Padlock and Chain In our September 2007 Credit-to-Cash Advisor e-newsletter, we provided an overview of the U.S. Uniform Commercial Code, its origin and various provisions. This month we will focus on UCC Article 9. Arguably the most important article for creditors of U.S. debtors.

In 1999, UCC Article 9, which deals with secured transactions, underwent significant revisions in terms of scope and requirements. The ramifications of the revisions were deemed so extensive that The National Conference of Commissioners on Uniform State Laws (NCCUSL) – the body that developed the Uniform Commercial Code – required all states enacting the provisions to subscribe to a uniform effective date of July 1, 2001. Should any state fail to enact the statute, or utilize a different effective date, the NCCUSL foresaw “horrendous complications”.

(For a thorough understanding of these “complications”, read “Why States Should Adopt the …Revised Article 9".)

Most every state did comply with the July 1, 2001 effective date and the provisions have been now been adopted by all 50 U.S. states, as well as the District of Columbia (Washington, DC) and the U.S. Virgin Islands.

UCC Article 9, also known as Revised Article 9 (RA9), deals with secured transactions in all their various forms. It provides the rules that govern any transaction (other than finance lease) that maintains the creditor’s interest in a debtor’s personal property. A “debtor” under the code can be an individual (in the case of a mortgage on the family home) or any business entity, from a registered corporation to a single proprietorship.

UCC 9 Benefits in Commercial Transactions

UCC Article 9 can be beneficial to commercial creditors, especially those wanting to sell to customers that do not meet their normal credit standards. It allows the seller the competitive advantage of providing credit terms with less risk.

The Article provides a “security interest” in the goods being sold. In cases of payment default by the buyer, the seller/creditor has the ability to repossess and then resell the products. In situations where the buyer files bankruptcy, the seller that is secured under UCC 9 generally has a priority claim over all unsecured creditors and some other secured creditors. (Note: priority rights are very complex issues and will not be addressed in this article.)

In order to avail themselves of the security interests under UCC Article 9, however, creditors must carefully follow each step in the process, completing the appropriate documentation to the letter. Failure to do so can result in the claim being rejected.

UCC 9 Process

Securing your interests under RA9 involves two key events: attachment and perfection.

Attachment creates the security interest between the creditor and debtor, and occurs when an agreement to such (Security Agreement) is legally made and signed by both parties.

Perfection establishes the creditor’s priority in relation to other creditors of the same debtor. Primarily, perfection occurs when a UCC 9 financing statement is filed with the appropriate state body. However, there are a number of circumstances, other than filing, that can result in perfection depending upon the type of property being secured. In terms of a sale of goods/equipment, in which the seller desires to retain a security interest, filing is generally the means of perfection. Filing is the form of perfection we will discuss in the remainder of this article.

UCC Search and Filing

The first step toward establishing a security interest is the search for previously filed and currently effective financing statements. Obviously, any previous filings (including tax liens, which are a separate matter) on the same collateral you wish to secure, would take precedence over your security interest. In general, the rule is “first to file, first priority”, although there are various exceptions. Before establishing an interest in the buyer’s collateral, you will want to know if any other entity has/will have a priority right over you. It will also be necessary to inform such a party/ies of your security filing.

One of the improvements made in RA9 was that it required one centralized filing place in each state, which became the office of the Secretary of State. RA9 also changed the rules for establishing “choice of law”, that is, the determination of the state government with which financing statements on a particular entity must be filed. (See Choice of Law below.)

Each state now provides electronic access to their own RA9 filings, but every state uses its own search logic to access these files and there is a cost to access most systems.

RA9 and Choice of Law

Under RA9, financing statements on registered entities (including corporations, limited liability companies and limited partnerships) must be made in the state where the entity is registered. Thus, a financing statement for a company located in New York State, but which is incorporated in New Jersey, would have to be filed in New Jersey.

For unregistered entities, such as sole proprietorships, partnerships etc., the filing must be made in the state where the principal place of business is located. For individuals, searching and filing should be done in the state where the individual has his/her primary residence.

The rules for RA9s filed on foreign (non-US companies) are confusing. If the foreign entity is registered (in the U.S.) or in a country with a similar UCC-type filing/notice system (like Canada), the filing should be made in the jurisdiction of the registration. For all other “unregistered” corporations, the filing should be in Washington, DC. However, if an “unregistered” (as defined above) foreign company has its chief executive offices in New York, then the filing should be made in New York State. Some experts would suggest you also file in Washington, DC to be safe.

Filing the Financing Statement – Form UCC1

According to RA9, all filing offices that accept written forms must accept national UCC Financing Statement form UCC1. UCC1 is a short, seemingly simple form, with just 4 sections (described below). But, the ramifications of making a mistake on the form or not following instructions are tremendous. One error could result in the state authority rejecting the financing statement, or worse, make the security interest null and void in a default or bankruptcy situation. The UCC1 linked here is the form available on the web site of the New York State Department of State.

UCC1 Form Section 1: Debtor Information

1a. Organization’s Name: Incorrect or inaccurate debtor name is probably the most litigated matter in relation to the validity of a UCC security interest. You must complete the UCC1 form with the exact and correct, legal name of the debtor. For corporations, it is the name on the corporate charter. To determine the legal name, request copies of the company’s Articles of Incorporation or Certificate of Formation. If these are unavailable, contact the appropriate Secretary of State’s office to verify the legal name. Trade styles or dba’s (doing business as) are not acceptable.

1b. Individual’s Name: For individuals, the waters are a bit muddied. RA9 states it should be the debtor’s “correct name”; some state versions use “legal name”. However, there is no single source in the United States that defines what constitutes an individual’s “legal” name. Therefore, where possible, utilize the name found on other legal documents, i.e. mortgages or the like. No prefixes (Mr., Miss etc.) are allowed, and no suffixes except for titles of lineage (Jr., Sr., III etc.) should be used. In other words, you would not use designations like MD, RN, CPA etc. Also, do not use this field for trade styles or dba’s of a business entity.

Importance of Correct Legal Name

The primary reason for requiring the exact legal name is to make the filing “discoverable” by another party seeking to secure the same property. The burden is on the filer in such cases, not the searcher. Requirements of the searcher are as follows:

Search is on the debtor’s correct name.
Search is of the database maintained by the filing office, not a third-party database.
Search is done using the filing office’s “standard search logic”, which differs in each state.

If a financing statement is not found under these circumstances, then the filing is considered “seriously misleading” and this will result in a court finding in favor of the rights of a subsequent filer.

UCC1 Form Section 2: Additional Debtor’s Information

Although it is not a requirement, some filers utilize this section to include the trade style or d/b/a (doing business as) of the debtor, just to be safe.

UCC1 Form Section 3: Secured Party Information

This section should be completed with the name and address of the secured party or a representative of the secured party. If a mailing address is not included, the filing office will have grounds to reject the financing statement.

UCC1 Form Section 4: Collateral

RA9 removed the requirement to specifically describe the collateral being secured on the Financing Statement. As long as the Security Agreement fully describes the collateral, it is appropriate to use generic statements such as “all personal property” or “all assets”. However, some experts suggest utilizing the same description of collateral on the UCC1 as is used on the Security Agreement. Again, just to be safe.

Debtor Signature: The signature of the debtor is no longer required under RA9, and there is no place for one on the UCC1 form. The debtor’s signature on the “Security Agreement” is considered automatic authorization of the security interest. Proof of authentication of the Security Agreement is not required by the UCC filing office. However, it is the responsibility of the secured party to ensure document authentication of the Security Agreement.

Some Other Rules Regarding RA9 Filings

Continuation: Financing Statements are generally valid for a period of five years; however, it is possible to extend the validity. Continuation forms must be filed, but only in the period six months prior to the date of lapse.

Termination: Upon termination of a financing statement, the creditor/filer must submit a termination statement to either the filing office or the debtor. Failure results in a fine and, potentially, remuneration to the debtor for any losses caused by the failure to file the termination statement.

Common Mistakes in Filing and Perfecting Security Agreements under RA9

Failure to file under the debtor’s correct legal name.
Failure to use the debtor’s correct legal entity. Box 2a of UCC1 specifically asks for the type of organization. Correct information here is as important as getting the debtor’s legal name right.
Failure to file in the required jurisdiction and/or according to the specific requirements of that required jurisdiction.
Failure to amend changes in the debtor’s name, address or legal entity when they occur.
Failure to notify prior secured creditors when a conflict of collateral exists, whether in the initial filing or when continuing/renewing.
Failure to ensure that the Security Agreement corresponds to the Financing Statement. In other words, don’t make the Security Agreement so broad that it clouds the intention of the Financing Statement.

Consider Using a Professional for Any UCC Security Filings

As you can see, filing and perfecting a security interest under UCC Article 9 is anything but simple. Unless you have internal experts on UCC nationwide, it’s a good idea to utilize a professional firm for searches and filing for the following reasons:

Professional firms are expert in the search logic utilized in various state databases.
If you only use RA9 occasionally, access to the various state databases may be prohibitively expensive.
Professional firms will have local knowledge of the filing requirements. For instance, some states require a particular font size and all caps to fill out the financing statement. Each state has the ability to require something unique, regardless of how ridiculous it may seem.

Another suggestion is to have your UCC professional perform a “Search to Reflect” after the financing statement has been filed. This will ensure that your filing can be found utilizing the standard search logic of the particular state’s filing system, thus alleviating any potential surprises down the road.

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Disclaimer: This information is provided by ABC-Amega Inc. for informational purposes only and is not intended to be legal advice and is not a substitute for competent legal advice on the referenced subject.

ABC-Amega Inc. provides 1st and 3rd party commercial collection services since 1929 and collecting in more than 200 countries worldwide. For further information, contact info@abc-amega.com.