Service Area: UCC Services

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.

Debtor Name Errors in UCC Filings

Posted on November 12, 2014 by - UCC Financing Statements

The Impact of Debtor Name Errors in UCC Financing Statements

Perfection of a security interest involves drafting and executing a sound security agreement, properly filing a UCC Financing Statement and ensuring the filing complies with Article 9 of the Uniform Commercial Code.  When preparing a UCC filing, minor deviations in the name of the debtor can prevent a security interest from being perfected.  Creditors may assume it is enough to simply conduct an online search to determine the correct spelling of a debtor’s legal name. However Article 9-503 (a) states that for a registered entity one must obtain the organic public record.  Minor discrepancies coupled with strict state search logic can add up to a costly mistake.

Unperfected Security Interest

Let’s take a look at a few cases where the creditor failed to perfect their security interest, because searches conducted using the jurisdiction’s search logic did not reveal their UCC filing.

Jurisdiction: Nebraska
Case: EDM Corporation, doing business as EDM Equipment, doing business as NOVI, LLC, Debtor
Hastings State Bank, Plaintiff-Appellant v. Thomas D. Stalnaker, Chapter 7 Trustee of EDM Corporation
Verdict: The Court of Appeals for the Eighth Circuit affirmed the bankruptcy court’s ruling that the bank’s financing statement was “insufficient due to the addition of d/b/a” as part of the debtor’s name.

The bank listed the debtor’s name on the UCC filing with both the debtor’s public record and the d/b/a names.  The debtor’s name was EDM Corporation and its d/b/a was EDM Equipment.  The bank used a non-standard-form financing statement and listed the debtor as “EDM Corporation d/b/a EDM Equipment.”  Subsequently, two separate lenders failed to turn up the financing statement when conducting UCC searches.  The court noted that the standard-form financing statement expressly indicated not to include a d/b/a or other extraneous information in the field for the debtor’s name.  The court emphasized the importance of putting in the exact public record name of the debtor – no more and no less.

Jurisdiction:  Idaho
Case: Wing Foods, Inc., Debtor. Bankruptcy Estate of Wing Foods, Inc., by and through its Chapter 7 Trustee, Gary L. Rainsdon Plaintiff, vs. CCF Leasing Company and B S & R Equipment Company, Defendants.
Verdict:  The court determined the UCC Financing Statement was “fatally flawed” and as a result, the debtor was permitted to avoid the creditor’s security interest.

The creditor, CCF Leasing Company, leased equipment to Wing Foods, Inc. The creditor took steps to perfect a security interest by filing the UCC; unfortunately, the financing statement listed the debtor’s name as “Wing Fine Food.” The court found that the difference in the name was seriously misleading because a UCC search, using the jurisdiction’s search logic, would not have revealed the financing statement.  Because the filing was seriously misleading, the court ruled that Wing Foods, Inc. was able to avoid CCF Leasing Company’s security interest in its Chapter 7 bankruptcy.

Jurisdiction: Texas
Case: In re JIM ROSS TIRES, INC.; dba HTC Tire Pro; dba HTC Tires & Automotive Centers, Debtor(s).
Verdict: The court found the listing of the debtor’s name “seriously misleading” because the search logic used for UCC searches in the state would not have revealed the financing statement.

On the UCC Financing Statement, the creditor listed the debtor by including both the debtor’s legal name and d/b/a – “Jim Ross Tires Inc. DBA HTC Tires and Automotive.” The creditor argued their security interest was perfected, because their filing could be located using a “non-standard wild card search”; unfortunately for the creditor, the court did not agree with their argument.  “Accordingly, the Court finds that the Financing Statements are ineffective to grant security interests in Debtor’s collateral. Although this result is harsh, the Court must examine the result in the context of claims between competing creditors.”

Jurisdiction: Georgia
Case: Receivables Purchasing Co., Inc. v. R&R Directional Drilling, L.L.C.
Verdict: The appeals court affirmed the trial court, which determined the creditor did not have a security interest, because the financing statement was seriously misleading.

The creditor in this case simply added a space in the name of the debtor listing it as “Net work Solutions, Inc.” The creditor requested the Georgia Superior Court Clerks Cooperative Authority (GSCCCA) perform a search: “The GSCCCA did a certified search under the correct name Network Solutions, Inc. The Search did not reveal (debtor’s) financing statement, which…was filed incorrectly under Net work Solutions, Inc.”

Avoid this UCC Filing Mistake

While some creditors attempt to search online for a debtor’s business name, minor alterations to the name or the inclusion of a d/b/a could be fatal to the filing.  We recommend you obtain the debtor’s corporate legal name from the Articles of Incorporation filed with the state and monitoring the entity’s name for any subsequent changes. In addition to confirming your debtor’s corporate legal name, it is important understand the search logic used in the state because including a space where one does not belong or changing “and” to “&” in the debtor’s name may be enough to render a UCC filing ineffective.

The Art of Drafting a Perfect Security Agreement for Your UCC Filing

Posted on September 24, 2014 by - UCC Financing Statements

There’s an Art in Drafting a Perfect Security Agreement for Your UCC Filing

Today we take a field trip to the Museum of Art and examine “Starry Night” by Vincent van Gogh. At first glance, “Starry Night” may look like a child swirled a paint brush around, hastily drew a few houses with a black magic marker, and added a church steeple, with some lazy-cartoon-like mountains in the background. But, as we know, a child did not create this piece of art; an artist created this piece – someone who honed his craft to absolute perfection. Every swirl in this painting is deliberate, precise in size and tone – all of its contents make it a single masterpiece.

OK, but what does “Starry Night” have to do with a Security Agreement and the UCC filing process? Often, Security Agreements and artistic masterpieces are incomplete. And while an incomplete piece of art may be on display, with no one judging it as “incomplete,” a security agreement does not have the same privilege.

Perfection, Precision, Masterpiece

Drafting a solid Security Agreement (perhaps not as aesthetically pleasing as “Starry Night”) is also an art form. Designed to mitigate risk and to grant creditors security in the event of debtor default, meticulous details combine to create a perfected security interest, i.e. the UCC-1 Financing Statement.

The most common errors in Security Agreements are often as simple as omitted details. Perhaps it’s a misspelled debtor name, the absence of a granting clause or a vague collateral description. So, what makes a solid Security Agreement?

Correctly Identify the Debtor.

There are oodles of cases demonstrating the devastating consequences of incorrectly spelling the debtor’s name in a Security Agreement or UCC Financing Statement.

Include the Debtor’s Address.

Not only should the debtor’s address be included, but it’s also imperative the address be correct.

Date the Agreement.

Confirm the document is dated – this is a great rule of thumb when your debtor signs any document for you.

Ensure the Signors are Authorized.

It is unfortunate to discover the individual who signed the document does not have the authority to sign, or all partners/members do not sign.

Include the Granting Clause.

A Security Agreement is nothing when the granting clause is missing, after all, it actually grants the security interest.

Clearly Identify Collateral.

This is a touchy subject. Often, collateral descriptions are too vague or too specific. Creating the right balance to ensure you have effectively covered the collateral is tricky.

Reference Governing Law.

Don’t forget to include reference to the governing law.

NCS Can Help

Properly perfecting a security interest through Article 9 of the Uniform Commercial Code is an art form. Make sure all of the required information is included and accurate. If in doubt, seek assistance from a professional.

Your Customer Defaults, Fortunately You Filed a UCC – Now What?

Posted on September 3, 2014 by - UCC Financing Statements

Your Customer Defaults, You Filed a UCC – Now What?

Congratulations, you filed a UCC to position yourself as a secured creditor! Unfortunately, your customer has defaulted on payments. You have attempted to work with your customer regarding their past due account, but they are still unable to meet the commitment – now what?

Any time your customer has defaulted on payments, we recommended you take immediate action to recover the funds; the longer an account remains unpaid, the harder it becomes to collect. A great, and relatively inexpensive, first step is to send a Demand Letter. A demand letter is a demand served upon your debtor, advising legal action may be taken if payment is not received within a specified time frame.

In the event the demand letter does not prompt payment, you may need to proceed with further legal action. Your next course of action is dictated by the type of UCC you filed.

Did you file a PMSI UCC?

If your customer has defaulted on payment(s) and you have filed a Purchase-Money-Security-Interest (PMSI) UCC, you need to determine whether or not you would like your equipment/inventory (aka goods) 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 do 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.

Did you file a Blanket UCC?

If your customer has defaulted on payment(s) and you have filed a Blanket UCC, you could place the outstanding debt with a collection agency or file suit against your debtor.

Has your customer filed bankruptcy?

Keep in mind, the bankruptcy court freezes all debtor assets.

  • If your customer filed Chapter 7: File your secured proof of claim, regardless of whether you filed a PMSI or Blanket UCC.
  • If your customer filed Chapter 11:
    • PMSI UCC:  If you would like your goods back and your goods are at your customer’s location, contact the Trustee to repossess. If the Trustee is uncooperative, you may need to take additional legal action.
    • Blanket Filing: File a secured proof of claim and monitor for distribution.

Of course, as in any situation, it is in your best interest to seek legal advice and it is important to remember, a UCC filing is a remedy and not a cause of action in suit.

Articles of Incorporation: Not Just for Name Verification

Posted on July 15, 2014 by - UCC Financing Statements

Articles of Incorporation: Not Just for Name Verification

Do you know that if your customer changes their name you must amend your UCC filing or your security is jeopardized? Did you know Articles of Incorporation are required to verify an entity’s legal name and to verify jurisdiction?

Per Section 9-507(c) of the UCC, the secured party has four months to amend a UCC filing when the debtor’s name changes. If the secured party does not amend the UCC filing, the filing is not effective to perfect a security interest in collateral acquired by the debtor before or within four months after the change.

Best Practice

Make sure your Security Agreement requires your debtor advise you of any changes to their name, address or organizational structure. It is your responsibility, as the secured party, to ensure the UCC filing is updated and contains the correct information.

You can also utilize resources like our Corporate Monitoring, which will alert you when the State Corporation Division reports a change in your customer’s corporate profile along with decision making information to keep the UCC Financing Statement in compliance with Article 9-507(c).

Articles of Incorporation are not only required under UCC Article 9 to verify the entity legal name, but must also be used to verify jurisdiction.

In this example, the state of Texas is reporting the entity as a Foreign Limited Partnership organized in Delaware. However, if you review the Articles, you will discover the LP is actually organized in California. If the documentation had not been reviewed, the UCC would have been filed in the wrong jurisdiction, consequently there would be no security interest.

Secured Transaction Takeaway: Always review all documents carefully!