Service Area: UCC Services

Bankruptcy Proof of Claim: What if It’s Late?

Posted on January 3, 2022 by - Credit Risk Management

What Happens to Your Claim if Your Bankruptcy Proof of Claim is Late?

Bankruptcy proofs of claim are your key to ensuring the Trustee is aware of funds owed to you by the bankrupt party. And, just like filing UCCs or mechanic’s liens, there are deadlines in play for proofs of claim. What happens to your claim if your proof of claim is filed late? A Bankruptcy Court in North Carolina recently decided one creditor was not entitled to distribution of funds, because its proof of claim reached the court one day after the bar date.

The Bankruptcy Proof of Claim

A proof of claim is a document filed within the bankruptcy court that alerts the court, debtor, Trustee, and other interested parties that a creditor wishes to register a claim against the assets of the bankruptcy estate. This document is important because it provides proof that the claim is valid and owed, and notifies the Trustee of the creditor’s claim as well as to what class the claim should be associated.

The U.S. Bankruptcy Court’s official form includes fields for various pieces of information, such as creditor name and location, the amount of the claim, the basis of the claim, whether the claim is secured, if the claim is based on a lease, and whether the claim is subject to right of setoff.

The Bar Date

The bar date is a deadline by which all creditors must file their proof of claims within the bankruptcy court. It is critical that the proof of claim is filed correctly and timely, whether it’s secured or unsecured, to ensure creditors’ rights are preserved and to maximize any possible distribution.

A Day Late Means Your Hanging Out with the General Unsecured Creditors

In the bankruptcy case of North Carolina New Schools, Inc., the bar date was set for September 13, 2016. One creditor, WorkSmart, Inc., mailed its proof of claim around September 7, 2016, and its claim was received by the court September 14, 2016. One day after the bar date. The bankruptcy Trustee filed an objection to avoid the creditor’s claim, arguing the creditor failed to file its claim timely. The creditor filed a response, claiming a “…’mailbox presumption’ creates a rebuttable presumption that the Claim was received in the ordinary course of business.”

A mailbox presumption? Yeah, I didn’t know what it was either. According to the court “The mailbox presumption is a common law evidentiary principle that permits a party to prove receipt of a document that has been mailed.” Essentially, the creditor argued that because the document was allegedly mailed timely, it should be considered received timely. And although I initially chuckled at the word “common” it is apparently a popular topic. The court went on to explain that courts are split, and there isn’t a definitive answer as to whether the mailbox presumption should apply in the mailing of a proof of claim.

Unfortunately for this creditor, the court decided there is a difference between service of a document and the filing of a document (we just talked about this in another post), and it is the creditor’s responsibility to ensure the document is filed by the deadline.

“…applying the mailbox presumption to the mailing of a proof of claim would complicate, bring uncertainty, and cause undue delay to the bankruptcy claims process. Setting a bright-line rule for the filing of claims is vital to the timely administration of a chapter 7 case. Creditors, with minimal expense or inconvenience, can ensure that a proof of claim is received by the clerk’s office before the deadline by filing their claims electronically or directly at the clerk’s office counter, using some form of priority or overnight mail, or calling the clerk’s office to verify the receipt of the claim.”

And just like that, the creditor’s claim for $169,569 was not entitled to distribution, because it was filed a day late.

The Bankruptcy Proof of Claim Lesson

Make sure your proof of claim is received by the bar date. Navigating a proof of claim? Contact us today and let our experts help you!

What Is a UCC-3 Filing and Why Should You File One?

Posted on November 29, 2021 by - UCC Financing Statements

What Is a UCC-3 Filing and Why Should You File One?

Have you filed a UCC-1 to secure your interest in certain collateral? Well, if you have and you need to continue, amend, assign, or terminate your UCC filing, you will file a UCC-3. You may have already guessed, but today’s post is all about the UCC-3, including its magical powers. OK, it may not be magical per se, but it is certainly powerful and shouldn’t be ignored.

UCC-1, UCC-3, UCC-5, UCC-11

It may seem like an odd numbering system, but each form is important in its own right. A UCC-1 is the initial Financing Statement and is filed to provide notice to other creditors of your security interest. Typically, when we talk about perfecting your security interest or filing a UCC, we are usually referring to a UCC-1 or your initial filing.

Let’s skip the UCC-3 for now and jump ahead to the UCC-5 and the UCC-11. A UCC-5 is an information statement you file when you believe an existing record is inaccurate or was wrongfully filed. In compliance with Article §9-518, this statement should include reference to the original filing (the filing with the alleged errors). It should indicate it is an information statement and it should identify what you believe to be inaccurate in the original filing. It’s important to note, this filing does not amend any information – you will need to file the UCC-3 if you need to amend info.

The UCC-11 is an information request to determine whether there are other secured parties, whether specific collateral is already secured by a UCC, and to determine a creditor’s priority.

Bouncing back to the UCC-3.

A UCC-3 Wears Many Hats

It’s true, a UCC-3 is used to continue your existing filing, amend your existing filing, terminate your existing filing, or assign your interest to another secured party.

Continuation

A UCC is effective for 5 years. If you need to extend the filing, you will file a UCC-3 Continuation within 6 months before the expiration date of the existing filing. Once the continuation has been filed, your UCC is effective for another 5 years. If you don’t file your continuation timely, your UCC will become ineffective.

How often should you continue a filing? It depends on what you are providing as the creditor. If you are a lender, and your customer’s loan period is longer than 5 years, you would need to file continuations every 5 years until the loan is paid off/closed, to maintain your security. If you are a distributor of goods, and your customer operates on a revolving line of credit with you, you should file a continuation every 5 years as your relationship continues.

I’m going to repeat what I just said moments ago: if you do not file a continuation timely, your existing UCC will become ineffective. And, as we’ve discussed on our blog before, you can’t revive your security interest; you will lose your place in line.

Amendment

Ah, UCC Amendments, let me count the ways! Why would you need to amend your UCC? The most common reasons to amend a filing include a change in your customer’s name or address, a change in your company’s name or address, or a change in the collateral.

The most common, and arguably most critical, reason to amend your filing is if your customer’s name or address changes. We talk about this a lot, because not only is it vital to your security interest, it’s also one that consistently stymies creditors. Article §9-507(c) clearly states you have a 4-month window to amend your filing for a debtor name change to maintain your priority. If you fail to timely amend your filing, your filing will be considered seriously misleading, and your security interest will be unperfected. Remember, names matter in UCCs, after all, a search by name is how parties identify whether a security interest already exists on certain collateral.

I mentioned you may want to amend a filing if your company’s name or address changes, and while this is not dictated by Article 9, it is a best practice. I recommend amending the filing to alleviate delays or missed notifications about a debtor’s bankruptcy. For example, let’s say your customer files for bankruptcy. The bankruptcy trustee will go through public records (i.e., UCC filings) to ensure notifications of the bankruptcy – including the mega important bar date info – are mailed to all parties. If your address is wrong and the mail is either delayed or returned, you could miss the bar date. Yes, you could likely argue you missed the bar date because you didn’t receive timely notification, but the court may say “Hey, not my problem, you should have maintained the public record.” Is it worth the hassle?

If there is a change in the collateral, you will need to amend your filing. Other creditors are relying on the information you provide to determine whether an interest already exists on certain collateral. If your Financing Statement doesn’t correctly identify the collateral, other creditors can assume there is collateral available for them to use as security – keep it current, don’t let that happen.

Assignment

If you need to assign or transfer all or some of your rights to the collateral to another secured party, you will file an Assignment.

9-514 Assignment of Powers of Secured Party of Record

(b) [Assignment of filed financing statement.]

Except as otherwise provided in subsection (c), a secured party of record may assign of record all or part of its power to authorize an amendment to a financing statement by filing in the filing office an amendment of the financing statement which:

(1) identifies, by its file number, the initial financing statement to which it relates;

(2) provides the name of the assignor; and

(3) provides the name and mailing address of the assignee.

Assignments occur frequently with banks, as one bank transfers its security to another bank.

Termination

Seems fitting to end today’s post with Terminations. The filing of a termination ceases the effectiveness of the original UCC. Typically, terminations are filed at the end of the relationship when monies have been paid and/or collateral returned. As an example, your bank filed a UCC when you signed for your car loan; once your car loan is paid off, the bank terminates their UCC, which frees up the collateral (i.e., your car).

Use caution when terminating filings because you can’t un-terminate them. If you need a billion dollar warning, check out How JP Morgan Chase Bank’s Billion Dollar Mistake Can Make You a Better Credit Manager.

Security Interest Survives Crazy Collateral Transfers

Posted on October 25, 2021 by - UCC Financing Statements

Bank’s Security Interest Survives Crazy Collateral Transfers; UCC Filing for the Win

It’s a great day to read about a UCC success story! The secured creditor’s UCC filing allowed it to maintain its secured position, despite the collateral being transferred from the debtor’s company to a related company owned by the same debtor. I’ll forewarn you; this case is a little crazy and convoluted, but the takeaway is strong. A security interest, via UCC filing, survives if you properly perfect it.

The Case: IN RE K&L TRAILER LEASING, INC., Bankr. Court, ED TN 2021

I mentioned this case is a bit convoluted. Before we dive in, let’s map out the key players and facts.

  • The Secured Creditor: Greeneville Federal Bank (GFB)
  • The Collateral for the Security Interest: Certain Trailers and Lease and Sales Proceeds
  • The Debtor: K&L Sales & Leasing, Inc. (Sales)
  • The Debtor’s Other ½ of a Company: K&L Trailer Leasing, Inc. (Leasing)
  • Other Creditors: other parties who claim a security interest in the transferred inventory and have filed claims in the Debtors’ bankruptcy cases. (This includes defendant FirstBank, a creditor of Leasing.)

OK, let me explain the debtor’s ½ company. K&L Sales & Leasing, Inc. (Sales) is GFB’s debtor, and is owned 100% by Kris Fellhoelter. Kris also has 50% ownership in K&L Trailer Leasing, Inc. (Leasing); the other 50% is owned by Kris’ parents (Marvin and Linda). Kris is the president of both companies, and according to the court summary, both companies “share other officers, and employees, some of whose salaries were paid by Sales.”

It Started with a $2.5M Loan, Secured by a UCC

GFB loaned Sales $2.5M and GFB perfected its security interest by filing a blanket UCC with the Tennessee Secretary of State. As mentioned above, the collateral included “certain trailers and lease and sale proceeds.” As necessary, GFB continued its security interest by filing Continuations. “At all pertinent times, Sales was engaged in the sale of ‘big rig trailers’ so that GFB’s filing of the UCC-1 perfected its blanket inventory lien on all used trailers owned by Sales.”

Cash Disappeared and Things Got a Bit Questionable

In theory, and in albeit questionable business practices, Leasing would buy trailers from Sales to lease to its customers. “The transfers of trailers from Sales to Leasing ‘ordinarily occurred only after [Leasing] had a potential third party willing to lease that trailer.’” One of the first, but minor-ish, questionable business practices was Kris insisting on being the one to enter these sales transactions in the records for both companies – despite having a CFO that manages the books.

The real questionable behaviors started just before Sales and Leasing both filed for bankruptcy. Here’s a snippet from the court opinion:

“During May 2020, the month before Sales and Leasing filed their bankruptcy petitions, Sales transferred trailers that were subject to GFB’s inventory lien to Kris and Marvin at a rate that was more than twenty times the historical average monthly volume of such transfers, with such transfers in May 2020 exceeding $2 million in value. Transfers by Sales to Leasing, Kris, and Marvin in June (at the end of which the bankruptcy petitions were filed) also far exceeded the previous monthly average for such transfers. Sales’ records for ‘virtually all of the transfers’ from Sales to Leasing or Marvin reflect that Kris was the salesperson. For many of the trailers transferred from Sales to Leasing, Kris, and Marvin in May and June of 2020, the CFO ‘could find no evidence of any funding.’”

So, just before Sales files for bankruptcy protection, it transfers collateral (secured by GFB’s UCC!) to Leasing, and unsurprisingly Sales doesn’t pay GFB.

Know what this sounds like? Well, I’ll tell you what it doesn’t sound like: transfers to a buyer in the ordinary course of business.

Bankruptcy Trustee Tries to Avoid GFB’s Security Interest

GFB argued it was owed the proceeds from these transfers because the transfers didn’t occur in the ordinary course of business and remained protected by its UCC. The Bankruptcy Trustee (Trustee) claimed GFB’s “security interest was interrupted” when Sales transferred goods to Leasing, and that these transfers happened in the ordinary course of business.

Why does that matter?

Well, if the transfers occurred during the ordinary course of business, the Bankruptcy Trustee could avoid GFB’s security interest. In addition to the Trustee’s efforts to avoid GFB’s lien, FirstBank (a creditor of Leasing) joined the fight for funds. FirstBank argued GFB’s security interest was subordinate to FirstBank’s because GFB’s interest ended once goods transferred from Sales to Leasing.

Ultimately, the Trustee and FirstBank arguments relied on these transfers occurring during the ordinary course of business. It was up to GFB to prove the transfers happened outside the ordinary course of business.

GFB Proves It and Wins It; The Security Interest Survives

First, GFB defeated FirstBank’s argument. The court determined, if FirstBank had done its due diligence and run a UCC search, it would have uncovered GFB’s security interest in the trailers in Leasing’s possession.

“Had such would-be creditor of Leasing inquired into how Leasing came into ownership of the trailers, the creditor would have discovered that the trailers were transferred from Sales. That knowledge would then have led the creditor to search the UCC filing office in Tennessee for liens against Sales’ inventory, only to discover the inventory lien of GFB. The discovery of GFB’s lien against Sales’ inventory then would have led to an inquiry into whether the transfer by Sales to Leasing was either (a) approved by GFB or (h) a sale in the ordinary course under section 47-2-403(2) because those are the only two ways that GFB’s perfected security interest in the inventory of Sales could have been lost by Sales’ transfer to Leasing of the inventory on which GFB had a perfected security interest.”

Next, GFB defeated the Trustee. When relying on “ordinary course of business” failed the first time, the Trustee claimed it was within its “strong arm power” (see Bankruptcy Code 11 U.S.C. § 544(a)(3)) to avoid GFB’s security interest. And that’s where the argument failed a second time.

“…under Tennessee law as discussed above, unless the trailers at issue were transferred by Sales to Leasing as a buyer in the ordinary course or with GFB’s permission, GFB’s perfected security interest in those trailers continued in the hands of Leasing, and nothing about § 544(a)(1) or (2) allows the Trustee to overcome GFB’s prior perfected security interest.”

GFB’s security interest survives and its secured creditor status remains in tact.

Never underestimate the power of a properly perfected security interest. Your UCC filing is the leverage and protection you need to ensure recovery of your receivable.

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!

Compliance with UCC 9-503(a) when Filing UCC in Georgia

Posted on August 23, 2021 by - UCC Financing Statements

Filing a UCC in Georgia? Make Sure You Correctly Identify the Debtor because Georgia Takes “Seriously Misleading” Seriously.

Compliance with UCC 9-503(a) must be one of the easiest and most challenging aspects of perfecting security interests. A contradiction, right? Under Article 9, a debtor should be identified on the UCC as its name appears on the public organic record (organization) or unexpired driver’s license (individual) – it’s that easy. And yet, following the Article 9 requirement has proven time and again to be quite a challenge for creditors when filing UCCs. And most courts, like the U.S. Bankruptcy Court in Georgia, are no nonsense when it comes to properly perfecting a security interest.

What is Compliance with UCC 9-503(a)?

In compliance with UCC 9-503(a), when the debtor is a registered organization, creditors should rely on the information found on the public organic record.

If the debtor is an individual, creditors must first look to the state’s legislation.  With the 2010 Amendments, each state had to decide whether they would implement “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.

Summary of IN RE Bryant, Bankr. Court, MD Georgia 2021

The debtor, Darren Eugene Bryant (Bryant), filed for bankruptcy protection. The creditor, Regions Bank (Regions), filed a Proof of Claim for $2,515,673.21, which included both funds secured by a UCC filing and unsecured funds. The bankruptcy trustee argued Regions’ UCC was seriously misleading (thus unperfected) because Regions failed to correctly identify Bryant on the UCC.

  • Bryant’s unexpired driver’s license identified him as: Darren Eugene Bryant
  • Regions’ UCC Financing Statement identified Bryant as: Darren E Bryant or Darren E. Bryant

You see where this is going, right? This is from the court opinion:

“The financing statement must include the name of the debtor, the name of the secured party or a representative of the secured party, describe the collateral covered by the financing statement, and state the maturity date of the security obligation or state that the obligation is not subject to a maturity date. The name on the financing statement sufficiently identifies a debtor ‘if the debtor is an individual to whom this state has issued a driver’s license that has not expired, only if the financing statement provides the name of the individual which is indicated on the driver’s license[.]’”

Yep, Regions failed to comply with UCC 9-503(a).

“The Trustee argues that the Debtor’s name as listed on [Regions’] financing statements does not comply with O.C.G.A § 11-9-503(a)(4). This Court agrees. The statute requires that, for the financing statement to be effective, the name must ‘provide the name of the individual which is indicated on the driver’s license.’”

But, But, But… No, Buts, The Instructions Are Clear

In rendering its decision, the court points to the standard filing form provided by GSCCCA, stating “The UCC-1 form specifically notes that any part of Debtor’s name should not be abbreviated. While [Regions] attempted to argue that the abbreviation of the Debtor’s name still matched the Debtor’s driver’s license, [Regions] abbreviated the Debtor’s name from the name on the driver’s license despite the explicit instructions to the contrary. Therefore, the name on the financing statement does not match the Debtor’s name on the Debtor’s driver’s license, [Regions] financing statement does not comply with O.C.G.A § 11-9-503(a)(4).”

Here’s the Debtor’s Name section of the Financing Statement:

Debtor Section of UCC

Here’s the instructions for the form (highlight added):

Instructions for Debtor Section of UCC

Would It Appear in the Search?

You’re familiar with the phrase “grasping at straws,” yes? Well, in true straw-grasping-fashion, Regions tried one more argument. Regions argued if a search was done without the middle name and/or middle initial, its UCC filing would have appeared. But, the court disagreed, because in theory the searcher would be searching by the name as it appears on the driver’s license.

“A third party searching for a lien on potentially encumbered property relies on the system created by the Georgia Superior Court Clerks’ Cooperative Authority, the ‘GSCCCA,’ to produce results. Whether using the exact search or the stem search, the Georgia UCC Search logic description states, “[w]hen searching for an individual, [the Debtor’s] last name and first name are required, [the Debtor’s] middle name is optional.’ Georgia Superior Court Clerks’ Cooperative Authority, UCC NAME SEARCH LOGIC. Therefore, a proper search done by the guidelines set by the GSCCCA could include a debtor’s middle name. Liens that would not be disclosed by a search that includes a debtor’s middle name would not be perfected. In this case, a third-party searcher optionally could include the Debtor’s middle name, Eugene, when searching for encumbered property, which would not disclose [Regions’] lien. Because a search for “Darren Eugene Bryant”, a correct search according to the guidelines set by the GSCCCA for liens on the Debtor’s property, would not have disclosed [Regions’] lien, [Regions’] financing statement would qualify as seriously misleading under § 11-9-506(c).”

It’s an expensive lesson to learn. Always, always, always identify the individual debtor by the name that appears on their unexpired driver’s license.

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.