Service Area: UCC Services

Credit Survival Guide: UCC Filings

Posted on October 18, 2016 by - UCC Financing Statements

Credit Survival Guide: UCC Filings

You go out on a limb and sell to a new customer. As an experienced credit professional, you aren’t worried about working with this customer because you have a UCC filing program to lower your DSO, increase your sales, and to elevate your creditor status to a secured creditor.

A couple years down the line, your customer files for bankruptcy. You think you’re in good shape because you used a UCC filing to secure your transaction.

But it turns out that your debtor’s business not only changed ownership, but changed names, without informing you. With incorrect information on your UCC filing, you are left as an unsecured creditor.

This is a very common and frustrating situation for creditors. Whether or not you’ve been burned this way before, here are a few tips to avoid collecting pennies on the dollar or, even worse, a write-off.

Where do you start?

Tip #72: Know Your Debtor

You have your Security Agreement/Credit Application signed by your customer (the Debtor) and are ready to file your UCC-1. Before you file, make sure the customer’s legal name is listed on your Agreement. Many times, Debtors will list their DBA names on the Agreement, which could be a problem in the event of a bankruptcy.

For registered entities, make sure the legal name as shown on their Articles of Incorporation is listed on the signed Agreement. If filing on a Sole Proprietor, the Agreement should show the individual’s full legal name, as reflected on their unexpired driver’s license.

You can also list a DBA name, but it isn’t required for the UCC filing. If filing on a partnership, make sure that both partners have signed the Agreement and their full legal names are reflected as well. The UCC-1 is a public record of your signed Agreement so the information on both documents should match and reflect the correct information for your Debtor.

My UCC is filed and I made sure all of my debtor information is accurate. I’m good to go, right? Not quite.

Tip #62: Reflective Searches Can Keep You Ahead of the Game

Often times, we take for granted when a UCC is instantly recorded online that all is well. BUT how do you know your filing will actually show up on a UCC-11 search? Each secretary of state office has their own software to house UCC filings that sometimes can be unreliable or outdated.

The only way to determine if your UCC filing is indexed correctly is to conduct a Reflective Search. If that Reflective Search does not display the filing, you have a problem.

In addition to making sure your UCC filing is correctly indexed, monitor your debtor for any changes to avoid an amendment of your filing.

Tip #35: Monitor for Name Changes

Are you aware that if your customer changes their name, you must amend your UCC Filing or your security is jeopardized? Section 9-507 (c) of the UCC tells us that we have 4 months to amend our UCC filing when the debtor name changes. If not, the UCC filing is not effective to perfect a security interest in collateral acquired by the debtor before or within four months after the change.

Make sure your Security Agreement requires the debtor to advise you of any changes to name, address, or organizational structure. It is the secured party’s responsibility to ensure the UCC filing is updated and contains the correct information. Best practice is to monitor your customer for change.

Takeaways

Filling inaccuracies and unreported changes to name, address, or organizational structure can jeopardize the security of your UCC filing. The experts at NCS are well versed in every state’s search logic and can alert you to indexing errors, making sure your filing is accurate.

Ask about NCS Corporate Monitoring Service! Corporate Monitoring provides an email notification to alert you of an entity name or status change and NCS will recommend what you need to do to retain your secured position.

Today’s 3-in-3 Topic is: UCC Filings and Consignment

Posted on September 13, 2016 by - UCC Financing Statements

Today’s 3-in-3 Topic is: UCC Filings and Selling on Consignment

Today’s 3-in-3 features UCC Specialist, Elizabeth Hunt. Read on to learn more about consignments and how UCC filings can secure consignments and reduce your risk.

“What is a consignment?”

Elizabeth: A consignment is when the owner or the consignor retains title to the consigned goods that are delivered to the consignee.  The consignee will then hold the goods for sale or for use.  Once those goods are sold, the consignor’s rights then attach to the proceeds.

“Does consignment carry risk?”

Elizabeth: Yes, consignment does carry risk, specifically if the consignor doesn’t take the necessary steps to protect their ownership of their goods. Without the additional security of a UCC Financing Statement, the consigner could lose their rights to their goods and the proceeds.

“How can a consignor protect the consigned goods & what steps should they take?”

Elizabeth: Consignors can protect their goods by complying with Article 9 of the Uniform Commercial Code and filing a UCC-1.

If you are consigning goods, follow these important steps:

  • First, you should have a consignment agreement signed by both you (the consignor) and your customer (the consignee). This agreement should include the terms and conditions of the consignment, a clause granting the security interest, and a detailed description of your consigned goods.
  • Second, you need to make the agreement public record by filing the UCC-1 Financing Statement in the consignee’s state of organization.
  • Third, you should conduct a UCC search and send authenticated notification letters to the prior secured parties. This notification informs prior secured parties that you have, or expect to acquire, a Purchase Money Security Interest in your consigned goods.

Once these steps have been completed, the consigned goods are protected against competing claims. It is important you complete this process prior to releasing your goods, because anything delivered prior to perfection of your security interest may not be secured from prior secured creditors.

3-in-3 Takeaway

The takeaway from this segment is that if you are consigning product, make sure you file a UCC. When filing the UCC, you should search and notify all other creditors of the goods located at your customer’s business that you hold title to those goods.

Perfection is key; make sure the process is complete prior to delivering your goods so you’re secured moving forward.

What is the Right UCC Filing?

Posted on August 23, 2016 by - UCC Financing Statements

Today’s 3-in-3 Topic is: What is the Right UCC Filing?

Today’s 3-in-3 features Cindy Bordelon, Manager of our UCC Services, and her recommendations for determining the appropriate UCC filing.

Question 1:  How do I figure out what filing is needed for me to protect myself?

Cindy: The best way to answer your question is with some questions.  What are you selling, what is your customer doing with the goods and what do you want to secure?   The type of transaction that is taking place and what you’re trying to secure will help to determine the type of filing you need.

Question 2: In these 2 examples, what would be the appropriate filing for me?

Example 1: Let’s say you’re a manufacturer and are selling product to someone that’s going to be stocking it, like a stocking distributor. And they’re going to be holding the inventory for 60 or 90 days and you would like to take a secured interest or a priority interest in your inventory, maybe the proceeds and accounts and accounts receivable.

Cindy: Well this would be a prime example of a Purchase Money Security Interest in inventory, — also known as a PMSI in inventory.  So you’re looking to secure your inventory, take priority security in the inventory so you’ll be able to repossess it in the case of a default or bankruptcy, and also — depending on certain circumstances — you might want to try to secure your accounts, accounts receivable and the proceeds.

Example 2: What if you are the manufacturer of a piece of equipment that your customer is going to use in the course of their business? In this example, what would be the appropriate filing?

Cindy: This would be an equipment filing because they’re actually using the piece of equipment in the course of their business so you want to secure that piece of equipment since they’re not restocking or reselling anything.

Question 3:  When would a blanket UCC apply?

Cindy: When you’re not looking to repossess anything and are just concerned about taking a secured interest in the accounts, accounts receivable and the general intangibles. So it’s kind of like laying a blanket over general items and nothing specific.

3-in-3 Takeaways

  • Use a blanket UCC filing when you’re trying to take a secured interest in the personal property of your debtor or their intangibles.
  • Use a PMSI in equipment filing when you want to take a priority interest in your equipment that your customers are using in the course of their business.
  • Use a PMSI in inventory filing when you want to take a secured interest in your inventory accounts and accounts receivable just in case of default or bankruptcy.

The Tale of Two Rivals: Sales and Credit

Posted on June 24, 2016 by - In Other Commercial Credit News

The Tale of Two Rivals: Sales & Credit

If you are a credit professional, you have likely worked with sales folks who can’t seem to get you the information you need – despite how loudly and persistently you ask.

If you are a sales professional, you have likely worked with credit folks who seem to never have enough details. No matter how much you give, they are always harping for better information.

When the credit department wants to implement a new process, a mechanic’s lien process, for example, there is almost always one stumbling block: “How am I going to get sales on board with this?” (Sales, I’m sorry, but I don’t know how you feel, as I, too, am a credit professional and can sympathize with credit departments a bit more easily.)

This week, we shared an article by Walter Cupkovic and Jack Parrino (“authors”), Construction Due Diligence: Sooner is Always Better than Later. This article resonated with me for two reasons, the first reason comes in the first sentence of the second paragraph.

“When a contractor, subcontractor, or material supplier ‘sells’ a job, it is selling three things — ‘labor, materials, and credit.’”

YES! It’s brilliant and exactly how it works (or should work) in the construction industry. It’s not just furnishing materials and labor, and it’s not just extending credit. It’s both–working as a team.

Next, the authors acknowledge what I consider the second most resonant point of the article — that even a good customer can’t guarantee timely payment on a construction project.

“While credit due diligence is an important factor, there is no guarantee that a particular construction project will be successful or that otherwise having a ’good customer will’ result in payment in full. Let’s face it, contractors, subcontractors, and material suppliers sell to and/or work with many qualified contractors and owners but still find themselves in the middle of a troubled project, whether as a result of lack of additional financing to complete, a bankruptcy within the tier of contractors, or some other circumstance.”

Again, may I shout “YES!”?

Determining the credit worthiness of your customer is more than bank statements and credit reports. Credit worthiness is not simply concluding, “Well, they’ve been a good customer for over 30 years.”

Determining true credit worthiness is about understanding the risks associated with a particular project and that lie within the contractual chain; it’s about knowing what monies may be tied up in other projects throughout the state and country.

This is why additional tools like LienFinder, Bankruptcy Monitoring & Corporate Monitoring, are so incredibly valuable! A resource like LienFinder can provide you with a broader picture of the parties within your ladder of supply.

It’s easier for me to show you the value of this tool through an actual example pulled from LienFinder for one of our clients.

Alert

Warning: Since January, Classic Homes is the owner and/or GC on mechanic’s lien filings with claims totaling $661,767.

NCS Recommendation: You currently have outstanding claims of $462,185.70 on 6 projects that Classic Homes is a part of (Classic is listed as Owner and/or GC). It does not appear the liens are filed on any projects you are directly supplying to, however, keep a close eye on current projects & any project going forward. Ensure your customer continues to pay you timely and in the event payment stalls, proceed with the filing of a mechanic’s lien.

This matters! We know an ol’ saying which seems to thrive in the construction industry: robbing Peter to pay Paul. It is quite possible that this NCS customer will never be impacted by the information above, but if history is any indication of what’s to come…you can never have too much information.

The mechanic’s lien process is an awesome security afforded to those furnishing to construction projects. Just remember, mechanic’s liens aren’t reported to credit bureaus and mechanic’s liens aren’t reported to financial institutions. The credit worthiness of your customer may appear immaculate, per the credit report you pulled–but what happens when hundreds of thousands of dollars are tied up in ongoing projects?

UCC Filings: Fixture Filings 101

Posted on June 14, 2016 by - UCC Financing Statements

UCC Filings: Fixture Filings 101

Today’s post is a 101 on fixtures and fixture filings as they pertain to Article 9 of the Uniform Commercial Code. Most variations of UCC filings are fairly easy to explain. A Blanket filing is a security interest in all assets of your customer. A Purchase Money Security Interest filing grants a security interest like a blanket filing, but with the added ability to repossess inventory or equipment. But fixture filings… fixture filings, seem to be a bit more difficult to understand.

First, Define Fixture

The general idea of a fixture filing isn’t necessarily the complicated part; it’s actually determining what constitutes as a “fixture” that can be tricky. Here are the definitions of fixtures and fixture filing under Article 9:

  • 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)

What Can Be Considered a Fixture?

Based on the definition under Article 9, it would be anything that is “so related to a particular real property.”

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: the items are secured to the building or premises, but can be removed if necessary and their removal won’t impact the structural soundness of the building or property. Here are just a few examples of items that could be covered by Article 9:

  • Hotel headboards and external signs
    • Headboards are often affixed to the wall, but could be removed without compromising the physical integrity of the hotel (i.e. a 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’s a Holiday Inn or Marriott are attached to the building, but not permanent.
  • Gas/Fuel pumps
    • The pumps you pull up to when it’s time to fill your tank are secured to the ground with bolts (or something similar). If the pump is removed, it doesn’t impact the actual property, as a new pump could be put right back in its place. Another common fixture similar to gas/fuel pumps, would be air tanks that are secured outside places like hospitals. Here in Cleveland, OH, there are Airgas tanks, which can be seen from the highway, that are secured on the backside of the MetroHealth campus. These tanks are affixed to the ground, but they can be removed if necessary.
  • Walk-In Coolers, Ovens, Dishwashers, Air-vent/Oven hoods etc.
    • Equipment often seen in restaurants would likely be considered fixtures. These pieces of equipment are typically secured to the building, whether it’s the floor or the walls, but again, can be removed if necessary.

Filing on a Fixture & Fixture Filing

Fixture filings and filing on a fixture are actually two different filings.

A filing on a fixture is simply a UCC Financing Statement, recorded with the Secretary of State, which includes “fixtures” in the collateral description. This filing does not attach to real property and would not appear in real property records (i.e. the county Assessor’s or Recorder’s Offices).

I tend to think of a filing on a fixture as a typical UCC filing, as it must comply with Article 9 just as blanket filings & PMSI filings do, but the collateral description would include “fixtures.”

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. A fixture filing should satisfy Sections 9-502(a) & (b). Section 9-502(b) is key, as it is specific to real property:

(b) [Real-property-related financing statements.]
Except as otherwise provided in Section 9-501(b), to be sufficient, a financing statement that covers as-extracted collateral or timber to be cut, or which is filed as a fixture filing and covers goods that are or are to become fixtures, must satisfy subsection (a) and also:
(1) indicate that it covers this type of collateral;
(2) indicate that it is to be filed [for record] in the real property records;
(3) provide a description of the real property to which the collateral is related [sufficient to give constructive notice of a mortgage under the law of this State if the description were contained in a record of the mortgage of the real property]; and
(4) if the debtor does not have an interest of record in the real property, provide the name of a record owner.

Why record a fixture filing? One excellent reason is 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.

Best Practice

If you are providing items that are affixed to real property, do both a filing on a fixture with the Secretary of State and a fixture filing with the real property records.

UCC Continuation Rejected? Now What?

Posted on April 26, 2016 by - UCC Financing Statements

Clerk of Courts Rejected UCC Continuation Because Filing Had Already Been Continued

What happens when you file a UCC-3 to continue your security interest and the county rejects the filing because “CONTINUATION ALREADY FILED ON 07/07/10 #091136583”? Ask for proof!

In Signature Credit Partners, LLC v. Casaic Offset & Silkscreen, Inc. (2012 WL 1999494 (W.D.La.)), Signature Credit Partners, LLC (Signature) lost their security interest when their UCC filing lapsed in 2010, because they failed to file a continuation. But, did Signature fail itself or did the Clerk of Courts fail Signature?

The Facts of the Case

Signature filed a UCC in November 2000, which granted a security interest in a printing press that was in the debtor’s (Casaic’s) possession. The PMSI filing from 2000 was continued by Signature in 2005, and when it came up for continuation in 2010, Signature hired a third party to file the continuation which would then grant them a security interest until 2015.

In 2010, the third party submitted Signature’s continuation to Caddo Parish Clerk of Courts (in Louisiana) but Caddo Parish rejected the continuation because “CONTINUATION ALREADY FILED ON 07/07/10 # 091136583”. This rejection indicated to Signature that their continuation was already filed & they were granted security interest for another five years.

The Fly in the Ointment

In 2011, the debtor, Casaic, filed for bankruptcy protection and it was discovered that Signature’s UCC filing was not continued in 2010. It turns out that the Clerk of Courts made an error in data entry when it entered the continuation filing number into the system. So, when the Clerk of Courts saw that a continuation had already been filed, they were actually looking at a different continuation altogether.

Signature argued that it should be granted the security interest because it was the Clerk of Courts that made the error and led Signature to believe they were secured. Of course, the courts were quite frank in their denial:

“First, there is no dispute that Louisiana law regarding the ranking of liens governs this dispute. Under Louisiana Revised Statute 10:9–515(d), a continuation statement must be filed in the same filing office where the financing statement was originally filed within six (6) months of the expiration of the five (5) year period specified in La. R.S. 10:9–515(a)… Although Signature contends that it attempted to file a continuation statement, the facts are clear that no continuation statement was filed. Therefore, as a matter of law, Signature’s financing statement lapsed on November 21, 2010. La. R.S. 10:9–515(c) provides that if a continuation statement is not timely filed, a security interest is deemed to have lapsed and “upon lapse, a financing statement ceases to be effective and any security interest or agricultural lien that was perfected by the financing statement becomes unperfected, unless a security interest is perfected otherwise.”

What Should Have Happened

I asked my coworker, NCS UCC Specialist, what we would do if a continuation was rejected because the filing was “already continued” and she advised

“If the county rejected the filing because it had already been continued we would have talked to the creditor, and we would have spoken with the Parish and obtained a copy of the filing.”

In this case, once the Clerk of Courts rejected the continuation, Signature or the third party should have requested a copy of the continuation – but neither party did. Had they requested a copy of the continuation, it would have been apparent that the filing was not Signature’s filing.

Another Best Practice

We’ve previously recommended that creditors do a reflective search after every UCC filing. A reflective search will assist creditors in ensuring their filing was actually recorded and indexed accurately. You can learn more about reflective searches here.

Consignment UCC Filing: A Crucial Aspect of Bankruptcy Law

Posted on March 28, 2016 by - UCC Financing Statements

Consignment UCC Filings and the Sports Authority Bankruptcy

A company selling on consignment takes an unnecessary risk when it forgoes filing a UCC-1 Financing Statement. Complying with Article 9-324 of the UCC can protect a creditor from its debtor’s existing creditors and its debtor’s future creditors, because the UCC creates a public record of the creditor’s security interest.

What is a Consignment Filing?

In a previous post we explained the basics of a consignment and you can read that post here (or view the infographic here). Essentially, when a consignment agreement and UCC are filed:

“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.”

Why Would I File a UCC if I’m Selling on Consignment?

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

If the debtor files for bankruptcy protection, the inventory the debtor has on hand is gathered up and sold off 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.

Consignment Sales & the Sports Authority Bankruptcy

This is an unfortunate, yet classic, case of “too big to fail”. Shortly after filing for bankruptcy protection, Sports Authority filed complaints against its creditors, stating these creditors sold on consignment without filing a UCC and are therefore unsecured. (The number of complaints filed by Sports Authority is over 150, some sources say as high as 165.)

The complaints filed by Sports Authority will be used to determine whether or not a creditor is secured and the priority of the creditor. If the judge determines these creditors are unsecured, the inventory in Sports Authority’s possession could be plopped into the pool of items to be sold and the proceeds of that sale will be distributed to secured creditors first.

According to L. John Bird of Fox Rothschild LLP

“If Judge Walrath agrees … consignment vendors will have only a security interest, governed by the Uniform Commercial Code as enacted in Delaware and the principles of bankruptcy law.  Pursuant to the Post-Petition Financing order entered in these bankruptcies, the Debtors have given their DIP Lenders a first-lien security interest in all assets not otherwise encumbered by a perfected lien. This means that for any shipments that were not properly perfected (by filing a UCC-1 statement within 30 days of shipment), the consignment vendors may not have a 1st priority lien.”

Sports Authority is a large company with creditors like Nike & Under Armour. Creditors selling to these large companies often have a false sense of security… “Eh, I don’t have to file a UCC, Sports Authority is a large company, they will pay.”

Is a UCC Filing Required?

Short answer: No. Creditors are not required to file a UCC. In default or bankruptcy situations, when a creditor is selling on consignment, there is a slight chance the creditor could argue it’s common knowledge that the debtor engages in consignment sales.

But making that argument seems shaky at best, not to mention inefficient – how much time would it take to successfully make that argument vs. filing the UCC and granting a security interest at the beginning of the relationship?

Best Practice

If selling on consignment, execute a security agreement & ensure it includes clear identification of inventory, search for existing secured creditors & notify those creditors of your security interest, file the UCC-1 in the appropriate jurisdiction(s) – if possible, and file the UCC prior to the debtor taking possession of the inventory.

Don’t neglect a simple opportunity to be a secured creditor.

Filing UCCs: Tips for Secured Parties

Posted on March 7, 2016 by - UCC Financing Statements

UCC Filings: Top Tips for Secured Parties Facing Possible Debtor Name Change

As all secured creditors know, maintaining perfection of their security interests under UCC Article 9 is essential to ensuring priority over other claimants. Unfortunately, there is a common event that can quickly eliminate the perfection of a security interest: a debtor name change. Article 9-507(c) of the UCC provides the secured party with a four month window to amend a UCC filing if the debtor’s name changes:

§ 9-507. EFFECT OF CERTAIN EVENTS ON EFFECTIVENESS OF FINANCING STATEMENT.
(c) [Change in debtor’s name.]

If the name that a filed financing statement provides for a debtor becomes insufficient as the name of the debtor under Section 9-503(a) so that the financing statement becomes seriously misleading under Section 9-506:

1. the financing statement is effective to perfect a security interest in collateral acquired by the debtor before, or within four months after, the filed financing statement becomes seriously misleading; and

2. the financing statement is not effective to perfect a security interest in collateral acquired by the debtor more than four months after the filed financing statement becomes seriously misleading, unless an amendment to the financing statement which renders the financing statement not seriously misleading is filed within four months after the financing statement became seriously misleading.

We’ve previously discussed the importance of monitoring your customers for changes in their name as well as for changes with their status with the Secretary of State. Today we have some tips for you!

Tips for Secured Parties Facing Possible Debtor Name Changes

The following tips are courtesy of Ms. Mary Cowan, NCS President and Professor Margit Livingston, DePaul University College of Law, and were originally featured in  Debtor Name Changes Under Article 9: The Importance of Keeping Financing Statements Current and Accurate.

  • Tip #1: Incentivize
    Incentivize your debtor to keep you informed. In the security agreement, the debtor should agree to inform you of any planned name changes and/or relocations [specify number of days] in advance. Failure to do so should constitute default, allowing the security party to call in the debt.
  • Tip #2: Examine Payments
    Examine the payments made by the debtor. If the debtor has been sending payment checks that reflect a certain name or address and that information changes, you should immediately contact the debtor for clarification.
  • Tip #3: Monitor Corporate Status
    Every three months check the state corporate registry where your debtor is listed. A change of name or status will be indicated on the registry.
  • Tip #4: Stop Credit
    Do not advance additional funds to the debtor beyond the original credit limit amount without verifying the debtor’s current name, address and business form.

It’s a Challenge

We recognize that keeping track of debtor name changes can be challenging, but it is worth the effort: loss of a perfected status is a prospect that no secured party wants to face!