Service Area: UCC Services

UCCs and Liens Make Your Company a Payment Priority

Posted on May 14, 2018 by wpengine - Credit Risk Management, Mechanic's Liens & Bond Claims, Preliminary Notices & Construction Credit, UCC Financing Statements

Use UCC Filings and Mechanic’s Liens to Make Your Company a Payment Priority

Businesses prioritize how, when and which vendors are paid and often pay secured creditors ahead of unsecured creditors. But why? In this article, we will review how you, as a trade creditor, can use secured transactions to ensure you are a payment priority for your customers and how you can avail yourself of legal protections, should your customer default or file for bankruptcy protection.

How Does Your Debtor Prioritize Payments?

If your debtor decides to pay 3 of its 10 creditors this month, how or why does the debtor choose which three they are going pay?

Perhaps it’s because the creditor provides a product or service that is vital to the day-to-day operation of the debtor’s business. It could be the debtor has a longstanding relationship with the creditor, so the debtor ensures they are always paid timely. Or, maybe it is because the creditor has security, either through the filing of a UCC or the service of a preliminary notice to protect mechanic’s lien rights.

Why does security make a creditor a priority? Debtors tend to pay secured creditors first, because failing to pay may result in significant consequences.

For example, if a creditor has properly perfected a security interest through a UCC filing, the creditor could leverage the UCC to repossess the goods or collect money directly from third parties. And, the service of a preliminary notice or filing of a mechanic’s lien alerts all parties involved that there is a payment issue. Once the issue is known, it’s hard to hide from it.

Payment Priority | The Leverage of UCC Filings

Article 9 of the Uniform Commercial Code was created to promote commerce. UCCs provide trade creditors the opportunity to secure goods and/or accounts receivable by using the debtor’s personal property/assets as collateral. To create a security interest, you must have a signed security agreement, record the Financing Statement to make the security interest public record and notify the prior secured creditors to establish priority in inventory.

There are two primary types of UCC filings: Blanket and Purchase Money Security Interest (PMSI).

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. The priority or payout in a bankruptcy is determined by the filing date (first in time, first in right). Blanket filings are applicable when providing financing, selling services, or in situations when your customer “consumes” or otherwise does not stock your goods.

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

In the event the debtor defaults on payment or files for bankruptcy protection, the type of UCC filing in place dictates the next steps available to the creditor.

For example, if you filed a PMSI, you would first determine whether you would like your equipment/inventory back. If you do not want your goods back, you can place your claim with an attorney to file suit. By filing suit, you may receive Judgment, which allows you to garnish accounts and/or attach to assets. If you want your goods back, and your customer has the goods, you have the right to repossess without disturbing the peace. If you are unable to peacefully repossess the inventory/equipment, you could take legal action by filing a temporary restraining order or by filing suit against your debtor.

In addition to the security of the UCC filing, the Security Agreement can be used as leverage for breach of contract. Payment terms are written into every Security Agreement. Therefore, if your customer defaults, they are breaching the terms of a signed agreement.

It’s also worth mentioning that a UCC filing program has widespread benefits. Not only will a sound UCC filing program make you a payment priority, it will also minimize financial risk, reduce DSO, improve cash flow and increase sales. UCCs aren’t solely used for 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.

Payment Priority | Using the Mechanic’s Lien Process

Payment cycles in the construction industry are painfully slow. It’s all too common to see invoices age 60-90 days, and still be considered “average payment terms.” Fortunately, in construction, creditors can leverage the mechanic’s lien process to reduce DSO. More specifically, NCS clients with a sound preliminary notice program have experienced an average of a 25% reduction in DSO, with some clients experiencing reductions as high as 50%.

Much like Article 9, mechanic’s lien laws were created to promote commerce and provide creditors, who furnish to the improvement of real property, credit security. However, unlike Article 9, there is very little that is uniform about mechanic’s lien laws, as each state has its own statute.

Become familiar with the mechanics lien statute for the state in which your project is located. It’s important to know the deadlines for each action in advance, to allow ample time to follow the state’s requirements & to take advantage of every opportunity to protect your receivables.

Implementing a mechanic’s lien process is one of the greatest securities available to the construction credit professional. To leverage your position as a secured creditor, you must have a solid foundation for your mechanic’s lien process, which may include a properly drafted, executed & served preliminary notice.

A preliminary notice is a low-cost, proactive alternative to the high-cost & high-stress, reactive remedy of a collections placement. Serving preliminary notices regularly reduces the need to file a mechanic’s lien or proceed with suit actions.

— 97.3% of the time, serving a notice will get you paid.

— 99% of the time a notice and mechanic’s lien will get you paid.

— Only 1% of the time will a project go to suit.

A 97.3% success rate is HUGE and the primary driver behind that success is that everyone within the contractual chain knows you are supplying to the project and taking steps to secure your rights as a creditor – there is transparency.

Don’t be afraid! Too often, companies are led to believe that by protecting their rights to get paid, they will jeopardize projects and relationships. UCC Article 9 and Mechanic’s Lien and Bond Claim laws are there to protect creditors.

Be a payment priority; implement secured transactions.

Lien Should Be Filed by Registered Entity

Posted on May 4, 2018 by wpengine - In Other Commercial Credit News

A Lien is Only Valid if it is Filed by a Registered Entity

A construction lien can be invalidated if the lien claimant doesn’t exist. Well… wait. Of course, a non-existent entity can’t file a lien! In this case, “doesn’t exist” = “not registered” with the Secretary of State or comparable agency.

Registered Name, Not Just for UCCs

Frequently, when referring to the importance of an entity’s name and its standing with the Secretary of State, we are discussing UCC filings. After all, Article 9 dictates the debtor’s name should appear on the Financing Statement as it appears on the public organic record. Not to mention, if an entity isn’t in good standing with the Secretary of State, it’s often an early warning sign of bigger issues.

‘Know Thyself”

Ryan P. Krushelnitzky reviewed an Alberta court decision in his article, Contractor Know Thyself: If you don’t, you may lose your lien.

Essentially, the lien claimant registered its lien under the name Advantage Custom Homes Inc. However, Advantage Custom Homes Inc. was not a registered entity at the time the lien was registered. The business was transitioning from 7083335 Canada Inc. to Advantage Custom Homes Inc., and while a public announcement was made about the upcoming changes, the changes were not yet in effect.

Ultimately, the property owners contested the lien and argued the lien was invalid because “a non-existing company is not a person that can register a lien.”

The judge relied on section 6 of the Builder’s Lien Act, specifically the word “person.”

Builders’ Lien Act, RSA 2000, c B-7, s 6(1)

Creation of lien

6(1) Subject to subsection (2), a person who

(a) does or causes to be done any work on or in respect of an improvement, or

(b) furnishes any material to be used in or in respect of an improvement,

for an owner, contractor or subcontractor has, for so much of the price of the work or material as remains due to the person, a lien on the estate or interest of the owner in the land in respect of which the improvement is being made.

According to Krushelnitzky, “Justice Khullar explained that in order to determine who might be a “person” for the purposes of Section 6(1), the critical issue was to determine “who did the work,” because “the party doing the work is entitled to file a builders’ lien.”

And in this case, the party that performed the work at the time was 7083335 Canada Inc. not Advantage Custom Homes Inc.

“the issue is simply that the corporate entity of Advantage Custom Homes Inc. did not exist on October 26, 2016 so was not “a person” that could file a lien.” – Justice Khullar

Krushelnitzky’s Take Away

Krushelnitzky reminds claimants, small mistakes matter.

“Builders’ liens can be tricky. Small mistakes at the time of registration can result in the loss of lien rights. Contractors that operate using multiple corporate entities, or that engage in corporate restructuring during the course of a project, need to be particularly mindful that the proper, existing, legal entity is the party registering the lien. The best way to avoid losing a lien is to seek legal advice before the lien is registered.”

NCS Best Practice

When filing a lien, ensure your backup documentation is in line, and confirm you are filing under the correct legal name. The name, as it appears on your contract, should match the name as it appears with the Secretary of State, W-9, etc. If you are in the process of a name change or the transition occurs mid-project, be prepared to provide supporting documentation, such as copies of the Articles of Incorporation or merger documents.

Business names change and registrations/renewals can be overlooked.

If you have any concerns, it’s best to seek legal guidance as soon as possible.

Register Operator’s Liens with a PPSA

Posted on March 23, 2018 by wpengine - In Other Commercial Credit News

Executing an Operator’s Lien? Take Time to Register it with a PPSA

In a recent Alberta court decision, a creditor claimed it had priority in the defunct debtor’s estate, because the creditor and debtor had executed an operator’s lien. The operator’s lien, however, was not registered in compliance with the PPSA. Subsequently, the creditor did not perfect its security interest and did not hold priority.

What Section of the PPSA Governs the Priority of an Operator’s Lien?

In a recent legal decision, the Court of Queen’s Bench of Alberta stated operator’s liens fall under section 35 of the PPSA.

Residual priority rules

35(1) Where this Act provides no other method for determining priority between security interests,

(a) priority between perfected security interests in the same collateral is determined by the order of occurrence of the following:

(i) the registration of a financing statement, without regard to the date of attachment of the security interest,

(ii) possession of the collateral under section 24, without regard to the date of attachment of the security interest, or

(iii) perfection under section 5, 7, 26, 29 or 77, whichever is earlier,

(b) a perfected security interest has priority over an unperfected security interest, and

Essentially? First in time, first in right. Which means, if a Financing Statement isn’t registered, a security interest is unperfected.

Cansearch Resources Ltd v Regent Resources Ltd, 2017 ABQB 535

Cansearch Resources Ltd (Cansearch) was the day-to-day operator and partial owner of the Joffre Gas Battery and Compression Facility. Cansearch entered an operator’s agreement with the now bankrupt Regent Resources Ltd (Regent).

Within the agreement, there was language granting Cansearch an operator’s lien for unpaid expenses. At the time the operating agreement was executed, Cansearch did not perfect its security interest under the PPSA.

The agreement also allowed Regent to mortgage its ownership interest, which it did. Alberta Treasury Branches then loaned Regent $28M and perfected its security interest in compliance with the PPSA.

When Regent filed for bankruptcy protection, Cansearch argued its operator’s lien gave it priority, but the court nixed the argument because Cansearch did not perfect its security interest — the operator’s agreement needed a registered PPSA to be perfected.

It’s worth noting, Cansearch did abandon its claim to priority, because it failed to register the lien under the PPSA, and instead pursued a possessory lien. Unfortunately, the court determined a possessory lien would not apply either.

Never Assume an Agreement is Enough

According to Pantelis Kyriakakis, author of Operator’s Liens and the PPSA Priority Regime, “Generally, operator’s liens that arise under an agreement are consensual security interests that are subject to the framework and priority system set out in PPSA.”

Kyriakakis states operators should register a PPSA to perfect their security interest; however, many simply don’t.

“It is both possible and advisable for operators to perfect their operator’s lien by registering such security interests in accordance with the PPSA. However, this is not common practice. As a result, operators remain unperfected secured creditors. …in the event an operator does perfect their security interests in an operator’s lien, they will likely be in a subordinate priority position to any prior registered secured creditors.”

Take advantage of the laws that protect you! If you have the security language/granting clause within your agreement, take time to register a PPSA (or file a UCC in the US). Never assume the agreement will be sufficient in proving priority.

Filing a UCC to Perfect Your Security Interest

Posted on March 5, 2018 by wpengine - UCC Financing Statements

Filing a UCC to Perfect Your Security Interest? No Security Exists if the Debtor’s Name is Wrong

Yes, that’s right. It’s yet another case of an unperfected security interest because the creditor failed to comply with Article § 9-503.

In a fight for priority, a creditor claimed “…[T]hey have ‘valid, enforceable, properly-perfected, unavoidable prepetition liens…’” which is senior to the bank’s UCC for debtor-in-possession (DIP) financing.

Unfortunately, the creditor did not have a ‘valid, enforceable, properly-perfected, unavoidable prepetition lien’ because the creditor did not list the debtor’s name on the Financing Statement as the name appears on the public organic record.

The Case: Fishback Nursery, Inc. v. PNC Bank, NA, Dist. Court, ND Texas 2017

The debtor, BFN Operations LLC (BFN) also known as Zelenka Farms, filed for bankruptcy protection. PNC Bank NA (PNC) had a security interest in substantially all BFN’s assets and perfected its security interest by filing a UCC. Fishback Nursery Inc. and Surface Nursery Inc. (collectively “Nurseries”) furnished various agricultural products to BFN, and Nurseries also filed UCCs.

Nurseries filed three UCCs, one in each state where they sold products to BFN: Oregon, Michigan & Tennessee. On all three UCCs, Nurseries identified BFN as “BFN Operations, LLC abn Zelenka Farms.” Unfortunately for Nurseries, the addition of “abn Zelenka Farms” rendered their security interests unperfected. BFN’s name, in the public organic record, is “BFN Operations, LLC” and does not include “abn Zelenka Farms.

Not Saved by the Savings Clause

According to the court opinion, Michigan & Tennessee both offer a “savings clause.” The Michigan “savings clause” can be found under MCL 440.9506(3):

“If a search of the records of the filing office under the debtor’s correct name, using the filing office’s standard search logic, if any, would disclose a financing statement that fails sufficiently to provide the name of the debtor in accordance with section 9503(1), the name provided does not make the financing statement seriously misleading.“

Here’s an example of a search in Michigan. PNC would have processed a UCC search by the entity’s correct name, “BFN Operations, LLC” – that search would provide the following results:

A search for the name Nurseries used on their UCC’s, “BFN Operations, LLC abn Zelenka Farms” provides these results:

If you look closely, you will see the File Numbers in both images are different; 6 different UCCs. The search run by PNC, on the debtor’s correct name, does not reveal the filings by Nurseries; Nurseries’ UCCs would only appear in a search of “BFN Operations, LLC abn Zelenka Farms.”

Some may argue that Nurseries’ UCCs should have appeared, because the debtor’s name begins with “BFN Operations, LLC” but as you can see, a UCC search does not operate as a keyword search. If it were a keyword search, it would pick up any/all variations of the entity’s name.

Seriously Misleading, Security Interest Unperfected

Because the UCCs did not comply with Article 9, Nurseries’ security interest was unperfected. Obviously, with an unperfected security interest comes the “parting prize” of unsecured creditor status. PNC properly perfected its security interest; thus, PNC is a secured creditor and its UCC takes priority.

Best Practice: PUBLIC. ORGANIC. RECORD.

Always, always, ALWAYS correctly identify your debtor, in compliance with Article 9, on the UCC Financing Statement. We see issues like this time & time again – avoidable errors that eliminate a creditor’s security. Article 9 sets out specific parameters, and to perfect a security interest, you must comply with each requirement.

Compliance with UCC Article 9-503 and Alternative “A”

Posted on February 19, 2018 by wpengine - UCC Financing Statements

Filing a UCC on an Individual? Make Sure You Comply with UCC Article 9-503

To Determine Whether One Creditor Correctly Identified the Individual on the UCC Filing, a Bankruptcy Court Had to Venture into Uncharted UCC Article 9 Territory

Filing a UCC on an individual? It is critical that you comply with Article § 9-503(a): The Financing Statement must list the debtor’s name as it appears on the debtor’s unexpired driver’s license.

Let me repeat: The Financing Statement must list the debtor’s name as it appears on the debtor’s unexpired driver’s license.

But what happens if the printed name on the driver’s license is different than the individual’s signature on the driver’s license? Technically, both names (the printed & signed) appear on the license – which is correct?

Until now, no one has questioned whether the name shown in the signature or the printed name on the driver’s license should appear on the Financing Statement. This is uncharted territory under UCC Article 9.

Of course, we’ve encountered cases where the name on the Financing Statement and driver’s license don’t match, but these differences are typically due to spelling errors. Errors such as a misspelled last name: the name on the driver’s license is ”Susan Walker” vs. the name on the Financing Statement is ”Susan Wakler”. We’ve even encountered a case where the name on the driver’s license was misspelled, and the courts determined the misspelling should have been reflected on the Financing Statement.

But an argument that compliance with Article § 9-503 is achieved when using the driver’s license signature vs. the printed name? Definitely a new layer of complexity.

In a recent bankruptcy case, one Georgia court determined the printed name on the unexpired driver’s license is the name that should appear on the UCC Financing Statement, leaving one creditor’s security interest unperfected.

The Case | Bank Lends Money, Debtor Files for Bankruptcy Protection

In 2015, Kenneth R. Pierce (Pierce) obtained an $18,000 loan from Farm Bureau Bank (Bank) and the proceeds of the loan were used to purchase farming equipment, a fertilizer spreader. Bank and Pierce executed a security agreement and Bank filed a UCC to perfect its security interest.

In 2017, Pierce filed for Chapter 12 bankruptcy protection. Subsequently, Bank timely filed a proof of claim for the balance owed of $14,459.81 and attached a copy of their UCC-1 to the proof of claim.

On the UCC filing, Bank identified Pierce as “Kenneth Pierce;” however, Pierce’s name on his unexpired driver’s license was “Kenneth Ray Pierce.” Pierce filed an objection with the Bankruptcy Court, claiming Bank’s security interest was unperfected, because Bank incorrectly identified Pierce on the UCC filing.

Quick Refresher on “Alternative A”

Before we get into the Court’s review of the case, let’s do a quick review of Alternative A under the 2010 UCC Amendments.

In compliance with § 9-503(a), when the debtor is a registered organization, creditors should rely on the information found on the public organic record.

If the debtor is an individual, creditors must first look to the state’s legislation. With the 2010 Amendments, each state had to decide whether they would implement “Alternative A” or “Alternative B.”

Alternative A: if the debtor holds an unexpired driver’s license, the Financing Statement must list the debtor’s name as it appears on the unexpired driver’s license. (If the debtor does not have a driver’s license, the Financing Statement should list the “individual name” of the debtor or the debtor’s surname and first personal name.)

Alternative B: the debtor’s driver’s license name, the debtor’s actual name or the debtor’s surname and first personal name may be used on the Financing Statement.

The Bankruptcy Court’s Review | Technically Two Names Appear on the Individual’s Driver’s License

Technically two names appear on Pierce’s driver’s license, at least that is Bank’s primary argument. See, the printed name on his driver’s license is “Kenneth Ray Pierce” though Pierce’s signature reads “Kenneth Pierce.” Bank argued that Article § 9-503(a) doesn’t specify whether the identifying name must be the name that is typed on the driver’s license.

“But as Farm Bureau Bank points out, there are two names “indicated on the driver’s license”: “Kenneth Ray Pierce” (typed) and “Kenneth Pierce” (signed). Farm Bureau Bank argues that O.C.G.A. § 11-9-503(a)(4) is not limited to the name typed on the driver’s license, but rather that it includes the name signed by the Debtor, and thus its Financing Statement does provide the (signed) name of the Debtor.”

Georgia is an Alternative A state, and in the plain text of the law, Bank isn’t necessarily wrong; it does not specify whether the printed name or signed name is the name to be listed on the Financing Statement:

9-503. NAME OF DEBTOR AND SECURED PARTY.

(a) [Sufficiency of debtor’s name.]

[Alternative A]

(4) subject to subsection (g), if the debtor is an individual to whom this State has issued a [driver’s license] that has not expired, only if the financing statement provides the name of the individual which is indicated on the [driver’s license];

(5) if the debtor is an individual to whom paragraph (4) does not apply, only if the financing statement provides the individual name of the debtor or the surname and first personal name of the debtor;

Thus, it becomes the Court’s duty to determine whether the error on the Financing Statement is seriously misleading, or if Bank’s security interest is perfected because it substantially complied with the law.

The Bankruptcy Court’s Review | Webster’s Dictionary, Case Law & Basic Compliance with the Law

Courts weigh a variety of factors when deciding a case, often relying on previous legal decisions for guidance, the “plain language of the law” and even Webster’s dictionary.

The Court thought perhaps the answer would lie within the definition of “indicate” as it appears in “indicated on the driver’s license.”

“Turning to Webster’s Third New International Dictionary 1150 (1981) the following are among the definitions provided for the word “indicate”: “to point out or point to or toward with more or less exactness,” to “show or make known with a fair degree of certainty,” and to “reveal in a fairly clear way.” These definitions do not help the Court determine which of two names is “indicated” on the Debtor’s driver’s license. Indeed, the presence of two different names on the driver’s license is precisely the opposite of exactness, certainty, and clarity.”

I now understand the saying “clear as mud.”

The Court also reviewed various Georgia cases. Unfortunately, most of the cases did not address the exact issue in this case. The Court then turned to other jurisdictions’ case law, and one Nebraska bankruptcy case shed some light, though the case was decided prior to the 2010 Amendments and does not wholly apply to the case at hand.

“In Genoa Nat’l Bank v. Southwest Implement, Inc. (In re Borden), the debtor was identified by his legal name “Michael Ray Borden” or by “Michael R. Borden” on his driver’s license and on other legal documents. 353 B.R. 886, 887-88 (Bankr. D. Neb. 2006). However, the debtor often signed legal documents by his nickname, “Mike Borden.” Id. The court held that financing statements identifying the debtor as “Mike Borden” were seriously misleading. Id. at 892. In re Borden suggests that the name typed on legal documents trumps the name signed by the debtor.”

OK, What about Standard Search Logic?

The second argument Bank lodged was that the UCC would appear in a search based on Georgia’s standard search logic. But, under that argument, the search would have been done using Pierce’s name on his driver’s license – “Kenneth Ray Pierce.” And, a search for “Kenneth Ray Pierce” would not have uncovered the filing for “Kenneth Pierce.”

As a side note, a search of Georgia’s UCC Index can be done with a partial name. Yes, Bank should have searched by the individual’s name as it appears on the driver’s license, however, a partial search of “Pierce, KE” revealed the UCC:

Seriously Misleading, Unsecured Status

On its Financing Statement, Bank failed to identify its debtor in compliance with § 9-503. Failing to correctly identify its debtor meant the UCC filing would not be uncovered in a search. The Court declared Bank’s UCC as seriously misleading, bumping Bank to unsecured creditor status.

Always Obtain a Copy of the Driver’s License

At NCS, our UCC experts continually stress the importance of the driver’s license, yet nearly 30% of creditors fail to comply with Article 9 requirements. I know, you are tasked with a lot and it’s easy to overlook or neglect the driver’s license. But the name on the driver’s license, the printed name, is vital for a perfected security interest.

This case is another example of a creditor losing its secured status because of an avoidable error. Don’t jeopardize your perfected security interest; obtain a copy of the unexpired driver’s license as a part of your credit application process. Every. Time.

Secured Creditor Bumped to Unsecured Status

Posted on February 16, 2018 by wpengine - In Other Commercial Credit News

Secured Creditor Slips to Unsecured Creditor Status & Loses Over $50,000

Late last fall, we reviewed a pivotal case in Wisconsin. A creditor’s security interest was unperfected because the debtor’s name on the UCC Financing Statement included (unintentionally) an extra space.

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.

Turns Out, a Space is Worth 33% of $169,437.72

At the time of the court’s decision, the differences in the recovery percentages for secured vs. unsecured creditors were unknown. However, a recent article, Wisconsin Federal Court Holds That Creditor Who Inadvertently Included Extra Space in Debtor’s Name in UCC Financing Statement Was Unsecured, is reporting that secured creditors are to recover 100% of their claims, while unsecured creditors are to recover only 66%.

For the creditor Double Bubble, this means recovery of approximately $113,000 vs. the balance owed of $169,437.72.

“[c]reditor was deemed an unsecured creditor who could only be paid 66% of its $169,437.72 claim under the receiver’s plan. The creditor filed an objection, arguing that it properly perfected its security interest and, as a secured creditor, was entitled to 100% of its claim under the plan. The Court denied the creditor’s request.”

Strict Compliance with Article 9

Strict compliance with Article 9 is imperative. 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;

As a best practice, follow the peer review and/or buddy system. In other words, have a colleague carefully review the prepared filing prior to recording and check for indexing errors once a filing has been recorded.

NCS can help – contact us today!

The Difference Between Consignment & Bailment

Posted on January 22, 2018 by wpengine - UCC Financing Statements

Is it a Consignment or is it a Bailment?

Consignment is often confused with Bailment and vice versa. While they are different, they do have similar characteristics. For example, under both consignment and bailment, the ultimate ownership of the goods remains with the party that supplies the goods (consignor/bailor).

In this post, we will take a high-level look at consignment vs. bailment.

Consignment Refresher

We’ve discussed Consignment filings before, but here’s a quick 101:

“A consignment is when the owner (the consignor) retains title to goods delivered to the consignee. The consignee will then hold the goods for sale or use. When the goods are sold, the consignor’s rights attach to the proceeds. If the consignee is not able to sell the goods they can be returned to the consignor without any obligation. The advantage of a consignment sale is that it minimizes the risk of non-payment and can be an option when doing business with a poor credit risk.” – quote from blog post, Protect Your Consignment Sales

What Makes a Bailment Different from Consignment?

Under a bailment agreement, the bailor (owner), delivers its goods to another party (the bailee), “for some express purpose” and once the bailee has fulfilled this purpose, the goods are returned to the bailor.

In other words, a bailment is a transfer of physical possession of the goods, not a transfer of title or ownership of the goods.

“Express Purpose” Could Be to Improve Upon the Original Goods

Here’s an example:

My fictional company, Fan Co., manufactures and sells industrial-sized smart fans.

Fan Co. manufactures all the smart fan parts; however, Fan Co. doesn’t have the equipment needed to assemble and program the motherboards that make their fans “smart.”

So, Fan Co. manufactures all the pieces/parts for the motherboards and hires a third party to assemble and program the motherboards.

Under an agreement between Fan Co. and the third party, the third party will assemble and program the motherboards and send the completed motherboards back to Fan Co.

Fan Co. retains ownership of the pieces/parts, even when they are in the third party’s possession.

Chart it Out

Still a little fuzzy on the difference between consignment & bailment? Maybe this quick chart will help.

Best Practice: Hope for Bailment & Prepare for Consignment

Technically, because a bailment is not a sale of goods, it tends to fall under Article 2 of the UCC, not Article 9.

However, releasing goods to another party, whether the intention is for the goods to be returned or sold, is a risk.

What if the third party files for bankruptcy protection, while in possession of your goods? Even when those goods are slated to be returned to you, if you failed to file a UCC under Article 9, your right to repossess those goods may be in jeopardy. Furthermore, if another creditor filed a UCC on that same entity, their security interest would take priority.

Before releasing goods to a third party, ensure you have a signed security agreement and file a UCC-1.

Properly Perfected UCC and Repossession

Posted on December 18, 2017 by wpengine - UCC Financing Statements

Can a Properly Perfected UCC Really Give Me the Right to Repossess?

Yes, a properly perfected security interest and proof of debtor default may afford you the right to repossess the collateral. Today’s post reviews a recent case that demonstrates the power of a properly perfected UCC.

In CNH INDUSTRIAL CAPITAL, AMERICA, LLC v. T & P FARMS, LLC, Dist. Court, ND Mississippi 2017, the court granted the Secured Party the right to repossess its equipment because it had 1.) proven the debtor defaulted on the contract and 2.) properly perfected a security interest through UCC Financing Statements.

Background: The Contract, The UCC-1s & The Replevin

In 2015, the debtor, T & P Farms, LLC (T & P) purchased over $1M in farming equipment from Medlin Equipment Company of Mississippi County (Medlin).

According to the court opinion, there were 4 pieces of equipment sold, and each sale was “…evidenced by a Retail Installment Sale Contract and Security Agreement.” (3 of the 4 sales were addressed in the replevin action.)

Included in the contract, aside from the security language and terms of the sale, was a clause regarding debtor default: “the seller has the right to ‘take possession of all Collateral, without notice or hearing…’” and Medlin assigned its interest in the equipment to CNH Industrial Capital America, LLC (CNH). Subsequently, a PMSI filing was properly perfected, by CNH, for each sale/contract.

By the end of 2016, the debtor had stopped making the agreed upon monthly payments and in May 2017, CNH filed a replevin action.

What is Replevin Action?

Wex Legal Dictionary defines replevin as the action used by creditors to repossess collateral from debtors in default. “A writ authorizing the retaking of property by its rightful owner (i.e., the remedy sought by replevin actions).”

The rules of replevin may vary by jurisdiction and this case looks to Mississippi statute (Section 11-37-101 of the Mississippi Code). According to the court opinion, a replevin action requires a declaration under oath to include:

(a) A description of any personal property;

(b) The value thereof, giving the value of each separate article and the value of the total of all articles;

(c) The plaintiff is entitled to the immediate possession thereof, setting forth all facts and circumstances upon which the plaintiff relies for his claim, and exhibiting all contracts and documents evidencing his claim;

(d) That the property is in the possession of the defendant; and

(e) That the defendant wrongfully took and detains or wrongfully detains the same

The Secured Party Prevailed

When a replevin action is filed, the party filing the action needs to prove their right to repossess the collateral. In this case, the Secured Party filed the action, then the Secured Party proved its properly perfected security interest as well as the default of its debtor.

“A plaintiff in a replevin action establishes the right to immediate possession by demonstrating a default on a purchase contract and a perfected security interest in the collateral.”

The debtor is afforded an opportunity to defend against the repossession. The debtor asked the court to consider equitable defense (a defense based on fairness, not law), based on the debtor’s need for the equipment to maintain his business and support his family. The debtor further added he should not have to pay for the equipment, because the equipment was faulty. Unfortunately, the debtor’s defense wasn’t persuasive enough.

“While a rule of equity may play some role in this determination, such as where a party claims an equitable lien in the subject of the action, T & P has not cited, and this Court has not found, any authority which supports the proposition that a possessory interest in collateral may be equitably created by either the condition of collateral unrelated to the existence of a default or the need for continued possession.”

CNH properly perfected its security interest and successfully established the debtor’s default, therefore, the court granted CNH the right to repossess the equipment.

UCC for the win!