Supply House? You Can Use the UCC to Get Paid
By John Allen Waldrop III, Commercial Lawyer
Supply houses often overlook a powerful tool at their disposal when trying to get paid. They are often so focused on preserving lien and bond rights that they forget about the power of the Uniform Commercial Code (UCC). The UCC can be a faster and more effective collection tool, when used correctly.
Collection and Repossession
Direct collection and repossession are two quick and powerful remedies that can be found under Sections 9-607 and 9-609, respectively. Section 9-607 permits the creditor to collect money directly from third parties that owe money to the debtor.
In construction lending, this means that a Supply house can appeal directly to the owner or general contractor for ANY money owed to a subcontractor when that subcontractor is in default with the Supply house.
Repossession under 9-609 allows the creditor to recover the collateral when the debtor is in default as long as they do not breach the peace. Thus, the Supply house can pick up material from the job site in whole or partial satisfaction of the debt.
Repossession can occur before filing suit with or without the debtor’s consent or when the debtor is in default. Timing can be critical if a debtor is insolvent.
Purchase Money Security Interest
Another benefit of using the UCC to get paid is that a Supply house can create a “Purchase Money Security Interest” (PMSI.) Under applicable law, a PMSI is a super-priority secured position. This means that the Supply house’s interest will trump the bank’s senior lien holder position even though the bank may have filed its mortgage before the filing of the UCC by the Supply house. In a bankruptcy or insolvency situation, this can be a powerful tool to maximizing the recovery.
How to Create and Perfect the Security Interest
The process to create and perfect the security interest is easy.
First, the Supply house can include security interest language in its standard credit application. Then, upon signing of the credit application, it can then file a form, known as a UCC-1, in the appropriate jurisdiction.
The forms must be filed properly, but there is an easy and cost effective solution to minimize the risk of errors by using a reliable provider.
NCS is a leading provider of secured financing services in North America. They can make sure that the forms are filed accurately, timely and in the right location, which are critical components. They will even remind you when it is time for renewal. After using their services for over ten years, I have found them to be “easy to do business with” and reasonable in their pricing.
UCCs Are a Powerful Tool
A sale is not a sale until the money is in the bank.
Construction lending at all levels within the supply chain requires the use of best practices to be successful. The UCC can be a powerful tool, when used correctly, to manage risk.
For credit professionals managing a portfolio of contractors and subs in the construction industry, a relatively small investment in a UCC program can yield a huge return.
About the Author
John Allen Waldrop III is a commercial lawyer with over 20 years of experience. He served for over 15 years as in-house counsel for a leading national wholesaler of materials in the construction industry where he provided counsel to the credit department. The contents of this article are for general information purposes. It is not intended as “legal advice” and does not create an attorney client relationship with any of the readers. Mr. Waldrop received no compensation or other consideration for providing this article. For follow up questions, Mr. Waldrop can be reached at firstname.lastname@example.org.