UCC Article 9 – Secured Transactions
- Article 9 applies to any transaction which is intended to create a security interest (a security interest is a type of property interest created by agreement or by operation of law over assets to secure payment of a debt) such as Office Equipment, fixtures, financed goods, farm equipment, heat pumps, documents, instruments, promissory notes, letters of credit, general intangibles, chattel paper or accounts and also to any sale of accounts or chattel paper.
WHAT IS A UCC?
- In a credit sale or a loan, the lender or creditor may demand collateral (securing the lender/creditor’s Interest) to ensure repayment from the debtor. In case of default, the lender which has secured their interest in specific collateral can take possession. Often tangible (anything that can be touched) or intangible property (something which a person or corporation can have ownership of and can transfer ownership to another person or corporation, but has no physical substance such as copyright, trademarks, patents etc.) of the debtor serves as security for an obligation, with the creditor acquiring a security interest in the debtor’s property.
- The security interest is Perfected by filing a financing statement in the public record at the state or county level. This filing is legal notice that the secured party has a legally protected interest in the personal property of the debtor. Perfection is extremely significant for achieving protection from third parties that also may have claims against the debtor, or in the collateral being used to secure the financial obligation.
- Conflicting security interests among secured parties are ranked according to priority in time of perfection. As a result, the secured party who perfects the security interest first, by filing a financing statement has priority to any secured party (parties) who filed at a later time.
INITIAL FINANCING STATEMENTS (UCC-1)
- A Financing Statement is a standardized form that a lender files with the state to secure their interest in collateral from a borrower.
- Financing Statements are effective for 5 years
- A Transmitting Utility – The asset bonded (surety) is the “energy” or the labor of the debtor. Thus the Debtor/Grantee became the “utility” for the “transmission” of energy, designating the debtor as a Transmitting Utility, an individual utility transmitting public and private debt. Transmitting Utility Filings have no expiration date.
- A manufactured-home transaction is a type of secured transaction which creates security interest in a manufactured home. A manufactured-home is used as primary security in a secured transaction. But a security interest will not vest in a manufactured-home if such home is held as an inventory. Manufactured Home filings are effective for 30 years.
- Public Finance Transaction means a secured transaction in connection with which debt securities are issued, and all or a portion of the securities have an initial stated maturity of at least 20 years. Public Finance Filings are effective for 30 years.
WHERE TO FILE INITIAL FINANCING STATEMENTS
- Financing Statements covering tangible property as collateral must be filed in the state(s) where the collateral is located.
- Financing Statement covering intangible property as collateral must be filed in the state of the debtor’s residence.
- Financing Statements that cover both tangible and intangible property should be filed both where the collateral is located and where the debtor resides.
- An Amendment is used to change or add to information that was previously filed on the Initial Financing Statement such as changing, adding or deleting a Debtor or Secured Party’s name and/or address and any collateral change such as adding, deleting, restating covered collateral or assigning collateral.
- A Continuation is used to extend the Original Financing Statement’s effectiveness for an additional five years. A continuation statement will prevent a previously filed financing statement from lapsing if the continuation is filed by the secured party within six months prior to the expiration date. (example: If an Initial Financing Statement was filed on June 1, 2015 and is due to expire on June 1, 2020 the Continuation needs to be filed between January 1, 2020 and before June 1, 2020 within that six month window before expiration so the initial filing does not expire. If an Original Financing Statement expires or lapses the lien I no longer perfected. The creditor could not challenge the lien in court.
- An Assignment is used to assign the rights or part of the rights to the collateral to another party.
- A Termination is filed when a debtor no longer has an outstanding secured obligation or commitment to make advances, incur obligations, or otherwise give value to a secured transaction. Another creditor searching public records will see that there is no longer a lien on our business assets.
INFORMATION STATEMENT (UCC-5)
- A person may file an Information Statement with respect to a record indexed under that person’s name if the person believes the record was inaccurate or wrongfully filed, or a person may file an Information Statement with respect to a record if the person is a Secured Party of record with respect to the financing statement to which the record relates and believes that the person that filed the record was not entitled to do so.
FEDERAL TAX LIENS
- A Federal Tax Lien is the government’s legal claim against your property when you neglect or fail to pay a tax debt. The lien protects the government’s interest in all your property, including real estate, personal property and financial assets.
- Federal law provides that the place for filing these liens is determined by the laws of the state in which the property is situated. Therefore, each state can determine the office in which federal tax liens are to be filed and indexed.
STATE TAX LIENS
- A State Tax Lien is a lien imposed as a result of failure to pay income taxes or other taxes.
- The majority of those states that do record state tax liens require filing only in a local office. The filing office most often is in the county where the property is located. Other states have state tax liens at both the Secretary of State and a local office.
- A Judgment Lien may be obtained after litigation where, based upon the judgment, a lien is placed on property in order to secure payment of a money judgment.
- Judgment liens are often indexed in the same office as state tax liens.
TIPS FOR PLACING SEARCH ORDERS
- If you are unsure where to search, start with the state of the debtor’s residence and the state(s) where the collateral might be located.
- Once you choose a state, always search the central filing office (usually the Secretary of State).
- Determine whether any county searches would be helpful. For most businesses, conducting a search in the county of the debtor’s residence is often a good practice.
- Where the party to be searched is involved in farming operations, a search in the county where the land is located may be beneficial.
- If the party conducting the search knows where any of the debtor’s collateral is located, searching in that county also may be of value.
- Since tax and judgment liens ordinarily attach to the debtor’s real property, a county search for those kinds of liens may prove helpful if conducted in the counties where the debtor owns land.
TIPS FOR UCC FILINGS
- Make sure all information is complete and correct when filing UCC’s. If the information is not complete or correct it will affect the Perfection of a UCC and the loss of Priority (example: misspellings, typos, missing information, etc.). If a UCC Filing is rejected for any reason you will lose the date of filing and will have to resubmit the filing once it is corrected on the date you get the corrected copy. By losing a filing date you can potentially allow another creditor to file against the debtor and their filing will Perfected and Priority goes to that creditor.
- Required information of a UCC-1 Financing Statement is as follows: The debtor’s legal individual name or business name, address, City, State, Postal Code and Country. Make sure if there are any additional debtors that they are listed accordingly with all of the necessary information as previously stated and using the proper addendums if necessary for additional debtors. The secured party’s name, address, City, State, Postal Code and Country. Also make sure if there are any additional secured parties that they are listed accordingly with all the necessary information and using the proper addendums for additional secured parties. The UCC-1 must include a collateral description.
- Required information of a UCC-3 is as follows:
The original financing statement number entered in 1a.
Name of the secured party on the initial financing statement in box 9
One of the boxes checked on the following:
Box 2 – Termination – A Termination is an Amendment. It does not affect the lapse date. The lapse date is when the original financing statement lapses in 5 years unless such filing is Continued.
Box 3 – Assignment – Box 7 of the form needs to be completed as well with Organization or Individual name, mailing address, City, State, Postal Code and Country.
Box 4 – Continuation – Must be filed within six months of the Initial Financing Statement lapsing or will result in a lapse and the lien is no longer perfected.
Box 5 Party Information Change – Check either the debtor or Secured Party being affected and then check one of the three boxes (Change, ADD, or delete) depending what is being done. Boxes 6 and/or 7 will be used in this circumstance.
Box 8 – Collateral Change – Please check the box on how the collateral is to be changed. (ADD, Delete, Restate or Assign). Provide a Collateral description of which action is to be taken.
- Required information of a UCC-5 Information Statement as follows:
Box 1 – Initial Financing Statement Number required
Box 2 – check one of the three boxes to indicate the claim made by the Information Statement.
Box 3 – Basis for claim of box checked in Item 2 needs to be completed
Box 4 – If this Information Statement relates to a record filed (or recorded) in a filing office described in Section 9-501(a)(1) provide the date and time on which the Initial Financing Statement identified in item 1a was filed (recorded).
Box 5 – Name of Authorizing Party – This name must be the same name as a Secured Party of record or the name under which the record is indexed.
UCC FILING MISTAKES
- If the debtor name is not the legal name by adding additional information or a DBA is added can cause the lien to be deemed ineffective because it may not be found. (example: “ABC, Inc., a Delaware corporation” which is adding additional information or ABC, Inc. D/B/A DEF, Inc. which is adding a DBA name) will be indexed exactly as it is presented and will not show up by searching the legal name.
- Filing in the wrong jurisdiction:
The proper central office in respect to personal property is the state where the debtor is located not by the debtor’s mailing address. A debtor who is an individual is located where they reside and a debtor that is a registered entity is located in the state of organization.
- Some states require that you include specific language related to collateral or tax requirements and the National UCC Form does not ask you to include the information and can lead to rejection.
- The National UCC Form is accepted in all jurisdictions except the state of New York. Previous forms prior to the National UCC Form are mostly rejected. Some states have created their own specific forms.
- If you don’t check the appropriate real estate boxes on fixture filings and legal descriptions attached the fixture filing could be indexed as a UCC Financing Statement related to personal property.
REASONS FOR REJECTION OF A UCC FILING
- The UCC Filing is not on the proper form.
- When filing an Amendment, the initial financing statement file number provided in 1a. is not correct, already lapsed or not legible.
- An Amendment adding a new party does not provide the new party’s name and/or mailing address.
- An Amendment adding a new debtor does not provide the new debtor’s name and/or mailing address.
- For a Continuation, it is not within the six month window prior to the lapse date to file.
- An Assignment does not provide the name and/or mailing address of the assignee.
- Trying to file a UCC-3 on an already lapsed Financing Statement.
- UCC Document being submitted is illegible leading to the possibility of not indexing the correct debtor or secured party name.
YOU CAN TRUST OUR KNOWLEDGE AND EXPERTISE TO GUIDE YOU THROUGH THE MAZE OF UCC FILING AND SEARCHING.
IMPORTANCE OF INCLUDING SIMILAR NAMES WHEN UCC SEARCHING
- Many states maintain Federal Tax Lien records with their UCC records. A search will include both UCCs and Federal Tax Liens that appear on the index. Government agencies such as the IRS is not required to precisely identify the taxpayer on a Federal Tax Lien. They can claim priority even if the lien lists a variation of the taxpayer’s legal name. It is imperative to include name variations to be certain all Federal Liens are found.
- There are many situations where a security interest or lien could be indexed under a variation of the debtor name. Therefore it is crucial to search similar names to uncover all possible records.
SEARCHING PRIOR NAMES
- Current law requires the debtor name to appear exactly as it is listed on the “public record” for that state. It is also crucial to search all prior names (if any) on “public record” for that debtor to provide due diligence in uncovering all possible UCC records for that particular debtor to maintain perfection and Priority on collecting debt.
- Creditors need to exercise due diligence in monitoring debtors for changes in their name and address not only to maintain a security interest but evaluate your risks when extending credit. The following case demonstrates the consequences of failing to monitor a debtor’s name change.
GUGINO V. WELLS FARGO BANK NORTHWEST, N.A. (IN RE: LIFESTYLE HOME FURNISHINGS, LLC.
SEARCH TO REFLECT
- It is always a good practice to perform a Search to Reflect in the filing office once a UCC has posted to the index to ensure due diligence. If the UCC that was filed does not appear on the Search to reflect it could have been mis-indexed due to a typographical error and can be found and fixed so it will appear on the searchable UCC index. If not caught and found it could put a secured party at risk.
- Another reason to perform a search to reflect after a UCC Filing has posted to the index in your filing office is to determine the Priority and Perfection of your filing. Another creditor could have a filed a UCC or other lien against that debtor after your UCC Filing or lien had posted so you know that your filing has higher priority to collect versus other creditors that hold a claim on the same collateral.
COMPREHENSIVE FIVE PART UCC DUE DILIGENCE SEARCH
- A Five Part Comprehensive UCC Search consists of searching public records at both the State and County levels. It consists of State Level UCC and Lien Searching, Federal and State tax liens, Judgments, Litigation and Bankruptcy. Doing a comprehensive Five Part UCC Due Diligence Search can show any existing liens or other financial obligations that could affect their ability to repay the considered loan or determine if Priority can be obtained should the lender decide to fund the loan or deal. It is also important to track UCC lapse dates and file Continuations within six months of the lapse date especially if the loan or financial obligation has not been satisfied to ensure the priority position and perfection of that filing.