Service Area: UCC Services

Creditor’s OMEGA Mistake Started with Collateral Description

Posted on August 24, 2015 by - UCC Financing Statements

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Creditor’s OMEGA Mistake Started with the Collateral Description in Its UCC Filing

In Omega Optical, Inc. 476 B.R. 157 (Bankr. E.D.Pa. 2012) (“Omega”) Omega filed bankruptcy and listed Sovereign Bank (“Sovereign”) as a secured creditor within the filing. Indeed, Sovereign was a secured party, as they had filed a UCC Financing Statement. Unfortunately for Sovereign, they made a few mistakes… a few costly mistakes.

Oh the Collateral Description

In the filing, Sovereign described the collateral as “all assets.” As you know, a vague collateral description can be fatal. Article 9 does allow a creditor to list collateral as “all assets” on the actual financing statement, but the creditor must provide a more thorough collateral description within the Security Agreement.

In this case, however, the Bankruptcy Judge, Bruce Fox, deemed the collateral description of “all assets” as it appeared on the financing statement to be:

“…super-generic and not sufficient to effectively perfect a lien on any collateral. In addition, the description of the collateral is limited to the collateral that existing [sic] at the time the lien was filed, and does not extend to any collateral acquired after the lien was filed. Therefore, Sovereign Bank’s lien is not properly perfected.”

Reclassified aka Demoted

Because the UCC was not properly perfected, Omega’s proposed reorganization plan demoted Sovereign’s claim to that of an unsecured creditor. Once demoted to unsecured, Sovereign’s UCC was terminated and all security (or potential security) forfeited. The court subsequently held a plan confirmation hearing and Sovereign did not object to the plan – the very plan which indicated they were unsecured. They, Sovereign, even filed an unsecured proof of claim.

Did Sovereign not realize it had been bumped from secured to unsecured? Why wouldn’t they object to a plan that could cost them a significant amount of money?

Yes, Sovereign “knew” it had been bumped, meaning, Sovereign did not object to the plan, which for all intents and purposes indicates that they knew they were considered unsecured.

“I object” came, but it came too late.

A few months after the plan confirmation, Sovereign filed a motion requesting to amend their proof of claim, stating that their lack of objection to the plan and that asserting an unsecured proof of claim was an “obvious oversight.”

As an aside, Section 506(d)(2) of the Bankruptcy Code does state that failing to provide a proof of claim does not, by itself, void the lien:

“Sections 501 and 1111 of the Code govern the filing of proofs of claims. In a Chapter 11 proceeding, only creditors whose claims are listed by the debtor as “disputed, contingent, or unliquidated” are required to file proofs of claim. Bankruptcy Rule 3003(c)(2) directs that a creditor so listed must file, and that one who fails to do so will not be treated as a creditor “with respect to such claim for the purposes of voting and distribution.” This rule does not, however, extinguish a creditor’s lien as a penalty for failure to file a proof of claim. In fact, the legislative history of § 501(a) indicates that it is “permissive only, and that no creditor is required to file a proof of claim.”… However, “the filing of a proof of claim is a prerequisite to the allowance of unsecured claims, including the unsecured portion of a secured claim, and priority claims.” Furthermore, “[f]iling a proof of claim may be unnecessary… in situations in which the creditor is secured and has not asserted a claim against the estate, and no determination under section 506(d) has been requested.”

So, if Sovereign’s only error was thatthey “forgot” to file a proof of claim or “accidentally” filed the wrong proof of claim, their lien likely would not have been vacated. But, because Sovereign’s UCC was deemed unperfected AND they neglected to file the proper proof of claim, 506(d)(2) can’t “save” them.

Four Parts

According to the bankruptcy judge, when determining whether or not a lien is extinguished by the confirmation process, there is a “four part test”:

“Four conditions must therefore be met for a lien to be voided under section 1141(c): (1) the plan must be confirmed; (2) the property that is subject to the lien must be dealt with by the plan; (3) the lien holder must participate in the reorganization; and (4) the plan must not preserve the lien.”

Unfortunately for Sovereign, they got 4 out of 4 on this test:

  • The plan was confirmed
  • The property (collateral) was dealt with by the plan
  • Sovereign participated when they submitted the unsecured proof of claim
  • The plan considered Sovereign unsecured, which means the lien was not preserved

Lessons Learned

  • Properly identify the collateral in the UCC filing (quite frankly, much of this could have been avoided, if the collateral description was sufficient enough to keep the UCC in play).
  • File the proper forms & pay attention (nothing worse than being the only kid who didn’t do their homework and getting called out on it later).

Is Art Worth More if a UCC-1 is Never Filed

Posted on August 10, 2015 by - UCC Financing Statements

Is Art Worth More if a UCC-1 is Never Filed?

Is art worth more if the UCC-1 was never filed? Yes, I’m asking the hard hitting questions of our time. OK, maybe not our time, but definitely a tough question that was answered in Salander-O’Reilly Galleries 475 B.R. 9 (S.D.N.Y.  2012) (Salander).

Kraken Investments Ltd. (“Kraken”) entered into a consignment agreement with Salander for the sale of Sandro Botticelli’s “Madonna and Child” with a price tag of no less than $8.5 million.

As you know, with consignment agreements, the consignor (Kraken) retains title to the goods (the painting) until the consignee (Salander) sells the goods and/or the goods are returned to the consignor.

In 2007, Salander, filed for bankruptcy protection. Kraken requested Salander return the painting, which was Kraken’s right based on the consignment agreement. Unfortunately, Salander did not comply with Kraken’s request, so Kraken wanted to pursue arbitration in order to retain ownership of the painting.

According to the terms of the consignment agreement, arbitration was to be handled in New Jersey, the bankruptcy proceeding was being handled in New York (and the piece of art & debtor were also in New York), so as you may have guessed: bankruptcy trumps arbitration. It was up to the bankruptcy judge to determine whether the rights to the art belonged to the bankrupt estate or Kraken.

There was a lot of money at stake and someone was bound to lose big.

As it turns out, the judge ruled that Kraken did not have rights to the art because the consignment agreement itself was not “binding.” To add insult to injury, the judge pointed out that rights could have been maintained had Kraken filed a UCC-1 with its consignment filing.

“The Court well understands why Kraken is perturbed, even outraged, by the idea that SOG’s [Salander] creditors may enjoy the proceeds from the sale of a valuable painting concededly owned by Kraken. The law of the state in which Kraken consigned the painting, however, allows for such an outcome where the consignor does not protect itself by filing a financing statement giving notice of the consignment to the consignee’s creditors.”

The takeaway is that a consignment agreement itself is not enough to secure rights – it is best to file a UCC with the consignment agreement to create a security interest in the goods.

So, is art worth more if it becomes an asset to the bankruptcy estate?

I’m not sure I’d be willing to find out – file the UCC!

Leverage Your UCC Filing in the Collection Process

Posted on July 27, 2015 by - UCC Financing Statements

Leverage Your UCC Filing in the Collection Process

The collections process is not a “desired” process. By desired, I mean, no one actually wants to go through it – creditors and debtors alike. But, if you have a UCC filing and your customer has defaulted, you may want to pursue the collection process.

If remedies like demand letters & repossession of goods fail, you may need to enlist the assistance of a collection agency. While I am biased, I would strongly recommend seeking assistance from an agency that also specializes in UCC filings (*fake cough* NCS…).

I mean really – would you go to your cardiologist and ask him to look at the muffler on your car? Of course not!

Leveraging a UCC filing in the collection process is significantly more effective than attempting to collect without any leverage. This is the reason crazy things like blackmail are effective – you have something that another party wants.

To be clear, I do not condone blackmail – unless it’s in a movie or TV show as a great plot twist – but I do support LEGAL ways of securing your receivables.

What Information Should I Send to a Collections Agency?

We have previously discussed the importance of providing your collection agency and/or collector with sufficient information on the collection. (If you need a refresher, you can check out this post.)

You should send the usual suspects: invoices, statement of account, correspondence, but there are also a few UCC specific items you should include.

  • A copy of the signed Security Agreement
  • A recorded copy of the UCC filing
  • A current UCC search: This may indicate whether or not there are other secured parties and determines priority of your filing
  • A description of the item(s) sold aka the collateral: Is the collateral easily removable? Example: is it a 10 ton crane or a pallet of 2 oz widgets
  • The claim amount (how much you are owed by the debtor)
  • The current fiscal status of your debtor: Is their corporate standing with the Secretary of State current, are they in default on other debts, have they simply gone out of business or filed for bankruptcy protection etc.

It’s All about the Leverage

Your UCC filing is your leverage – providing you a security interest in the event of default – don’t misuse your leverage… use it right or lose it!

If you have questions about the UCC filing and collection process, please don’t hesitate to contact us!

Supply House? You Can Use the UCC to Get Paid

Posted on July 21, 2015 by - In Other Commercial Credit News

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 johnallenwaldrop@gmail.com.

Debtor’s Business and Your UCC Filing

Posted on June 2, 2015 by - UCC Financing Statements

Your Customer is Selling Their Business, What’s in Store for Your UCC Filing?

Businesses are bought and sold every day, sometimes without any consequence to creditors/vendors. Unfortunately, that is only sometimes. One of the primary reasons businesses are sold is due to fiscal distress, and the sale of the business is “simply” a way to escape the debts owed. (I use the term “simply” loosely – selling a business, especially a business with multiple vendors etc., is difficult – think of selling a home… times 100.)

How Can They Escape?

An unfortunate and common consequence of these transactions is that the buyer may require language within the sale that relieves them of any responsibility for the previous business owner’s debts. Erasing the debt linked to the business becomes a condition of the sale.

If They Can Escape the Debt, How Can a UCC Possibly Help?

Your UCC filing acts as a lien on the business, therefore, before title passes from one party to another, the lien should be acknowledged & either settled or renegotiated. Check out this success story:

A UCC Success Story

USF has a long time customer with several restaurants. The customer is a high volume account with annual sales exceeding $2M. The credit worthiness of the customer remains unknown as the division does not have financials, only their payment history.

The Credit Team pursued UCC’s on all locations to help mitigate risk last year. We were notified that the customer was selling a location which at the time had an AR in the mid six figures, all of which was past due. After their attorney did their due diligence they noticed a lien on the business which prompted a call from the seller inquiring about the UCC. Around the same time the attorney reached out and asked what was needed to lift the lien. The answer was simple, a lump sum check for the entire balance of $154,000. The sale took place and our Credit Manager was contacted by the attorney who had the check in hand for the full amount. Had we not had the UCC filing in place we would not have received this payment and very likely, only cents on the dollar.

The end result was a very good month for the division from a performance perspective based on this recovery. This success paid for the cost of filing previous UCC’s and future UCC filings for years to come. This was definitely a win when looking at the cost benefit/ROI for securing our receivables with the UCC process and utilizing the services of NCS.  – Division Credit Manager, US FOODS BALTIMORE

Use Your Spidey-Sense

OK, so you may not have a “spidey-sense” (perhaps you do – who am I?) but there are services available to monitor various aspects of your customer’s business, which could provide you with alerts to potential danger.

  • UCC Filings: file UCCs on your customers. We have previously discussed that these are harmless documents for your customer, but invaluable to you as a creditor.
  • Corporate Monitoring: enlist a service to monitor the incorporation activity of your customer. In the event your customer’s incorporation expires or is terminated, you will be notified & can take appropriate action immediately. (NCS offers corporate monitoring, take a minute to read this client perspective.)
  • Credit Reporting: this should come as no surprise – it’s incredibly important to know whether or not your customer is overextended. High debt to income ratios should be treated cautiously, as well as vague credit histories.

When in Doubt – Shout it Out!

No, you don’t have to actually shout, but if you have any concerns about your customer & their working capital or abilities to pay their debt with you, ACT. Make inquiries on the account and monitor the payment trends, reduce credit limits, require monies up front – whatever it takes to reduce your risk.

RUG: Secured Transactions in Mexico

Posted on May 13, 2015 by - UCC Financing Statements

Secure Your Receivables in Mexico via the RUG

Historically, Mexican companies have had difficulty securing financing from foreign banks, primarily due to concerns about the reliability of the laws governing secured transactions.

The Mexican government recognized the need to alleviate those apprehensions and set forth goals to create a mechanism that allows public disclosure of security interest and to establish priority rules for debtors.

In September of 2010, Mexico instituted amendments to their secured transaction law. These amendments better aligned Mexico’s secured transactions with U.S. Uniform Commercial Code – Revised Article 9 and Canada’s Personal Property Security Act.

A properly perfected pledge (in the U.S. & Canada this would be the security agreement), protects the creditor against third parties that claim an interest in the collateral, allows the creditor to foreclose on the property and apply all proceeds to the outstanding debt, and grants preference against a bankruptcy trustee and all other creditor types including tax claims.

The filing system in Mexico is called the RUG (Registro Unico Garantias Mobiliarias – Unified Registry of Moveable Property Collateral) and RUG filings are in place for 12 years.

There Are Three Ways to Pledge Collateral Under the RUG

  • Ninguno: all products that are to be sold by the debtor (similar to the PMSI in Inventory filing under UCC/PPSA)
  • Todos los bienes de la empresa: all assets currently owned (similar to Blanket or Basic filing under UCC/PPSA)
  • Bienes específicos: any specific asset that can be identified (similar to a PMSI in Equipment filing under UCC/PPSA)

Compliance with the RUG

  • The debtor must sign three documents (must be written in Spanish):
    • A non-possessory pledge, which is similar to a security agreement under the UCC & PPSA
    • A credit application, which is specific to the RUG filing process with Mexican law governing
    • A promissory note, which elevates the security interest to an executive proceeding if there is a default, and provides stronger remedies for the creditor
  • The secured party will need to authenticate the identities of the debtor by ensuring a Mexican notary public is present at the time the documents are signed.
  • The secured party must verify the debtor’s correct legal name, by requesting the debtor provide a copy of the articles of incorporation, as well as provide their The Federal Tax Registration and electronic registry number.
  • The completed pledge agreement, signed by both parties and notarized should then be recorded in the public registry by a Federal Notary.

NCS Is Here to Help

If you would like to begin securing transactions in Mexico, please don’t hesitate to contact us! NCS can provide all necessary documents and assist with the execution of a RUG filing.

The Importance of Filing Your PMSI Timely

Posted on April 27, 2015 by - UCC Financing Statements

The Importance of Filing Your PMSI Timely: When is a Purchase Money Security Interest (PMSI) Perfected?

A PMSI is considered fully perfected once you:

  • have the debtor sign and date the security agreement/credit application
  • verify the debtor’s correct legal name and state of jurisdiction through the articles of incorporation or driver’s license
  • file the Financing Statement
  • complete a UCC-11 search in the state of jurisdiction and all states to which the secured party is shipping
  • notify all previous secured parties

The typical perfection process time can take 3 to 4 weeks.

Why Would a PMSI Perfection Be Delayed?

There are many factors that can cause the delay of a security interest’s perfection. Factors such as:

  • if the state of jurisdiction does not offer online filing (i.e. the jurisdiction only accepts entries via fax or mail)
  • if the filing includes an attachment, such as an additional collateral description, and the state does not permit the online filing of attachments
  • if the UCC search website is not through the security interest filing date (i.e. today is 04/01/2015, but the state has only filed records through 02/01/2015)
  • if several previous secured parties need to be notified and there is a delay in verifying receipt of the notification letters or if those parties are located in a different country

The Date of Perfection

Once a PMSI is fully perfected, your collateral will be secured as of the date of the filing or the date the agreement was signed, whichever is later.

Example of Perfection

Any inventory that the debtor takes possession of before the date of perfection may not be protected by the filing. This is because you are not considered a secured creditor until perfection which is achieved by completing the steps listed above.

For example, you and your customer signed a security agreement. Some time passes; now your customer has an outstanding balance of $100,000.00 and you decide to file a PMSI. Because you filed a PMSI and followed all the steps for perfection, you believe you are now a secured creditor, so you extend an additional $50,000.00 to your customer. Unfortunately, you are only considered secured for the $50,000.00 your customer acquired after the PMSI was perfected, leaving the $100,000.00 unsecured.

Had you, the creditor, filed the PMSI when the original $100,000.00 agreement was signed, the full amount ($150,000.00) would be considered secured by the Purchase Money Security Interest filing.

Don’t Get Hit By Preference

Another important reason to file a PMSI as soon as you receive the signed security agreement/credit application is to proactively protect yourself, in the event your customer files for bankruptcy protection.

Let’s say you discover your customer is intending to file bankruptcy in the next month and you are not a secured party. Unfortunately, it’s too late to file the PMSI as security because there is a 90 day preference period regarding all security interest filings and bankruptcy. Any security interest filed within 90 days of the bankruptcy being filed will be dismissed as a preference and not considered as part of the bankruptcy proceedings, leaving you as an unsecured party.

Best Practice

Always file your PMSI at the time the security agreement is executed! Remember the UCC has no impact on your customer’s credit or day to day operations. Only impact is if they file bankruptcy then you are a secured party.

The Benefit of UCC Filings

Posted on March 24, 2015 by - UCC Financing Statements

The Benefits of Secured Transactions and Article 9 of the Uniform Commercial Code

The subjectivity in evaluating credit worthiness magnifies the need for credit tools. Article 9 of the Uniform Commercial Code provides an opportunity for trade creditors to collateralize or “secure” their goods and/or accounts receivable utilizing the personal property assets of their customer.

Sounds Like a Big Deal!

Not really. From your customer’s perspective, a UCC filing is practically irrelevant, unless there is a bankruptcy. In addition, the filing never costs the debtor a dime… ever. A Security Interest or UCC filing simply elevates the status of your receivable and/or inventory/equipment to that of a secured creditor.

How Does It Work?

In a bankruptcy, all creditors are split into two classes: secured and unsecured.

  • In a Chapter 7, secured creditors are paid first in the order the UCCs were filed; unsecured creditors split what is left over on a pro-rated basis.

A UCC filing ensures you are a secured creditor and therefore in the best possible position to get paid. In addition, a Purchase Money Security Interest filing provides the priority right of repossession of your inventory or equipment at default or bankruptcy. You define default in your security agreement.

  • In a Chapter 11, all secured creditors have the same status providing substantial leverage over the unsecured creditors as it relates to leveraging liquidation.

The UCC process is a cost-effective solution for securing your inventory, equipment and/or receivables, especially important in today’s fragile economy.

Your customer’s only involvement in the process is signing a security agreement. This agreement or contract may be a stand-alone document or can be added to a standard credit application or other document. When your customer signs a security agreement, the UCC-1 perfects or records the security interest. A security interest collateralizes your company through equipment, inventory, the proceeds from the sale of your inventory, and your accounts receivable. Once the filing is completed, it protects all transactions for five years. Protect your bottom line as a secured creditor.

Types of UCC Filings

In an earlier post we discussed the differences between Blanket Filings and PMSI Filings; however, there are additional UCC filings.

  • Consignment sales: Goods sent to an agent for sale with title being held by consignor until a sale is made.
  • Bailment: Goods, which will be processed or improved in some manner, delivered in trust for a limited period.
  • Tooling: Tools provided to an outside manufacturing company in order for that company to provide a finished product for sale.
  • Warehousing Situations: Stocked goods or inventory held at a third party location.
  • Installments/Promissory Notes: Payment for a debt made in intervals.

How Do You Begin?

Determine when and where security is applicable in your business. For example, your company may deem filings are necessary for all customers with credit lines higher than $10,000.

Once you have set an account threshold, begin implementing the UCC filings by having your customer sign a security agreement. The best time to have your customer sign the agreement is at the time of contract and it’s a best practice to include the security agreement within the terms of your loan or credit application.