Top 5 Mistakes in Security Agreements

UCC Filings: Top 5 Mistakes in Security Agreements

In an earlier post we discussed the art of drafting a perfect security agreement and today we’d like to discuss the common mistakes in security agreements.

1. Incorrectly Identifying the Debtor

How difficult is it to identify the debtor aka your customer – significantly more difficult than it should be. The greatest obstacle with identifying your customer is ensuring you have the correct spelling of their corporate legal name – not their DBA or trade name. Leaving off “Inc.” or “The” can deem a filing seriously misleading & subsequently unenforceable.

Always review the Articles of Incorporation to confirm your debtor’s name.

2. Omitting Debtor’s Address

Remember, omitting information is just as fatal as listing the information incorrectly. Make sure you correctly identify and list the corporate address of your debtor.

3. Date, Date, Date

Don’t lose rights because you forget to list the date or you list the wrong date. In a recent case the lender lost its secured position (on $1,100,000.00) because the Security Agreement was dated December 13th and the Promissory Note was dated December 15th. Due to the discrepancy the court held that there was no perfected security interest.

Don’t go it alone!

A best practice in drafting security agreements (or any document for that matter) is to have someone else review the document. In grade school we had proofreading buddies – just because we aren’t in grade school anymore, doesn’t mean we should stop taking advantage of another set of eyes.

4. Authorized Signatures

First, make sure the agreement is signed. Second, make sure the person signing the document is permitted to sign the document. Because a security agreement is part of a consensual process, it’s imperative that the parties signing the document are authorized to do so.

5. Don’t Forget the Granting Clause

The granting clause actually grants the security interest, so do yourself a favor and confirm it is written into the agreement! In fact, without the granting clause, the security agreement isn’t actually a security agreement.

When in doubt, seek a legal opinion.

Request a review of your security agreement to ensure the necessary parts are in place & accurate. Drafting a security agreement does not have to be difficult, but it does need to be perfect – that’s why it’s called a “perfected security interest” when you become a secured creditor. Don’t lose your security because you didn’t perfect the security agreement.

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