Service Area: Notice and Mechanic’s Lien Services

No Lien Rights for Rental Equipment Companies in Pennsylvania

Posted on January 3, 2024 by - Mechanic's Liens & Bond Claims, UCC Financing Statements

No Mechanic’s Lien Rights for Rental Equipment in Pennsylvania; Companies Should Consider UCC Filings

Originally published in the Credit Research Foundation’s publication, Perspective by CRF (Q4 2023)

The Pennsylvania Superior Court released a crushing decision, wiping out mechanic’s lien rights for those who provide rental equipment to construction projects. Fortunately, mechanic’s liens aren’t the only form of security available to the equipment rental industry. In today’s post, we’ll review this recent Pennsylvania legal decision and how UCC filings are poised to be the payment leverage rental equipment companies need.

The Case at a Glance

The Case: RA GREIG EQUIPMENT COMPANY v. MARK ERIE HOSPITALITY, LLC, 2023 PA Super 206 – Pa: Superior Court 2023

The Result: Mechanic’s lien rights do not extend to rental equipment providers. Rental equipment isn’t incorporated into the improvement; therefore, it isn’t classified as ‘materials’ under Pennsylvania’s statute.

Background

R.A. Greig Equipment Company (Greig) leased a Telehandler-2019 Haulotte LT 9055 SN#2065360 to Mark Erie Hospitality, LLC (Mark Erie) for the improvement of a hotel lot and a second vacant lot.

In March 2022, Greig filed a mechanic’s lien to recover $56,392 in unpaid rental charges and $135,311 in equipment replacement costs (the equipment was allegedly damaged on site).

Mark Erie objected to Greig’s mechanic’s lien, and the Trial Court sustained the objection when it concluded the equipment and rental payments weren’t “materials” as defined under Pennsylvania’s statute. Fast forward, Greig appealed the Trial Court’s decision and here we are in front of the Superior Court.

Superior Court’s Decision: No Lien Rights for Rental Equipment

The Superior Court sought to answer several questions in its review of the case, but the one we are most interested in is whether Greig’s rental equipment and rental payments are considered “materials” and lienable under Pennsylvania’s mechanic’s lien law.

Under Pennsylvania’s mechanic’s lien law, Title 49 P.S. 1201 (7) “’Materials’ means building materials and supplies of all kinds, and also includes fixtures, machinery and equipment reasonably necessary to and incorporated into the improvement.”

The Superior Court had to dig into the archives for other cases that addressed materials and uncovered a case from 1923. In that case, a lumber company supplied lumber for temporary use and “no part of the lumber so used [became] a permanent part of the building.” The lumber company filed a lien, but its lien was removed because “no recovery could be had for materials not actually used in the building and that [the] defendant was not responsible for lumber . . . which did not and was not intended to become part of the structure.” Essentially, the lumber company’s lumber was not incorporated into the construction.

Based on the decision in the 1923 case, Pennsylvania’s Superior Court affirmed the Trial Court’s decision: Greig’s rental equipment and rental payments were not incorporated into the improvement, thus not lienable. Because the statute clearly states “…machinery and equipment reasonably necessary to and incorporated into the improvement.” (emphasis added).

No Mechanic’s Lien Rights? File a UCC!

This is an excellent (albeit unfortunate for Greig) example of how UCC filings are just as vital to ensuring payment on construction projects as mechanic’s liens. We work with construction companies throughout the country, and many will file both UCCs and mechanic’s liens depending on the state in which the project is located and what materials or services they are providing to their customer.

In this case, Greig could have protected itself if it had filed a Blanket UCC filing to secure its accounts receivable. Under UCC Article 9, a Blanket filing is a security interest in all assets of your customer on a non-priority basis, eliminating potential conflict with your customer’s primary lender. Think of it as a blanket that lays down over all customer assets.

What You Should Know about UCC Filings

Here are a few key things you should know about UCC filings.

  • UCCs should be filed as soon as you have the signed agreement.
    • The Technical: Deadlines are determined by the filing type. Blankets should be recorded prior to lending or shipping, PMSI in Equipment should be recorded within 20 days of when the debtor receives possession of the collateral, and PMSI in Inventory must be recorded and authenticated notification letters must be sent before the debtor receives possession of the collateral.

Watch out for Preference: Let’s say you discover your customer is intending to file bankruptcy in the next month. Unfortunately, it’s too late to file the UCC as security because there is a 90-day preference period regarding all security interest filings and bankruptcy. Any security interest filed within 90 days of the bankruptcy filing will be dismissed as a preference and not considered part of the bankruptcy proceedings, leaving you as an unsecured party.

  • UCC filings are consensual. This means, your customer your customer signs an agreement agreeing to the filing. The agreement (e.g., the security agreement which can be built right into your contract) includes language granting you a security interest in certain goods and/or services.
    • The Technical: In compliance with Article 9-102, a Security Agreement is an authenticated agreement that creates or provides a security interest. The agreement must include the date, debtor’s legal name and address, authentication, granting clause, collateral description and default terms.
  • UCC filings do not impact your customer’s credit rating.
    • The Technical: UCCs will appear in a credit report, but simply to provide confirmation that another creditor has a secured position or that you pledged collateral for trade credit.
  • UCCs are a simple security solution (especially when you let NCS handle the details!) when mechanic’s liens or credit insurance just won’t cut it.
    • The Technical: UCCs do require strict compliance with Article 9. Time and again we see creditors lose their security because they failed to comply with sections like UCC 9-503(a) which dictates how to correctly identify your customer on the Financing Statement or UCC 9-108 which outlines how the collateral should be identified.

Remember, material and equipment suppliers aren’t limited to the mercy of mechanic’s lien rights. UCC filings are a simple, low-cost solution, to protect your receivables.

Changes to Florida’s Lien and Bond Claim Laws

Posted on October 11, 2023 by - Mechanic's Liens & Bond Claims, Preliminary Notices & Construction Credit

As of 10/01/2023, Changes Are in Effect for Florida’s Mechanic’s Lien and Bond Claim Laws

After several amendments and readings, Florida passed House Bill 331 (effective 10/01/2023) which revised mechanic’s lien and bond laws; including provisions relating to the definition of a contractor, when notices must be served, notarizing forms, and more.

Highlights from Florida House Bill 331

Florida House Bill 331 was introduced in January 2023. This bill was sponsored by the Regulatory Reform & Economic Development Subcommittee, the Civil Justice Subcommittee, and Tobin Rogers Overdorf (R-85). Upon review of the introduced bill, the Regulatory Reform & Economic Development Subcommittee made this comment regarding the direct economic impact on private sector:

“The bill may cause more subcontractors, laborers, and material suppliers to receive compensation for the labor, services, or materials they supply for construction projects, which may have a positive indeterminate impact on the private sector. However, the bill may have a negative indeterminate impact on the private sector by making it costlier to transfer a lien to a payment bond, and an indeterminate impact on the private sector by eliminating and replacing certain alternative forms of security that a contractor working on public project may file in lieu of a payment bond.”

Here are some highlights of the changes.

  • Definition of “Contractor” (713.01): The term “contractor” now includes those who provide construction management services, “…which include scheduling and coordinating preconstruction and construction phases for the construction project, or who provides program management services, which include schedule control, cost control, and coordinating the provision or procurement of planning, design, and construction for the construction project.”
  • Notice of Commencement (NOC) (713.13): The person signing the NOC may use an online notary and the NOC must be filed for contracts greater than $5,000 (previously $2,500).
  • Notice of Termination of Notice of Commencement (NOT) (713.132): The owner must serve a copy of the NOT upon “…each lienor who has a direct contract with the owner and on each lienor who has timely and properly served a notice to owner… If properly served before recording in accordance with this subsection, the notice of termination terminates the period of effectiveness of the notice of commencement 30 days after the notice of termination is recorded in the official records.”
  • Computation of Time (713.011): In the event a deadline falls on a weekend or holiday, the deadline will roll to the following business day. And, if the clerk’s office is closed in response to an emergency, deadlines are tolled by the number of days the clerk’s office is closed. For example, if there were a catastrophic event and the clerk’s office was closed for 4 days, those 4 days do not count against the calculation of your deadline.
  • Manner of Serving Documents (713.18): Documents must be served “(a) By hand delivery to the person to be served… (b) By common carrier delivery service or by registered, Global Express Guaranteed, or certified mail to the person to be served, with postage or shipping paid by the sender and with evidence of delivery, which may be in an electronic format. (c) By posting on the site of the improvement if service as provided by paragraph (a) or paragraph (b) cannot be accomplished.” This section also clarifies the Notice to Owner is effective as of the date of mailing, if the notice is mailed within 40 days after the date the lienor first furnishes labor, services, or materials.
  • Release of Lien (713.21): A release of lien must include the lienor’s notarized signature, the official record’s reference number, and the recording date of the lien.
  • Notices of Nonpayment / Bond Claim (713.23): the notice should be served upon contractor and a “copy of the notice of nonpayment upon the surety.”

Mechanic’s Lien and Bond Claim Rights in Florida

From The National Lien Digest©, here’s a refresher on the key steps to securing mechanic’s lien and bond claim rights on Florida projects.

Private Projects | Mechanic’s Lien

  • Notice: You should serve the preliminary notice within 45 days from first furnishing (the date you begin supplying materials or labor to the project). If you are supplying specially fabricated materials, you should serve the notice prior to or within 45 days from the date fabrication begins. (**The preliminary notice must be received within the 45-day period!)
  • Mechanic’s Lien: You should file your lien within 90 days of your last furnishing (the date you last supplied materials or labor to the project) and serve a copy of the lien to the owner within 15 days of filing the lien.
  • Suit: In the unlikely event you must foreclose your lien, you should do so within 1 year of the date you filed the lien.

Private Projects | Bond Claim

Yes, there’s specific statute for payment bonds on private projects!

  • Notice: You should serve the preliminary notice within 45 days of first furnishing and the notice must be received by the deadline. (Just like you would for mechanic’s lien rights.)
  • Bond Claim aka Notice of Non-Payment: Serve the bond claim within 90 days from last furnishing.
  • Suit: You should file suit to enforce your bond claim within 1 year from your last furnishing.

Public Projects

  • Notice: Yes, you guessed it – just like private projects, you should serve the preliminary notice within 45 days of first furnishing and the notice must be received by the deadline.
  • Bond Claim aka Notice of Non-Payment: Serve the bond claim after 45 days from first furnishing, but within 90 days from last furnishing.
  • Suit: You should file suit to enforce your bond claim within 1 year from your last furnishing.

NCS Credit’s Experts Are Here for You

Florida is a stickler when it comes to following its laws to the letter. Don’t risk losing your security – let our experts help you with your preliminary notices, mechanic’s liens, bond claims, and suit filings. Contact us today!

Help Your Customer Understand UCC Filings

Posted on September 14, 2023 by - UCC Financing Statements

A Letter to Help Your Customer Understand UCC Filings & What It Means for Their Business

Implementing UCC filings in your credit-granting process includes educating your customer on the process and what a UCC filing will mean to their business. To help you better explain the process to your customer, we created a letter you can provide to them. Some like to include this letter when presenting their customer with the Security Agreement or Credit Application, others like to mail it to their customers once a year as a friendly reminder. No matter how it fits into your process, we hope it helps!

Our Credit Granting Process, UCC Filings, and What it Means for You, Our Valuable Customer

Dear Valued Customer,

Credit granting processes used to be fairly simple, requiring a quick review of references, a simple financial statement, perhaps a letter of credit, and very little paperwork. Credit granting today is intensive, in-depth, and often requires a comprehensive assessment.

As part of our credit granting process, we file UCCs to ensure our position as a secured creditor. UCC filings allow us to reduce our financial risk and exposure while extending larger credit lines to you.

UCC filings (also known as Financing Statements) are recorded with the Secretary of State and establish a public record of our security. UCC Financing Statement + Secretary of State + Public Record may sound ominous, but this simple public record filing does not negatively impact you. In fact, unless you were to default or file for bankruptcy protection, you may not even notice it.

What Is a Secured Creditor? In the unlikely event that you default or file for bankruptcy protection, your creditors may be either secured or unsecured. Secured creditors (like us) are paid before unsecured creditors, and sometimes unsecured creditors aren’t paid at all.

What Do We Need From You? To secure our right to be paid, we ask that you sign a Security Agreement. That’s it! There is no other action required on your part. This Security Agreement permits us to record a UCC Financing Statement with the Secretary of State and grants us a security interest in the goods or services we are selling to you.

What You Should Know about UCC Filings

  • UCC filings do not hurt your credit rating. UCC filings will appear on a credit report, but simply to provide confirmation that another creditor has a secured position or that you pledged collateral for trade credit.
  • UCCs, filed by us, cost you nothing.
  • UCC filings are security for us, as your vendor, in the unlikely event that you default or file for bankruptcy protection.

We have partnered with the leading professional UCC filing service, NCS Credit. NCS Credit prepares and records all required documentation, and you may receive correspondence from them. You can learn more about NCS Credit at NCScredit.com or by calling 800.826.5256.

We truly appreciate your business and your support of this process, and we are here to answer any questions you may have!

Sincerely,

Credit Manager, Sample Company Inc.

NCS Is Here to Help

If you have questions or need help educating your team or customers on UCC filings, please contact us! We want the UCC process to protect you and to be as streamlined and stress free as possible.

Editor’s Note: This content was originally published in March 2022. It has since been updated and revised for 2023.

U.S.’s Article 9 of the UCC and Canada’s PPSA

Posted on July 27, 2023 by - UCC Financing Statements

The U.S.’s Article 9 of the Uniform Commercial Code (UCC) and Canada’s Personal Property Security Act (PPSA)

The U.S.’s Article 9 of the Uniform Commercial Code (UCC) and Canada’s Personal Property Security Act (PPSA) are sets of law that govern commercial transactions between states and provinces.

The PPSA was largely modeled after the UCC.

Forms

First, let’s take a look at the specific forms used when filing a UCC or registering a PPSA. It’s interesting to note, in the U.S. the UCC3 Financing Statement is used if a filing needs to be amended, continued or terminated. Whereas in Canada, a Renewal is used to continue a filing, a Change Statement is used to amend a filing and a Discharge is used to terminate a filing.

UCC and PPSA

In order to create a security interest you must:

  • Have a signed Security Agreement and the security agreement must contain a granting clause and collateral description
  • Record (US) or Register (Canada) the Financing Statement to make the security interest public record
  • Notify the prior secured creditors in order to Establish Priority in Inventory

The Financing Statement does not require the debtor’s signature

UCC versus PPSA

Despite their overall similarities, there are significant differences between the UCC & the PPSA

  • Individuals
    • Under the UCC, verify the individual’s name with an unexpired driver’s license
    • Under the PPSA, include the individual’s birthdate
  • Establish Priority in Equipment
    • Under the UCC you must record your filing within 20 days of your customer’s receipt of the equipment
    • Under the PPSA you must register your filing within 15 days of your customer’s receipt of the equipment
  • Where to File
    • A UCC: for a registered entity the UCC is filed in the state of organization and the UCC for an individual is filed in the state of residence
    • A PPSA: if the entity is registered in British Columbia, Ontario, or Saskatchewan, the PPSA is registered in the province of registration, otherwise the PPSA is registered in the province(s) in which the entity is registered and where goods are located
  • Life of Filing
    • In the US, the secured party’s filing is good for 5 years (in most states – WY filings are good for 10 years)
    • In Canada, the secured party may choose a filing period from 1-25 years or “infinity”

PPSA  

The PPSA allows for repossession upon default, much like the UCC, however, the PPSA provides a broader definition of default.

Default is the failure to pay or otherwise perform the obligation secured when due, or the occurrence of an event or set of circumstances that, under the terms of the security agreement, causes the security interest to become enforceable.

A secured party may take possession of and sell the collateral when the debtor is in default under the security agreement or when the collateral is at risk. The collateral is “at risk” if the secured party has reasonable grounds to believe the collateral has been or will be destroyed, damaged, endangered, disassembled, removed, concealed, sold, or otherwise disposed of contrary to the terms of the security agreement.

Remember Quebec did not adopt the PPSA. They have their own law called the Civil Code of Quebec. The most recognized difference between Quebec and PPSA law is the interpretation of the concept of chattel mortgage.

Editor’s Note: This content was originally published in August 2014. It has since been updated and revised for 2023.

Serve the Preliminary Notice Upon the Construction Lender

Posted on July 24, 2023 by - Mechanic's Liens & Bond Claims, Preliminary Notices & Construction Credit

In Some States, You Should Serve the Lender with the Preliminary Notice to Protect Your Mechanic’s Lien and Bond Claim Rights

The infamous first step to protecting mechanic’s lien and bond claim rights: serve the statutory preliminary notice. State statute not only dictates when your notice should be served and what information should be included in the notice, it also dictates who should receive a copy of the notice. Frequently, the project owner and/or the general contractor (GC) are required to receive a copy of the preliminary notice. But did you know a couple states require the lender also receive a copy of the preliminary notice?

Definitely Serve the Lender with the Notice in These 2 States

Two states require serving the notice upon the lender and indicate serving the lender may improve the priority of your mechanic’s lien.

First up, Arizona and California. These states’ statutes explicitly identify the construction lender as a required party (emphasis added):

Ariz. Rev. Stat. Ann. 33-992.01 B. Except for a person performing actual labor for wages, every person who furnishes labor, professional services, materials, machinery, fixtures or tools for which a lien otherwise may be claimed under this article shall, as a necessary prerequisite to the validity of any claim of lien, serve the owner or reputed owner, the original contractor or reputed contractor, the construction lender, if any, or reputed construction lender, if any, and the person with whom the claimant has contracted for the purchase of those items with a written preliminary twenty day notice as prescribed by this section.

California statute says:

CA Civ Code 8200 (a) Except as otherwise provided by statute, before recording a lien claim, giving a stop payment notice, or asserting a claim against a payment bond, a claimant shall give preliminary notice to the following persons:

(1) The owner or reputed owner.

(2) The direct contractor or reputed direct contractor to which the claimant provides work, either directly or through one or more subcontractors.

(3) The construction lender or reputed construction lender, if any.

Consider Serving the Lender with the Notice in These 3 States

Then there’s Alabama, Florida, and Oregon.

There is case law in Alabama which supports serving the lender with the notice, though statute doesn’t specifically identify it as a requirement.

“The building industry today is operated on the basis of borrowed money, i.e., construction financing. Practically every corporation or would-be home owner must borrow. The practice in the industry has typically been that the construction loan funds will not be distributed in a lump sum. Rather, the funds are advanced from time to time as construction progresses, upon the lender’s ascertainment (by the use of monitoring procedures such as vouchers and on-site inspections) that the work is indeed being completed or the supplies being furnished. This procedure allows the lender to actually corroborate the expenditures.

Because of the practices in the construction industry, we hold that from this day forward, public policy dictates that the same written notice that is required to be given to the owner must also be given simultaneously to the construction lender, if the lender’s identity can reasonably be obtained. We note that it would not be that difficult to obtain the identity of the construction lender, because the lender’s mortgage would be on record in the office of the judge of probate. This notice would give the construction lender, as well as the owner, the opportunity to insure that the mechanics and materialmen are paid out of the remaining contract funds, that any potential liens are satisfied, and that the property is not encumbered.” – Bailey Mortg. Co. v. Gobble-Fite Lumber Co.

In Florida, if the lender is listed on the Notice of Commencement, you should consider sending them a copy of the preliminary notice.

F.S. Title 40, Section 713.06 (d) A notice to an owner served on a lender must be in writing, must be served in accordance with s. 713.18, and shall be addressed to the persons designated, if any, and to the place and address designated in the notice of commencement. Any lender who, after receiving a notice provided under this subsection, pays a contractor on behalf of the owner for an improvement shall make proper payments as provided in paragraph (3)(c) as to each such notice received by the lender. The failure of a lender to comply with this paragraph renders the lender liable to the owner for all damages sustained by the owner as a result of that failure…

Regardless of where that party falls in the contractual chain, if they appear on the Notice of Commencement, it’s in your best interest to serve them with a copy of the preliminary notice.

Oregon’s statute doesn’t say the lender is required; however, if you serve the lender your mechanic’s lien may have greater priority.

ORS 87.025 (3) No lien for materials or supplies shall have priority over any recorded mortgage or trust deed on either the land or improvement unless the person furnishing the material or supplies, not later than eight days, not including Saturdays, Sundays and other holidays as defined in ORS 187.010, after the date of delivery of material or supplies for which a lien may be claimed delivers to the mortgagee either a copy of the notice given to the owner under ORS 87.021 to protect the right to claim a lien on the material or supplies or a notice in any form that provides substantially the same information as the form set forth in ORS 87.023.

Best Practice: Serve All Parties with the Notice, even if the Notice Isn’t Required

We are firm believers in serving the preliminary notice upon all parties within the contractual chain. Why? Glad you asked – let’s take a look.

Ensure Compliance with Statute

Mistakes happen. One of the most common obstacles in securing lien and bond claim rights is knowing which parties are actually in the contractual chain; gathering job information is tough.

How many times have you reviewed project information and discovered you only have information for the project location and your customer? Your customer tells you “I’m a contractor on the project” – are they the GC or are they a subcontractor (sub)? If you think they’re a sub and opt to not send the preliminary notice, then later find out they were the GC and required to receive a copy of the notice. An easy way to avoid “Oops, I didn’t know I needed to serve the lender” is if you serve everyone in the contractual chain.

Become a Payment Priority

Preliminary notices are harmless (unless, of course, you don’t send them) and an excellent way to promote transparency while establishing your place as a payment priority. By notifying everyone of your involvement, parties know your company name, how to get in touch with you, and what you are furnishing to the project.

Think of it this way: what if something goes awry with the GC and the owner begins remitting payment direct to subcontractors and various suppliers. Don’t you want to be front of mind for the owner? Wouldn’t it be nice if the owner had a notice from you (which includes your contact information) and they could speak with you directly to make payment arrangements?

Just think of all the subcontractors and suppliers the owner doesn’t know about – how quickly are those folks going to get paid? Not only are they unlikely to get paid, but it’s also more likely they will have to proceed with a mechanic’s lien or bond claim.

Serve the Notice, Every Time

If I had to choose between the cost of a preliminary notice or the cost of lost lien rights, I would choose the preliminary notice. Every. Single. Time.

Not sure who the lender is? We can help. Our experts are knowledgeable and ready to handle lender searches for you – contact us today!

Credit Insurance Cuts Coverage, Renews Focus on UCCs

Posted on July 13, 2023 by - UCC Financing Statements

While Credit Insurance Companies Slash Coverage, Credit Professionals Shift Focus to UCC Filings

As the economy struggles to realign, businesses are scrambling and struggling to keep the supply chain in motion, but the financial risks are staggering. Sales teams are pushing for customers to have access to larger credit limits and credit teams are pushing back because the financial protections they once relied on have vanished. Suppliers have widely used credit insurance to protect their accounts receivable, but credit insurance companies continue to cut coverage and slash policies to maintain their own bottom lines. While insurance companies deliver crippling blows to businesses’ financial security, credit departments have been carefully reevaluating risk mitigation strategies, and it’s brought UCC filings into renewed focus.

Credit Insurance Turbulence

Credit insurance, also known as trade credit insurance or accounts receivable insurance, insures a creditor’s accounts receivable against a debtor’s nonpayment, insolvency, or bankruptcy. Credit insurance is a widely used, internationally accepted, risk resource and is commonly used in European and Asian countries.

When the economy is good, obtaining and maintaining credit insurance is reasonably uneventful. When the economy is bad, insurers start dropping marginal accounts and overall portfolios like a bad habit, leaving creditors unprotected.

The pandemic has truly taken its toll on all facets of the economy, including credit insurance. In difficult economic times, more businesses are going to fail; this means more insurance claims and more insurance payouts. I’ll let you in on the worst kept insurance secret: insurance companies are in the money-making business, not the money-losing business. So, to save the insurance company money, your policies are taking a hit. One source cited insurance coverage had been slashed by 15%, across all industries amid the pandemic, in an effort to balance their own books: “James Daly, CEO of credit insurer Euler Hermes North American, said his company has had to scale back coverage across all industries by 15%, including retail.”

15%! Can you afford the financial burden of lost coverage on your riskiest accounts? Are the high premiums you pay worth the losses you will incur because your coverage has been slashed?

UCC Filings, Your Security Interest Awaits

Article 9 of the Uniform Commercial Code (UCC) provides an opportunity for trade creditors to secure goods and/or accounts receivable by leveraging the personal property assets of their customer. Under UCC Article 9, a security interest is an interest in personal property or fixtures and secures payment or performance of an obligation. Before extending credit, many creditors require their debtors to enter into a security agreement. The debtor will pledge specific personal property as collateral to grant a security interest to the creditor. Then, in the event of debtor default, the creditor can use the collateral to recover payment. Typically, the collateral can be sold to reduce the debt. Then, any surplus proceeds belong to the debtor and, vice versa, any deficit is still an obligation of the debtor.

Included under the Article 9 umbrella are all forms of consignment and letter of credit payment rights that support the payment or performance of other collateral. Article 9 applies to leases if the parties intend that the lease provide security, as well as sales of account and chattel paper, including pledge, chattel mortgage, conditional sales, trust receipts, and field warehousing.

A Financing Statement is effective for 5 years (10 years in Wyoming), and if a Continuation is not filed timely, the Financing Statement will lapse, and the Security Interest will be extinguished. Once the debtor fulfills the obligation, a Termination should be filed.

Why UCC Filings?

Now, more than ever, you need to protect your receivables and it’s become too expensive and risky to pursue that protection solely through credit insurance. Yes, credit insurance may still be the best option for securing export (international) transactions, but domestically (plus Mexico, Canada, Australia & New Zealand) consider UCC filings or at least supplement credit insurance with UCC filings.

The Costs

The cost of filing a UCC is nominal compared to the premiums and deductibles of credit insurance. Credit insurance premiums may range between 0.2% – 0.8% of your company’s estimated annual sales. If your company sells approximately $10 million a year, the annual premium to cover the entire AR could be $20,000 – $80,000. UCC filings cost approximately $200 per filing and filings are in place for 5 years. With UCCs, you don’t have to deal with annual premiums, deductibles, etc. UCCs are a low-cost solution, ensuring you aren’t throwing good money away.

Pick & Choose

With UCC filings, you choose the accounts to secure, you set the risk threshold, you are in control. Credit insurance companies are in the business of making money – they aren’t charity organizations. You will be required to insure good accounts to justify insurance on the riskier accounts. This way the insurance company collects premiums on the accounts that are likely to remain solvent, to make up for the money they will pay out on the accounts likely to default.

UCCs Don’t Judge

Unlike credit insurance, UCC filings aren’t judgmental. A UCC isn’t going to cease simply because your customer’s risk profile changes. The state of Delaware isn’t going to contact you and say “Listen, we see your customer’s debt has grown, so we’re going to have to unperfect your UCC.” UCC filings will secure your receivables if you have properly perfected the security interest, regardless of your customer’s creditworthiness or the economic climate.

The Value of Public Record

Let’s not forget the immense value of the public record. Recording your Financing Statement creates a public record; it is a public acknowledgement of the financial agreement. This can be invaluable in a volatile economy. As an example, if you have filed a UCC and your customer decides to sell its business without telling you, that UCC is out there in the public record and can halt the sale, helping to ensure you are paid. Credit insurance doesn’t do that.

More Sales

As you know, the business world is aggressively competitive. UCC filing is more than reducing risk; it’s about the opportunity to expand your market, by providing you with the security needed to sell to marginal accounts and by providing the added security needed to increase existing clients’ credit lines. UCC filings create a competitive advantage.

Credit Insurance and UCC Filings

Credit insurance certainly has its place in the global economy. After all, it’s insurance, powered by actuaries who carefully evaluate risk, which alleviates the burden on your credit department to analyze and monitor accounts. But, for those supplying domestically, UCC filings offer the security needed to extend credit at a fraction of the cost. As insurance companies cut your portfolio coverage, perhaps you should consider supplementing coverage with UCC filings. Pay for and use the credit insurance for the amount the insurance company is willing to insure, then file a UCC to provide security on the outstanding balance. You don’t have to pick one or the other – it’s not credit insurance OR UCCs, it’s credit insurance AND UCCs.

Editor’s Note: This content was originally published 2020. It has since been updated and revised for 2023

Selling on Consignment and UCC Filings

Posted on July 10, 2023 by - UCC Financing Statements

UCC Filings: What is Consignment?

We have previously discussed whether you should secure your receivables, under Article 9 of the UCC, via a Blanket Filing or a PMSI Filing and now we would like to discuss consignment filings. First, let’s review consignment.

What is Consignment?

Consignment, according to UCC Article § 9-102 means “…a transaction, regardless of its form, in which a person delivers goods to a merchant for the purpose of sale.”

Who is the Consignor?

A person that delivers goods to a consignee in a consignment (i.e. the owner of the goods being delivered)

Who is the Consignee?

A merchant to which goods are delivered in a consignment (i.e. the recipient of the goods being delivered)

“Sale or Return” versus “True Consignment”

There are two recognized types of consignment:

“Sale or Return” where goods are delivered to the Consignee primarily for retail purposes.  In this type of Consignment, title passes to Consignee upon delivery, but Consignee remains contractually obligated to return any unused goods.

“True Consignment” where the goods are delivered to be primarily used by the Consignee, but Consignor retains title to the goods.  Consignee may either be pulling goods from stock on a need be basis, or might be testing out goods on a trial basis to determine the necessity of the goods.

How Does a True Consignment Work?

The consignor/owner retains title to the delivered goods, while the consignee/recipient holds and attempts to sell the goods. If and when those goods are sold, the owner’s security attaches to the proceeds of the sale. If the consignee is unable to sell the goods, they can simply return the goods to the owner.

Example of Consignment

  • The Goods:  Mulch & Fertilizer
  • Owner of Goods:  The Tractor Folks
  • Recipient of Goods: The Garden Supply Guys

In this case, The Tractor Folks have supplied The Garden Supply Guys with mulch and fertilizer. The Tractor Folks own that mulch and fertilizer until The Garden Supply Guys sell the mulch and fertilizer, as needed, to its customers.

If The Garden Supply Guys are unable to sell the mulch and fertilizer, they can return it to The Tractor Folks without any further obligation. (Remember, this is a simple example, and individual agreements may contain different stipulations.)

File UCCs to Protect Your Interest in Consignment

Are you required to file a UCC on a consignment transaction? No. However, we’ve now seen prominent bankruptcy cases (e.g., Sports Authority) where creditors are finding themselves unsecured, receiving pennies on the dollar.

A simple consignment agreement is often viewed by the courts as a “secret lien” and may not be enough to protect you if your customer (aka “the consignee”) defaults or files for bankruptcy protection, as there is no legal/recorded document identifying your title to the goods provided.

If your customer files for bankruptcy protection, the inventory they have on hand is gathered up and sold to pay creditors (secured creditors first and then the unsecured creditors). Without the UCC filing identifying you as a secured creditor and specifically identifying your goods, the inventory you supplied automatically becomes property of the estate.

Need assistance with filing a UCC on your consignment transactions? Reach out and let us help.

(Originally published April, 2015)

Serve the Lender with the Notice

Posted on July 5, 2023 by - Mechanic's Liens & Bond Claims

When Should the Lender Receive a Copy of the Preliminary Notice?

When you need to secure mechanic’s lien or bond claim rights, serving a preliminary notice upon the required parties is just as important as ensuring the proper notice is served in the correct manner.

Did You Know? 72.55% of states have either a required or optional preliminary notice that should be served on commercial projects in order to preserve mechanic’s lien rights. 19 states require a preliminary notice be served in order to secure claim rights for public projects.

The Owner & The General

The majority of states with a preliminary notice requirement, request the notice be served upon the owner and/or the general contractor. But sometimes, a state’s statute may also require that the lender receive a copy of the notice.

What is a Lender?

A lender is the party (or parties) funding the project. Often the lender is a financial institution, but sometimes, especially in the case of P3s, the lender may be a corporation or other entity.

Arizona statute 33-992.01, defines the Construction Lender as “any mortgagee or beneficiary under a deed of trust lending funds all or a portion of which are used to defray the cost of the construction, alteration, repair or improvement, or any assignee or successor in interest of either.”

Which States Indicate the Lender be Served with a Copy of the Notice?

Required:

  • Arizona – In Arizona, on private projects, claimants should serve notice upon the owner, prime contractor and construction lender within 20 days from first furnishing materials or services.
  • California – In California, on private projects, serve notice upon the owner, prime contractor and lender within 20 days from first furnishing materials or services.

Recommended:

  • Alabama – In Alabama, on private projects, claimants should serve the notice upon the owner and construction lender prior to first furnishing materials or services.
  • Oregon – Serving the lender with the preliminary notice in Oregon may provide you greater priority when a lien is later filed.

What Happens if I Don’t Serve the Lender?

In the event you do not serve the lender (or any required party for that matter) and the validity of your notice is called into question, it will ultimately be up to the legal jurisdiction. In my case law research, courts frequently interpret the statute liberally to protect the parties supplying to a project, but there are some courts that have upheld the statute word for word.

(Some states, like Minnesota, are VERY particular about notice requirements)

Best Practice

Serve all parties within the contractual chain, even if they aren’t required to receive a copy of the notice. It is best for everyone to know that your company is furnishing to the project, and that all parties know you intend to be paid for the services you provide!

*Editor’s Note: This content was originally published in October 2015. It has since been updated and revised for statute changes effective 2023.