By Paul Hodnefield, Esq.

A company’s customer list is often one of its most valuable assets.  Consequently, most businesses make every effort to protect their customer lists from disclosure to competitors.  Unfortunately, some businesses do not have the option of keeping their customer lists confidential.  Lenders engaged in factoring or that serve other highly-competitive niche markets not only cannot keep their customer lists confidential, they have to put them in the public record.

What these lenders have in common is that the UCC security interest is an essential component of nearly every transaction.  They rely on the security interest to manage the higher risk often associated with these transactions.  However, the benefits of a security interest come at a price.  The secured party must file a financing statement in the public record to make the security interest enforceable against the debtor’s other creditors.    

A filed financing statement provides the names of the debtor and secured party.  That information becomes public record and is then available to any interested party.  Enterprising competitors routinely take advantage of this situation by conducting UCC searches by the secured party’s name.  The results of these searches provide a ready-made list of the designated lender’s customers. 

Competitors use the secured party search results for marketing efforts aimed at the other lender’s customers.  The targeted lender is at a disadvantage because it ordinarily has to file its financing statement, wait for the filing office to index the record and then conduct a search to reflect before advancing funds.  This delay can give a diligent competitor enough time to identify the pending transaction, contact the debtor, and offer slightly better terms.  This strategy can end up costing lenders deals they thought were all but closed.

Competitive customer losses are by no means limited to pending transactions.  The results of a secured party search allow a competitor to conduct sustained marketing efforts aimed at taking away the other lender’s market share.     

To reduce the effect of competitive raids on customer lists, some lenders try to hide their UCC records by filing under trade names.  However, this does not entirely solve the problem.  The trade names are also public records, and competitors can easily identify and search under them.  Moreover, the secured party must incur ongoing costs to file and maintain trade names created for this purpose. 

Some lenders simply make up names for the secured party field on the financing statement.  These entirely fictitious secured party names are not registered as trade names and have no obvious connection to the actual secured party.  This approach often works for a short time.  However, competitors can usually identify the name before too long and tie it to the actual secured party.  Moreover, the use of entirely fictitious names invites challenges to the sufficiency of the record if the debtor defaults or files for bankruptcy. 

There really is no perfect method for a lender to completely hide its financing statements from competitors.  The ideal solution would not only prevent searches under the secured party’s name from disclosing filed UCC records, it would also raise to a prohibitive level the competitor’s transaction costs for reverse-engineering customer lists.  There is one other vital consideration.   Any solution must allow the lender to promptly receive any legitimate inquiries regarding the filed UCC record.

What many lenders do not realize is that UCC Article 9 provides the basis for such a solution.  To be sufficient under UCC Section 9-502(a)(2), a financing statement must provide the name of the secured party or representative of the secured party (emphasis added).  If the financing statement provides the name of a representative for the secured party, it need not indicate that capacity. 

A lender can use the name of a secured party representative on its financing statements to prevent searches on the actual secured party name from disclosing a full list of debtors.  Ideally, the representative would serve multiple lenders from different lending markets.  That would prevent searchers from connecting a debtor name to a particular secured party, even if they have the representative’s name.  It would also substantially dilute the value of a secured party search for lead-generation purposes.   

Due to the growing need to prevent competitive losses, CSC recently became the first company to offer representative services for lenders interested in protecting their customer lists from secured party UCC searches.  Our Secured Party Representative Service (“SPRS”) allows lenders to keep their name out of the UCC records without interfering with searches on the debtor name.  In addition, the SPRS service provides a prompt and streamlined communication channel for inquiries about filed records without disclosing the actual name of the secured party.

For more information about the SPRS service, please contact a CSC representative at (800) 927-9800.

Paul Hodnefield is Associate General Counsel for Corporation Service Company and a frequent speaker/writer on UCC search and filing issues.  Please feel free to contact him with questions or comments at phodnefi@cscinfo.com, or 800-927-9801, ext. 2375.