Indiana Law Review


An Organizational Approach to Resolving
the Attachment and Perfection Problems

of Identity Changes under § 9-203(1)(a) & § 9-402(7)
of the Uniform Commercial Code

Gregory J. Morical*

"Look to the essence of a thing, whether it be a point of doctrine,

of practice, or of interpretation."
1

Introduction

The purpose ofthe Uniform Commercial Code (U.C.C or "Code") is to provide clear

and concise answers to practical commercial questions. In some circumstances, however,

courts have interpreted and applied the Code in a way that blurs its intended effect. This

Article will focus on one such distortion. This distortion is a result ofthe judicial attempt to

resolve the effect that a postperfection change in corporate form, or "identity change," has

upon an otherwise valid security interest in after-acquired property.

An identity change occurs when a debtor (the "original debtor") changes its corporate
form, transfers assets subject to a security interest to the postchange entity (the "new

debtor"), and continues business as the new debtor. A change of form can occur in various
ways. For example, an entity can change from a proprietorship or partnership to a

corporation, a subsidiary may be created, or a merger may result. A transfer of assets
pursuant to an identity change is different from a transfer of assets to a third party because

an identity change involves a transferor and transferee that are similar, if not substantively

identical.

Changes in corporate form occur constantly within the national economy. An entity has
creditors and clients before the change and continues to operate as an economic unit,

regardless ofform, after the change. Unfortunately, the problem ofhow to treat the effect of

a change in form on a prechange security interest in after-acquired property has not been

satisfactorily resolved. The Permanent Editorial Board ofthe Uniform Commercial Code has

recognized this problem and is considering revising Article 9 to make the intended effect of

the applicable sections more clear.2 However, the special committee set up to review Article

9 (the "Study Committee") itself is split on which ofthe two prevailing approaches to adopt:

the identity approach or the Burke approach.
3
Regardless, the Committee has been unable

to articulate a statutorily valid means of implementing the identity approach.

This Article fills the gap in the Committee's analysis by proposing a statutorily valid

means of implementing the identity approach through use of the term "organization." For

* Law Clerk to Justice J. Craig Wright, Supreme Court of Ohio. J.D., Indiana University School of

Law—Bloomington, 1994; B.A., DePauw University, 1990. My thanks to Professor Bruce Markell and Alice
McKenzie Morical for their insigtful comments on earlier drafts. The views expressed in this Article are those

of the author alone.

1. Marcus Aurelius Antoninus, A.D. 121-180 (translated by Morris Hickey Morgan [1859-1910]).

2. See PEB Study Group, Uniform Commercial Code Article 9 Report 140-5 1 (December 1 , 1 992); id.

at 141 ("Accordingly, the Committee thinks that Article 9 should distinguish between name changes, in which the

original debtor continues as the same legal entity, and other changes, in which the original debtor does not so

continue.").

3. Id. at 144-45.



44 INDIANA LAW REVIEW [Vol. 28:43

purposes of simplification, this statutory interpretation will be referred to as the

organizational approach or organizational interpretation. Though the organizational

approach relies on many of the policy justifications of the identity approach, it reaches the
same result in a more practical and certain manner.

The organizational approach uses language already present in the Uniform Commercial

Code to provide a means by which to implement the identity approach, while at the same

time avoiding the current problems of that approach. Specifically, this approach uses the

definition of "organization" as the means to differentiate between transactions involving

identity changes where the transferor and the transferee are related entities, from those

transactions involving unrelated third parties. The goal ofthis Article is twofold. First, this

Article will demonstrate why the result reached by the identity approach is the preferred
result, and how the traditional problems with that approach may be avoided with the
proposed interpretation. Second, in case the Committee does not revise Article 9 to reflect

this interpretation, this Article provides an analysis by which courts that agree with the

policies underlying the identity approach may use the language of the current U.C.C. to
legitimately reach an appropriate result.

The first Part ofthe Article provides the context for considering the issue by setting forth

the essential aspects ofa secured transaction and the practical policies which underlie Article

9 of the Uniform Commercial Code. Part II traces the development of the response to the

issue within the Code and judicial opinion. This Part specifically addresses the foundations

and problems ofthe two different approaches courts have taken to resolve the issue. Part III

considers the effect of the two approaches upon the various commercial constituents and

concludes that the identity approach is vastly superior, though problematic as currently

applied. Part IV provides a means to overcome the problems of the identity approach

through use ofthe term "organization." This Part sets forth the means by which the approach

should be judicially applied. Finally, Part V proposes a set of official comments that would
legislatively adopt the organizational approach, whether by the Committee or individual state

legislatures.

I. Background

The secured transaction plays an important role in modern commercial and consumer

relationships.
4

Secured transactions provide creditors, who deal with debtors who are

otherwise unable to access credit resources, with a mechanism to inject value into individual

and organizational endeavors.
5 A secured creditor has a significant power over debtors

because ofthe ability to seize a debtor's property upon nonpayment. As a result, the Code

generally requires the secured transaction to be memorialized in writing.
6 A potential

4. See Robert M. Lloyd, Secured Transactions 1-18 (1988).

5. The collateral of a secured transaction allows the secured creditor to finance an individual or business

which is a larger credit risk by minimizing the risk of nonpayment. If a default results, the creditor has a claim

against the debtor for the amount owed, against the collateral to satisfy the deficiency, or both. The subsequent

decrease in the creditor's risk may be passed on to the debtor in the form ofa more favorable interest rate or payment

plan. F. Stephen Knippenberg, Debtor Name Changes and Collateral Transfers Under 9-402(7): Draftingfrom

the Outside-ln, 52 Mo. L. Rev. 57 (1987).

6. This requirement "is in the nature of a Statute of Frauds." U.C.C. § 9-203 Official Cmt. 5 (1994).



1 994] RESOLVING PROBLEMS OF IDENTITY CHANGES 45

problem arises when the secured transaction leaves the debtor in possession ofthe collateral.

The debtor's possession of the collateral has the potential to mislead other creditors into

believing that the property is unencumbered.
7
Creditors operating under that mistaken belief

may lend on the collateral.8 The U.C.C. provides a solution to this problem of "ostensible

ownership" by requiring the original secured party to file a financing statement declaring and

detailing the security interest in the debtor's collateral, a description ofthe collateral, and the

amount ofthe security.
9
This system of"notice filing"

10
provides an incentive to prospective

secured parties to search for applicable financing statements: debt secured by collateral

already securing another debt is inferior in terms of satisfaction to the previous debt.
11

If

prospective secured parties do not investigate prior to providing value, then they bear the risk

of receiving an inferior security interest. Essential to fair application of the notice filing

system is the ability of diligent, prospective secured parties to locate filings relevant to the

debtor, and thereby act knowledgeably if lending on collateral securing a superior security

interest.

The particular method of secured lending at the center of this Article is lending upon

after-acquired property.
12 Due to their nature, many businesses have a constant turnover in

a significant amount of potential collateral. The clearest examples of this type of business

It fulfills an evidentiary function by establishing the terms ofan agreement, thereby decreasing the likelihood of a

future dispute. A written agreement is not necessary where the secured party maintains possession ofthe collateral.
Possession by the secured party provides an equally effective means to ensure that both parties agree on and

understand the particular collateral subject to the security interest. Id. The terms ofthe security agreement can have

a significant impact in that they bind not only the parties, but other creditors of the debtor and purchasers of the

collateral. U.C.C. § 9-201.

7. This is known as the problem of "ostensible ownership." Lloyd, supra note 4, at 5.

8. When the subsequent secured party lends and takes an interest in the collateral, no problem will occur

if the collateral is of sufficient value to cover both liabilities in the case of a default. If that is not the case, then the

problem ofhow to divide the proceeds ofthe collateral among the conflicting secured parties arises. On one hand,

the original secured party should be favored, because it provided the value initially. On the other hand, how could

the second secured party have known that the collateral was secured by an earlier agreement?

9. U.C.C. § 9-402(7). Where such a filing is not made, the collateral is open for other secured parties who

filed before the original filing or tojudgment debtors seeking to satisfy theirjudgments. Where a filing is properly

made, the security interest of later secured parties is subject to that of the original secured party—the original
secured party has "priority." U.C.C. § 9-312. A secured party may also perfect a security interest by possessing
the collateral. U.C.C. § 9-203.

10. U.C.C. § 9-402 Official Cmt. 2.

11. U.C.C. §§ 9-301(l)(a), 9-312(5).

12. Article 9 provides a mechanism that allows secured parties to lend on types of collateral which would

be ineffectively secured under a traditional secured transaction. This type of lending generally involves inventory

or accounts receivable financing, or may include any type of collateral held by a debtor for a short period of time,

being subsequently replaced by other items. See Lloyd, supra note 4, at 208-09 (for example, new shoes in the

inventory ofa shoe store). The Code provides an effective means ofsecuring these types of collateral through the

use ofan after-acquired property clause to subject property acquired by a debtor after the execution of a security

agreement to the security interest. U.C.C. § 9-204. The secured party may continue to advance funds with the

expectation that, if necessary, the debtor will have the collateral necessary to satisfy whatever obligation remains

outstanding.



46 INDIANA LAW REVIEW [Vol. 28:43

include manufacturers and sellers of consumer goods, such as a shoe store or an electronics

wholesaler. The assets of such entities are primarily inventory and accounts receivable.

However, both inventory and accounts receivable undergo constant turnover, making lending

documentation with respect to single pieces of collateral impossible. Instead, the U.C.C.

established section 9-204, which allows the secured party to take a security interest in a type

of collateral, for instance accounts receivable and inventory, that a debtor currently has or

will acquire in the future. The debtor benefits by being able to acquire credit based upon a

significant amount of its assets and the secured party benefits by a constant flow of present

collateral from which it may, if necessary, satisfy the debt.

After the security interest is attached and perfected, debtors are capable of undergoing

many types ofchanges which may frustrate the secured relationship and the notice system for
prospective secured parties. Postperfection changes can be categorized as external or

internal. External changes involve changes in the debtor's environment that affect the validity

of the security interest or financing statement. They include changes in: the debtor's

residence, place of business, location and/or use of collateral,
13
and the location of the

debtor.
14

Generally, external changes are resolved by the Code with a strong degree of

certainty.

One example of such a change is a debtor name change, which may adversely impact
the ability of a prospective secured party searching the filing system to learn ofa prechange

security interest, thus bringing into question the effectiveness of the prechange financing

statement.
15

Internal changes involve a change in the debtor itself which affects the validity

of the security interest or financing statement.

One type of internal, postperfection change that the Code does not clearly address is an

"identity change." As set forth above, an identity change occurs when a debtor changes legal

form, transfers all or part of its assets to the successor entity, and continues business as the

new entity. Only through a change in corporate form can a debtor accomplish an identity

change, because the corporate form is the only legal mechanism that creates a different legal

entity.
16

Regardless of whether the debtor is a proprietorship, partnership, or existing

corporation, it can form a new corporation and transfer all or part ofthe assets and business

operations of the original entity to the successor. A change in form may also result from a
merger or occur as a result of a business transfer between a parent corporation and its

subsidiary. Scenarios that involve an identity change are potentially very factually complex.

13. U.C.C. §9-401(3).

14. U.C.C. § 9-103.

1 5. The Code provides answers to how most types of internal changes affect the validity ofan underlying

security interest and the effectiveness of a financing statement. In the case of a name change that renders the

financing statement "seriously misleading" to a reasonable searcher, the secured party is given four months in which

to file a new amended financing statement or the perfected status ofthe security interest lapses. U.C.C. § 9-402(7);

§ 9-402 Official Cmt. 7. In the case ofa transfer ofthe collateral from one debtor to an unrelated entity, the security

interest and its perfected status continue in the collateral unless the secured party authorized the sale. U.C.C. § 9-

306(2). The effect of the name change rule is to place a general duty of research on prospective secured parties

regarding the collateral: "any person searching the condition ofthe ownership ofa debtor must make inquiry as to

the debtor's source of title, and must search in the name of a former owner if circumstances seem to require it."

U.C.C. § 9-402 Official Cmt. 8.

16. See United States v. Fidelity Capital Corp., 920 F.2d 827 (1 1th Cir. 1991).



1 994] RESOLVING PROBLEMS OF IDENTITY CHANGES 47

However, at the core ofeach scenario is the use ofcorporate form to create distance between

the prechange and postchange debtor.

Theoretically, an identity change creates two issues regarding the validity ofapplication

of a prechange security interest in after-acquired property to the postchange debtor. First,

the postchange entity has a different legal identity than the prechange entity. This calls into

question the enforceability of the security agreement signed by the prechange entity against

the postchange entity with respect to collateral acquired after the change that otherwise

would have been subject to the original security interest in after-acquired property. Second,

the change may have the effect of hampering prospective secured parties from determining

the existence of a prechange security interest. The identity change may have been
accompanied by other internal and external changes, the most common of which seems to
be a name change. The combined impact of the identity and accompanying changes may

hinder the effectiveness ofthe prechange financing statement in fulfilling the goals ofnotice

filing. As discussed below, the evolution of the statutory and judicial responses to identity

changes has only recently confronted these two issues effectively. However, the approach

that courts have used can be changed to achieve better results.

II. A Change of Form and Article 9

The problem of internal postperfection changes affecting an after-acquired security

interest did not arise under pre-Code law.
17 The courts first confronted the issue under the

1962 version of Article 9, which provided little guidance.
18

Those courts divided

postperfection changes into two categories: name changes and transfers. 19 In the case of a

name change, refiling or amendment ofthe financing statement was not necessary to continue

the perfected security interest absent knowledge of the impending change by the secured

party prior to filing.
20 When a change of form occurred with a subsequent transfer of

collateral and business to the successor entity whose name was similar, courts often held that

the change should be treated as a name change, at least indirectly conceptualizing the pre and

postchange debtors as the same entity.21 Most courts did not distinguish between collateral

17. State of New York, Report of the Law Revision Commission for 1955, Study of the Uniform

Commercial Code 281 (1955).

18. Ray D. Henson, Handbook on Secured Transactions Under the Uniform Commercial Code

§ 4-6 at 67 (2d ed. 1979).

19. See generally Knippenberg, supra note 5.

20. In re Kalamazoo Steel Process, Inc., 503 F.2d 1218 (6th Cir. 1 974). In re The Grape Arbor, Inc., 6

U.C.C. Rep. Serv. (Callaghan) 632 (Bankr. E.D. Pa. 1969) (postfiling change of name from The Philadelphia

Eating Society did not invalidate financing statement); Continental Oil Co. v. Citizens Trust & Savings Bank, 244
N.W.2d 243, 244-45 (Mich. 1976); see also William B. Davenport & Daniel R. Murray, Secured
Transactions 166(1978).

2 1

.

Davenport & Murray, supra note 20, at 166. See also Ryan v. Rolland, 434 F.2d 353, 357 ( 1 0th
Cir. 1970) (secured party is not required to refile as to present or after-acquired property after debtor transfers to

successor corporation); Avdoyan v. Sun Bank at Pine Hills, N.A. (In re Sofa Center, Inc.,) 18 U.C.C. Rep. Serv.

(Callaghan) 536, 539 (M.D. Fla. 1975).



48 INDIANA LAW REVIEW [Vol. 28:43

acquired before and after the change, nor did they consider the effect ofa change in form on

the validity of the security agreement and security interest.22

A. The Effect ofthe 1972 Revision: § 9-402(7)

Part ofthe 1972 revision ofArticle 9 was aimed at resolving the effect a postperfection,

internal change in the debtor has upon a prechange security interest.23 Section 9-402(7) of

the revised Code expressly addresses the problem. Two sentences ofthat section bear upon
this discussion:

24

Where the debtor so changes his name or in the case of an organization its name,

identity or corporate structure that a filed financing statement becomes seriously

misleading, the filing is not effective to perfect a security interest in collateral

acquired by the debtor more than four months after the change, unless a new

appropriate financing statement is filed before the expiration ofthat time.
25 A filed

financing statement remains effective with respect to collateral transferred by the

debtor even though the secured party knows of or consents to the transfer.26

The drafters did not clearly indicate which portion of section 9-402(7) they intended to

govern a change in form.
27 The language ofthe Official Comment is somewhat ambiguous:

"Subsection (7) also deals with the case of a change ofname of a debtor and provides some

guidelines when mergers or other changes ofcorporate structure ofthe debtor occur with the

result that a filed financing statement might become seriously misleading."28

B. The Identity Approach

Shortly after section 9-402(7) was codified, the majority of courts confronted with

identity changes began to rely on the language of the new statute while still applying the

prerevision reasoning.
29

Changes of corporate form were given the name, "identity changes

22. See In re A-l Imperial Moving & Storage Co, 350 F. Supp. 1 188, 1 189 (S.D. Fla. 1972).
23. Subsection 7 of U.C.C. § 9-402 was added "[t]o solve [the] dilemma of whether to require the filing

ofan amendment upon a significant change of identity ofthe debtor." American City Bank v. Western Auto Supply,

631 S.W.2d 410, 418-19 (Tenn. Ct. App. 1981). "The decisions [under the 1962 Act] do not, however, supply a

satisfactory rule for practice; their rationale is frequently narrow." Davenport& Murray, supra note 20, at 166.
24. The first version, which stands virtually unchanged today, was proposed in Preliminary Draft 2,

February 1970.

25. Hereinafter referred to as the "second sentence."

26. Hereinafter referred to as the "third sentence."

27. See Review Committee of Article 9 ofthe U.C.C, Final Report 246 ( 1 97 1 ) (discusses change ofname

and "new" debtors).

28. U.C.C. § 9-402(7) Official Cmt. 5. The intent of the section is to govern only the effectiveness of the

filing. "Obviously, the subsection does not undertake to state whether the old security agreement continues to

operate between the secured party and the party surviving the corporate change of the debtor." U.C.C. § 9-402

Official Cmt. 7. See PEB Study Group, supra note 2, at 143 ("Some courts have failed to recognize that § 9-402(7)

addresses only the question of the effectiveness of a filed financing statement and not the question of whether a

security interest attaches to particular property."). Therefore, application of this section necessarily assumes the

validity of an underlying security interest.

29. See, e.g., Corwin v. RCA Corp., 516 F.2d 24 (6th Cir. 1975) (applying Ohio law, which had yet to



1 994] RESOLVING PROBLEMS OF IDENTITY CHANGES 49

or intrafamily transfers."
30

Courts applying this approach classified internal postperfection

changes of a debtor into three categories: name changes, identity changes or intrafamily

transfers, and transfers to an unrelated party.

The identity approach interprets the language ofthe secondsentence ofsection 9-402(7)

as governing more than a simple name change;31 it also governs changes in the debtor's

corporate form or "identity."
32 When only the form of the entity changes, the postchange

debtor is not treated as a distinct and separate entity from the prechange debtor for purposes

ofArticle 9.
33

Under the identity approach, the thirdsentence is interpreted as applying only

adopt the revised U.C.C. § 9-402(7). However, the court made mention of the revised section in its analysis).

Corwin involved the creation and subsequent transfer collateral to a new corporate entity, Kittyhawk Television

Corp., by the original corporation, Kittyhawk Broadcasting Corp. The security agreement granted the secured party

a security interest in present collateral; the agreement did not contain an after-acquired property clause. Following

the transfer, the secured party failed to execute either a new security agreement or a financing statement showing

the name ofthe new corporation. The debtor subsequently filed for bankruptcy. The trustee sought to avoid the

security interest by arguing that the security interest did not survive the transfer. The court disagreed. In its

reasoning, the court disregarded the separate and distinct status of the corporations to hold that a name change had

taken place.

See also Houchen v. First Nat'! Bank of Pana, 445 F. Supp. 665 (S.D. III. 1977). Houchen involved a bank

loan to individual debtors for the purpose of starting a business. The bank took a security interest in the fixtures,

equipment, inventory and after-acquired property of the business. After receiving the loan, the debtors transferred

all of the business assets to a corporation, Taylorville Eisner Agency, Inc., which they had previously formed.

Thereafter, the corporation assumed the debt of the individual debtors and ran the business.

When the debtor filed voluntary bankruptcy two years later, none ofthe merchandise and inventory held for

sale was present at the time ofthe transfer of assets to the corporation. The corporate debtor had not signed a new

security agreement, nor had the bank filed a new or amended financing statement. The bankruptcy court held that

a failure to file an amended financing statement made the bank unsecured as to collateral acquired by the debtor

more than four months after the transfer. The district court reversed. It read the definition of collateral in the third

sentence to mean all collateral subject to the security interest. The financing statement "remain[ed] effective with

respect to collateral transferred, which included any property to be acquired by the corporation which would fall

under the after-acquired property clause. " Id. at 669.

30. Claude Michael Stern, Note, Debtors' Name or Identity Changes: Distributing Benefits and Burdens

Under Article 9, 31 HASTINGS L.J. 959, 983 (1980).

3 1

.

"The court was probably correct in concluding that the transaction fell within the second sentence of

9-402(7) as a 'change in corporate structure.' There was only one debtor, not a sale of collateral to an independent

third party." Barkley Clark, The Law of Secured Transactions under the Uniform Commercial Code

S2-29 (2d ed. Supp. No. 2 1992) (referring to Bank ofthe West v. Commercial Credit Fin. Servs., Inc., 852 F.2d

1162 (9th Cir. 1988)).

32. Barkley Clark, a noted commentator on the U.C.C, agrees:

The better construction of § 9-402(7) is that incorporation of proprietorships should be treated in the

same way as name changes and mergers. This approach is consistent with the definition of

"organization" in § 1-201(28). The incorporation of a proprietorship easily fits within the phrase

"changes in name, identity or corporate structure." More important, there is no good policy

justification for treating these transaction under the third sentence of § 9-402(7).

/tf. at 2-1 16.

33. The separate status ofthe entity should be respected for matters outside ofthe secured transaction (i.e.,



50 INDIANA LAW REVIEW [Vol. 28:43

to transfers of "unrelated" parties.
34 Where a debtor undergoes a change in form with a

subsequent transfer of collateral to the successor entity, the identity approach treats the two

entities as so related that the third sentence does not apply. Rather, the effectiveness of the

financing statement is controlled by the second sentence}5

The Ninth Circuit in Bank of the West v. Commercial Credit Financial Services*
6

applied the identity approach to resolve the effect of a transfer of assets by a parent

corporation from one subsidiary to another. Bank ofthe West provided four million dollars

of financing to Allied, a wholly owned subsidiary of Boles World Trade Corp (BWTC),
secured by present and after-acquired inventory, accounts and proceeds ofAllied. Two years
after the Allied financing, Commercial Credit entered into account factoring financing with

respect to a beverage wholesaling business operated by Boles & Co., Inc. (BCI), another
wholly owned subsidiary of BWTC. Shortly thereafter, BWTC transferred the beverage
business from BCI to Allied. Bank ofthe West asserted that it had priority over Commercial
Credit for the accounts generated by the beverage business after its transfer from BCI to

Allied. The court held that the transfer was a "change in corporate structure ofthe debtor."37

Therefore, the Continental financing statement continued to be effective as to collateral

acquired by Allied for a minimum of four months. The court reached this conclusion by
interpreting the term "debtor" in the second sentence "to mean not only the transferor, but

also to include the transferee."
38

The identity approach is supported by practical and sound policy. The approach is

oriented toward practicality. When only a change in corporate form has occurred, the
prechange debtor's clients and creditors perceive the pre and postchange entities as the same

organization. As a result, the change in form cannot practically be said to have created a

completely different entity. Furthermore, the identity approach frustrates attempts ofdebtors

to make unsecure an otherwise valid security interest in after-acquired property by changing

corporate form. The Ninth Circuit recognized this policy in In re West Coast Food Sales,

Inc.
39

In In Re West Coast, the court refused to allow "a debtor ... to evade the obligations

of a validly executed security agreement by the simple expedient of an alteration in its

business structure."
40

As currently advocated and applied, the identity approach has two problems that render

it ineffective in resolving the effect of a change in form on a prechange security interest in

after-acquired property: (1) it fails to provide a reliable and generally applicable means for

parties and courts to determine whether an identity change or a third party transfer has

the extent of a shareholder's liability on a corporate debt). See infra note 44 and accompanying text.

34. Bank ofthe West, 852 F.2d at 1 169.

3 5 . "Under the facts ofthis case and in order to effectuate the purposes ofthe Uniform Commercial Code,

we think it is proper to disregard the form of the transaction and instead to focus upon its substance." Corwin v.

RCA Corp., 516 F.2d 24, 27 (6th Cir. 1975) (transfer of substantially all of corporation's assets to newly formed

corporation). See supra note 29.

36. 852 F.2d 1162(1988).

37. /</. atll69.

38. Id. at 1170.

39. 637 F.2d 707 (9th Cir. 1981).

40. Id. at 709.



1 994] RESOLVING PROBLEMS OF IDENTITY CHANGES 5

1

occurred; and (2) it fails to address the issue ofwhether a prechange security interest may be

properly asserted against the postchange debtor.

Courts that have applied the identity approach have failed to set forth a consistent set of

factors on which to base future determinations ofwhether a transaction is an identity change

or a transfer to an unrelated party. Furthermore, the application ofthe factors that have been

enunciated has been haphazard. Courts have used a variety of factors and a fact-centered

analysis, incapable of general application, to determine that particular transactions result in

identity changes.

Two factors that several courts have considered are the ownership and control of the
prechange and postchange debtors. Those factors were the focus ofthe court's reasoning in

In re Meyer-Midway,
4]
where the court found that the transaction constituted an identity

change. The case involved the merger oftwo separate corporations, Meyer and Midway, into

a newly formed corporation, Meyer-Midway, Inc. The court held the original financing

statement sufficient to overcome the bankruptcy trustee's challenge to the after-acquired

security interest in accounts receivable generated within four months after the merger.42 In

Corwin v. RCA Corp.,43 the Sixth Circuit focused on the ownership and control of the
original and successor entities.

44
That court placed emphasis on the fact that the original and

successor entities occupied the same location in making its determination that the transfer

of assets should be governed by the second sentence.
45

The court in In re Cohutta Mills
46

focused on ownership and control, as well as other

factors, to determine that a prechange and postchange debtor were "related" parties. The

original debtor, King's Tuft, Inc., procured a loan from a local bank that was secured by a

note on the debtor's equipment, machinery, and after-acquired property. The bank filed a

proper financing statement, perfecting the security interest. Two years after the filing, the
debtor formed a new corporation, Cohutta Mills, Inc., and transferred King's Tuft's assets

to that corporation. The court noted that the two corporations had the same president, the

successor corporation followed in the same line of business as King's Tuft, at the same

location, using the same machinery and equipment. As a result, the court stated that "[r]ather

than merely a transfer of assets between two corporations, King's Tuft essentially became

Cohutta Mills as a result of the transaction."
47

Although courts have considered various

factors, they have failed to provide a coherent rule or test for applying their approach.

A second problem ofthe "identity" approach is the assumption that a prechange security
interest may be asserted against a postchange entity. The courts applying the identity

41

.

65 B.R. 437 (Bankr. N.D. 111. 1986). But see In re Paramount Int'l v. First Midwest Bank, 154 B.R.

712 (Bankr. N.D. 111. 1993) (The court declined to follow Meyer-Midway, but the issue of the case was whether

the use of the debtor's trade name on the financing statement was sufficient to perfect a security interest in the

collateral.).

42. In dicta, the court recognized that a new filing would be required by the end of the four month period

because the name ofthe successor entity rendered the financing statement seriously misleading. Meyer-Midway,

65 B.R. at 443.

43. 516F.2d24(6thCir. 1975).

44. Id. at 26.

45. Id. at 24.

46. 108 B.R. 815 (Bankr. N.D. Ga. 1989).

47. Id. at 820.



52 INDIANA LAW REVIEW [Vol. 28:43

approach have not confronted this issue. However, as critics of the identity approach

recognize, an issue exists as to whether the original security agreement is effective to create

a security interest in collateral acquired by the postchange entity after the transfer. On its
face, section 9-402(7) governs only the effectiveness of a financing statement; it does not

control the validity ofthe underlying security interest.
48 The validity ofa security interest is

governed by section 9-203(1), which requires that:

(a) the collateral is in the possession ofthe secured party pursuant to agreement, or

the debtor has signed a security agreement which contains a description of the

collateral and in addition, when the security interest covers crops growing or to be

grown or timber to be cut, a description ofthe land concerned.49

The result ofa change in form is the transfer ofthe security obligation from one entity

to a different legal entity. Because the two entities are legally distinct, the signature of the

original debtor would seem insufficient to qualify as the "signature" ofthe postchange debtor

for purposes of section 9-203(1 )(a).
50

Therefore, the prechange security agreement would

not extend to cover collateral acquired after the change of form. Because the secured party

would not have a security interest in the collateral, the identity language of section 9-402(7)

in itself would be insufficient to subject that collateral to the prechange security interest.

C. The Burke Approach

In response to the above two problems, the critics ofthe identity approach developed

a new approach.51 It is authored by William Burke, Chairman of the Article 9 Study
Committee and is based upon a strict, albeit narrow, interpretation ofthe relevant language

of the Code. It attempts to provide a bright-line test for determining the effect of a

postperfection change in form on a prechange security interest.

The Burke approach argues that section 9-402(7) governs two types of postperfection

changes. The first category includes simple name changes and mergers, which leave the

original debtor as the successor entity. The narrowness of the approach is based on a

48. "[T]he language of § 9-402(7) cannot properly be construed to dispense with the specific requirements

of § 9-203(1)." Bank of Yellville v. Scott, 1 13 B.R. 516, 522 (Bankr. W.D. Ark. 1990); see also, U.C.C. § 9-402

Official Cmt. 7, discussed in supra note 15.

49. U.C.C. § 9-203(1 Xa)- The two other requirements for a valid security interest are not affected by a

change in form. They are that "value" has been given and that the debtor has rights in the collateral. U.C.C. § 9-

203(lXb),(c).

50. If this construction of"the debtor" is correct, the assumption that the security interest may be asserted

against a successor entity is invalid. That construction also would make invalid the reasoning ofcourts that applied

successors and assigns clauses to validate the security interest. Again, U.C.C. § 9-203 requires that "the debtor"

sign the security agreement. In the case ofa "successors and assigns" clause, the successor debtor has not "signed"

the "security agreement." Even though such a clause may be sufficient to enforce a general agreement against the

successor entity, it would be insufficient to meet the signature requirement for establishing a valid security interest

under the statute.

5 1

.

William M. Burke, The Duty to Refile Under Section 9-402(7) ofthe RevisedArticle 9, 35 Bus. Law.

1083 (1985). "However, [the identity approach] is a weak foundation upon which to build a refiling doctrine since

it offers no neutral principles upon which one can determine when a transfer will be honored and when it will be

disregarded." Id. at 1092.



1 994] RESOLVING PROBLEMS OF IDENTITY CHANGES 53

perception that the two references to "the debtor" in the second sentence "make it clear that

the section applies only to change ofname category cases."
52

In these situations, the second

sentence of section 9-402(7) governs and provides that the financing statement remains

effective to perfect collateral acquired within four months
53

after the change and will continue

to do so unless the change makes the financing statement seriously misleading.
54 The second

category of changes, resolved under the third sentence of section 9-402(7), includes all

transfers of collateral: those from a debtor to a third party, as well as when a debtor changes

corporate form and transfers the collateral from an original to a successor entity.
55

The court in Bank ofYellville v. Scott
56

applied the Burke approach to two individuals

who borrowed $185,000 from a local bank to purchase an audio/video business and

subsequently incorporated. Prior to incorporation, they executed a security agreement

granting the bank a security interest in all present and after-acquired property of the

business.
57 The bank filed a financing statement listing the individuals, as well as the

business, KC Audio Video Center ofCamden, as the debtors. During the following month,
the individuals formed a corporation and transferred all assets of the business to that

corporation, KC of Camden, Inc., in return for all but one share of the corporation's stock.
Shortly thereafter, the corporation entered into an agreement with Borg-Warner to finance

the corporation's purchase of additional inventory.
58

The bank did not become aware of the

debtor's incorporation until the following year. The bank did not take steps to execute a new

security agreement, nor did it file a new or amended financing statement.59 Borg-Warner

asserted that it had priority to the inventory it helped finance,
60
even though its financing

statement postdated the one filed by the bank and covered the same type of collateral. The

court used the Burke approach to find for Borg-Warner. It held that the original secured

party did not have a security interest in collateral acquired by the debtor after the

incorporation.
61

52. Id. at 1 095; see also Eldon H. Reiley, Guidebook to Security Interests in Personal Property

§ 3.07 (1994) ("While this sentence refers to changes other than name changes, it is not clear that it has any

meaningful application to any change other than a simple name change.").

53. This period will be the shorter of four months or the effective time remaining on the financing

statement. U.C.C. § 9-402, Official Cmt. 7.

54. The timeframe is the effective period of the financing statement. Id.

55. This is the position advocated by the Sixth Circuit. Bluegrass Ford-Mercury, Inc. v. Farmers Nat'l

Bank of Cynthiana, 942 F.2d 381 (6th Cir. 1991). The debtor sold a car dealership to a third party, who retained

a similar corporate name and remained at the same location. The court held that the transaction was governed by

the third sentence. The court placed emphasis on the "unrelated" ownership in reaching that result. Id. at 388.

56. 113 B.R. 516, (Bankr. W.D. Ark. 1990).

57. Id. at 518.

58. These items included stereo equipment and other property capable ofbeing identified by serial number.

Id.

59. Id. at 518-19.

60. The arrangement was such that Borg-Warner could not assert a purchase money security interest

override. See U.C.C. § 9-312(4).

61

.

Two factually similar bankruptcy cases reached the same result. See Northeastern Bank of Penn. v.

Spirit of the West, Inc. {In re Spirit of the West, Inc.), 164 B.R. 34 (Bankr. M.D. Pa. 1993); In re Just for Kids,

Inc., 150 B.R. 123 (Bankr. M.D. Pa. 1992).



54 INDIANA LAW REVIEW [Vol. 28:43

III. Comparing the Two Approaches

Prior to considering whether revitalization of the identity approach is possible through

use of the term organization, it must first be determined whether the identity approach

outcome warrants the effort.

One way of examining the relative merits of the two approaches is to consider the
practical effects of the different approaches on the participants involved in secured

transactions. This seems to be the most appropriate mechanism to test the effectiveness and

policy implications of the available approaches. After all, the Code is meant to provide

practical guidance. Manifestly, therefore, it would seem that the most practical approach

should be preferred. Five different parties feel the impact of either approach, and therefore

deserve consideration. These parties are: the original secured party, the prospective secured

party, unsecured and lien creditors of the successor entity, and the debtor.

A. The Original Secured Party

A change of form "is fraught with risks"62 and causes monitoring problems for the
original secured party. Practically speaking, a debtor can alter its form without significant

difficulty.
63 A transfer of assets from the original to the successor entity may be

accomplished by a minimal exchange of paper. The transferee may retain the debtor's
location, line of business, ownership, and name. Even a diligent secured party, policing the

debtor as to changes that may impair his security interest, would unlikely be able to discern

that a change of form has occurred.
64

Regardless ofthe secured party's expectations or the

security agreement, the approach taken by a court in resolving the situation will dictate

whether the secured party has a security interest in collateral acquired by the debtor after the

change in form.

The Burke approach provides that when a debtor changes its form the prechange

security interest will not extend to any collateral acquired after the change.
65 The burden on

a secured party is acutely felt, especially in cases of inventory or accounts receivable

62. Davenport & Murray, supra note 20, at 167.
63. For example, the incorporation of a proprietorship or partnership may only require the filing of a

Certificate of Incorporation in the proper government office.

64. A presently secured party could be required to monitor the secretary of state's office for recent

incorporations and mergers. Under either approach the secured party will monitor those filings, for as discussed

infra in note 108 and accompanying text, only a narrowly qualified transaction should be treated as an identity

change. Qualified transactions include cases with characteristics that make it difficult for a secured party to learn

of a change that threatens his security interest. In situations not covered, the secured party will encounter

characteristics that should put him on notice to check other sources of information to determine whether a change

has occurred that would threaten his security interest. At that point, he would monitor the recent filings in the

secretary of state's office. A requirement that the secured party constantly monitor those filings makes the balance

of his duties onerous and is devoid of policy justification. See Clark, supra note 31, at 2-1 1 1.

65. The Ninth Circuit expressed strong antipathy to that result: "To hold otherwise would permit debtors

to decide which sentence of section 9-402(7) applies merely by choosing an advantageous formal arrangement for

the desired transaction." Bank of the West v. Commercial Credit Fin. Servs., 852 F.2d 1 162, 1171 (1988).



1 994] RESOLVING PROBLEMS OF IDENTITY CHANGES 55

financing, where present collateral
66

will be unavailable to satisfy the debtor's obligation.

Without that collateral, the likelihood that the obligation will be fully secured decreases,
67

which frustrates the fundamental purpose ofthe secured transaction—to provide security for
credit extended.

68
Part of the Study Committee recognized the problems involved with

placing such a strict monitoring burden on presently secured parties: "[the Burke approach]

would unduly prejudice secured parties whose debtors engage in corporate or similar

restructurings without their knowledge or consent [E]ven a diligent secured party may

be unaware that individual debtors have incorporated their business into a new debtor . . ,"69

The secured party could add a clause to the security agreement requiring the debtor to inform

the secured party of an impending change of form, but such contractual rights have little

value when most needed—bankruptcy.70 The holder of mere contract rights stands as an
unsecured creditor.

71
Therefore, the holder takes last from what is almost always an

insufficient pool of assets.
72

The "identity" approach, on the other hand, provides diligent prechange secured parties

a reasonable period of time in which to discover and resolve the potentially threatening

situation. Where the debtor in the course ofthe change in form also changes its name, so that

the financing statement becomes seriously misleading, the original secured party has four

months in which to file a new financing statement.73 In that case, the Code expressly allows

a secured party to refile under the name of the postchange entity, without requiring the

consent ofthe debtor.
74 Where the name remains the same or the change does not render the

financing statement seriously misleading, the collateral remains perfected until the end ofthe

effectiveness of the financing statement.
75

66. Present collateral is transferred by the original to the successor entity and is protected under the third

sentence. As discussed earlier, particular items of those types of collateral are generally held by the debtor for a

limited time before they are sold and replaced with other similar items. See U.C.C. § 9-204.

67. Although a proceeds claim under § 9-306 is available, the tracing requirements make it difficult to use.

68. The secured transaction provides the secured party the stability to make advances. Allowing the debtor

to cut off the security interest undermines this stability. See supra notes 5-1 1 and accompanying text.

69. PEB Study Group, supra note 2, at 144.

70. "It is often said that the acid test of a security interest is in the debtor's bankruptcy." Henson, supra

note 18, at 258. The trustee in bankruptcy may successfully avoid (i.e., render the transaction unsecured) where the

security interest is unperfected. 1 1 U.S.C. § 545 (1988). In bankruptcy, any prepetition contract claim the secured

party may have against the debtor is treated as an unsecured obligation. Unsecured obligations receive pro rata

satisfaction, to the extent of their claim, from the remains ofthe debtor's estate after administrative expenses and

priority claims are satisfied. 1 1 U.S.C. §§ 507(a), 726(a), (b) (1988).

71. 11 U.S.C. §502(1988).

72. 11 U.S.C. §726(1988).

73. Four months is a more reasonable period oftime in which to expect a present secured party to monitor

its debtor closely enough to discover a change of form accompanied by a name change. Regardless of theoretical

reasonableness, the drafters ofthe Code established four months as a reasonable time for prospective and current

secured parties to become aware of changes of name and form. See infra note 82 and accompanying text.

74. The secured party may refile a financing statement without the debtor's consent in the case ofa change

in name, identity, or corporate structure. See U.C.C. § 9-402(6).

75. Such a result properly recognizes the difficulty a secured party would have in determining such a

change during his monitoring.



56 INDIANA LAW REVIEW [Vol. 28:43

B. The Prospective Secured Parties

Extending the current secured party's security interest a minimum of four months after
the identity change does not unduly burden prospective secured parties. By providing a four
month "safe"

76
period for present secured parties following a simple name change, the Code

has already "allocated the burden of discovering" changes in the debtor "to later lenders."
77

Furthermore, prospective secured parties already have a clear duty to inquire into the prior

ownership of collateral
78
and as a result, they are "better situated to reduce or eliminate the

risk of loss

—

e.g., by inquiring into the new debtor's corporate history and the source of its

property."
79

Requiring prospective secured parties to search the recent
80
corporate history ofa debtor

would not be inconsistent with the already existing burden.
81

It is implicitly included in the

prospective secured party's current duty to inquire into the background ofthe debtor four

months prior to a contemplated transaction.
82

In addition, the duty of inquiry is not limited

to the filing system, and therefore may include state incorporation records. The court in In
re Pasco Sales CoP recognized that a prospective secured party should not rely on the filing
system as the sole source of information, but should instead treat it as "a starting point for

investigation which will result in fair warning concerning the transaction contemplated."
84

Placing the burden ofsearching state incorporation records on the prospective secured party

is also consistent with section 9-401 (3),
85
which generally places the burden of changes that

the present secured party cannot control upon the prospective secured party.
86

Finally, courts

76. Any collateral acquired within that period is subject to the financing statement, regardless of whether

the change makes the previous filing seriously misleading. U.C.C. § 9-402 Official Cmt. 7.

77. Bank of the West v. Commercial Credit Fin. Servs., 852 F.2d 1 162, 1 173 (9th Cir. 1988).

78. "[A]ny person searching the condition ofthe ownership ofa debtor must make inquiry as to the debtor's

source oftitle, and must search in the name ofa former owner ifcircumstances seem to require it." U.C.C. § 9-402

Official Cmt. 8; see also Peter F. Coogan, The New UCC Article 9, 86 Harv. L. Rev. 477, 526 (1973).

79. PEB Study Group, supra note 2, at 145.

80. "Recent" includes the four months prior to the anticipated transaction. If the change occurred prior

to that period and an amended financing statement has not been filed, the subsequent secured party would gain

priority over the unperfected previous security interest. Reiley, supra note 52, at 3.07[3],

8 1

.

Some courts disagree: "To require a searcher to determine to what extent a debtor entity is owned or

controlled by owners of the transferor debtor would render the filing system of Article 9 unreliable. The potential

structural variations ofthe new debtor are infinite." Bank of Yellville v. Scott, 1 13 B.R. 516, 522-23 (Bankr. W.D.

Ark. 1990).

82. This duty flows from the second sentence, which implicitly requires prospective secured parties to

search under prior names of the debtor.

83. 354 N.Y.S.2d 402 (1974), rev 'don other grounds, 52 N.Y.S.2d 42 (1976).

84. Id. at 405 (quoting Beneficial Fin. Co. ofN.Y. v. Kurland Cadillac-Oldsmobile, Inc., 32 A.2d 643,

645(1969)).

85. "A filing which is made in the proper place in this state continues effective even though the debtor's

residence or place of business or the location of the collateral or its use, whichever controlled the original filing, is

thereafter changed." U.C.C. § 9-401(3).

86. "[I]t was not intended . . . that interested parties be completely absolved from any inquiry as to the past

history of the debtor." In re Pasco Sales Co., 354 N.Y.S.2d 402, 405 (1974).



1 994] RESOLVING PROBLEMS OF IDENTITY CHANGES 57

that have considered the effect ofa change of form on potential and present secured parties

are more comfortable in placing the burden of searching recent corporate history on

prospective secured parties:

We decline to adopt the position advocated by the trustee . . . that a creditor must
file a new financing statement whenever a debtor changes from a proprietorship or

partnership to a corporation Section 9-402(7) requires a new statement only

when the change renders the existing financial statement "seriously misleading".

. . . Since ... we find that a creditor doing a lien search would have been on actual

notice of . . . [the] security interest and the identity ofthe debtor despite the bank's

failure to completely observe the "corporate technicalities," it would be

inappropriate to hold that a change in the entity ... is seriously misleading as a

matter oflaw A flat rule that a new financing statement must be filed whenever
a debtor incorporates might be easier to apply, but that standard is not supported

by a plain reading of the statute or the existing law in the jurisdiction.
87

C. The Unsecured Creditors

The rights ofunsecured creditors are also affected by the approach applied.88 Unsecured

creditors are interested in the validity ofa security interest to the extent that collateral subject

to an invalid security interest is available to satisfy their claims in bankruptcy.
89 When the

Burke approach is applied, unsecured creditors benefit from the generally larger amount of

assets available. When the identity approach is applied, the number ofavailable estate assets
decreases as the assets are made subject to the original, prechange security interest.90

Allowing unsecured creditors access to collateral acquired after the change is

illegitimate. The original secured party injected value into the debtor based upon the

assumption that the after-acquired collateral would provide security for the debt. The

unsecured creditor would unfairly take advantage of that value and the expectation of the

secured party, undermined by an action ofthe debtor, where that value would not have been

present had the expectation ofthe secured party been upheld or the secured transaction not

been executed. Application of the identity approach deprives unsecured creditors of this

windfall and favors the secured party who provided the debtor with the means to acquire the

collateral or operate the enterprise. The unsecured creditors who would take advantage of
the after-acquired collateral are not treated unfairly when their access is denied.

D. The Lien Creditors

The treatment of lien orjudgement creditors91 is similar to that of unsecured creditors;

when the identity approach is applied they will have access to less collateral in bankruptcy

than under the Burke approach. The justification of denying unsecured creditors a windfall

in bankruptcy applies with equal weight to lien creditors.

87. In re Darling Lumber, Inc. 56 B.R. 669, 674 (Bankr. E.D. Mich. 1986).

88. Knippenburg, supra note 5, at 65.

89. An invalid security interest increases the pro rata proportion of satisfaction the unsecured creditors

would receive in a Chapter 7 bankruptcy proceeding. See 1 1 U.S.C. §§ 544(a), 558 (1988).

90. Knippenburg, supra note 5, at 65.

91

.

Lien orjudgment creditors are entities that have received a state court judgment. U.C.C. § 9-301(3).



58 INDIANA LAW REVIEW [Vol. 28:43

Lien creditors do have an advantage over unsecured creditors under the identity

approach; outside of bankruptcy, lien creditors have priority over unperfected security

interests.
92 Under the identity approach, the secured party has four months in which to refile

or amend a financing statement made seriously misleading by the change of form. Failure

to refile or amend results in the security interest becoming unperfected as to collateral

acquired four months after the change. The lien creditor can satisfy its judgment with

unperfected collateral, whereas an unsecured party takes subject to the security interest,

regardless of whether it is perfected.
93

E. The Debtor

A debtor subject to a valid security interest in its after-acquired property has only one
interest in which approach is applied to its change of form. The debtor wants to avoid the

security interest. However, the original security interest was the result ofa bargain between

the debtor and the secured party, and the debtor should be bound by that agreement.

Ifthe Burke approach is applied, the debtor's collateral will no longer be subject to the

original, bargained-for security interest. Instead, the debtor will be free to induce a new

secured party to provide credit by offering that party the primary security interest in the

collateral. The effect of the Burke approach is to provide the debtor with a windfall. The

amount ofcredit provided to the debtor by the original secured party was determined, at least

in part, by the amount of collateral that would secure the debt. If less collateral were

available at the time of lending, only the credit capable of being secured with that collateral

would likely have been extended. Under the Burke approach, the debtor removes the

bargained for collateral from the original credit relationship while still retaining the original

amount of credit. Furthermore, that collateral may be used to induce other secured parties

to extend credit. In that sense, the debtor can "have its cake and eat it too."

Therefore, the Burke approach provides a debtor with the incentive to undergo a change

of form any time it wishes to increase available credit. This incentive is detrimental to the

original secured party. The problems inherent in this incentive provide significant policy

support for the identity approach.

The identity approach precludes a debtor from acting unilaterally to sever a prechange

security interest in after-acquired collateral. Instead, the debtor is held to the original

bargain. Under the identity approach, the debtor is no worse off than it would be under its

bargained-for position. The debtor is not permitted to obtain double the credit for the same

collateral.

The results reached by the identity approach, in contrast to those ofthe Burke approach,

are manifestly supported by policy, as well as by actual commercial practice and expectation.

A debtor that changes its form should not be able to cut off a previously valid security
interest in after-acquired property.

Only secured parties who are diligent in their efforts to police debtors may take

advantage of the identity approach. Failure to file an amended financing statement within

four months after a change in form that caused the financing statement to become seriously

misleading causes the security interest to become unperfected. At that point, any prospective

secured party that lends on collateral will have a superior interest in the after-acquired

92. U.C.C. § 9-301(1 )(b).

93. Id. See also Henry J. Bailey III, Secured Transactions 233-34 (3d. ed. 1933).



1 994] RESOLVING PROBLEMS OF IDENTITY CHANGES 59

collateral. Ofcourse, ifthe change ofform did not make the financing statement misleading,

the less than diligent secured party will pay the price for its lax search. This analysis

concludes that the identity approach is preferable to the Burke approach. But it must

overcome two problems in order for the identity approach to be generally applicable.

IV. Substance Over Form: An "Organizational" Interpretation

The two problems ofthe identity approach are a failure to adequately address the effect

of a change of form on the validity of the prechange security agreement, and a failure to

provide a clear means of distinguishing between identity changes and third party transfers.

While avoiding these two problems, the benefits of the identity approach can be realized by

focusing on whether the pre and postchange entities are the same "organization." An entity
that is the same organization both pre and postchange should be treated as having undergone

an internal change governed by the second sentence.

This approach is supported by the policies underlying the U.C.C. The legal form that

an entity takes or the fact that an entity changes its form does not affect its treatment under

the Code. The U.C.C. is limited to governing commercial relationships. The policies that

justify distinguishing entities by their legal form do not apply in the commercial context.
94

The rights and responsibilities that the U.C.C. articulates do not, nor should they, vary with

the type of entity involved. For instance, when a seller of goods who breached a duty to a
buyer is found liable, the legal form ofthe seller may play an important role in satisfying the

judgment. However, the seller's form does not control the nature or extent of the duty that

it breached. Issues internal to the U.C.C. are answered regardless of an entity's legal form.

Resolution of those issues depends solely upon the role that the entity plays in the

relationship.

The Code has codified this understanding through the expansive definition of

"organization," which provides: "'Organization' includes a corporation, government or

governmental subdivision or agency, business trust, estate, trust, partnership or association,

two or more persons having a joint or common interest, or any other legal or commercial
entity."

95

94. Traditionally, various forms of legal entities have been assigned different characteristics, which impact

their relationships with other entities. The doctrine which has grown up to justify treating the various forms of

entities differently is limited by the reasoning upon which it is based. For example, the separate existence of a

corporation from its founders was recognized on the ground that those founders should be able to limit their liability

in order to promote investment. Traditional doctrine provides, therefore, that after a proprietorship incorporates,

the corporation should be treated as a separate and distinct entity from the proprietor. See Harry G. Henn & John
R. Alexander, Laws of Corporations 23-35 (3d ed. 1983). The law recognizes the flexible nature of business

entities in general. A change in the ownership of a corporation does not change the responsibilities or existence of

the corporation. Donnell v. Herring-Hall-Marvin Safe Co., 208 U.S. 267 (1908); Old Dominion Copper Mining

& Smelting Co. v. Lewisohn, 210 U.S. 206 (1908). Furthermore, where control of a corporation changes, for
example through a wholesale replacement ofthe board of directors, the corporation remains the same entity. The

justification of limited liability does not extend to treating the proprietorship and corporation differently with respect

to their obligations under a security agreement.

95. U.C.C. § 1 -20 1 (28). The definition has not changed since adopted in the May 1 949 draft, where it was

codified as § 1-201(23).



60 INDIANA LAW REVIEW [Vol. 28:43

By creating an expansive definition of "organization," the drafters created a means for
disregarding the legal form of entities for purposes of determining their rights and

responsibilities within the U.C.C.
96 The end result ofthis effort is that the substance,rather

than the form of the entity identifies an "organization" for the purposes of the U.C.C.

generally, and Article 9 specifically. Ifthe entity changes form, but its substance remains the

same, it remains the same organization.

The definition and purpose of the term "organization" has value in interpreting the

language of the applicable sections of Article 9 in relation to the U.C.C.'s purposes as a

whole. The term "organization" is listed in the second sentence as one of the entities that

may undergo an "identity change." The placement of that expansive word within the
sentence that allows for the continued effectiveness ofthe financing statement provides the

very mechanism by which to apply the substance-based concept ofthe Code to the effect of

changes of corporate form on a pre-change security interest in after-acquired property.

Because the U.C.C. is concerned with the role of an entity and not its legal form, the

substance rather than the form of an entity should determine the validity of the security

interest and financing statement.

Consideration ofthe definition of"organization" also serves to undermine and discredit

a major statutory interpretation argument ofthe Burke approach. That approach concludes

that the second sentence does not apply to changes in form because those changes involve

more than one debtor and the sentence only states "the debtor." Upon review, however, the

definition of debtor is an aid to the identity approach. The definition of organization is

included within the definition of "debtor." The definition ofdebtor includes: "the person

who owes payment or other performance of the obligation secured."97 The definition of
person ties "debtor" and "organization" together: "Person" is defined to include an

"individual or an organization."
98

Therefore, as long as an entity remains the same

organization, it remains the same debtor.

The Comment ofthe Article 9 Review Committee supports an interpretation ofthe word

"debtor" as focusing on the substance ofan organization and not its form. That Comment
makes clear that the Committee perceived only two categories of debtors: the same debtors

and new debtors.99 Given the purposes of the Code, the most plausible meaning for "new

debtor" is a substantively different organization.

The interpretation that a debtor does not become a different debtor as a result of a

change in form is supported by consideration ofwhat such a change resembles. Furthermore,

the expectation of the parties supports treating a debtor which has undergone a change of

form as the same debtor. One commentator commented on both of these arguments:

96. The definition of "organization" is expansive because it includes "every type of entity or association,

excluding an individual, acting as such." U.C.C. § 1-201 Official Cmt. 28. The exclusion ofan "individual, acting

as such" from the definition does not have an impact on the purpose of this inquiry, since an individual can only

undergo a name change. Any other type of action by an individual {i.e. proprietorship) would qualify the individual

for treatment as an organization.

97. U.C.C. §9-105(1 )(d).

98. U.C.C. § 1-201(30).

99. Final Report, supra note 27, at 244.



1 994] RESOLVING PROBLEMS OF IDENTITY CHANGES 6

1

[C]hanges in business form seem more analogous to name changes. If a debtor

changes his name, the creditor continues to deal with the same person. So too, if

the debtor incorporates, although his legal form has changed, the ultimate players

remain the same. . . . Although at law, each entity is an entity unto itself and

recognized at law, we all know the law indulges in legal fictions. If the creditor is

still talking to, working with and loaning money to the same people, isn't the

change in business form like a change in name?100

In addition, at least one court has properly criticized the argument that a pre and postchange

debtor are separate and distinct: "[T]his reasoning assumes two debtors though factually

there is only one."
101

By construing "organization" to focus on the substance of the entity and not its legal

form, the original and successor entities may be regarded as the same organization and

therefore the same debtor. The expectations of commercial parties, discussed above, are

affirmed.
102

Finally, a plain reading of section 9-402(7) in light of the substance-based

interpretation of the above definitions leads to the conclusion that where an entity changes

form, but not substance, the change should be governed by the second sentence.

A. Solution to the Attachment Problem

Construing "organization" to include both the pre and postchange entities also provides

a solution to the attachment problem of the identity approach. As discussed above, an

organization that merely undergoes a change in corporate form remains the same debtor.

Because the pre and postchange debtors are the same debtor, the signature of the prechange

debtor will qualify as the signature ofthe postchange debtor. Consequently, that prechange

signature will remain effective to maintain the validity of the original security agreement

against the postchange entity. Therefore, the security interest will attach to collateral

acquired after the change by the postchange entity.

B. Factors on Which to Base the Same "Organization" Determination

The issue ofwhether a change ofform or third-party transfer has occurred is focused on

whether the pre and postchange entities are the same organization. Ifthey are not, then the

postchange debtor is a "different" debtor and a third-party transfer has occurred.

The last step in setting up this new interpretation in support ofthe identity approach is

providing a generally applicable method for determining when a transaction involves the

same or a different organization. More practically, this last step requires a decision as to

whether the transaction and the resulting effect upon the security interest should be governed

by the second ox third sentence of section 9-402(7).

Critics ofthe identity approach emphasize that such an approach fails to provide a sound

basis for a notice system. "[The identity approach] is a weak foundation on which to build

a refiling doctrine since it offers no neutral principles upon which one can determine when

1 00. 1 UCC Serv. (MB) Sec 6. 1 0[5], at 6-2 1 8.
101. First Agri Services v. Kahl, 385 N.W.2d 191, 193 n.5 (Wis. Ct. App. 1986) (citations omitted).

102. According to the expectations of the parties, a successor entity which maintains many of the same

essential characteristics as the original entity acts in the capacity as that debtor. In some instances, the similarities

may be so pronounced that a secured party is unaware that any change has occurred.



62 INDIANA LAW REVIEW [Vol. 28:43

a transfer will be honored and when it will be disregarded." 103 Unfortunately, prior to this
point, those critics were correct. The identity approach lacked statutory support and was

applied haphazardly, with no court nor commentator proposing a generally applicable

analysis that was both reliable and practical. The following approach meets that goal.

The focus of the inquiry is the essential characteristics of an "organization."

Additionally, the different traits ofan organization that may impact the efficacy ofthe notice
filing system should be considered. The two major considerations of the Article 9 filing

system are: first, to provide notice to prospective secured parties of an existing security

interest; and second, to ensure that the duty ofthe present secured party to protect its security

interest by monitoring changes in the debtor is not onerous. 104

/. Ownership and Control.—At first glance, there seems to be an essential and
distinguishing trait ofan organization: its membership. However, defining an organization

by its whole membership may be painting with too broad a brush. It may not be useful for
definitional and practical purposes to include the organization's receptionist and janitorial

staff as part of its membership. Instead, the proper focus ofthe membership inquiry is those

individuals most deeply involved in the significant business activity ofthe organization; those

individuals or entities that act as owners and those that are in control or act as managers.

Therefore, part of the analysis must focus on the ownership and control of the entity

immediately prior to and after the change to determine whether the postchange entity is the

same organization.

Focusing on the elements ofownership and control of the pre and postchange entities

to determine whether an identity change has occurred is supported by one ofthe main reasons

the identity approach is preferred to the Burke approach. The identity approach blocks a

debtor from cutting off a valid security interest in after-acquired property by altering its

corporate form. An effort aimed at avoiding such activity should focus on the typical
characteristics of such a debtor. Generally, an organization attempting to circumvent a

security interest maintains the same ownership and control throughout the change. If the

ownership and control are different after a change, then the likelihood that the transaction

was a bona fide transfer to a third party increases. It follows that the greater the similarity

in ownership and control, pre and postchange, the greater the likelihood that an identity

change has occurred.
105

Looking to the ownership and control ofthe debtor to determine whether an identity

change has occurred is also supported by practical considerations. An important part of a
secured transaction is the individual or individuals who form the relationship between the

secured party and debtor. Ifthe individuals who comprise the debtor are the same before and

after the change, a secured party is less likely to become aware of a change affecting his

103. Burke, supra note 5 1 , at 1092.

104. U.C.C. § 9-402 Official Cmt. 2.

105. Courts have previously relied on ownership and control in finding that a transaction resulted in an

identity change. For example, the Ninth Circuit focused on ownership of the pre and postchange debtor to hold:

"We conclude as a matter oflaw that the security agreement executed by the proprietorship continued to be effective

as to the accounts receivable generated by the corporation after the change in entity status." Towers v. B.J. Holmes

Sales Co., 637 F.2d 707, 709 (1981). See also Cohutta Mills v. Small Business Admin., 108 B.R. 815 (Bankr.

N.D. Ga. 1989), discussed supra at notes 46-47.



1 994] RESOLVING PROBLEMS OF IDENTITY CHANGES 63

security interest. Furthermore, the presence of the same people in the pre and postchange

entity provides prospective secured parties with the resources to learn about prior forms of

the entity and any liens against its property.

2. Line ofBusiness and Location.—The reasoning which places importance on the
ownership and control of the pre and postchange entities extends to place importance on

whether a debtor maintains the same line of business and the same location. Both

considerations may act to mislead current secured parties as to identity or offer prospective

leads to prospective secured parties searching for prior liens. For instance, where the

prechange entity stays in the same location, a present secured party would probably not

realize that a change in form had occurred. It is unlikely that a transfer of assets to an entity

located in the same location as the transferor was a transfer to an unrelated party.

Additionally, an entity that merely changes form would probably continue in the same line

of business. Adding the pre and postchange entities' line of business to the analysis offers

an additional factor that therefore improves the accuracy and certainty of the approach.
106

Application of these factors without guidance raises two problems. First, it fails to

provide parties with an understanding ofwhat consequences they may expect from changes

ofform. Second, it provides little guidance to courts applying the approach. This results in

inconsistent opinions and fact-sensitive deliberations. A clear rule ofgeneral application that
commercial actors are capable of following is preferable. Therefore, the analysis of the

identity approach should be structured and limited to considering relevant factors in a way

that provides clear and consistent results. The inquiry should be limited to comparing the

four factors listed above immediately prior to and following the transfer to the postchange

entity.
107

Where the four factors are identical immediately pre and postchange, the transaction

should be treated as an identity change. The four factors must be essentially identical,

otherwise the certainty of the approach is undermined. Where the debtor has changed legal

form in an attempt to circumvent the original security interest, minor dissimilarities may be

overlooked. Courts must keep in mind that the more the factors are dissimilar and they use

their discretion to find an identity change, the greater effect the ruling will have on

undermining the efficiency ofthe notice filing system and the stability ofcommercial conduct

generally.
108 As a result, judicial discretion should be used sparingly.

106. The more factors available to courts in determining whether an identity change has occurred, the more

precise and clear the analysis provided by the courts. The clearer the analysis, the more commercial parties are able

to forecast the results and consequences of their conduct, and plan accordingly.

107. The relevant points in time are immediately before and after the actual change. Since all four of the

factors may change during the course ofan organization's existence, their value in this deliberation is at the time

ofthe transfer itself. The focus at this time causes the identity approach to arrive at a result with the same level of

certainty as the Burke approach. See Bluegrass Ford-Mercury v. Farmers Nat'l Bank of Cynthiana, 942 F.2d 381

(6th Cir. 1991).

108. Where all but one share of a successor corporation is owned by the same persons who owned the

original debtor, the change should be treated as an identity change. These facts were held to constitute a transfer to

an unrelated party in BankofYelhille v. Scott, 1 13 B.R 516 (Bankr. W.D. Ark. 1990) (decided under the Burke

approach).



64 INDIANA LAW REVIEW [Vol. 28:43

V. Proposed Legislative Response

Though the "organizational approach" may be used by courts under the current language
of the U.C.C., some legislative action is preferable. That action would ensure application

of the identity approach and the protection of current secured parties.

As shown above, actual revision of the text of the Uniform Commercial Code is not
necessary to apply the modified interpretation of the identity approach. However,

legislatures could adopt some variation of the following as an "Official Comment" to the
following sections to make clear their intent that the identity approach should be applied

where a pre and postchange entity are the same organization:

1-102(28) "organization":

An organization remains the same organization, notwithstanding a change in
corporate form, where all of the following four factors are substantially similar

immediately before and after the change in corporate form: ownership ofthe entity;

individuals that manage or control the entity; location of the entity's business or

offices; and the entity's line of business.

9-203(1 )(a):

A debtor that undergoes a change in corporate form remains the same debtor where
it is the same "organization" under section 1-201(28). As a result of being found

the same debtor, the pre-change signature of the debtor shall be effective to

continue the validity of the security agreement to collateral acquired after the

change.

9-402(7):

The second sentence of section 9-402(7) is intended to cover instances where a

debtor changes corporate form but remains the same "organization" under section

1-201(28). Where a change in form results in a different "organization," the

effectiveness ofthe financing statement is governed by the third sentence ofsection

9-402(7).

Conclusion

The different results that the identity approach and Burke approach reach on any given

set of facts provide a disruptive context for parties to predict the consequences of their

actions as well as for courts to resolve conflicts. A postperfection change in form has a large
impact upon the parties to a secured transaction, as well as to others affected by the status

ofthe security interest. The above discussion outlines a method for resolving postperfection

changes that provides courts with a statutorily valid means to enforce the expectations ofthe

parties in a way that promotes certainty.