Service Area: UCC Services

When Space & Noise Impact UCC Filings

Posted on October 9, 2017 by - UCC Financing Statements

Double Bubble, Toil & Trouble: When Space & Noise Impact UCC Filings

As we prepare and review UCC filings, clients frequently ask us, “Does an extra space in my customer’s registered name really matter?” and “Does it matter whether I identify my customer as LLC if their registered name appears as L.L.C.?”

Two seemingly small issues, right? Wrong.

Article 9-102(71) clearly defines a registered organization and Article 9-503(1) clearly states the debtor’s name must be identified as it appears on the public organic record.

A financing statement sufficiently provides the name of the debtor:

(1)… if the debtor is a registered organization, or the collateral is held in a trust that is a registered organization, only if the financing statement provides the name that is stated to be the registered organization’s name on the public organic record of most recently filed with or issued or enacted by the registered organization’s jurisdiction of organization which purports to state, amend, or restate the registered organization’s name;

Recently, one creditor suffered the consequences of an inadvertently added space, after a noise word, in their debtor’s name, and the creditor’s security interest was unperfected.

Compliance with Article 9 & Seriously Misleading

As mentioned above, strict compliance with Article 9 of the Uniform Commercial Code is imperative. Failing to identify the debtor by its name as it appears on the public organic record could result in the filing being seriously misleading.

If it’s determined the Financing Statement is seriously misleading, the security interest can be deemed unperfected and priority can be lost.

What Makes the Name Seriously Misleading?

If a search for the Financing Statement, using the Standard Search Logic in the UCC filing office, fails to reveal the Financing Statement, the filing is considered seriously misleading, and thus, unperfected.

Standard Search Logic is the holy grail of determining whether a filing is seriously misleading. Search logic is created, determined & managed through an algorithm and varies by state filing office.

In 2015, International Association of Commercial Administrators (IACA) released the revised Model Administrative Rules, which include a specific section frequently referred to as “standard search logic.”

One standard search logic rule is 503.1.2: “No distinction is made between upper and lower case letters.” This means the debtor’s name could be entered as ABC COMPANY INC or ABC Company Inc, and both are acceptable.

Another rule addresses punctuation: 503.1.3 (b) “Punctuation marks and accents are disregarded. For the purposes of this rule, punctuation and accents include all characters other than the numerals 0 through 9 and the letters A through Z (in upper and lower case) of the English alphabet.”

IACA recognizes the general idea of “noise words”. Typically noise words include “and,” “the,” “inc” and “co.”  Although noise words are addressed in the Model Administrative Rules, the list of actual noise words are determined by the individual filing office.

503.1.3 (c) The following words and abbreviations at the end of an organization name that indicate the existence or nature of the organization are “disregarded” to the extent practicable as determined by the filing office’s programming of its UCC information management system:

[Insert the filing office’s own “Ending Noise Words” list here.]

This difference by jurisdiction could mean a filing is simultaneously properly perfected in Virginia and deemed seriously misleading in Wisconsin, based on the jurisdiction’s search logic.

Double Bubble, Toil & Trouble

In United States Securities and Exchange Commission V. ISC, Inc., Dist. Court, WD Wisconsin 2017, creditor Double Bubble, Ltd.’s security interest was unperfected because of a small error in the debtor’s name on the Financing Statement.

Double Bubble, Ltd. (Double Bubble) filed a UCC to secure credit extended to ISC, Inc. (ISC). On the Financing Statement, Bubble identified ISC as “ISC, Inc .” At first glance, it appears correct, but close review reveals there is an extra space between the “c” and the “.” in “Inc.”

According to the court opinion, the receiver assigned to ISC, Inc. identified Double Bubble as an unsecured creditor because Double Bubble’s UCC did not appear in the receiver’s UCC search. The receiver searched for filings by “ISC, Inc.” which is ISC’s name as it appears on the public organic record.

An extra space after a typical noise word is a minor variance of the debtor’s name. Double Bubble argued that if the receiver had practiced reasonable diligence and altered its search, even to just “ISC,” Double Bubble’s UCC filing would have come up in the search.

The court agreed with Double Bubble’s argument in theory, but in practice the court held the filing was seriously misleading, therefore the filing was unperfected and Double Bubble’s creditor status was unsecured.

Text from the court’s opinion:

“The court has some sympathy for Double Bubble because the additional space would be easy to overlook, even if one were careful in filing the financing statement. And Double Bubble is correct that the receiver could have found its financing statement if he had used a different search, say a search simply for “ISC” with no punctuation or corporate designation. Double Bubble contends that such a search would have been “reasonably diligent.” But reasonable diligence is not the current standard.

“Seriously misleading” is a term of art with a statutorily defined meaning: a search “under the debtor’s correct name” must find the financing statement, otherwise it is seriously misleading. The fact that the DFI provides search “tips” and “hints” that might produce a broader set of results does not change the statutory standard. Double Bubble’s objection is overruled. Double Bubble will participate in phase II as an unsecured creditor.”

A Space at the End of a Noise Word, Really?

It may seem extreme. But, when it comes to perfection under Article 9, major or minor errors are still errors. And, unfortunately for Double Bubble, errors result in unperfected security interests.

Earlier I mentioned that standard search logic varies by state filing office. Double Bubble filed its UCC via Wisconsin Department of Financial Institutions (WDFI). And, the search logic WDFI uses does not account for errors such as an additional space.

Not the First, Certainly Not the Last

This isn’t the first time a creditor’s security interest has been invalidated because of “space.” In Receivables Purchasing Co., Inc. v. R & R Directional Drilling, L.L.C., the Georgia Court of Appeals determined the creditor did not have a security interest because the debtor’s name had an extra space listed.

The creditor added a space in the debtor’s name, listing it as “Net work Solutions, Inc.” The creditor requested the Georgia Superior Court Clerks Cooperative Authority (GSCCCA) perform a search:

“The GSCCCA did a certified search under the correct name Network Solutions, Inc. The Search did not reveal (debtor’s) financing statement, which…was filed incorrectly under Net work Solutions, Inc.”

I agree with the Receivables Purchasing Co. decision; after all, the space is right in the middle of the debtor’s name. And, while I don’t necessarily disagree with the Double Bubble decision, it has certainly raised questions and has forced me to reevaluate my understanding of the absolutes in Article 9.

Today’s Takeaway & NCS Best Practice

I expect the Double Bubble case will be referenced in future legal arguments on whether a Financing Statement is sufficient or deemed seriously misleading.

Obviously, compliance with Article 9 is critical. However, prior to this case, debtor names containing accidental additional spaces and/or noise words, did not necessarily leave a creditor’s security interest unperfected. But the decision in Double Bubble has reaffirmed the need for strict compliance with Article 9.

You must identify the debtor as it appears in the public organic record in compliance with Article 9-503. And as a best practice, if there are variations of a debtor’s name, include all name variations on the Financing Statement. Adding variations will increase the likelihood of the Financing Statement appearing in a search.

As always, carefully review the filing prior to recording and check for indexing errors once a filing has been recorded. You have opportunities to prevent, catch & correct mistakes!

Payment Bonds Can Be Conditional Too

Posted on September 15, 2017 by - In Other Commercial Credit News

Payment Bonds Can Be Conditional Too

Are you furnishing to a private Florida project where a payment bond has been issued? Then you should take a few minutes to review an article we shared this week, The Conditional Payment Bond Trap Facing Florida Subcontractors.

Types of Payment Bonds Available on Private Projects in Florida

First, a primer on the payment bonds available on a private, Florida project:

1 – The owner may require the general contractor to obtain a payment bond. If the payment bond is not properly recorded along with the Notice of Commencement, the payment bond would be a non-statutory payment bond.

2 – A conditional payment bond that is properly recorded along with the Notice of Commencement will be designated as such, and it will include the wording:

(§713.245) This bond only covers claims of subcontractors, sub-subcontractors, suppliers, and laborers to the extent the contractor has been paid for the labor, services, or materials provided by such persons. This bond does not preclude you from serving a notice to owner or filing a claim of lien on this project.

3 – An unconditional payment bond will prevent any liens from attaching to the property if the bond is properly recorded along with the Notice of Commencement. The unconditional bond will not include the conditional wording.

Conditional Payment Bonds Are Precarious

In the above article, author Ryan W. Owen, explains conditional payment bonds and their precarious nature. Owen advises that conditional payment bonds don’t provide the same protections as a standard payment bond.

“Conditional payment bonds do not provide owners or subcontractors with the same protections as standard payment bonds. The surety’s obligation under a conditional bond is only triggered when the owner pays the general contractor and the general contractor fails to pay its subcontractors.”

How can you avoid losing your bond claim rights? As a best practice, always serve the preliminary notice and bond claim upon all parties, and file the mechanic’s lien (when available). And, at the very least, read the terms of the bond!

“Florida subcontractors must carefully examine any bonds attached to a notice of commencement and remember to take all the appropriate steps necessary to protect their lien rights against the project and their claim against the bond when the bond is conditional.”

Owen’s article also includes a chart, which maps rights available if a standard payment bond, conditional payment bond or no bond is issued for a project. Included in the chart is whether a pay-when-paid clause is valid, and notice time frames for 1st and 2nd tier subcontractors and material suppliers.

UCC Introduction and Scope of Article 9

Posted on September 11, 2017 by - UCC Financing Statements

Part 1 | Introduction & Scope of Article 9

The importance of credit decisions and the need to utilize technical skills to protect receivables is receiving a significant increase in visibility and attention. Recognizing an opportunity to generate an increase in sales, while maintaining an acceptable level of risk, is the goal. Perfecting a lien (UCC-1) under Article 9 of the Uniform Commercial Code demonstrates utilization of such technical skills.

By examining specific examples where the use of Article 9 with marginal accounts applies, the opportunities to increase sales and profits can be better recognized.

As an example, an existing customer could be in a position where their account has fallen considerably past due. If the customer does not continue to receive merchandise, the leverage for payment is greatly reduced and a customer may be lost. An alternative might be to secure future transactions, thereby maintaining acceptable risk.

Other examples abound: the new customer who has favorable credit risk factors, but no track record; the very large existing customer who has interim financial statement weakness; the new operator taking over a business; or the growing customer who needs expanded credit lines to support their growth. The key ingredient underlining all opportunities to use security is sound judgment by the credit decision maker.

Introduction – The Security Interest

A security interest protects against the nonpayment of an obligation or nonperformance of a promise. Many creditors require their debtors to enter into a security agreement when credit is extended.

The debtor will provide specific personal property (i.e. collateral) as 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.

Under UCC Article 9, a security interest is an interest in personal property or fixtures which secures payment or performance of an obligation. A Purchase Money Security Interest (PMSI) applies to a seller of the collateral to secure the sales price or a person who gives value to enable the debtor to acquire the collateral.

The Scope of Article 9

Article 9 includes consensual security interests in personal property and fixtures.

What’s Included?

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.

Software has also been added as a category. Software is a computer program and includes related supporting information. However, software embedded in goods and customarily viewed as part of the goods is treated as part of the goods and not software.

Also included are sales of account and chattel paper, including pledge, chattel mortgage, conditional sales, trust receipts, field warehousing and factor’s liens.

Article 9 applies to leases if the parties intend that the lease provide security.

What’s Not Included?

Article 9 does not apply to income tax liens, landlord’s liens, statutory liens (i.e. mechanic’s liens), wage assignments, interest in or liens on real property, or sales of securities.

What is Collateral?

According to Article 9, collateral is “property subject to a security interest or agricultural lien. The term includes: (A) proceeds to which a security interest attaches; (B) accounts, chattel paper, payment intangibles, and promissory notes that have been sold; and (C) goods that are the subject of a consignment.” – § 9-102. DEFINITIONS AND INDEX OF DEFINITIONS

Collateral can be either tangible or intangible. Some forms of tangible collateral are consumer goods, equipment, inventory and farm products. Some forms of intangible collateral are instruments which include any written evidence of the right to receive money, documents of title and receipts, chattel paper, accounts, general intangibles, healthcare receivables and supporting obligations.

Correctly Identify Your Customer on PPSAs in Ontario

Posted on August 14, 2017 by - UCC Financing Statements

It’s Important to Correctly Identify Your Customer on PPSAs in Ontario

Registering a PPSA in Ontario? Then you know the importance of correctly identifying your customer, drafting & executing a sound Security Agreement and registering the Financing Statement in the correct jurisdiction.

Today we are going to focus on identifying your customer, but I’m going to digress for just a moment to recap the recent changes to Ontario’s PPSA regarding jurisdiction.

Quick Digression

Within the last few years (2015), Ontario enacted its 2006 amendments to the PPSA. The 2006 amendments provided additional clarification on where the PPSA should be registered. Prior to the amendments, jurisdiction was determined based on the location of the debtor’s “chief executive office.” With the enactment of the amendments, jurisdiction was determined by entity type (i.e. if it’s a corporation, limited partnership or organization, the province/territory of organization is the jurisdiction).

“(3)(c) if the debtor is a corporation, a limited partnership or an organization and is incorporated, continued, amalgamated or otherwise organized under a law of a province or territory of Canada that requires the incorporation, continuance, amalgamation or organization to be disclosed in a public record, in that province or territory.”

OK, Back on Track | Your Customer’s Name: English & French

Properly identifying your customer is imperative. Under Article 9, you should identify your customer by the name as it appears on the public organic record. Well, what should you do if your Ontario customer has an English and French name? According to the PPSA, you should identify your debtor by its English and French names.

The Minister’s Order — Personal Property Security Act 1990, section 17 under Particulars of Content of Form, states debtors should be identified by both the English & French name.

17. Despite paragraph 2 of subsection 16 (4), if a corporation has an English form of name and a French form of name:

1.       the English form of the name shall be set out on the appropriate line for the name of a business debtor; and

2.       the French form of the name shall be set out on another appropriate line for the name of a business debtor

PPSA Registrations Against Corporate Debtors with English/French Names

Jeffrey Alpert, author of “PPSA Registrations Against Corporate Debtors with English/French Names,” recently explored a New Brunswick case. Despite jurisdiction not being Ontario, Alpert felt it provided secured parties a learning opportunity. And he warned that courts seem to have a “zero-tolerance” policy when it comes to debtor identification.

“This case serves as another warning that the Courts usually follow a “zero tolerance” policy when it comes to mistakes in registering against the name of a debtor under the PPSA.”

The very quick synopsis of the case: the creditor did not identify the debtor by the debtor’s name as it appeared on its Articles of Amendment or in the New Brunswick Corporate Affairs Registry Data Base. In fact, it was the omission of a hyphen within the debtor’s name that invalidated the creditor’s security interest.

Judge Stephenson, presiding over the case, is quoted as saying:

“I acknowledge this is a harsh outcome for the inadvertent admission of a dash in a financing statement. However, that outcome is mandated by the operation of Section 43(8) of the PPSA…It must be recognized that avoidance of these type of over-sights is the reason why post-registration confirmatory searches are conducted against debtor names as a matter of usual commercial practice, and included in closing books, to confirm that a search against the correct names will turn up the relevant registrations… Bottom line, the desire for efficiency and certainty, in a system where priority generally turns on time of registration, necessitates accuracy and precision, which in turn gives rises to the need for statutory provisions such as Section 43(8) to address the consequences of non-compliance with the prescribed registration requirements.”

Alpert’s recommendation to creditors?

“When a debtor is an incorporated company, the secured party must ensure that its registered financing statement shows the debtor’s name as required by the PPSA. After a secured party has registered its financing statement, it should also search against the debtor’s correct name, in order to make sure that its financing statement appears on the search.”

I couldn’t agree more — identify your customer via the proper public record and then perform a reflective search! Every. Time.

Need help with PPSAs? Contact NCS today!

3-in-3: Taking a Secured Interest in Canada via the PPSA

Posted on July 17, 2017 by - UCC Financing Statements

3-in-3: Taking a Secured Interest in Canada via the PPSA

Today’s 3-in-3 features UCC Specialist, Diane Toth. Read this post to learn more about the similarities and differences of the UCC and PPSA.

Canada’s Personal Property Security Act was enacted in the early 70’s and modeled after Article 9 of the Uniform Commercial Code.  Just like a UCC filing, a properly perfected PPSA requires a signed security agreement, public registration of the Financing Statement, and search/notification of any previously secured creditors.

A UCC is filed based on where your customer is registered. What determines where a PPSA is registered?

Diane:  Under Article 9 of the UCC Financing Statement, it’s filed in the jurisdiction of where the debtor is registered, or if an individual, in their state of residence.  Under the PPSA, the security interest is registered in the jurisdiction where the chief executive office is located.

Unfortunately, the PPSA does not define chief executive office, which leaves where to file when shipping to multiple provinces open to interpretation. Under the current PPSA, if the chief executive office is in Alberta, but you’re shipping to British Columbia and Ontario, you would want to file in Alberta, British Columbia and Ontario.

The good news is the Ontario PPSA recently enacted an amendment that better defines a debtor location and this change is more in line with Article 9’s debtor location rules.  (Hopefully the remaining provinces will follow suit!)

Another exception is the province of Quebec.  Quebec has chosen not to follow the PPSA and governs its secured transactions under the Quebec Civil Code which requires an agreement called the Deed of Hypothec.

Is establishing priority in equipment different when registering a PPSA vs. filing a UCC?

Diane:  Yes, under Article 9 you have 20 days from the date of delivery of the equipment to file a UCC to maintain priority rights in your equipment. To maintain your rights under the PPSA, you only have 15 days from the date of delivery to file your PPSA. If you file on the 16th day after the equipment is delivered, you will lose your priority on that equipment which also includes the loss of right of repossession.

UCC filings are effective for 5 years (except Wyoming, which is 10 years). Is a PPSA also effective for 5 years?

Diane: No, under PPSA you choose the length of time for your security interest.  You can choose between 1 to 25 years or even infinity.  Of course, the longer the filing is effective, the more expensive the filing fee.  If you do choose to validate your PPSA for longer than 5 years, the best practice would be to conduct periodic searches to review for any changes that may affect your security interest.

If you have questions, don’t hesitate to contact us – we’re here to help!

3 in 3 Using the PMSI UCC to Get Paid

Posted on May 8, 2017 by - UCC Financing Statements

3-in-3: Using the PMSI UCC to Get Paid

Today’s 3-in-3 features UCC Specialist, Aimee Ebersbach. Read this post to learn more about how you can utilize the PMSI UCC to get paid.

My customer has defaulted; I filed a PMSI, what should I do?

Aimee: What we recommend creditors do first is to contact their debtor and try to get the matter resolved amicably. It’s important that the creditor ask questions such as: “Do you have my inventory?”; “Can I come pick it up?”; “Are you still in business?”

It’s important for the creditor to remind the debtor they’ve signed a security agreement and the debtor is technically in breach of contract. The creditor should also remind their debtor that they have filed the UCC which perfected their security interest and has given them a priority in either their inventory or equipment.

What should I do if the amicable route doesn’t work?

Aimee: Although every case is different, there are some major benefits to sending an attorney demand letter. One of them is the low cost. It’s a flat fee and there’s no obligation for the creditor to formally place that debtor with collection at that point.

The creditor can customize the content of the letter, which includes attaching the signed security agreement and UCC filing. Another benefit is that the letter is sent via certified mail. That will alert the creditor as to whether or not the debtor has vacated the premises.

If the demand letter is unsuccessful, we recommend placing the debtor for collection. It’s important to have an expert attorney review your claim as soon as possible so that attorney can provide a recommendation on enforcing the security agreement and the UCC filing. It’s also important to know that legal action may need to be taken to properly repossess any inventory or equipment.

Time is of the essence. It is important that the claim be reviewed by an expert in that industry.

Let’s assume we’ve gone through all those measures and then we find out our debtor sold off our inventory or equipment. Is there still value in obtaining counsel and trying to go after the claim with an attorney?

Aimee: Absolutely. The creditor will have a breach of contract against the debtor via the security agreement. So at the very least, the creditor will be able to file suit against the debtor and any other responsible parties such as a personal guarantor.

Again, getting the claim to an attorney who’s an expert in that field is the best bet.

3-in-3 Takeaways

  • Be proactive. Keep the lines of communication open with the debtor.
  • Act quickly once you realize there’s a problem, so you have the best chance to get your equipment or inventory back.
  • Have an attorney send a demand letter & include copies of the security agreement and UCC.

NCS has many clients who have successfully leveraged their security interest to repossess their inventory or equipment.

Contact NCS if you don’t know where to start.

Fixture UCC Filings for Creditors Supplying to the Foodservice Industry

Posted on April 24, 2017 by - UCC Financing Statements

Fixture UCC Filings for Creditors Supplying to the Foodservice, Beverage & Hospitality Industries

Blanket Filings, Consignment Filings and PMSI Filings are commonly used by creditors who supply to the food, beverage and hospitality industries. As a matter of fact, we’ve already covered these filing types, so today we will round out our series with Fixture Filings.

When we discussed PMSI in Equipment filings, I mentioned that there could be instances where your equipment would qualify as a fixture. If your piece of equipment is deemed a fixture, then a Fixture Filing is the UCC for you.

Fixture Filings

In the food, beverage and hospitality industries, fixtures could include ranges, ovens, coolers, sinks, dishwashers, hotel headboards and external signage. Notice the overlap? How can a cooler be a piece of equipment and a fixture? Based on the definition under Article 9, a fixture is anything that is “so related to a particular property.”

What are fixtures? Fixtures are “goods that have become so related to particular real property that an interest in them arises under real property law”. — Article 9-102(41)

What is a fixture filing? A fixture filing is “the filing of a financing statement covering goods that are or are to become fixtures and satisfying Section 9-502(a) and (b). The term includes the filing of a financing statement covering goods of a transmitting utility which are or are to become fixtures.” — Article 9-102(40)

The key is “so related,” which indicates the item isn’t permanent, but is still physically attached to the real property. You will likely notice a theme here: fixtures are secured to the building or premises, but can be removed if necessary (if their removal won’t impact the structural soundness of the building or property).

Take the example of headboards and external signage. Headboards are often affixed to the wall, but could be removed without compromising the physical integrity of the hotel (i.e. a removed support beam would compromise the hotel, but simply changing out a headboard that is secured to the wall won’t make the building tumble to the ground).

Similarly, the signs you see outside the hotel identifying it as Holiday Inn or Marriott are attached to the building, but not permanent (the same could be said for signs identifying restaurants).

If we look closer at the differentiation of a cooler being a piece of equipment versus a fixture, the answer is gray at best. Wait, what? If the equipment is affixed to the floor or walls yet still removable, it could be considered a fixture.

Here’s an Example

For example, a cooler that has been bolted to the wall and secured to the floor, like a walk-in cooler, would likely be a fixture. Whereas, a display cooler that holds soda, (those that you often see in grocery stores at the checkout line), can easily be moved as needed.

Here’s another example from NCS’ Jerry Bailey: “If it’s a restaurant and I put a copier in that business, that business could still run if the copier was removed. They could still run the restaurant, so, in that case, it’s not a fixture. If it’s a restaurant and I put a stove in there and I take the stove out, the restaurant can’t continue to cook food, so if the restaurant can’t continue to cook the food, then the stove is very much a fixture.”

Fixture Filings Can Protect You if Your Customer Tries to Sell His Business

Although a fixture filing is still a UCC filing, it is recorded in the real property records, which then turns the security interest into a mortgage or lien against the actual property where the fixture is or will be located.

This makes fixture filings immensely beneficial for creditors, in the event their customer tries to sell their business, because the filing clouds the title of the property. This encumbrance alerts potential buyers/sellers that you need to be paid before the filing will be removed from the property – essentially, the filing keeps the property from transferring from one party to another, until the debt is satisfied.

When Mechanic’s Liens May be a Better Solution

Now, briefly back to the idea that you could also benefit from securing mechanic’s lien rights. There are situations where the piece of equipment is considered an improvement to the building, therefore eliminating the fixture filing.

As an example, one of our clients furnishes exhaust hoods, exhaust fans, heaters and other various pieces of equipment for commercial kitchen ventilation systems. Independently, a single piece of equipment, such as an exhaust hood, could be classified as a fixture (because it is affixed to the property). However, if this same piece of equipment is deemed an “improvement to the real property,” rights can be secured via the state mechanic’s lien statute.

Mechanic’s lien statute has its own set of gray-area-challenges, but one important difference to keep in mind is that mechanic’s liens are not consensual. Meaning, your customer does not have to sign an agreement permitting you to file a mechanic’s lien, unlike the Security Agreement required for UCC filings. If you supply items that rest on the fine line of “fixture” or “improvement to real property” you may want to consider securing your mechanic’s lien rights.

Of course, one could argue that a new walk-in cooler is an improvement to a real property (i.e. mechanic’s lien) or that a ventilation hood is merely affixed & therefore removable (i.e. a fixture filing), which means that determining whether something is or isn’t an improvement to a building will likely require a legal opinion.

The Important Role of PMSI UCC Filings in the Foodservice

Posted on April 4, 2017 by - UCC Financing Statements

The Important Role of PMSI UCC Filings in the Foodservice, Beverage & Hospitality Industries

Previously we discussed how Blanket Filings and Consignment Filings can reduce risk when supplying to the food, beverage & hospitality industries. Now let’s discuss PMSI in Inventory and PMSI in Equipment filings and their role in securing creditors.

Purchase Money Security Interest (PMSI) Filing: Inventory or Equipment

A Purchase Money Security Interest (PMSI) filing provides the same benefits as the blanket filing with the addition of priority of repossession of specific identifiable goods, primarily inventory or equipment that your company would provide.

The determination of whether your goods are inventory or equipment depends on what your customer is doing with the goods you provide.

If you sell goods to your customer and your customer intends to resell them to other entities, then your goods would be considered inventory. Within the food, beverage & hospitality industries, we don’t often see creditors using inventory filings.

Why? Well, frequently these goods are perishable and you don’t want them back.

PMSI in Inventory: “Securing collateral that is defined as inventory 9-102(48) – “Inventory” means goods, other than farm products, which: (A) are leased by a person as lessor; (B) are held by a person for sale or lease or to be furnished under a contract of service; (C) are furnished by a person under a contract of service; or (D) consist of raw materials, work in process, or materials used or consumed in a business.”

PMSI in Equipment filings are much more common in the food, beverage & hospitality industries.

PMSI in Equipment: “Securing collateral that is defined as equipment 9-102(33) – “Equipment” means goods other than inventory, farm products, or consumer goods. The “equipment” is used in the course of the debtor’s business – it is not stocked.”

Creditors who would benefit from a PMSI in Equipment would supply items like copy machines, beverage dispensing machines, flatware, ice machines, stoves/hoods and walk-in coolers; equipment your debtor would keep, use in their ordinary course of business and not re-sell. These are items that you could potentially repossess because there is a resale value to you.

(Note, if you are supplying equipment, it could be deemed a fixture, which warrants a different type of UCC filing.)

Let’s Look at an Example

As an example, a bankrupt restaurateur has six secured creditors. One of his creditors is secured via a PMSI Filing, 5 creditors are secured via Blanket filings, and the remaining creditors are unsecured.

The creditor secured via a PMSI filing has sold a piece of equipment which has been placed in Chef Charles’ restaurant. The original price of the equipment was $10,000, and over time, Chef Charles has retained possession of the equipment and paid $5,000 towards the balance, leaving a balance of $5,000 due to his creditor.

The bankruptcy trustee is going to liquidate Chef Charles’ $61,000 in assets and begin paying his creditors.

The creditor with the PMSI filing will go in first and repossess their piece of equipment. Then the total assets value is reduced from $61,000 to $56,000. Now, payment priority goes first in time, first in right.

Once the secured creditors have been paid, there is $1,000 remaining, and that $1,000 will be disbursed on a pro-rata basis to all general unsecured creditors.

Because the creditor secured their equipment through a PMSI filing, they took priority over the various Blanket filers.

The food, beverage and hospitality industries are enormous — just drive down the street and you are likely to see a dozen different restaurants in a half mile stretch. Although variety is nice as a consumer, this heavily saturated market is extremely risky for creditors.

Extending credit without security is simply a risk you cannot afford in this market — file UCCs to mitigate your risk and exposure.