Service Area: UCC Services

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.

Top 5 Mistakes in Security Agreements

Posted on March 11, 2015 by - UCC Financing Statements

UCC Filings: Top 5 Mistakes in Security Agreements

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

1. Incorrectly Identifying the Debtor

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

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

2. Omitting Debtor’s Address

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

3. Date, Date, Date

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

Don’t go it alone!

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

4. Authorized Signatures

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

5. Don’t Forget the Granting Clause

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

When in doubt, seek a legal opinion.

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

Protect Your Consignment Sales

Posted on January 26, 2015 by - UCC Financing Statements

Protect Your Consignment Sales with UCC Filings

If you allow customers to have possession of goods under a “consignment” agreement prior to the actual sale, you are at risk of losing your rights in the goods. To protect your interest, you must have perfected a security interest in those goods under Article 9 of the Uniform Commercial Code (“UCC”) prior to delivery.

What is a consignment?

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.

Does consignment carry risk?

There is a credit risk to be managed in a consignment sale. If the consignor does not take the necessary steps to protect ownership of its goods, the consignor can lose interest in the goods and proceeds.

How can the consignor protect the consigned goods?

Consignors can perfect their security interest by complying with Article 9 of the Uniform Commercial Code.

How to comply with the Uniform Commercial Code?

The consignor’s goods on consignment, or the proceeds from the sale of those goods, may become the subject of a competing creditors claim in the event of bankruptcy or default. The consignor must comply with the Uniform Commercial Code (UCC) for perfecting a security interest in the goods. A perfected consignment interest will afford the consignor priority in their consigned goods over a judicial lien creditor, a bankruptcy trustee and other secured creditors.

Steps to secure the consigned goods

  1. Possess a Consignment Agreement signed by both the consignor and consignee stating  the terms and conditions of the consignment, grant a security interest and describe the goods being consigned. The description of the goods must make them easily identifiable. Generic descriptions such as “all goods” are not acceptable. Then, before delivery…
  2. Make public the “existence” of the Consignment Agreement by filing a UCC Financing Statement [UCC-1] in the consignee’s state of organization.
  3. Conduct a UCC search and send authenticated notification to all previously secured creditors. The notification advises that the consignor has or expects to acquire a purchase money security interest in the described goods of the consignee.

When all of the perfection steps have been completed the consigned goods are protected against competing claims. Remember that any consigned goods delivered prior to the perfection steps are not secure from prior secured parties.

Have you successfully perfected your consignment interest?

Unless you are familiar, comfortable and confident with the process, assistance is recommended.

Accurately Indexed UCC Filing

Posted on January 5, 2015 by - UCC Financing Statements

Accurately Indexed UCC Filing: Conduct a Reflective Search After Every UCC Filing

Obtaining a reflective search is the best practice to make sure the UCC Financing Statement or UCC change statement has been indexed accurately.

What is a Reflective UCC Search?

A reflective UCC search confirms that a UCC filing was recorded. The reflective search returns a jurisdictional report by debtor name reflecting all UCC filings through the date of your recorded UCC filing. This search also lists previous secured creditors by filing date to help determine your filing position. In 2001, Revised Article 9 changed the requirements of the debtor name and implemented standard search logic.

What is the Debtor Name?

Section 9-503(a) describes the debtor name as either:

  1. A registered organization, of which the name is as indicated on the public record of the debtor’s jurisdiction of organization; or
  2. An individual, which several states describe as the name on a birth certificate or driver’s license.

Article 9-506(b) clearly states “a financing statement that fails sufficiently to provide the name of the debtor in accordance with Section 9-503(a) is seriously misleading.” Not following the rules for a correct debtor name will affect whether the UCC filing is found using the state’s standard search logic.

What is Standard Search Logic?

In 2001, standardized search logic rules were developed by the International Association of Commercial Administrators (IACA). IACA is the professional association for government administrators of business organizations and secured transaction record systems. Each state formed its own search logic rules based on IACA’s rules. The strict search logic intentionally left no margin for error or variances of the debtor name.

How are Filings Recorded?

A filing is recorded according to the law of a particular filing state. Options include XML, internet manual entry, fax or mail. Many states still have manual processes that can lead to errors by either the submitting party or the filing officer. Such errors can jeopardize the security.

Additionally, each state has its own rules to record names and index filings. Your filing is indexed in accordance with the particular method used in the recording state. This means the filing party must know the nuances of each state’s filing system in order to search the filings properly. For example, punctuation can be extremely important in one state and of little importance in another. Other ways states have adopted different rules include:

  • Punctuation
  • Apostrophes
  • The ampersand (&)
  • How to treat the word “the”
  • Spaces
  • Individual names

Can a Reflective Search Help Confirm the Accuracy of a UCC Filing?

When done properly, a reflective search can confirm the accuracy of a UCC filing. It can assure:

  • No errors in debtor name were made by the recording entity.
  • The filing was recorded in accordance with a particular state’s methods and format.
  • Change statements are indexed to the proper original filing.

Are you sure your debtor name is indexed correctly?

Unless you are familiar with these processes in all 50 states, assistance is recommended.

What is Subordination?

Posted on December 16, 2014 by - UCC Financing Statements

Avoiding Potential Pitfalls When Entering into a Subordination Agreement

What is Subordination?

Subordination is “the process by which a creditor holding a priority debt agrees to accept a lower priority for the collection of its debt in a deference to a new debt.” according to Cornell University Law School’s Legal Information Institute. Or “A written contract in which a lender who has secured a loan by a mortgage or deed of trust agrees with the property owner to subordinate its loan (accept a lower priority for the collection of its debt), thus giving the new loan priority in any foreclosure or payoff.”

There are instances when a secured creditor decides to subordinate a senior-priority position to another creditor because it increases the prospects of the obligation being satisfied.

However, if a creditor is considering whether or not to provide financing, equipment or other assets based on obtaining a senior priority position, by swapping priority with an existing creditor, said creditor must be cautious of this approach.

The junior-priority creditor entering into the subordination agreement must carefully review the security agreement and perfection procedures undertaken by the pre-existing creditor to determine that the prior security interest was properly perfected.

Pitfalls of Subordination

The recent case of Caterpillar Financial Services v. Peoples National Bank, N.A. (March 4, 2013) from the Seventh Circuit of the U.S. Court of Appeals, reveals the potential pitfall of entering into a subordination agreement without an experienced professional lien processing service.

In Caterpillar, the debtor obtained loans to purchase mining equipment from three separate entities: (1) Peabody Energy Corporation (“Peabody”), (2) Caterpillar Financial Services Corporation (“Caterpillar”) and (3) Peoples National Bank (“Peoples”).

Each of the creditors extended their loans in the order indicated and filed their UCC Financing Statement at the time of obtaining the loan so they had the priority position indicated above. Debtor eventually defaulted on all three loans.

Partial Subordination or Total Subordination?

When Peoples obtained its loan, Peabody agreed to subordinate its first position, in terms of priority, to Peoples to increase the possibility that Debtor would have the ability to repay the Peabody loan.  The court addressed whether the subordination agreement permitted Peoples to move ahead of Caterpillar in terms of priority.  The court observed that there are two approaches to subordination – “partial subordination,” which constitutes the majority approach and “total subordination,” which is followed in a minority of jurisdictions.

“The “partial” in “partial subordination” denotes the fact that the parties to a subordination agreement swap places in the priority ladder only to the extent of the smaller of the swapping parties’ loans. If, for example, Peabody had been owed $1 million by S Coal, the subordination agreement would have given the bank [Peoples] first priority only with respect to the first $1 million of the bank’s $1.8 million loan. The order of priority would then be bank ($1 million), Caterpillar ($7 million), bank ($.8 million), Peabody ($1 million). The amount subordinated is limited to the amount that the creditor having priority over the nonparty was owed before he swapped places with a junior creditor. In the real as distinct from the hypothetical case, S Coal owed Peabody at least $4 million, which was much more than the bank’s loan, and so the bank was able to move into first place for its entire loan without hurting Caterpillar.”

The partial subordination approach allows the creditors to actually swap positions, so that the junior secured creditor Peoples would actually jump ahead of Caterpillar.  By contrast, the total subordination approach would have had Peabody simply take the position of Peoples without Peoples jumping ahead of Caterpillar.

While the Seventh Circuit observed that it followed the partial subordination approach, this was not the end of the analysis. Peabody was unable to produce a security agreement authenticated by the debtor that identified the collateral.

Because the first position priority interest of Peabody was not properly perfected, the subordination agreement did not permit Peoples to assert a security interest with a more senior-priority than Caterpillar.  Further, the court noted that even if Peabody’s security interest had been properly perfected, Peoples could only claim priority status in relation to Caterpillar up to the amount of the Peabody loan.

This would seem a fair resolution because it prevents Caterpillar from being prejudiced by the subordination agreement to which it was not a party.  The priority of Caterpillar would remain unchanged with the same amount of secured indebtedness needing to be paid prior to Caterpillar having its debt satisfied.

This case demonstrates that, under the majority approach, subordination agreements can be an effective tool for prospective creditors requiring additional collateral.  Since the senior creditor may be facing the prospect of not being paid if the debtor is financially struggling, the senior creditor may be agreeable to a lien subordination agreement.

However, prospective creditors considering such an approach need to carefully review the security agreements and UCC filings of the other party to the subordination agreement.