Search Results for: collateral description

U.S.’s Article 9 of the UCC and Canada’s PPSA

Posted on July 27, 2023 by - UCC Financing Statements

The U.S.’s Article 9 of the Uniform Commercial Code (UCC) and Canada’s Personal Property Security Act (PPSA)

The U.S.’s Article 9 of the Uniform Commercial Code (UCC) and Canada’s Personal Property Security Act (PPSA) are sets of law that govern commercial transactions between states and provinces.

The PPSA was largely modeled after the UCC.

Forms

First, let’s take a look at the specific forms used when filing a UCC or registering a PPSA. It’s interesting to note, in the U.S. the UCC3 Financing Statement is used if a filing needs to be amended, continued or terminated. Whereas in Canada, a Renewal is used to continue a filing, a Change Statement is used to amend a filing and a Discharge is used to terminate a filing.

UCC and PPSA

In order to create a security interest you must:

  • Have a signed Security Agreement and the security agreement must contain a granting clause and collateral description
  • Record (US) or Register (Canada) the Financing Statement to make the security interest public record
  • Notify the prior secured creditors in order to Establish Priority in Inventory

The Financing Statement does not require the debtor’s signature

UCC versus PPSA

Despite their overall similarities, there are significant differences between the UCC & the PPSA

  • Individuals
    • Under the UCC, verify the individual’s name with an unexpired driver’s license
    • Under the PPSA, include the individual’s birthdate
  • Establish Priority in Equipment
    • Under the UCC you must record your filing within 20 days of your customer’s receipt of the equipment
    • Under the PPSA you must register your filing within 15 days of your customer’s receipt of the equipment
  • Where to File
    • A UCC: for a registered entity the UCC is filed in the state of organization and the UCC for an individual is filed in the state of residence
    • A PPSA: if the entity is registered in British Columbia, Ontario, or Saskatchewan, the PPSA is registered in the province of registration, otherwise the PPSA is registered in the province(s) in which the entity is registered and where goods are located
  • Life of Filing
    • In the US, the secured party’s filing is good for 5 years (in most states – WY filings are good for 10 years)
    • In Canada, the secured party may choose a filing period from 1-25 years or “infinity”

PPSA  

The PPSA allows for repossession upon default, much like the UCC, however, the PPSA provides a broader definition of default.

Default is the failure to pay or otherwise perform the obligation secured when due, or the occurrence of an event or set of circumstances that, under the terms of the security agreement, causes the security interest to become enforceable.

A secured party may take possession of and sell the collateral when the debtor is in default under the security agreement or when the collateral is at risk. The collateral is “at risk” if the secured party has reasonable grounds to believe the collateral has been or will be destroyed, damaged, endangered, disassembled, removed, concealed, sold, or otherwise disposed of contrary to the terms of the security agreement.

Remember Quebec did not adopt the PPSA. They have their own law called the Civil Code of Quebec. The most recognized difference between Quebec and PPSA law is the interpretation of the concept of chattel mortgage.

Editor’s Note: This content was originally published in August 2014. It has since been updated and revised for 2023.

Big Foot, a Unicorn, and a UCC Financing Statement

Posted on March 9, 2023 by - UCC Financing Statements

The 6 Myths of UCC Filings: Big Foot, a Unicorn, and a UCC Financing Statement All Walk into a Credit Conference

No, wait – not the right joke.

Let’s try again. Big Foot, Unicorns & UCC filings all have one thing in common: crazy myths surrounding their existence and, in the case of the UCC filing, crazy myths about their effectiveness.

While I’m not an expert on Big Foot and I think Unicorns are pretty, one thing I do know is the immense benefit UCC filings bring to your credit process. Today, I would like to dispel some of the age old myths about UCC filings.

Myth 1: “It’ll never work. I’ll always be behind the bank & never get paid.”

Fact: Bank relationships change – i.e. refinance. You may find you need to subordinate to a bank, but you will still remain ahead of other secured creditors.

Myth 2: “My customer’s bank won’t let them sign the security agreement.”

Fact: The bank should not have a problem with you being a secured creditor, however, the bank may request that you subordinate.

Myth 3: “The UCC filing will hurt my customer’s credit rating.”

Fact: UCC filings do not impair your debtor’s credit rating. The filings will appear on the credit report, but simply to provide confirmation that another creditor has a secured position or that you pledged collateral for trade credit.

Myth 4: “If I ask my customer to sign a security agreement, they are going to leave me & buy from a competitor that won’t ask them to sign a security agreement.”

Fact: Are you 100% positive your competitors are not filing UCCs or, at the very least, including security language in their agreements? The truth is, company’s everywhere file UCCs, and it’s a normal aspect of doing business. Reassure your concerned customer that the UCC filing simply allows you (the vendor) to be a secured creditor in the unlikely event they file bankruptcy.

Myth 5: “Eh, it’s not worth the money or the hassle!”

Fact: Hassles? You don’t need no stinkin’ hassles! This is why there are companies, like NCS, who will handle the “hassles” for you.

We can cultivate your collateral description, review your agreement to ensure it contains important aspects like the granting clause, pull the articles to confirm your debtor’s name & jurisdiction, process the actual filing, monitor the filing for expiration & monitor your customer for changes with the secretary of state.

You’re right, it may seem like a hassle to you, but to us it’s second nature. A minimal fee could save you hundreds of thousands of dollars in the event your debtor defaults.

To be a secured creditor or not to be, that is the question. Nah, there is no question because you should always be a secured creditor.

Myth 6: “A UCC filing will make me sprout a horn, grow fur & give me magical powers with glitter!”

Fact: OK, you got me there.

The Bottom Line

UCC filings are magical; UCCs grant you a security interest and put you in the best possible position to get paid, in the event your customer defaults.

Take the smart step and become a secured creditor, and don’t believe all the mythical malarkey surrounding their effectiveness.

NCS Credit Is Your UCC Filing Expert

We are UCC experts and we can help you implement a full service UCC Filing Program. Need help with a single filing? We do that too! Contact us today.

Editor’s Note: This content was originally published in May 2014. It has since been updated and revised for 2023.

What You Should Know Before Filing Your Own UCC in Florida

Posted on November 1, 2016 by - UCC Financing Statements

What You Should Know Before Filing Your Own UCC Financing Statements in Florida

You have taken the meticulous steps to properly perfect your security interest. You may have spent countless frustrating hours going back and forth with your legal department to agree on the security language. You have created a collateral description that others have only dreamed about. You have overcome obstacles with your sales team and even with your customers. But now you are here — you have conquered the proverbial mountain.

You’ve done it all & you are ready to secure your right to payment!

And just like that, you are tumbling back down the mountain, because someone missed a keystroke when indexing your filing… poof… your security interest is gone.

OK, perhaps I’m a smidge dramatic… but, the devastation that accompanies an invalid security interest is real.

“I can do it!” Just because you can, doesn’t mean you should.

When we discuss the UCC filing process with creditors, we frequently hear “Eh, it’s easy, we just do it ourselves.” Recording a Financing Statement may appear to be a simple task, but appearances can be deceiving.

We’ve said it before & I’ll say it again, UCC filings are more than a form fill document! A properly perfected security interest requires a detailed and accurate security agreement and a carefully completed, reviewed and indexed Financing Statement.

There are 50 states and over 3000 counties in the United States, which means there are hundreds of different processes for recording Financing Statements and fixture filings. Our UCC experts are familiar with all recording offices & processes — after all, they are experts. In some states, the Secretary of State’s office is responsible for the recording of the UCC, while in others the state may hire a third party to process the filings.

Recently, our NCS experts conducted an audit of UCC filings filed by a state-hired third party in sunny Florida. The results were unfortunate.

What Our Experts Were Looking For – Errors

The state of Florida uses a private company to manage their UCC filings. Unfortunately, this third party Florida has hired does not utilize electronic data entry.

Most Secretary of State offices operate an online system and although each system is different, they are online nonetheless. However, Florida didn’t get the memo. No electronic data entry means that every filing has to be faxed and/or physically mailed to this third party and the staff of this third party will manually index the info into their system.

It should come as no surprise, but this third party makes mistakes and they don’t subsequently review their own data entry, so the errors can go unnoticed quite easily.

As you know, even simple errors in UCC Financing Statements can quickly invalidate a security interest. (Remember the ‘falling down the mountain’ analogy above?) Companies operate on margins of error, and those margins are typically low, so how does this third party stack up?

Our UCC experts tracked this third party’s errors in July & August, here are the results:

  • July: 13% error rate
  • August: 7.5% error rate

In the month of July, out of 477 filings, 62 filings had errors, which is a 13% error rate. These aren’t minor errors. These are errors in the entity’s legal name and address — errors that would deem the filing seriously misleading.

Fortunately for our clients, part of our internal process includes reviewing every filing once it has been recorded and indexed. In the event we discover errors when we review the filings, we contact this third party and request it be corrected. The third party may be annoyed when we point out their mistakes, but we are doing our job to ensure our clients’ UCC Financing Statements are indexed correctly.

Just Because You Can, Doesn’t Mean You Should

Yes, recording a filing may seem simple, but not everything is as it seems. If you choose to file your own UCC Financing Statements, you should always review the filing once it has been recorded and indexed. Don’t ever assume that the Secretary of State, or in this case a company hired by the state, has indexed it correctly.

Have a review process in place, or better yet, rely on our experts to handle your UCC filings for you!

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.

A Primer on the Primary UCC Forms

Posted on November 2, 2015 by - UCC Financing Statements

A Primer on the Primary UCC Filing Forms

1, 3, 11… Confused counting? Of course not, silly, these numbers identify the various types of UCC filings under Article 9 of the Uniform Commercial Code (UCC). As you may already know, UCCs provide an opportunity for trade creditors to collateralize or “secure” their goods and/or accounts receivable, by leveraging the personal property assets of their customer.

Here’s a quick overview of the three primary UCC forms.

UCC-1: the Original

This is the initial UCC filing, which represents the granting of the security interest.

  • It must* include:
    • Your company (aka the secured party) name & address
    • Your customer’s (aka the debtor) name & address
    • The collateral description
  • It’s good for 5 years (10 years in Wyoming and up to infinity in Canada)

*It’s important to note, if you neglect to include one of these required bits of information, the filing will be rejected.

UCC-3: the Change

This UCC form is used to continue an existing filing, change information on an existing file or to terminate an existing filing. To change information on a UCC filing and to terminate a filing are pretty straightforward, but let’s dig a little deeper into the continuation.

What is a UCC Continuation?

If you perfect a security interest through UCC filings, you probably know that a UCC filing is good for five years (except in Wyoming, where it’s ten years and in Canada, where the PPSA can actually be infinite). So, what happens if the five years is up and you are still extending credit to your customer? You should continue your filing. Timely continuance of a UCC filing maintains your security & priority.

Here are a few other things you should know about continuations:

  • The five year anniversary of your filing is the “lapse” date aka expiration date. i.e. If the original filing was recorded 07/07/2014, then the continuation needs to be filed by 07/07/2019.
  • To maintain your secured position, you should continue your filing before the lapse date. If you haven’t filed the continuation by the time the lapse date arrives/passes, you have to file a brand new UCC which means you forfeit your priority position.
  • Don’t file your continuation too soon! A continuation can only be filed within six months of the lapse date – if you file it too soon or too late*, the recording office will reject the filing. i.e. If the lapse date is 07/07/2019, the earliest you can file the continuation is 01/07/2019.

*There is no wiggle room, so make sure you file timely.

“If my original UCC was filed July 1st and I record the continuation on February 1st, is my new renewal date February 1st?”

No. Your renewal will always be the date of the initial filing – for this example, it will always be July 1st.

UCC-11: the Search

This UCC filing is an “epic-information-dig”. Here are a few reasons why creditors, or other interested parties, may run a UCC search:

  • To determine if there are other secured parties on a particular debtor.
    • This can be helpful when a creditor needs to send notification letters to these other parties.
  • To determine if specific collateral is already secured by a UCC filing.
  • To determine a creditor’s priority (i.e. are they 1st, 2nd… 13th…).

Some creditors find the Search to be quite useful when they are requiring a customer to sign a security agreement, and the customer says “None of my other vendors make me sign these!”

When running searches as a part of a credit approval process, it arms the creditor with information on whether or not other parties are filing UCCs against their customer – with the search information, the creditor could say “Actually, XYZ Inc. asked you to sign a security agreement and subsequently filed a UCC, in order to protect their rights. We are simply following a streamlined credit approval process, which will have no negative impact on you, unless you were to default.”

Need help with UCCs? NCS has you covered!

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.

Demand Letters and UCC Filings

Posted on April 15, 2015 by - Credit Risk Management, UCC Financing Statements

What You Should Know about Demand Letters & UCC Filings

The demand letter is often overlooked as a collection tool for UCC filers, but it can be a cost effective alternative to the processes of repossession or litigation. As we’ve mentioned before, demand letters are not kind, gentle, love notes. Demand letters are typically harshly worded, authoritative notifications – after all, the definition of demand is “…an insistent and peremptory request, made as if by right.” which loosely translates to mean “It’s mine! You have it, pay me or give it back.”

What Should I Include in a Demand Letter?

Always remember to be factual & succinct. When you have filed a UCC, you should use that filing as leverage within your demand letter. Make sure to include the following information in the demand:

  • Date of the demand
  • Your company’s name and contact information
  • Your debtor’s name and contact information
  • The date the Security Agreement was executed
  • The UCC filing number and the date of the filing
  • Reference to the Collateral Description
  • Reference to the Default Terms
  • The amount of the debt
  • The due date of the debt
  • How the debt should be paid
  • The consequence of not paying the debt

You are probably wondering “How on earth can I be succinct when I have to include ALL of this information?!” And the answer is to remember to stick to the facts, no additional commentary or emotion need be in the demand, just the facts.

Who Should Receive a Copy of the Demand Letter?

The demand should be served upon your debtor and it is recommended you include a copy of the Security Agreement and a copy of the UCC filing.

There’s a Consequence for Every Action

Always include a description of the consequences for not paying the debt.  It’s important to include realistic ramification: “…If payment is not received, we may pursue all available legal remedies available under the Ohio Uniform Commercial Code.”

Can I Send a Demand Letter even if I Didn’t File a UCC?

Yes, absolutely YES! There are no prerequisites for sending a demand letter, other than the outstanding debt.

When Should I Send a Demand Letter?

You may find a demand letter to be most beneficial before attempting to repossess your goods or before proceeding with enforcement of the UCC filing under the Uniform Commercial Code.

 Looking for an example of a general demand letter? Download one for free

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.