Service Area: Collection Services

Billion Dollar UCC Mistake Will Make You a Better Credit Manager

Posted on February 8, 2016 by - UCC Financing Statements

How JP Morgan Chase Bank’s Billion Dollar UCC Filing Blunder Can Make You a Better Credit Manager

By now you have likely read thousands of articles and heard just as many news reports about JP Morgan’s “accidental UCC-3 Termination” – perhaps not thousands, but it was a widely covered topic in 2015. After all, accidentally terminating a UCC filing made JP Morgan an unsecured creditor – a $1.5 billion unsecured creditor.

Background

Here’s the unofficial “CliffsNotes®” version of what happened. (You can find full text of the case here) General Motors Corporation (GM) had two separate finance agreements with JP Morgan Chase Bank (JP Morgan). One agreement was for $300 million (a synthetic lease) and the other was for $1.5 billion (a term loan), both agreements were secured by different collateral and there was a UCC-1 filed for each.

GM paid off the $300 million, and subsequently asked their counsel to prepare the UCC-3 Termination. A representative with GM’s counsel ran a UCC search to locate the financing statement to be terminated, three results were returned with the search and the representative included all three with the termination filing.

Unfortunately, of the three filings included, one was the term loan for $1.5 billion which had not been paid in full.

The drafted paperwork was reviewed by GM’s counsel and forwarded to JP Morgan’s counsel, who also reviewed it – even signed a few documents – and the paperwork was then filed, “unknowingly terminating” JP Morgan’s security interest in the $1.5 billion.

None the wiser, until…GM filed for bankruptcy protection. Once the petition was filed, JP Morgan discovered the $1.5 billion unsecured debt and heads began spinning.

It was Simply an Accident, Right?

Yes, it was an accident, but no, it’s not simple. After GM filed for bankruptcy, and the unsecured debt came to light, JP Morgan advised the creditor’s committee that the UCC securing the $1.5 billion was terminated accidentally. (Even GM allegedly said they never intended to terminate this filing)

Through lengthy hearings and court of appeals processes, it was determined that whether the termination filing was intentional was irrelevant, because the termination was executed and therefore, the security interest was extinguished.

Don’t “Pull a JP Morgan”

When I say, don’t “pull a JP Morgan” I mean, don’t sign something without proper review – it doesn’t matter how many people reviewed it before you, if you are going to sign something, review it.

In this case, several parties “reviewed” and signed off on these documents, but clearly no one truly reviewed the documents, they simply relied on a belief that the person before them reviewed it. There was a checks/balance system in place, but that only works if the parties actually do the checks!

You Will Be a Better Credit Manager

Keep this case in mind when you establish a new UCC filing process or modify your current process. UCC filing requires concise & correct information and, as in the JP Morgan case, leaves very little to no room for error.

It’s important to correctly identify the involved parties, the collateral etc., but it’s crucial to review a filing carefully before recording it. Don’t leave the task of UCC filings to one person. At the very least, have one person prepare the documents and a separate person carefully review the documents before filing.

When I was in grade school, our teacher would have us exchange our papers with a classmate to proofread, make changes, correct errors, before turning the document in for a grade. Same thing should go for financing statements: Review. Review. Review. And then review it again.

Articles of Incorporation Play a Key Role in Your UCC Filing

Posted on January 19, 2016 by - UCC Financing Statements

Articles of Incorporation Play a Key Role in Your UCC Filing

Clients frequently ask:  “My customer’s name is on our agreement and I ran a query on the Secretary of State website; why do I need to pull the Articles of Incorporation too?”

Previously, we’ve mentioned that Articles of Incorporation are used to determine jurisdiction (see Articles of Incorporation: Not Just for Name Verification). In today’s example, Articles of Incorporation are important because even states make mistakes when indexing entities (more often than you’d think).

The first image is from the Ohio Secretary of State’s website. The search performed was for “J & J Flooring” and the returned result indicates the corporate legal name is “J & J Flooring, Inc.” so that’s what the creditor used on their credit application.

But look closer….

A screenshot showing the result of searching J & J Flooring on the Ohio Secretary of State's website. The Business Name row is marked with a red box and the Filing Type is marked with a red arrow.Under “filing type” the state indicates J & J Flooring is a Limited Liability Company, which is commonly referred to as an “LLC”.

So, which is it? “J & J Flooring, Inc.” or “J & J Flooring, LLC” — the only way to know for sure is to pull the Articles of Incorporation! Article 9 requires the debtor’s legal name, state of organization and the organization ID number – all three items are found on the Articles of Incorporation.

OK, here’s a look at the Articles of Incorporation. Drum roll please… aha! The entity’s corporate legal name is, in fact, “J & J Flooring, LLC”:

A screenshot showing the Articles of Incorporation for J & J Flooring with a red box around the official corporate legal name being J & J Flooring, LLC.

“Why can’t I just list ‘J & J Flooring’ on the filing, that way it will cover both ‘Inc.’ and ‘LLC’?” Because you can’t have your cake and eat it too.

We’ve previously discussed the importance of filing a UCC with the correct legal name, in fact, we specifically discussed a case where the creditor left “Inc.” off of the debtor’s name and the security interest was left unperfected. You can read more about that case here –  What a Difference a Name Makes: Omission of “Inc.” Left Security Interest Unperfected.

It’s all about the standard search logic, and though you may think “Inc.” and “LLC” are what are sometimes referred to as noise words, they are still words – don’t jeopardize your position; pull and review Articles of Incorporation carefully!

Have questions? NCS UCC experts are here to help!

Ontario PPSA Amendments

Posted on December 15, 2015 by - UCC Financing Statements

The 2006 Amendments are Coming to Fruition for the Ontario PPSA

The 2006 amendments to Ontario’s Personal Property Security Act (PPSA) are set to become effective by the end of the year.

Initially I thought “…the amendments passed nearly 10 years ago, and now there is a random rush to implement them?” Apparently I wasn’t alone with this thought. The same surprise appears right in the title of an article by Margaret Grottenthaler & Kelly Niebergall of Stikeman Elliott LLP: “A Little More Notice Please! Amendments to Ontario PPSA Debtor Location Rules Effective December 31 May Require Additional Registrations”

What’s changing?

As you may know, the PPSA is registered in the jurisdiction where the debtor’s “chief executive office” is located.

Unfortunately, “chief executive office” was not well defined under current statute, and by “well defined” I mean not defined at all. Creditors had difficulty in identifying the chief executive office, especially when business structures vary, as Grottenthaler & Niebergall pointed out:

“The background of the 2006 amendments (which are now to be brought into effect) is that there had been criticism of the existing Ontario PPSA debtor’s location definition, on the grounds that the whereabouts of a debtor’s chief executive office is not always obvious given that it is not generally identified on a public record. In addition, the location of the chief executive office can be difficult to determine in the context of partnerships and trusts that may be managed by persons in a variety of jurisdictions or in the case of entities that do not have a specific physical location from which they conduct business.”

How will the 2006 amendments clear up jurisdiction confusion?

The jurisdiction will be determined by the entity type. Grottenthaler & Niebergall provide a great chart which lists the debtor type and jurisdiction side by side.

This is a sample of the chart, Stikeman Elliott LLP, posted on their blog – in this example, if the entity is a corporation, the location of the debtor is where it is incorporated.

Type of Debtor Entity: Corporation, limited partnership or organization organized under the laws of a Canadian province or territory, as disclosed in a public record Location of Debtor: Its province or territory of organization

What if I have PPSAs currently registered? What if I just registered a PPSA in Ontario? 

If you have registered a PPSA in Ontario, you have a few options. Technically there is a grace period for these amendments, much like what we saw when UCC Article 9 was amended – and the grace period is 5 years (again, just like the UCC).

  • Option 1: you could leave your registered PPSA as is and review it sometime over the next 5 years to ensure you have it registered in the proper jurisdiction. (or)
  • Option 2 – The Preferred & Recommended Best Practice: review all existing PPSAs now, and confirm they are registered in the proper jurisdiction. If, in your review, you determine that a PPSA is not registered in the proper jurisdiction, you should amend the PPSA after the first of the year.

We aren’t the only ones recommending you review now as opposed to later – Robert M. Scavone & Maria Sagain, of McMillan LLP make the same recommendation:

“Although in most cases the amendments will provide a five-year grace period to perfect security interests under the new rules, secured parties should avoid being caught by surprise on December 30, 2020 and should begin reviewing existing registrations well in advance of that date to identify which ones will need to be “refreshed” during the grace period. Secured parties will also need to develop new due diligence procedures to ascertain the debtor’s location in accordance with the new rules for all PPSA registrations and searches done after December 31, 2015.”

You can read their full coverage of the Ontario PPSA amendments here: “Where’s Waldo: New Ontario PPSA Debtor Location Rules Finally Coming into Force”

Best Practices

Review all filings now, register a PPSA in the debtor’s jurisdiction and in the jurisdiction in which the inventory is located, and don’t go it alone! NCS UCC experts are here to help

Can Supporting Documentation Make or Break Your Claim?

Posted on November 10, 2015 by - Credit Risk Management

Can Supporting Documentation Make or Break Your Claim? Short Answer: Yes!

The words rumbled like daunting thunder from the mouth of a tall, lanky and otherwise nondescript bank branch manager. Although he was referring to fraudulent charges on an account, the same adage applies to those who secure credit through UCCs, mechanic’s liens or pursue collections.

I can’t say it with quite the same Armageddon-like-bellow, but I’ll strain to be tip-toes-tall and use the lowest voice I can muster, to repeat “supporting documents can make or break a claim”. Because it’s worth repeating, if for nothing more than a bit of a giggle while I try not to lose my balance.

Which documents should be included?

Regardless of whether you are pursuing a UCC, mechanic’s lien or collection, these are documents you should always have handy:

  • A copy of the Contract or Agreement (including Security Agreement)
  • A copy of the Purchase Order(s)

Short list huh? Well, hang tight, we’re not done. Let’s delve a bit deeper, and uncover the important documentation based on service type.

Filing a Mechanic’s Lien?

If you are securing rights through the mechanic’s lien process, the list of necessary documentation can fluctuate – meaning, you tend to need more supporting documentation and information for a mechanic’s lien than you would for a preliminary notice. In an ideal credit-management-world, you would want to have ALL of this documentation (remember, ideal, not required):

  • Proof(s) of Delivery
  • Itemized Statement
  • Invoices
  • Payment Bond
  • Notice of Commencement
  • Notice of Completion
  • Joint Check Agreement
  • Personal Guarantee
  • Lien Waivers

Generally, when serving a preliminary notice, you would want to include the information that will ensure the proper parties are served with a copy of the notice. This would include knowing who is in the contractual chain (owner, GC, debtor, surety, lender etc.) and can often be found on job information sheets, contracts and Notices of Commencement.

Once you are at the point where you are unpaid and disputes arise forcing you to pursue a mechanic’s lien or even collections, that’s when you will want to refer to open invoices, statement of account, joint check agreements, personal guarantees etc.  Which leads to a great segue...

Pursuing Collections?

We have covered this before, so I won’t rehash it too much. The best advice is to provide as much information as you can. When it comes to pursuing collections or suit, it’s almost always better to have more documentation than not enough documentation (kind of like cake, more cake is better than less cake).  Aside from the “usual suspects” spelled out above, be sure to include copies of correspondence, copies of returned/NSF checks and copies of credit reports.

Filing a UCC?

If you are filing a UCC, it’s a bit less about the backup documentation, and more about ensuring all necessary information is incorporated into your Security Agreement. In the event you are pursuing collections and intend to use your UCC filing as leverage, you will want to ensure you provide the collections agency with a recorded copy of the UCC filing, results from a recent UCC search, a description of the collateral and the amount you are owed.

Supporting Documentation

Maintaining documentation is important – not only for proceeding with secured transactions, but simply as a good business practice.

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!

Creditor’s OMEGA Mistake Started with Collateral Description

Posted on August 24, 2015 by - UCC Financing Statements

closed lap top computer with eyeglasses on top

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!