Service Area: Collection Services

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.

Survey: Securitization on A/R During the Pandemic

Posted on July 12, 2021 by - In Other Commercial Credit News, Mechanic's Liens & Bond Claims, UCC Financing Statements

Credit Research Foundation Survey: The Use & Impact of Securitization on A/R During the Pandemic

Originally published in The Credit Research Foundation’s Perspective newsletter (June 2021)

The Credit Research Foundation recently surveyed their membership on the use and impact of securitization (UCCs, mechanic’s lien, etc.) on accounts receivable during the pandemic. The survey explored the use of securitization as a risk mitigation tool.

“I Believe There Will Be an Increase in Bankruptcies During 2021.”

Unsurprisingly, 88% of respondents believe there will be an increase in bankruptcies in 2021. In general, 2020 saw a low rate of bankruptcies, in fact Epiq reported bankruptcy filings across all chapters were at their lowest point since 1986. However, commercial Chapter 11 bankruptcies continued to rise year over year, with a 29% increase in 2020, for a total of 7,128 filings. Forecasts indicate bankruptcy filings will increase in 2021, with a predicted spike in Q3 2021.

Why Will Bankruptcy Filings Increase in 2021?

This is certainly a question on many credit professionals’ minds as the challenges of the economy, government stimulus and indebtedness in the marketplace plague the overall portfolio risk of many organizations.  Additionally, Congress extended Sub-Chapter 5 of the Bankruptcy Code (small business) and the grace period to file under the extended debt levels ($7.5 million) an additional year, which now expires in March of 2022.  Given these factors there seems to be an awareness to the potential for at least certain segments of the economy to file for bankruptcy.  Anecdotally, conversations from many members of the Foundation have all eyes on Q3 and Q4 of 2021 as a pivotal and anticipated point for the next level of bankruptcy activity.

In an earlier NCS survey, 62% of respondents were actively monitoring their customers for bankruptcy. Continue to monitor your customers, and if there is a bankruptcy, ensure to complete your Proof of Claim by the bar date.

“Our Company Has Been an Unsecured Creditor in a Bankruptcy and Recovered Less Money Than Secured Creditors.”

An overwhelming 90% of respondents have suffered as unsecured creditors in a bankruptcy, watching from the sidelines as secured creditors recovered payments in full. These losses are preventable and at minimal cost. Secured transactions are your greatest defense against customer failure. Time & time again, we see secured creditors receive payment in full while unsecured creditors receive pennies on the dollar.

For example, Katy Industries, a leading manufacturer, importer, and distributor of commercial cleaning and consumer storage products, filed for bankruptcy when it was unable to meet the obligations of its creditors, with nearly $56 million of debt. In this case, secured creditors recovered the total amount of allowed claims (100%) while unsecured creditors faced a recovery rate of only 9.6%.

Another example comes from the healthcare industry. Holmes, Inc., provided health & wellbeing programs nationwide. When it filed for bankruptcy protection, its capital deficit was $31.5 million. According to the bankruptcy plan, secured creditors were to receive 100% of their claims and unsecured creditors were to receive approximately 3.5% of their claims.

Need more? In the Hostess bankruptcy, secured creditors recovered 100% and unsecured creditors recovered 0. In Kodak’s bankruptcy, secured creditors recovered 100% and unsecured creditors recovered 4-5%. Then there was Uno, where secured creditors received 100% and unsecureds received 13%. And HomeBanc Corp. distributed 100% of claims to secured creditors and unsecureds recovered anywhere from 1-10%.

“Our Company Currently Secures Our Accounts Receivable, Either in Full or Partially.”

83% of respondents currently secure their A/R. For the 17% who don’t currently secure A/R, the top two cited reasons are concerns about customer reaction and the costs associated with securing A/R, followed by no significant write-offs, no need, and reliance on 503(b)9 claims. A respondent from the manufacturing industry stated they do not secure A/R because “We have an 85% recovery rate as a Critical Vendor in our industry.”

Let’s circle back to the top two cited reasons for not securing A/R:  concerns about customer reaction and costs. First, it’s OK to be nervous about how your customer will respond to your request for a signed Security Agreement (needed to file UCCs) or your customer’s reaction when they receive a preliminary notice (needed to secure mechanic’s lien rights) via certified mail. But rest assured, these are traditional business practices that do not harm your customer’s creditworthiness or cost your customer a dime. UCCs and preliminary notices/mechanic’s liens secure your right to recover payment in the unlikely event your customer defaults or files bankruptcy. If your customer never defaults or files for bankruptcy, it’s as though the UCC/lien never existed.

As for the costs associated with UCCs and preliminary notices/mechanic’s liens, they are nominal compared to the hundreds of thousands of dollars you could lose as an unsecured creditor. These are general numbers, but a blanket UCC filing may cost around $100 and a PMSI filing with search & notify may cost around $175, and the protection is in place for 5 years. As for preliminary notices/mechanic’s liens, let’s focus on the preliminary notice. Why? Because research shows 97.3% of the time a preliminary notice is enough to get you paid. Generally, a preliminary notice may cost around $60 per project. Now, mechanic’s liens may have a higher price tag ($500+) but again, when compared to what you could lose, it’s a small price to pay.

Lastly, I do want to mention that 503(b)9 claims are a great resource; however, there are some pitfalls. The bankruptcy code was amended in 2005 to include a new administrative claim: 503(b)(9). With the addition of 503(b)(9) claims, some creditors became complacent. The availability of a 503(b)(9) claim seemed to misleadingly allay creditor concerns, “Nah, I don’t need UCC filings. We just file a 503(b)(9) to get paid.” This somewhat false sense of security can easily cost creditors millions of dollars.

Under 503(b)(9), creditors may file a claim for “the value of any goods received by the debtor within the 20 days before the date of commencement of a case under this title in which the goods have been sold to the debtor in the ordinary course of such debtor’s business.”

As you can imagine, there are challenges with 503(b)(9) claims. High-profile cases are in heated debate over the definition of “received by” for the 20-day rule. And, of course, there is the question of what constitutes a “good” because services are not covered under these claims, and whether those goods have been sold in the ordinary course of business.

A member of the panel at CRF’s Fall Forum, Judge Christopher S. Sontchi, Chief Judge of The United States Bankruptcy Court for the District of Delaware, has presided over several cases determining “goods” and “receipt.” Notably, in one case, Judge Sontchi looked to the UCC definition of goods and subsequently held that electricity is not a “good” under 503(b)(9).

To be clear, a UCC filing is not without potential obstacles. Your UCC must be properly perfected and there is a narrow margin for error. But, ensuring a UCC has been properly perfected is less cumbersome than proving goods are goods, defining date of receipt and verifying goods are sold during ordinary course of business. 

Rounding Out the Survey

How Are Creditors Securing A/R?

For creditors securing their A/R the top two security measures were Cash in Advance and UCC filings.

How Are Creditors Securing AR

Biggest Concerns with UCC Filings

Despite concerns surrounding UCC filings, respondents certainly recognize the benefits of UCC filings. Benefits include being a secured creditor in a bankruptcy, the ability to repossess goods if customer defaults, the customer will consider creditor a greater payment priority and there would be public record of the debt.

Biggest Concerns with UCC Filings

Biggest Concerns with Protecting Mechanic’s Lien Rights

Similar to what we see with UCC filings, respondents agree protecting mechanic’s lien rights would make them a secured creditor in the event of bankruptcy, customers would consider the creditor a greater payment priority and there would be public record of the debt.

Biggest Concerns with Mechanic's Liens

Secured Transactions are Excellent Way to Secure A/R

Whether you file UCCs or mechanic’s liens:

  • You are a priority. In bankruptcy, secured creditors have priority and are paid before unsecured creditors.
  • You can sell more. Securing your A/R allows you to extend larger credit limits and sell to those accounts that were previously out of reach.
  • Fewer write-offs. Fewer write-offs lower the costs associated with your product. Lower costs mean you can sell your product at a lower price while maintaining viable profit margins. Selling at a lower price makes your company more competitive, opening the doors to a larger market share. More sales with stable profit margins are a win.
  • Improved DSO. Here’s a testimonial from one of our clients: “After implementing the lien/notice to owner program, we have seen our DSO numbers steadily decline each month, to an average of around 22 days. That is over a 30% improvement in our DSO since we first partnered with NCS.”
  • Low cost solutions. UCC filings and preliminary notices/mechanic’s liens are truly a low-cost solution; especially when compared to the costs associated with chasing receivables.

UCC 9-503(a) and a Creditor’s Security Interest

Posted on June 21, 2021 by - UCC Financing Statements

UCC 9-503(a), Its Frenemy 9-506, and the Fate of One Creditor’s Security Interest

In a recent Chapter 12 bankruptcy case, two creditors competed for interest in a piece of farm equipment: a 7215R Tractor. On the UCC Financing Statements, one creditor listed the debtor’s name as it appeared on the unexpired driver’s license, the other creditor did not. Welcome to today’s edition of “The Tractors & Tribulations of UCC 9-503.”

What’s in a Name under UCC 9-503(a)?

Article 9 has clear rules. A big one, and the one that is often flubbed, is compliance with UCC 9-503(a). You must correctly list the debtor’s name on the Financing Statement; whether it is a registered entity or an individual. Article 9 says if it is a Registered Entity, then list the name on the Financing Statement as it appears in the public organic record. If it is an individual, it will be Alternative A or B. Under 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. And under 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.

Fail to comply with UCC 9-503(a)? Then be prepared to meet 9-503’s frenemy: UCC Article 9-506(b). That’s right, “Seriously Misleading.”

According to UCC Article 9-506(b), a Financing Statement is seriously misleading if a search for the debtor’s legal name does not reveal the filing.

9-506 EFFECT OF ERRORS OR OMISSIONS

(b) [Financing statement seriously misleading.]

Except as otherwise provided in subsection (c), a financing statement that fails sufficiently to provide the name of the debtor in accordance with Section 9-503(a) is seriously misleading.

The Case of Wilson Jerry Wynn aka Jerry W Wynn

The case, IN RE WYNN, Bankr. Court, MD Georgia 2021, is an all too familiar instance of failing to correctly identify an individual debtor on a UCC Financing Statement.

In 2013, the debtor Wilson Jerry Wynn (Wynn) entered into a security agreement with Deere & Company (Deere) for the purchase of a 7215R tractor. Deere, in turn, filed a UCC and listed the debtor’s name as “Jerry W Wynn.” Deere later filed an amendment in 2015 and listed the debtor as “Wilson Jerry Wynn.”

In 2014, Wynn entered into an agreement with AgGeorgia Farm Credit, ACA (AgGeorgia) for a loan. The collateral was farm equipment and expressly included the 7215R tractor.  According to the court opinion, at the time the loan/agreement was executed, Wynn provided documentation to AgGeorgia which indicated Deere had a UCC filed on the tractor. AgGeorgia filed a UCC and listed the debtor’s name as “Wilson Jerry Wynn.”

Key: from 2011 to 2016, Wynn possessed an unexpired Georgia driver’s license, which identified him as “Wilson Jerry Wynn.”

In 2017, Wynn filed for Chapter 12 and ultimately, AgGeorgia filed a complaint to determine the validity of Deere’s security interest.

The Court Considered

Here’s an excerpt from the court opinion:

“Georgia law requires… for a financing statement to be effective, it must include the debtor’s name… if the Debtor has a Georgia driver’s license, the financing statement should list the Debtor’s name as listed on the driver’s license. According to Georgia law, however,

[i]f a search of the records of the filing office under the debtor’s correct name, using the filing office’s standard search logic, if any, would disclose a financing statement that fails sufficiently to provide the name of the debtor in accordance with subsection (a) of Code Section 11-9-503, the name provided does not make the financing statement seriously misleading.

O.C.G.A § 11-9-506(c). Deere listed the Debtor’s name on its original financing statement as “Jerry W. Wynn,” but the Debtor’s name as listed on his driver’s license was Wilson Jerry Wynn… Although Deere listed the Debtor’s name incorrectly on its initial financing statement, if Deere’s financing statement would appear in a search of the Debtor’s correct name, the financing statement would still have priority over subsequent correctly filed financing statements, including AgGeorgia’s.”

So, the question becomes: Would Deere’s Financing Statement appear in a search using Wynn’s correct name?

Turns out, Deere and AgGeorgia performed two different search types. AgGeorgia performed an exact name search and Deere performed a certified search. The court clarified the difference between a certified search and an exact name search.

“A certified search… adds a second step beyond the exact name search to cross-reference the file numbers of amended financing statements and returns them in addition to the original financing statements; the results of a certified search include more results than the exact name search would have disclosed.”

Seems Deere’s search was more thorough, which is good, right? Well, it may have been more thorough, but it is not the standard search logic used in Georgia. Georgia has two standard search logics: exact search and stem search.

The exact name search would not have revealed Deere’s original 2013 UCC, though it would have revealed the 2015 amendment. Unfortunately for Deere, AgGeorgia properly perfected its security interest in 2014, giving AgGeorgia priority over Deere.

But Wait, AgGeorgia Knew about Deere’s Interest in the Tractor

Earlier I mentioned Wynn provided AgGeorgia with documentation about Deere’s interest in the tractor. Deere argued it has priority, because AgGeorgia knew about Deere’s interest. But the argument was futile. “This Court finds that, under Georgia law, actual notice does not affect the priority of liens and the first to perfect rule governs, giving AgGeorgia’s lien on the Tractor priority over Deere’s.”

AgGeorgia wins.

Wyoming House Bill Further Defines a Digital Asset

Posted on April 26, 2021 by - UCC Financing Statements

Wyoming House Bill Further Defines a Digital Asset

In 2019, Wyoming was the first state to enact blockchain-enabling laws, and to clarify the treatment of digital assets under the UCC. Recently, Wyoming enacted HB0043 (effective July 2021) which further defines a digital asset and identifies a digital asset as an intangible under UCC Article 9.

What Is a Digital Asset?

According to W.S. 34-29-101, a digital asset “means a representation of economic, proprietary or access rights that is stored in a computer readable format and is either a digital consumer asset, digital security or virtual currency.” The last part – virtual currency – may sound familiar because bitcoin or NFT (non-fungible tokens) are forms of digital assets.

Security Interest in Digital Assets

Creditors seeking a security interest in collateral containing digital assets would file a Blanket UCC and the Security Agreement must include the category of “intangibles” and may include “proceeds thereof.” Below is the text from HB0043 (emphasis added).

34-29-103. Perfection of Security Interests in Digital Assets; Control; Possession; Security Agreements; Location.

  • Notwithstanding the financing statement requirement specified by W.S. 34.1-9-310(a) as otherwise applied to general intangibles or any other provision of law, perfection of a security interest in virtual currency may be achieved through possession and perfection of a security interest in digital securities may be achieved by control. A security interest held by a secured party having possession or control, as applicable, of virtual currency or digital securities has priority over a security interest held by a secured party that does not have possession or control, as applicable. Other provisions of law relating to perfection and priority of security interests, including W.S. 34.1-9-322(c) and priority of control over delivery, shall apply, except that W.S. 34.1-9-322(a)(i) and (b) shall not apply. W.S. 34.1-9-207 shall apply to this section.
  • Before a secured party may take possession or control under this section, the secured party shall enter into a security agreement with the debtor and, as necessary, other parties. The security agreement may set forth the terms under which a secured party may pledge its security interest as collateral for another transaction. Consistent with W.S. 34.1-9-201(a), the security agreement shall be effective according to its terms between parties, against purchasers of collateral and against creditors.
  • If a debtor is located in Wyoming, a secured party may file a financing statement with the secretary of state to perfect a security interest in digital consumer assets or digital securities, including to perfect a security interest in proceeds pursuant to W.S. 34.1-9-315(d).
  • Notwithstanding any other provision of law, including article 9 of the Uniform Commercial Code, title 34.1, Wyoming statutes, a transferee takes a digital asset free of any security interest two (2) years after the transferee takes the asset for value and does not have actual notice of an adverse claim at any time during the two (2) year period. This subsection only applies to a security interest perfected by filing.

Other States Following Suit?

In a recent article Update on Nonuniform UCC Legislation for Emerging Technologies, the author reviews proposed amendments before Nebraska’s legislature. And, according to the National conference of State Legislatures (NCSL), 25 states have pending cryptocurrency legislation for the 2021 season. You can view NCSL’s list here.

UCC Terminated without Authorization

Posted on March 8, 2021 by - Credit Risk Management, UCC Financing Statements

UCC Terminated on Geringhoff NS 1230F Corn Head

UCC Terminated without Authorization, Do You Still Have a Perfected Security Interest?

To have your UCC filing terminated without authorization is unfortunate; to have it happen twice? Well, that’s downright frustrating and it’s exactly what happened to one secured party… er, unsecured party. Fortunately for this secured party, the US Bankruptcy Court stepped in. Let’s take a look at the case.

IN RE SMITH, Bankr. Court, WD Tennessee 2020

Farm Credit Services of America, PCA d/b/a AgDirect (AgDirect) financed farm equipment for debtor John H. Smith (Debtor) and AgDirect filed its UCC-1 with the Tennessee Secretary of State. The Security Agreement & UCC specifically identified the collateral as “Geringhoff NS 1230F Corn Head, bearing Serial Nos. 1011206151230F and 10435.”

Two years after Debtor purchased the equipment, the Debtor refinanced his credit through IberiaBank, and granted IberiaBank a security interest in its farm equipment, including the piece of equipment (the Corn Head referenced above) secured by AgDirect’s UCC-1.

About 10 days after IberiaBank filed its UCC-1, AgDirect’s UCC was terminated by an individual named Walter Smith. According to the court opinion, “This termination statement states that it was filed on behalf ‘Farm Credit Services of Mid-America, PCA’.”

Now, you may have not caught it, but the termination was filed on behalf of Farm Credit Services of Mid-America, PCA which is not the same entity as AgDirect (Farm Credit Services of America). The entities are technically related, but Farm Credit Services of Mid-America, PCA has no authority to act on behalf of AgDirect. AgDirect did not know who Walter Smith was and it certainly didn’t authorize the termination of its UCC.

AgDirect only uncovered this mayhem after it learned of Debtor’s bankruptcy filing. Ultimately, Debtor filed for bankruptcy twice, however, the first case was dismissed. In both cases, AgDirect was not listed as a creditor on the bankruptcy filings, and therefore wasn’t notified of either filing. Presumably, AgDirect was not notified because a UCC search would not have produced AgDirect as a secured creditor because its UCC had been terminated.

After the second bankruptcy filing, AgDirect filed a continuation of its original, albeit terminated, UCC-1. (Odd, right?) Shortly after the filing, Debtor and IberiaBank worked out a court-approved sale of various farm equipment (including the equipment AgDirect had interest in). Days later, Iberia Bank’s attorney filed a termination statement on AgDirect’s Continued UCC-1. So, if you’re still with me, although this “continuation” that was filed by AgDirect wasn’t really a continuation, it was still terminated without authorization.

Meanwhile, AgDirect is owed about $35,000 on the equipment and has NO idea that any of this is going on – the bankruptcies, the sale of equipment, the termination of its continued UCC, etc. In fact, the proceeds of $32,500 from the sale of the Corn Head were given to IberiaBank as the first lien creditor. Phew!

I’m going to fast forward past some additional issues in this case. Now AgDirect and IberiaBank are in front of the bankruptcy court. AgDirect argues it should be entitled to the $32,500 in proceeds because it was a priority lien holder in the equipment. IberiaBank argues AgDirect has no interest in the proceeds, because AgDirect’s UCC was terminated.

What Did the Court Say?

The court reviewed cases from other states, including the JP Morgan case from a few years back. (The JP Morgan case was different than the AgDirect case though, because in JP Morgan, several JP Morgan people had reviewed the termination before JP Morgan accidentally terminated its own filing.) After reviewing other cases, the bankruptcy court relied on a few sections of Tenn. Code Ann. including § 47-9-518(c) before rendering its verdict:

Tenn. Code Ann. § 47-9-518(c). The UCC Comments that accompany § 47-9-518 state: Sometimes a person files a termination statement or other record relating to a filed financing statement without being entitled to do so. A secured party of record with respect to the financing statement who believes that such a record has been filed may, but need not, file an information statement indicating that the person that filed the record was not entitled to do so. See subsection (c). An information statement has no legal effect. Its sole purpose is to provide some limited public notice that the efficacy of a filed record is disputed. If the person that filed the record was not entitled to do so, the filed record is ineffective, regardless of whether the secured party of record files an information statement. Likewise, if the person that filed the record was entitled to do so, the filed record is effective, even if the secured party of record files an information statement. See Section 9-510(a), 9-518(e). Because an information statement filed under subsection (c) has no legal effect, a secured party of record—even one who is aware of the unauthorized filing of a record—has no duty to file one. Just as searchers bear the burden of determining whether the filing of initial financing statement was authorized, searchers bear the burden of determining whether the filing of every subsequent record was authorized.

Further, the court stated “…pursuant to TCA §§ 47-9-509(d), 47-9-510(a), 47-9-511(a) and 47-9-513(d), an unauthorized UCC-3 termination statement does not terminate the underlying security interest. Therefore, the termination statements filed in this case were ineffective to terminate AgDirect’s secured interest in the Corn Head. In addition, the continuation statement AgDirect filed on June 19, 2019, sufficiently preserved its secured interest through October 2024.”

The verdict? AgDirect was the rightful recipient of the §363 sale proceeds and IberiaBank was ordered to remit the $32,500 in proceeds to AgDirect.

Could this Mess have been Avoided?

I believe some of this mess could have been avoided, in part. Now, I don’t know that AgDirect could have predicted someone would terminate its UCC filing. However, I do know that AgDirect could have been promptly notified of the termination if it had enrolled in a program like NCS Debtor Monitoring. This notification would have enabled AgDirect to take immediate action, likely saving it precious time and money.

Can You Revive a UCC Filing?

Posted on February 22, 2021 by - UCC Financing Statements

Revive a UCC Filing

Can Your UCC Filing be Revived if You Knowingly Let It Become Unperfected?

Can a UCC be “revived” if you knowingly fail to timely file an amendment for a debtor’s name change? Minnesota Bankruptcy Court says no. Today’s post reviews an ongoing case of an unperfected security interest & the persistent unsecured creditor lobbying for secured status.

Short on time? Here’s a quick synopsis from the court decision:

“When Unger Meat Company became Rancher’s Legacy Meat Co. in May 2014, Ratcliff had four months within which to correct his UCC-1 Financing Statement to reflect this change. When he failed to do so, by operation of the plain language of the UCC, as adopted in Minnesota, his lien became unperfected in September 2014. Although Ratcliff could have re-perfected his interest at any time by filing a new UCC-1 Financing Statement, he failed to do that as well. Instead, he filed two UCC-3 statements — a Continuation Statement in November 2015 and an Amendment to that Continuation Statement in January 2019. Basic rules of statutory construction prevent these documents — even when taken together as a whole — from serving as a substitute for the UCC-1 Financing Statement required to re-perfect the interest. Therefore, when this chapter 11 case was filed in September 2019, Ratcliff’s interests were unperfected; he had the status of an unsecured creditor. As such, he is not entitled to adequate protection payments or relief from the automatic stay, and his liens can be avoided for the benefit of the broader bankruptcy estate.”

The Tale of the Unperfected UCC Filing

In 2010, James Ratcliff (Ratcliff) & Joseph Unger started Unger Meat Company (UMC). Ratcliff purchased the building to be used by UMC and leased the building to UMC. Ratcliff and UMC entered into a Security Agreement, which granted Ratcliff a security interest in “all of the Debtor’s equipment, including but not limited to the equipment described on Exhibit “1” hereto, inventory, lease agreement, accounts receivable, furniture and fixtures, whether now owned or hereafter acquired, together with all proceeds and products thereof and replacements therefor.” In 2010, Ratcliff filed a UCC-1 to perfect the security interest and later filed a UCC-3 (amendment) in early 2011.

Early 2014, after UMC had spent years losing money, Ratcliff and the other original owners agreed to sell the company to SSJR, LLC. A new purchase agreement was executed, and the agreement identified SSJR, LLC as the sole purchaser of Ratcliff’s shares in UMC. After the sale was finalized, SSJR, LLC amended the Articles of Incorporation for UMC, changing the company name to Rancher’s Legacy Meat Company (RLMC).

Although Ratcliff was aware of the company name change, he did not file an amendment and four months after the name change, his security interest became unperfected. Remember, Article 9-507(c)? Article 9-507(c) provides a 4-month window to amend the filing for a debtor name change that may be considered seriously misleading. Guess what? A search on “Rancher’s Legacy Meat Company” is not going to reveal a UCC filed on “Unger Meat Company.” You know what that means: seriously misleading.

In 2015, 5 years after Ratcliff originally filed his UCC-1, he filed a continuation. Two problems with this continuation? Well, the first is he no longer had a perfected security interest because he didn’t amend his filing when the debtor name changed. The second problem is that even if Ratcliff had properly filed an amendment, he filed this continuation on the wrong debtor name; he filed the continuation listing the name as UMC, not RLMC.

Fast Forward to an Amendment with the Correct Name

Fast forward to 2019, nearly 10 years from the original filing and 5 years from the time he should have amended his filing with the correct debtor name, and 1 year from the alleged continuation filing, Ratcliff filed another amendment and this time he listed the debtor’s name as “Ranger’s Legacy Meat Co.” What is this, three wrongs make a right? I don’t think so.

Of course, we wouldn’t be talking about this case if there wasn’t a tipping point. That tipping point came at the end of 2019, when RLMC filed for bankruptcy protection. Ratcliff, by all accounts, was identified as an unsecured creditor, which he vehemently disagreed with. He told the court that although he didn’t amend it for the debtor name change, “his filings subsequent to that date “revived” the lapse of perfection and operated to “re-perfect” the Financing Statement.”

Yeah, that’s not how this works. You can’t revive your UCC; it’s not like the UCC passed out and you can wave smelling salts under its proverbial nose. When you know your security interest has become unperfected, because you failed to amend the filing timely, that’s it, game over.

The court supported “game over” when it referenced 9-515 of Minnesota’s UCC statute:

336.9-515 DURATION AND EFFECTIVENESS OF FINANCING STATEMENT; EFFECT OF LAPSED FINANCING STATEMENT.

(c) Lapse and continuation of Financing Statement. The effectiveness of a filed Financing Statement lapses on the expiration of the period of its effectiveness unless before the lapse a Continuation Statement is filed pursuant to subsection (d). Upon lapse, a Financing Statement ceases to be effective and any security interest or agricultural lien that was perfected by the Financing Statement becomes unperfected, unless the security interest is perfected otherwise. If the security interest or agricultural lien becomes unperfected upon lapse, it is deemed never to have been perfected as against a purchaser of the collateral for value.

Ratcliff persisted with his argument further by claiming the actions he did take were to “connect the dots” from his original UCC filed in 2010 to the amendment filed in 2019. The court didn’t buy it: “Just because Ratcliff ‘eventually’ got around to attempting to connect the disjointed and ineffective ‘dots’ he had filed does not mean that he was able to revive his interests or that either of his UCC-3 filings was effective.”

filing with commentary

Relentless-Ratcliff (my new nickname for him) leveraged any argument he could come up with, and one by one the court shut him down.

“Ratcliff’s interpretation of the UCC does not create a harmonious result. Instead, under his theory, a creditor could re-perfect a lapsed security interest by simply filing a Continuation Statement — and a “seriously misleading” one, at that — at essentially any time, as long as it later filed an Amendment to that statement. This would fly directly in the face of the clear directive of Minn. Stat. § 336.9-507(c)(2).  Why include directions about a timeframe within which an Amendment to a “seriously misleading” filing statement must be filed if it could, in fact, be filed at any time?”

Sorry Relentless-Ratcliff, your security interest is avoidable. However, being that he is relentless, he is appealing the decision handed down by the Minnesota Bankruptcy Court.

And, since the above decision was handed down, Ratcliff has won a motion for stay on the sale of all assets of debtor.

“…[T]his Court concludes that Ratcliff met his burden to show that the sale should be halted while he seeks to reverse his unsecured status on appeal and grants Ratcliff’s motion to stay pending appeal so long as he posts a supersedeas bond.”

Guess we’ll have to wait and see what happens in the next episode of “Relentless-Ratcliff and His Rogue Security Interest.”

NCS Insights for Credit Management in 2021

Posted on January 11, 2021 by - In Other Commercial Credit News

Bankruptcy Climate of 2020, Predictions for 2021, and What You Need to Do to Ensure Your Company is a Secured Creditor

The events of 2020 will not soon be forgotten. A year that began with hope and optimism was quickly darkened by a pandemic that locked down economies for weeks and months. Businesses that had been sluggish prior to the pandemic crumbled as consumers hunkered down at home, many losing their jobs and millions facing a healthcare crisis. Commercial bankruptcy filings increased 29% in 2020, leaving unsecured creditors scrambling to recover pennies on the dollar. In this article we will review the bankruptcy climate of 2020, predictions for 2021, and what you need to do to ensure your company is a protected creditor.

Bankruptcy Current Affairs

Epiq recently reported bankruptcy filings across all chapters are at their lowest point since 1986. However, commercial Chapter 11 bankruptcies continued to rise year over year, with a 29% increase in 2020, for a total of 7,128 filings.

“The peak in Chapter 11 filings for Q2 and Q3 is due to preexisting distressed companies coupled with the onset of a zero-revenue environment. The federal backstop proved a vital lifeline for the stabilization of corporations to protect the US economy,” said Deirdre O’Connor, managing director of corporate restructuring at Epiq. Unsurprisingly, the foodservice industry was on track to lose $240 billion in sales by the end of 2020. Between March & July, the foodservice industry had lost $165 billion, and consumer spending in restaurants was down more than 30%. Restaurant chains that filed bankruptcy in 2020 included Sizzler, Ruby Tuesday, Friendly’s, Souplantation, Chuck E. Cheese, NPC International (parent company for 100s of Pizza Hut and Wendy’s locations), and California Pizza Kitchen. The energy, retail, and consumer services sectors with liabilities exceeding $50M had the most filings since 2009 according to Bloomberg. Amid the pandemic, well known retailers like J.C. Penney Co. Inc., Neiman Marcus Group Inc., Lord & Taylor LLC, Stein Mart Inc., True Religion, Modell’s Sporting Goods, J. Crew Group, Sur La Table, GNC, Ascena Retail Group, RTW Retailwinds, Guitar Center, and Pier 1 Imports filed bankruptcy in 2020. These bankruptcies not only impacted the retail employees, they also trickled up to landlords. As retailers missed rent payments, landlords found themselves suffering losses which sent them into bankruptcy as well. And as oil prices plummeted, energy companies collapsed at an alarming rate. From Latham & Watkins LLP: “In the first 10 months of the year, 101 oil companies with a total of $94 billion in debt filed for bankruptcy. More than 95% of these bankruptcies fell under the upstream exploration and production and oil field services segment with the largest filings being Diamond Offshore Drilling Inc., $11.8 billion, Chesapeake Energy Corp., $11.8 billion, and McDermott International Inc., $9.9 billion.” Then there is the healthcare industry. As if healthcare systems aren’t buried under an immense strain, poor financial health pushed dozens of large health systems to bankruptcy. According to the American Hospital Association “Hospitals face catastrophic financial challenges in light of the COVID-19 pandemic. The AHA estimates a total four-month financial impact of $202.6 billion in losses for America’s hospitals and health systems, or an average of $50.7 billion per month.” Unfortunately, the financial distress pummeling these industries is likely to get worse long before it gets better. Despite the optimism surrounding vaccine rollouts, experts and analysts estimate a large wave of consumer and commercial bankruptcies in the first two quarters of 2021. Commercial bankruptcies are likely to include retail, healthcare, energy and additional industries like gyms, movie theaters, leisure services, and real estate firms.

11 Steps to Take Right Now

Fortunately, there is a silver lining in these grey financial times. Economic uncertainty offers many opportunities to improve your competitive position. Here are steps you can take right now:

  1. Re-examine your existing credit policies.
  2. Make your credit granting process more rigorous.
  3. Ensure your operational systems and customer agreements are in place with accurate and complete credit information.
  4. Research and verify your customers’ legal business names.
  5. Review The National Lien Digest for time and information requirements to protect your lien and bond claim rights.
  6. Monitor and review mechanic’s lien activity in LienFinder.
  7. If your department has been downsized and resources are limited, contact your credit vendors to obtain and verify credit history, credit scoring, UCC or lien searches.
  8. Implement Bankruptcy Monitoring to ensure you are timely notified of any debtor bankruptcy.
  9. Prepare Security Agreements as well as Personal and Corporate Guaranties, which are powerful tools to determine and/or minimize your risk.
  10. Talk to your trade groups and exchange financial information on mutual customers.
  11. Most importantly, secure your collateral.

Laws in Place to Protect Your Company

The U.S. government provides two bodies of law to help you with securing collateral: Article 9 – Secured Transactions of the Uniform Commercial Code (UCC) and The Mechanic’s Lien Laws. Who you are selling to determines which solution will put you in the best position to get paid. Here are several options to consider:

  • Article 9 provides the venue to secure personal property such as accounts receivable, inventory, equipment, general intangibles, goods, and software.
  • The UCC benefits your company when a customer defaults or files bankruptcy. If a customer defaults on payment terms and you have a signed Security Agreement that clearly defines default, you now have a breach of contract and can use this tool to repossess your goods or sue for payment.
  • In a bankruptcy, all creditors are split into two classes: secured and unsecured. In a Chapter 7 bankruptcy, secured creditors are paid first in the date order of the recorded financing statement. Unsecured creditors split what remains on a pro-rated basis, often receiving pennies on the dollar. The UCC filing elevates the status of your receivable to that of a secured creditor.
  • In a Chapter 11 bankruptcy, all secured creditors have the same status, which provides them with substantial leverage over the unsecured creditors as it relates to liquidation. Now is the time to incorporate the UCC process into your credit policies.
  • If you restructure past due receivables through installment notes, be sure to secure those notes.

UCC Article 9

Meeting the requirements of Article 9 requires you to collect information to better know and understand your new and existing customers. It is important that you:

  1. Have an updated signed Credit Application.
  2. Know the organization’s legal name and if it is registered with the Secretary of State, as well as its corporate address and shipping locations.
  3. Confirm the names of owners and officers.
  4. Understand your customer’s business and how it is using the products and services you provide.
  5. Verify whether your customer is in a community property state. If so, it is necessary that all liable parties sign all documents.

If you don’t have the time to gather this information, get your sales team involved. Offer a bonus to your team for accurately completed Credit Applications. And encourage them to be creative! For instance, rather than referring to the required but potentially threatening term “Security Agreement,” consider calling it a “Partnership Advantage Program.” Remember when customers turn to you for help, whether they are requesting extended payment terms, are currently past due or are seeking a credit limit increase, you’re in the perfect position to leverage this opportunity to become a secured creditor and reduce your credit risk.

Preliminary Notices, Mechanic’s Liens & Bond Claims

If you work in the construction industry you know that construction credit has its own unique process. To ensure that you’re making good credit decisions, take the time to update customer data and review your procedures. Start with researching your clients’ corporate information. Insist that job sheets be completed for every project, better yet, gather the information electronically with systems like the NCS Job App. Know the project address of where your materials or services are being furnished. Confirm who owns the property and who the general contractor is. You also have the opportunity to tie yourself into the trust fund of monies set aside for the project. To do so you must consistently serve preliminary notices and file Mechanic’s Liens or Bond Claims to secure your accounts receivables. These laws were created to protect owners of construction projects and ensure all contractors, subcontractors, and material suppliers receive the money owed them. Carefully follow the statutory guidelines within each state because small missteps could jeopardize your security. Protect your rights and benefit from your secured interest in case your customer or someone else in the contractual chain defaults or files for bankruptcy. If you are concerned a customer may file for bankruptcy, consider exchanging a carefully worded lien waiver for payment. Currently, that payment may not be considered preferential because the debtor received something in consideration for the payment. Attorneys have successfully used this argument in defense to preference claims. Setting up a defense by using a lien waiver is a smart move, although it doesn’t provide a guarantee.

Credit & Compassion

Every credit professional needs a well-planned credit process with a side of reasonable compassion. Keep in mind that how you treat your customers today will reap great benefits tomorrow. Take a balanced approach and try not to be too aggressive towards a good customer who has recently fallen on hard times. The economy will rebound, and your customer will remember your tempered approach to their situation. After all, it is both what you do and how you do it that earns a client’s loyalty. And a loyal customer is the best hedge to ensure your company’s long-term health.

NCS Is Here for You

In today’s tough economy, working with a responsive, flexible strategic partner is critical. As you spend more time each week extinguishing proverbial credit fires, having an expert to react quickly when special problems arise can make an immense difference. Our expertise in UCCs, mechanic’s liens, and commercial collections, will help you minimize your risk and improve your profitability, and our investments in cutting edge technology found in LienFinder, The National Lien Digest, and LienTracker Online will save you time.

Serve Your Pennsylvania Mechanic’s Lien as Statute Dictates

Posted on January 4, 2021 by - Mechanic's Liens & Bond Claims

Serve Your Pennsylvania Mechanic’s Lien as Statute Dictates Or Risk Losing Your Lien

What happens if the Sheriff’s Office is unsuccessful in personally serving your mechanic’s lien upon the project owner? In Pennsylvania, failing to meet the service requirements dictated by the mechanic’s lien statute could result in lost lien rights. A fate that one lien claimant knows all too well.

Pennsylvania Mechanic’s Lien Rights

For projects costing $1,500,000 or more, the owner or an agent for the owner may file a Notice of Commencement on the State Construction Notices Directory, prior to the commencement of any labor, work or materials being furnished for the searchable project. If filed, the Notice of Commencement shall be posted at the jobsite.

You should file a Notice of Furnishing on the State Construction Notices Directory within 45 days after first furnishing labor or materials. No Notice of Furnishing is required when contracting directly with the owner or when a notice of Commencement has not been properly filed and posted. A Notice of Non-Payment may be filed on the State Construction Notices Directory, for informational purposes, but is not required to preserve lien rights.

Serve a Formal Notice upon the owner after last furnishing and at least 30 days before filing the mechanic’s lien. File the mechanic’s lien within 6 months after last furnishing. You should serve notice of filing the lien upon the owner within 1 month from filing the lien and file an affidavit of service within 20 days from serving notice of the lien upon the owner.

And that’s where Pennsylvania statute got the better of the lien claimant… serve the lien upon the owner.

Case: Americo Construction Company v. Four Ten, LLC

Americo Construction Company (Americo) timely filed a mechanic’s lien for $26,000 for work it performed to the improvement of property owned by Four Ten, LLC (Four Ten).  After filing the mechanic’s lien, Americo hired the Sherriff to personally serve the lien upon Four Ten, which is precisely how statute instructs:

Title 49 P.S. Chapter 6, Sec. 1502 (c) Manner of service. Service of the notice of filing of claim shall be made by an adult in the same manner as a writ of summons in assumpsit, or if service cannot be so made then by posting upon a conspicuous public part of the improvement.

Americo advised the Sheriff that if personal service was unsuccessful, the Sheriff should post the lien to the property by a specified date to comply with statutory deadline of “1 month from filing the lien.” Seems OK, right?

According to the court of appeals’ opinion, the Sheriff’s first & second attempts at service were unsuccessful. The attempts were noted in the docket, but there was no indication whether a copy of the lien was posted at the property.

More than a month after the deadline to serve the lien, Americo received notification from the Sheriff on the failed attempts at service. Americo contacted the Sheriff and it was discovered the Sheriff had not posted the lien to the property as previously requested. Subsequently, the Sheriff went back to the property & posted the lien, then Americo filed an affidavit stating it served its lien.

  • The lien was filed 6/21/2018.
  • The lien needed to be served upon the owner by 7/21/2018.
  • The lien was eventually posted at the job site 8/15/2018.

Americo’s lien was officially served… 25 days late.

Of course, property owner Four Ten contested the validity of the lien. “Four Ten filed preliminary objections contending that Americo ran afoul of the thirty-day service requirement contained in the Mechanics’ Lien Law.”

But is it Americo’s fault if the Sheriff didn’t follow the instructions Americo provided? Americo argued it did everything it was required to do in accordance with statute. The court agreed with Americo:

“Americo did everything it was required to do effect service under the statute and our case law. Indeed, we would find that Americo did everything it reasonably could do to ensure timely service.”

So, what’s the problem?

Regardless of Americo following statutory requirements, the lien itself was not served in compliance with statute. The court said:

“Nevertheless, it remains undisputed that Americo did not timely serve Four Ten under the Law despite all of Americo’s efforts. We cannot ignore the unanimous authorities providing that the Mechanics’ Lien Law must be strictly construed. Further, our authorities are unanimous in holding that a claimant cannot substantially comply with the timeliness requirements: either service was timely or it was not.… service was not timely made on Four Ten, Americo is not entitled to the enhanced benefits of the Mechanics’ Lien Law. Strict compliance with the time limits in the act serve the purpose of providing a date certain for owners and third parties to be assured of the absence of such claims. Americo still retains a possible remedy at law, but in the absence of timely service, Americo’s mechanics’ lien claim was properly stricken.”

You may be thinking “…man, Pennsylvania isn’t messing around.” And you’d be right; this isn’t the first (or last, I’m sure) time a lien claimant has been burned by failing to comply with statute. Pennsylvania statute is clear, and courts take no issue with enforcing it.  Lesson? Follow the statute to the letter – always.