Search Results for: collateral description

No Lien Rights for Rental Equipment Companies in Pennsylvania

Posted on January 3, 2024 by - Mechanic's Liens & Bond Claims, UCC Financing Statements

No Mechanic’s Lien Rights for Rental Equipment in Pennsylvania; Companies Should Consider UCC Filings

Originally published in the Credit Research Foundation’s publication, Perspective by CRF (Q4 2023)

The Pennsylvania Superior Court released a crushing decision, wiping out mechanic’s lien rights for those who provide rental equipment to construction projects. Fortunately, mechanic’s liens aren’t the only form of security available to the equipment rental industry. In today’s post, we’ll review this recent Pennsylvania legal decision and how UCC filings are poised to be the payment leverage rental equipment companies need.

The Case at a Glance

The Case: RA GREIG EQUIPMENT COMPANY v. MARK ERIE HOSPITALITY, LLC, 2023 PA Super 206 – Pa: Superior Court 2023

The Result: Mechanic’s lien rights do not extend to rental equipment providers. Rental equipment isn’t incorporated into the improvement; therefore, it isn’t classified as ‘materials’ under Pennsylvania’s statute.

Background

R.A. Greig Equipment Company (Greig) leased a Telehandler-2019 Haulotte LT 9055 SN#2065360 to Mark Erie Hospitality, LLC (Mark Erie) for the improvement of a hotel lot and a second vacant lot.

In March 2022, Greig filed a mechanic’s lien to recover $56,392 in unpaid rental charges and $135,311 in equipment replacement costs (the equipment was allegedly damaged on site).

Mark Erie objected to Greig’s mechanic’s lien, and the Trial Court sustained the objection when it concluded the equipment and rental payments weren’t “materials” as defined under Pennsylvania’s statute. Fast forward, Greig appealed the Trial Court’s decision and here we are in front of the Superior Court.

Superior Court’s Decision: No Lien Rights for Rental Equipment

The Superior Court sought to answer several questions in its review of the case, but the one we are most interested in is whether Greig’s rental equipment and rental payments are considered “materials” and lienable under Pennsylvania’s mechanic’s lien law.

Under Pennsylvania’s mechanic’s lien law, Title 49 P.S. 1201 (7) “’Materials’ means building materials and supplies of all kinds, and also includes fixtures, machinery and equipment reasonably necessary to and incorporated into the improvement.”

The Superior Court had to dig into the archives for other cases that addressed materials and uncovered a case from 1923. In that case, a lumber company supplied lumber for temporary use and “no part of the lumber so used [became] a permanent part of the building.” The lumber company filed a lien, but its lien was removed because “no recovery could be had for materials not actually used in the building and that [the] defendant was not responsible for lumber . . . which did not and was not intended to become part of the structure.” Essentially, the lumber company’s lumber was not incorporated into the construction.

Based on the decision in the 1923 case, Pennsylvania’s Superior Court affirmed the Trial Court’s decision: Greig’s rental equipment and rental payments were not incorporated into the improvement, thus not lienable. Because the statute clearly states “…machinery and equipment reasonably necessary to and incorporated into the improvement.” (emphasis added).

No Mechanic’s Lien Rights? File a UCC!

This is an excellent (albeit unfortunate for Greig) example of how UCC filings are just as vital to ensuring payment on construction projects as mechanic’s liens. We work with construction companies throughout the country, and many will file both UCCs and mechanic’s liens depending on the state in which the project is located and what materials or services they are providing to their customer.

In this case, Greig could have protected itself if it had filed a Blanket UCC filing to secure its accounts receivable. Under UCC Article 9, a Blanket filing is a security interest in all assets of your customer on a non-priority basis, eliminating potential conflict with your customer’s primary lender. Think of it as a blanket that lays down over all customer assets.

What You Should Know about UCC Filings

Here are a few key things you should know about UCC filings.

  • UCCs should be filed as soon as you have the signed agreement.
    • The Technical: Deadlines are determined by the filing type. Blankets should be recorded prior to lending or shipping, PMSI in Equipment should be recorded within 20 days of when the debtor receives possession of the collateral, and PMSI in Inventory must be recorded and authenticated notification letters must be sent before the debtor receives possession of the collateral.

Watch out for Preference: Let’s say you discover your customer is intending to file bankruptcy in the next month. Unfortunately, it’s too late to file the UCC 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 filing will be dismissed as a preference and not considered part of the bankruptcy proceedings, leaving you as an unsecured party.

  • UCC filings are consensual. This means, your customer your customer signs an agreement agreeing to the filing. The agreement (e.g., the security agreement which can be built right into your contract) includes language granting you a security interest in certain goods and/or services.
    • The Technical: In compliance with Article 9-102, a Security Agreement is an authenticated agreement that creates or provides a security interest. The agreement must include the date, debtor’s legal name and address, authentication, granting clause, collateral description and default terms.
  • UCC filings do not impact your customer’s credit rating.
    • The Technical: UCCs will appear in a credit report, but simply to provide confirmation that another creditor has a secured position or that you pledged collateral for trade credit.
  • UCCs are a simple security solution (especially when you let NCS handle the details!) when mechanic’s liens or credit insurance just won’t cut it.
    • The Technical: UCCs do require strict compliance with Article 9. Time and again we see creditors lose their security because they failed to comply with sections like UCC 9-503(a) which dictates how to correctly identify your customer on the Financing Statement or UCC 9-108 which outlines how the collateral should be identified.

Remember, material and equipment suppliers aren’t limited to the mercy of mechanic’s lien rights. UCC filings are a simple, low-cost solution, to protect your receivables.

Top 5 Rookie Mistakes with Your UCC Security Agreement

Posted on June 28, 2023 by - UCC Financing Statements

Don’t Make These Top 5 Rookie Mistakes with Your UCC Security Agreement

The accuracy of your Security Agreement can make or break your properly perfected security interest. Compliance with Article 9 of the Uniform Commercial Code must be precise. Don’t fall victim to these rookie Security Agreement mistakes.

Note, today’s post focuses on the Security Agreement, but typically the information within the Security Agreement is the information that appears on the Financing Statement – at least it should be. It’s imperative for both the Security Agreement and the Financing Statement to be compliant.

Rookie Mistake #1: Getting the Debtor’s Name Wrong

I’m going to spend a bit more time on this mistake because it is, without question, the number one mistake made by secured parties: incorrectly identifying the debtor. UCC Article 9-503 specifically states if the debtor is a registered organization, the debtor’s name must be identified as it appears on the public organic record.

“…[i]f the debtor is a registered organization… the financing statement provides the name that is stated to be the registered organization’s name on the public organic record of most recently filed with or issued or enacted by the registered organization’s jurisdiction of organization…”

This means, list your customer’s name EXACTLY as it appears on the public organic record. If you pull Articles of Incorporation, and your customer’s name ends in “Incorporated” instead of “Inc.” then spell out Incorporated. Technically, Inc. is a noise word, but in one current case, the security interest was unperfected because of errors in the noise word. Be wary of spaces, punctuation and noise words – these seemingly small nuances are causing big problems for secured parties.

If the debtor is an individual, creditors must first look to the state’s legislation to determine whether to follow “Alternative A” or “Alternative B.” Most states enacted Alternative A, which states the debtor’s name should be listed exactly as it appears on the unexpired driver’s license.

Alternative A: if the debtor holds an unexpired driver’s license, the Financing Statement must list the debtor’s name as it appears on the unexpired driver’s license. (If the debtor does not have a driver’s license, the Financing Statement should list the “individual name” of the debtor or the debtor’s surname and first personal name.)

Alternative B: the debtor’s driver’s license name, the debtor’s actual name or the debtor’s surname and first personal name may be used on the Financing Statement.

Most recently we have reviewed several cases in which a seemingly tiny mistake has left a creditor’s security interest unperfected. Don’t get caught in the complacency trap!

Popular question “What should I do if my customer’s name changes?” Article 9 – 507(c) provides a 4-month window to amend a filing for a debtor name change that may be considered “seriously misleading.” If the change in your customer’s name makes the filed Financing Statement “seriously misleading,” UCC Section 9-507(c) states the Financing Statement will only be effective for collateral acquired prior to the name change or within four months following the change.

As a best practice, we recommend amending your UCC filing if your customer’s name changes. There may be situations where an amendment is not “required,” but it’s a risk to not amend. If you are unsure whether you want to amend your filing, I would recommend you determine whether the name change renders your filing as seriously misleading.

Rookie Mistake #2: Failing to Include the Granting Clause

Security interests under Article 9 are consensual. This means your customer must agree to grant you rights to the collateral. If your Security Agreement does not include a granting clause, it isn’t a Security Agreement.  The granting clause does not need to be fancy, embellished with extraneous words or phrases.

Here’s an example of a granting clause “In consideration for the extension of credit, Debtor hereby grants a security interest in and assigns to the Secured Party the Collateral described in paragraph II below to secure payment and performance of all debts, liabilities and obligations of Debtor of any kind whenever and however incurred to Secured Party.”

Rookie Mistake #3: Not Clearly Identifying Collateral

Crafting a clear collateral description that isn’t too specific or too vague can be challenging. Article 9 clearly states a “supergeneric” description is insufficient. In other words, to simply identify the collateral as “all the debtor’s assets” or “all the debtor’s personal property” is unreasonable. OK, so what is reasonable? Article 9-108(b) provides the following “examples of reasonable identification”

Except as otherwise provided in subsection (d), a description of collateral reasonably identifies the collateral if it identifies the collateral by:

(1) specific listing;

(2) category;

(3) except as otherwise provided in subsection (e), a type of collateral defined in [the Uniform Commercial Code];

(4) quantity;

(5) computational or allocational formula or procedure; or

(6) except as otherwise provided in subsection (c), any other method, if the identity of the collateral is objectively determinable.

You can review some of our posts on collateral here.

Rookie Mistake #4: Missing Dates & Authorized Signatures

I list these two together because generally, when we sign documents (any documents), we sign and date. The same should apply for the Security Agreement: sign and date. Like peanut butter & jelly: sign and date. Have I repeated enough? Sign and date.

It’s vital the document be signed by a person authorized to grant the security interest. Make sure the individual signing the document has been authorized by the company to sign.

Rookie Mistake #5: Neglecting to Reference Governing Law

This is easy to overlook, especially when it can amount to a brief sentence buried within the pages of a document.

“This security agreement will be governed by the laws of _________ (state).”

Mistakes Eliminate Security

Mistakes happen, and they come at a cost. Article 9 leaves virtually no room for error and one slight misstep can leave you with an unperfected security interest and sitting in a sea of unsecured creditors. Carefully draft, review & re-review your documents to ensure you avoid these rookie mistakes.

*Editor’s Note: This content was originally published in November 2018. It has since been updated and revised for statute changes effective 2023.

Is the Lien Consensual or Statutory?

Posted on August 30, 2021 by - Mechanic's Liens & Bond Claims, Preliminary Notices & Construction Credit, UCC Financing Statements

What’s the Difference between Consensual and Statutory Liens?

In commercial credit, creditors have an opportunity to secure accounts receivable by establishing their right to certain collateral. Then, in the event the debtor fails to pay, the creditor can leverage the collateral for payment. Depending on the goods or services provided, the collateral may be personal property or real property, and both could be secured by a lien. There are two types of liens creditors may use: consensual or statutory. The primary difference between consensual and statutory liens is that one requires consent and the other arises automatically from law or statute.

UCC Filings Are Consensual Liens

A properly perfected UCC filing benefits creditors that provide equipment, inventory, and consigned goods. To perfect the security interest the debtor must execute a Security Agreement. This Security Agreement grants the creditor a security interest in the goods/services, as noted in the collateral description within the agreement, in the event the debtor defaults or files for bankruptcy protection.

The key for consent lies within the text of the Security Agreement. The Security Agreement should include a granting clause, whereby the debtor grants the creditor a security interest in the debtor’s collateral. In other words, when your customer signs a Security Agreement, they are saying it is OK for you to proceed with filing a UCC (lien) to secure your rights to the described collateral. Your customer is providing you with consent.

Please note, if your Security Agreement does not include a granting clause, it isn’t a Security Agreement. Having your customer sign an agreement that is missing a granting clause means your customer isn’t providing consent for you to file the UCC on the collateral.

The granting clause does not need to be fancy or embellished with extraneous words or phrases. An example of a granting clause is: “In consideration for the extension of credit, Debtor hereby grants a security interest in and assigns to the Secured Party the Collateral described in paragraph II below to secure payment and performance of all debts, liabilities and obligations of Debtor of any kind whenever and however incurred to Secured Party.”

Mechanic’s Liens Are Statutory Liens

If a creditor is furnishing materials or services to the improvement of real property, the creditor may be entitled to a mechanic’s lien. The mechanic’s lien process does not require the debtor’s approval or consent, because it is a matter of law or statute. Each state’s statute may vary, but they generally permit the filing of a mechanic’s lien on the real property in the event the creditor isn’t paid. Hence, statutory lien.

Although it does not require your customer’s permission, there may be prerequisites to filing a mechanic’s lien. The most common prerequisite? Timely serving a preliminary notice upon parties within the ladder of supply. In fact, 33 states have a statutory preliminary notice that should be served prior to filing a mechanic’s lien on a private project.

It’s also imperative you carefully monitor the statutory deadlines. Statute will dictate when the notice and/or mechanic’s lien must be filed and failing to comply with statute could invalidate your lien. You certainly wouldn’t want to jeopardize your payment security.

Different, But Equally Beneficial

There are strict rules when filing a UCC or mechanic’s lien, as they are different types of processes with their own idiosyncrasies. But both processes can assist creditors with securing payment or recovery – in some cases, creditors can take advantage of UCCs and mechanic’s liens at the same time for the same debtor. Bonus? NCS specializes in both & is ready to assist you!

UCC Filings Work, Here’s a $95,000 True Story

Posted on August 9, 2021 by - UCC Financing Statements

Yes, UCC Filings Work, and Here’s a $95,000 True Story

With a properly perfected security interest (aka UCC filing), you can recover funds (or inventory/equipment) from your customer in the event of default or bankruptcy. Of course, as a brilliant credit professional this is not news to you, after all, it’s why you file UCCs – to protect your receivable. But did you know you could potentially recover funds from unsecured creditors who were paid with funds secured by collateral identified in your UCC? It’s true; UCC filings work.

Let Me Be Candid for Just a Second

Here’s the reality, sometimes UCCs unfairly get a bad rep. I’ve heard creditors balk at UCCs, claiming they are ineffective, a waste of money, and for all intents and purposes, useless. Some say, “Why bother filing a UCC, the bank is always going to be ahead of me?” or “Nah, there’s no guarantee that UCC will get me paid!” and others “Well, even if I file a UCC, if my customer files for bankruptcy, I won’t see a dime.”

Further, some believe in putting their security all in one proverbial basket : “We don’t need UCCs, we use credit insurance,” or “We don’t need UCCs, we file 503(b)(9) claims.” And, you know what? Is it possible, perhaps even likely, a bank will ask you to subordinate? Sure. Are UCCs an absolute guarantee? Nope, though neither is credit insurance or 503(b)(9) claims. But it bears repeating, UCC filings work. Honest, they do.

So, for my credit friends hanging out in the UCC-non-believer-pool, this is a $95,000 story you should read.

Tale as Old as Credit: Secured Creditor vs. Unsecured Creditor

In a recent decision from a U.S. Bankruptcy Court in Kentucky, secured creditor Nutrien AG Solutions, Inc. (Nutrien) was awarded summary judgment and able to recover funds paid by the debtor to unsecured creditor Burkmann Feeds of Glasgow, LLC (Burkmann).

The relationship between the debtors and Nutrien began in 2013, at which time Nutrien executed several Security Agreements with the debtors and then filed its UCCs. The relationship continued, an additional Security Agreement was executed in 2017, and its UCC filings were appropriately amended to include additional debtor names. The collateral description within the 2017 agreement and on the UCC filing was (emphasis added):

“All of the following whether now owned or hereafter acquired, all products and proceeds thereof, all additions or accessions thereto, and all substitutions and replacements thereof: All crops growing, grown or to be grown in 2017 and subsequent years. All harvested crops. All warehouse receipts or other documents (negotiable or non-negotiable) issued for storage of such crops. All seeds, fertilizer, chemicals and petroleum, and any other crop input products. All inventory, contract rights, chattel paper, documents, instruments, supporting obligations, accounts, general intangibles, and cash and noncash proceeds from the sale, exchange, collection, or disposition of any of the Collateral. All entitlements and payments, whether in cash or in kind, including but not limited to agricultural subsidy, deficiency, diversion, conservation, disaster, contract reserve, under any government or any similar or other programs. All farm and business machinery, equipment and tools.”

In 2018, the debtors entered a “Payment Agreement” with Burkmann and Burkmann did not file a UCC. Within the agreement, the following appears: “I hereby agree to give my entire MFP payment as partial payment for charges incurred regarding the above account number with Burkmann Feeds of Glasgow, LLC.” (MFP = Market Facilitation Program)

There were some other issues with this case, but ultimately the debtors applied for and received MFP payments totaling $95,000. The debtors then used the subsidy payments to pay Burkmann $95,000. Nutrien caught wind of this payment to Burkmann and Nutrien’s counsel sent a demand to Burkmann for the $95,000. Burkmann denied Nutrien’s demand.

Fast forward. Debtors file for bankruptcy. Burkmann files its proof of claim, and attached a promissory note and real estate mortgage, but no UCC filing. Nutrien contended its own properly perfected security interest covered the MFP payment that was made to Burkmann. The court agreed:

“The Application & Note/Security Agreement executed by the Debtors on July 11, 2017, at Paragraph 2, granted a security interest to Nutrien on all entitlements and payments “including but not limited to agricultural subsidy, deficiency, diversion, conservation, disaster, contract reserve, under any government or any similar or other programs.” As outlined in the Findings of Fact section of this Memorandum, Nutrien properly perfected its security interest in payments from all governmental programs by filing UCC Financing Statements against each of the Debtors. Since Burkmann Feeds did not perfect any security interest with respect to the funds owed them by the Debtors in 2018, Nutrien’s interest takes priority over any interest of Burkmann Feeds in the MFP payments.”

Recap:

“Nutrien properly perfected its security interest… Since Burkmann Feeds did not perfect any security interest… Nutrien’s interest takes priority over any interest of Burkman Fees in the MFP payments.”

Ouch, that’s gotta sting.

As with any court case, there was additional back and forth. Futile efforts by Burkmann to stake its claim in this $95,000, but the court wasn’t having it. Ultimately, the court then determined Burkmann was guilty of conversion. Admittedly, I was unfamiliar with conversion, but in Kentucky it is the “wrongful exercise of dominion and control over property of another.” In other words, Burkmann accepted funds that belonged to Nutrien.

Here comes my favorite part:

“Nutrien made demand on Burkmann Feeds for return of the $95,000 paid to the Debtors which they then paid to Burkmann Feeds under the MFP program. Under Article 9 of the UCC, Nutrien had superior rights to these funds over Burkmann Feeds at the time Burkmann Feeds took possession of them. Burkmann Feeds exercised dominion and control over the funds in a manner that denied Nutrien its rights in the funds. Burkmann Feeds intended to interfere with Nutrien’s rights to the payments when it refused Nutrien’s demand for return of the funds and Nutrien was damaged by the loss of the funds by Burkmann Feeds’ refusal to return them. Thus, all of the elements to establish a claim for conversion are met.

The facts as determined by the Court based upon the record are undisputed. Under Article 9 of the UCC, Nutrien had a perfected security interest in the $95,000 MFP payment that the Debtors paid to Burkmann Feeds. Burkmann Feeds’ interest was subordinate to that of Nutrien and under the undisputed facts, Burkmann Feeds’ retention of those funds constitutes conversion under Kentucky law. Accordingly, summary judgment in favor of Nutrien on Count III of the Complaint is appropriate.”

What does that mean?

Burkmann, the unsecured creditor who didn’t file a UCC, gets to pay Nutrien, the secured creditor who did file a UCC, $95,000.

Yes, UCC filings work.

Equipment UCC Filings Best Practices

Posted on September 14, 2020 by - UCC Financing Statements

Selling Equipment? Read Our Best Practices for Equipment UCC Filings

Purchase Money Security Interest (PMSI) Filings were created to encourage trade creditors to sell goods on credit terms, specifically in situations when creditors may not be comfortable extending the requested credit lines. There are two primary PMSI filing types: inventory and equipment.

Under Article 9 of the Uniform Commercial Code (UCC), “equipment” means goods other than inventory, farm products, or consumer goods. The equipment is used in the course of the debtor’s business – it is not stocked. [see 9-102(33)]

UCC Filings Provide Immense Benefits for Creditors

  • UCCs establish priority in the equipment for the creditor and provide the creditor an opportunity to repossess the equipment upon debtor’s default.
    • If the debtor defaults, the creditor can declare it in default and begin repossession proceedings.
  • UCCs create a public record of ownership of the assets in lease situations.
    • If the debtor files bankruptcy, the bankruptcy trustee will search for UCC filings to determine which assets belong to whom.
    • If the debtor defaults, other secured lenders will know not to foreclose on the equipment.
  • The security interest attaches to the equipment, therefore, if the debtor were to sell the equipment without paying for it in full, the creditor will maintain priority right to the equipment.

Considerations when Filing a UCC on Equipment

Sale or Lease

  • If the debtor purchases the equipment with the intention of taking title once the equipment has been paid in full, or if the debtor can purchase the equipment for something other than fair market value, the transaction is likely a sale.
  • If the debtor will never take title to the equipment, or can purchase the equipment for fair market value, it is likely a lease.

Two Steps to Perfect a Security Interest

There are two steps to perfect a security interest in equipment:

  • The debtor must sign a security agreement, granting an interest in the equipment.
  • A Financing Statement must be filed on the debtor, in the correct jurisdiction, and properly identify the equipment as collateral.

Priority

To establish priority in the equipment, the UCC needs to be filed within 20 days of the debtor’s receipt of the equipment.

Collateral Description

The collateral description for an equipment filing will frequently describe the equipment “as further described in Attachment A.” The attachment is typically an invoice or purchase order that lists the make, model, or serial number of the equipment being secured.

  • Ensure the attachment is attached to and filed with the UCC Financing Statement.
    • There have been recent cases when courts have ruled the collateral description does not sufficiently describe the collateral, when the creditor fails to include the attachment. If the collateral description is insufficient, the security interest is unperfected, leaving the creditor unsecured.

Debtor Name

In compliance with § 9-503, if your customer is a registered entity, your customer’s name must appear on the UCC exactly as it appears in the public organic record (frequently Articles of Incorporation).

If your customer is an individual, first determine whether the state has implemented Alternative A or Alternative B:

  • Alternative A: if the debtor holds an unexpired driver’s license, the Financing Statement must list the debtor’s name as it appears on the unexpired driver’s license. (If the debtor does not have a driver’s license, the Financing Statement should list the “individual name” of the debtor or the debtor’s surname and first personal name.)
  • Alternative B: the debtor’s driver’s license name, the debtor’s actual name or the debtor’s surname and first personal name may be used on the Financing Statement.

Most states implemented Alternative A, which means your customer’s name must appear on the UCC exactly as it appears on the unexpired driver’s license.

Multiple Pieces of Equipment

Multiple pieces of equipment can be secured with one UCC. However, there are some additional considerations.

  • Are all pieces of equipment under one purchase order and going to be paid off at the same time? If so, then all pieces can be covered under one filing.
    • Can identify all equipment within the collateral description.
    • Debtor will likely prefer a single UCC covering all equipment versus a UCC for each piece of equipment.
  • Are pieces of equipment being sold to the same debtor, but over time and with varying payment dates? This situation is not well suited for a single UCC. A UCC should be filed for each piece of equipment.

UCCs May Need to Be Terminated

UCC filings are in place for 5 years. Often, equipment sales are financed for less than 5 years, which means the UCCs may need to be terminated.

For example, if the financing is 54 months, and the debtor pays it off, the filing will be in place for 6 more months. The debtor may not know (or care) the UCC is still in effect, and you could leave the UCC in place until it lapses. However, if the financing is 12 months, the UCC would remain in effect for 4 more years and it is likely your debtor will want the UCC terminated.

  • You must terminate the UCC if the equipment is paid in full and the debtor requests the termination.
  • If the financing terms are longer than 5 years, you will need to file a continuation to extend the UCC for another 5 years. The debtor does not need to sign anything for a continuation.

It’s A 180 On The 180 Equipment, LLC Decision

Posted on September 23, 2019 by - UCC Financing Statements

It’s A 180 On The 180 Equipment, LLC Decision: The Collateral Description of “See Attached”

An Illinois Court of Appeals has reversed the Bankruptcy Court’s decision in 180 Equipment, LLC v First Midwest Bank, which had allowed the bankruptcy trustee to avoid the security interest of First Midwest Bank.

Recap of Events from What Happens When a UCC-1 Collateral Description References the Security Agreement?

180 Equipment, LLC (180 Equipment) obtained a loan from First Midwest Bank (Bank) and granted Bank a security interest in 26 specifically identified “categories of collateral, including accounts, chattel paper, equipment, general intangibles, goods, instruments and inventory and all proceeds and products thereof.”

In its Financing Statement, Bank identified the collateral as “All Collateral described in First Amended and Restated Security Agreement dated March 9, 2015 between Debtor and Secured Party.” However, Bank did not include the Security Agreement with the filing of its Financing Statement.

When 180 Equipment filed for bankruptcy protection, the trustee argued that Bank’s security interest was unperfected because it failed to sufficiently describe the collateral. “The trustee… contends that the mere reference to the collateral as being described in the amended security agreement does not suffice to indicate, describe or reasonably identify any collateral.”

Bank argued the filing of the Financing Statement was enough to put other creditors on notice. “…the purpose behind the filing of a financing statement is merely to provide notice to third-party creditors that property of the debtor may be subject to a prior security interest, and that further inquiry may be necessary to determine the identity of the collateral.”

The Bankruptcy Court’s decision? The Bankruptcy Court agreed with the trustee. Bank’s Financing Statement failed to sufficiently identify the collateral. Referring to the Financing Statement, the Bankruptcy Court states “Rather, it attempts to incorporate by reference the description of collateral set forth in a separate document, not attached to the financing statement. The financing statement, on its face, provides no information whatsoever, and therefore no notice to any third party, as to which of the Debtor’s assets First Midwest is claiming a lien on, which is the primary function of a financing statement.”

The Appeals Court Reversed the Bankruptcy Court Decision

As mentioned above, Bank argued its Financing Statement was enough to put other creditors on notice. Although the Bankruptcy Court ruled against Bank’s argument, the Court of Appeals agreed with Bank.

How did the Appeals Court determine Bank’s Financing Statement complied with Article 9? In the Appeals decision, the Court focused on the plain language of Article 9. Specifically, the Court reviewed §9-502, §9-504 and §9-108. These sections are paraphrased below:

9-502: Financing Statement is sufficient if it includes the name of the debtor, the name of the secured party, and indicates the collateral.

9-504: Financing Statement is sufficient if it provides “a description of the collateral pursuant to Section 9-108” or “an indication that the financing statement covers all assets or all personal property.”

9-108: Examples of Reasonable Identification include “(1) specific listing; (2) category; (3) except as otherwise provided in subsection (e), a type of collateral defined in [the Uniform Commercial Code]; (4) quantity; (5) computational or allocational formula or procedure; or (6) except as otherwise provided in subsection (c), any other method, if the identity of the collateral is objectively determinable.”

Did I indicate a possible trend? In its decision, the court aimed to define “indicates.” Ultimately, if the Financing Statement indicates the collateral description, the requirements under §9-502 are satisfied.

“…the ordinary meaning of ‘indicate’ is to serve as a ‘signal’ that ‘point[s] out’ or ‘direct[s] attention to’ an underlying security interest. That plain reading of the text allows a party to ‘indicate’ collateral in a financing statement by pointing or directing attention to a description of that collateral in the parties’ security agreement.”

That definition of indicates means Bank’s Financing Statement’s reference to the Security Agreement is sufficient — because it directs subsequent creditors to the Security Agreement.

The Appeals Court states the onus lies with subsequent creditors. If a creditor’s search turns up a Financing Statement and the Financing Statement references the collateral in the security agreement (e.g. “See Security Agreement), the creditor should then request a copy of the Security Agreement to confirm whether there is a conflicting interest in the collateral.

“While financing statements and security agreements both must describe the collateral, ‘the degree of specificity required of such description depends on the nature of the document involved—whether it is a security agreement or a financing statement…’ The ‘prudent potential creditor would request a copy of the security agreement,’ and ‘need look no further than the security agreement’ to resolve questions about the adequacy of the collateral description. The different treatment of these two documents highlights the distinct function each serves under Article 9: the financing statement provides notice of an underlying security interest, while the security agreement creates and specifically defines that interest.”

What a Win! But, Take Precautions

Although the Court of Appeals has reversed the Bankruptcy Court’s decision, as a best practice you should ensure the Financing Statement provides a collateral description, and if attachments are referenced the attachments should be recorded with the Financing Statement.

Seriously Misleading UCC Filing. Can You Solve the Mystery?

Posted on June 24, 2019 by - UCC Financing Statements

Seriously Misleading UCC Filing. Can You Solve the Mystery?

Who enjoys a good ol’ mystery game? Today’s mystery is why a Georgia Bankruptcy Court deemed one creditor’s UCC filing seriously misleading, thus making the creditor’s security interest unperfected. First, we’ll go through the facts of the case, then review the requirements under Article 9, and then the big reveal: why was the UCC seriously misleading!

Facts of Case: In re Wastetech, LLC, Bankr. Court, ND Georgia 2019

In 2017, the debtor executed six agreements granting a secured interest to the creditor. The six agreements were executed on the following dates in 2017: June 13, July 6, July 19, August 3, August 18, and September 26.

The Debtor’s Name Change

Smack in the middle of these six agreements, on July 27, 2017, the debtor changed its name from NTC Waste Group, LLC to Wastetech, LLC.

The Creditor’s UCC Filing

On November 14, 2017, the creditor filed a UCC-1 Financing Statement. The creditor identified the debtor on the Financing Statement as NTC Waste Group, LLC. Within the Financing Statement, the creditor also provided the following collateral description:

“Certain future receivables sold by said business seller and purchased by Crown Funding Group, Inc., as buyer, pursuant to that certain purchase and sale of future receivables agreement between seller and purchaser dated 8/7/2017 (the “agreement”).”

Timeline of Pertinent Events seriously misleading timeline of events

The Debtor Files for Bankruptcy & Trustee Begins the Search

February 13, 2018, the debtor filed for bankruptcy protection. After the bankruptcy filing, the bankruptcy trustee set out to identify the creditors with UCC filings in place.

The trustee searched for UCC filings by two variations of the debtor’s current name: “Wastetech” and “Wastetech, LLC”. The trustee’s searches did not reveal any UCC filings. The trustee then submitted to the court that it also searched by the debtor’s former name (NTC Waste Group, LLC), which did reveal a UCC filing. Searching got a bit technical, here’s an excerpt from the court decision:

“… the Trustee recently conducted several UCC index searches through the GSCCCA database using the Debtor’s correct name as well as its former name… According to the Affidavit, statewide “searches using the search terms `Wastetech’ or `Wastetech LLC’ did not lead to finding the Financing Statement.” Only searches using the former name of the Debtor produced the Financing Statement.”

But wait, there’s more! The trustee was certainly thorough.

“Further searches conducted using the standard search logic in the Debtor’s name through the GSCCCA database in the Coweta County UCC Index along with a stem search for the Debtor’s name also failed to return the Financing Statement, though UCC-1’s for another entity were disclosed. Finally, additional statewide stem searches using the Debtor’s name did not disclose the Financing Statement. Based on these results, the Trustee through counsel states that ‘a search of the Coweta County UCC Index, and the Georgia Statewide UCC Index, using a debtor name stem search in the GSCCCA database for the Debtor’s correct legal name of record did not disclose the Financing Statement.’”

No Safe Harbor

The search type described above was to prove the creditor’s Financing Statement didn’t appear under the “single exception” aka safe harbor. (The single exception, according to the court decision, is “a search of the records of the filing office under the debtor’s correct name, using the filing office’s standard search logic” which would disclose such financing statement.”)

Corporate Search & Public Organic Record Are Not the Same

The creditor argued “…that a search of the UCC records under “NTC” did produce the Financing Statement, and that a search of “wastetech” in the records of the Georgia Corporations Division led to Wastetech LLC, which was formerly known as NTC Waste Group, LLC…”

Yes, you read that correctly “Georgia Corporations Division” (a corporate search, not the public organic record).

The creditor cited several cases regarding effective UCC filings, despite the debtor name being incorrect. Unfortunately for the creditor, the cases cited all related to UCC filings that were filed PRIOR to a debtor’s name change. The creditor also tried to argue that it filed its UCC within 4 months of the debtor’s name change — but that’s not how it works. It appears the creditor wanted the 4 month window under Article 9-507(c) to apply, except that section applies to UCCs filed prior to a name change.

OH, and the Collateral Description

There was an issue with the creditor’s collateral description – which seems minor compared to the flurry of back & forth over the correct name of the debtor. Within the UCC-1 Financing Statement, the collateral description is “certain future receivables sold by said business seller and purchased…” But it did not please the court because the collateral description is specific rather than of a category.

“Had the description been “all future receivables of the Debtor,” it would have met the requirements under Section 11-9-108 by describing the collateral through category.”

The judge is ready to decide. Is the UCC filing seriously misleading?

The judge did not mince words in the decision. The creditor’s UCC filing was seriously misleading, which made the filing ineffective and the security interest unperfected.

“First, the Debtor’s name as listed in the Financing Statement is inconsistent with its legal name on the public record. Moreover, a search of the Georgia Superior Court Clerks’ Cooperative Authority’s Lien records for the Debtor’s correct name would not have disclosed the existence of the Financing Statement. Second, the Financing Statement does not indicate that it covers all assets or all personal property of the Debtor, and it fails to provide a description of, or reasonably identify, the Debtor’s Accounts Receivable that are subject to the Defendant’s security interest. Accordingly, the Financing Statement is seriously misleading, and perfection of the Defendant’s security interest in Debtor’s Accounts Receivable is legally ineffective.”

OK, So Maybe It’s Not a Mystery. Seriously.

I admit, as far as mysteries go this was kind of lame. I mean, given the facts of this case, is it really a mystery that the creditor was left with an ineffective Financing Statement, hanging out with unsecured creditors? Failing to correctly identify the debtor on the Financing Statement, relying on a corporate search versus the public organic record, and providing a poor collateral description? Definitely no mystery. I promise to craft a better mystery next time, until then, don’t be like this creditor!

  • Always identify your customer by their name as it appears in the public organic record
  • Public organic record and a corporate search are NOT the same thing
  • Carefully review your collateral description
  • After filing, conduct a reflective search to confirm the filing has been indexed properly

Always Perform A Reflective UCC Search

Posted on May 20, 2019 by - UCC Financing Statements

Always Perform a Reflective UCC Search: Especially on Your Recent Pennsylvania UCC Filings with Attachments

You should always perform a reflective search on each UCC filing to ensure your filing was indexed correctly. Through a reflective search you are likely to quickly catch errors in the spelling of a party name, and in the case of Pennsylvania, quickly identify when attachments aren’t recorded with the filing.

While performing a reflective UCC search on a Pennsylvania filing, our UCC Specialist identified issues with Pennsylvania’s records: attachments weren’t included with the recorded UCC filings.

Red Alert

You can imagine the potential issue with your UCC filing if your collateral description refers to an attachment, and the attachment isn’t attached.

Upon discovering the error, our UCC Specialist contacted the Pennsylvania Department of State and alerted them of the issue. In response, the Pennsylvania Department of State corrected the issue and then released a statement regarding the missing attachments. You can read the Pennsylvania Department of State’s statement via The National Law Review: Pennsylvania Bureau Notifies Filers of the Loss of Attachments Submitted with UCC Records

Here’s Jerry Bailey with the recap:

If you have questions or need assistance with searches, please contact us!