof of claim.