Service Area: UCC Services

What is Subordination?

Posted on December 16, 2014 by - UCC Financing Statements

Avoiding Potential Pitfalls When Entering into a Subordination Agreement

What is Subordination?

Subordination is “the process by which a creditor holding a priority debt agrees to accept a lower priority for the collection of its debt in a deference to a new debt.” according to Cornell University Law School’s Legal Information Institute. Or “A written contract in which a lender who has secured a loan by a mortgage or deed of trust agrees with the property owner to subordinate its loan (accept a lower priority for the collection of its debt), thus giving the new loan priority in any foreclosure or payoff.”

There are instances when a secured creditor decides to subordinate a senior-priority position to another creditor because it increases the prospects of the obligation being satisfied.

However, if a creditor is considering whether or not to provide financing, equipment or other assets based on obtaining a senior priority position, by swapping priority with an existing creditor, said creditor must be cautious of this approach.

The junior-priority creditor entering into the subordination agreement must carefully review the security agreement and perfection procedures undertaken by the pre-existing creditor to determine that the prior security interest was properly perfected.

Pitfalls of Subordination

The recent case of Caterpillar Financial Services v. Peoples National Bank, N.A. (March 4, 2013) from the Seventh Circuit of the U.S. Court of Appeals, reveals the potential pitfall of entering into a subordination agreement without an experienced professional lien processing service.

In Caterpillar, the debtor obtained loans to purchase mining equipment from three separate entities: (1) Peabody Energy Corporation (“Peabody”), (2) Caterpillar Financial Services Corporation (“Caterpillar”) and (3) Peoples National Bank (“Peoples”).

Each of the creditors extended their loans in the order indicated and filed their UCC Financing Statement at the time of obtaining the loan so they had the priority position indicated above. Debtor eventually defaulted on all three loans.

Partial Subordination or Total Subordination?

When Peoples obtained its loan, Peabody agreed to subordinate its first position, in terms of priority, to Peoples to increase the possibility that Debtor would have the ability to repay the Peabody loan.  The court addressed whether the subordination agreement permitted Peoples to move ahead of Caterpillar in terms of priority.  The court observed that there are two approaches to subordination – “partial subordination,” which constitutes the majority approach and “total subordination,” which is followed in a minority of jurisdictions.

“The “partial” in “partial subordination” denotes the fact that the parties to a subordination agreement swap places in the priority ladder only to the extent of the smaller of the swapping parties’ loans. If, for example, Peabody had been owed $1 million by S Coal, the subordination agreement would have given the bank [Peoples] first priority only with respect to the first $1 million of the bank’s $1.8 million loan. The order of priority would then be bank ($1 million), Caterpillar ($7 million), bank ($.8 million), Peabody ($1 million). The amount subordinated is limited to the amount that the creditor having priority over the nonparty was owed before he swapped places with a junior creditor. In the real as distinct from the hypothetical case, S Coal owed Peabody at least $4 million, which was much more than the bank’s loan, and so the bank was able to move into first place for its entire loan without hurting Caterpillar.”

The partial subordination approach allows the creditors to actually swap positions, so that the junior secured creditor Peoples would actually jump ahead of Caterpillar.  By contrast, the total subordination approach would have had Peabody simply take the position of Peoples without Peoples jumping ahead of Caterpillar.

While the Seventh Circuit observed that it followed the partial subordination approach, this was not the end of the analysis. Peabody was unable to produce a security agreement authenticated by the debtor that identified the collateral.

Because the first position priority interest of Peabody was not properly perfected, the subordination agreement did not permit Peoples to assert a security interest with a more senior-priority than Caterpillar.  Further, the court noted that even if Peabody’s security interest had been properly perfected, Peoples could only claim priority status in relation to Caterpillar up to the amount of the Peabody loan.

This would seem a fair resolution because it prevents Caterpillar from being prejudiced by the subordination agreement to which it was not a party.  The priority of Caterpillar would remain unchanged with the same amount of secured indebtedness needing to be paid prior to Caterpillar having its debt satisfied.

This case demonstrates that, under the majority approach, subordination agreements can be an effective tool for prospective creditors requiring additional collateral.  Since the senior creditor may be facing the prospect of not being paid if the debtor is financially struggling, the senior creditor may be agreeable to a lien subordination agreement.

However, prospective creditors considering such an approach need to carefully review the security agreements and UCC filings of the other party to the subordination agreement.

Small Mistake High Price in Mechanic’s Liens

Posted on December 2, 2014 by - Mechanic's Liens & Bond Claims

In the Field of Mechanic’s Liens, a Small Spelling Error has Large Price Tag

Mechanic’s Lien laws are notoriously complex and courts across the nation are often strict when determining compliance with statutes.  A New York court issued a decision which highlights the high costs of seemingly minor technical mishaps in the filing of a mechanic’s lien.

The Supreme Court of New York

New York County ruled in A. & L. Construction Corp. v. East Harlem Developers, LLC, that the plaintiff, A. & L. Construction Corp., lost the ability to foreclose its mechanic’s lien due to a minor error in the spelling of its name on the lien.

A. & L. Construction (A. & L.) filed proceedings to foreclose a mechanic’s lien against East Harlem Developers in the amount of $150,229.79.  The defendant, East Harlem Developers, filed a motion for summary judgment alleging the mechanic’s lien was invalid because the plaintiff, A. & L. Construction, is not the corporation named on the mechanic’s lien and the contract.

Evidently, on both the mechanic’s lien and the contract, the entity listed is “A&L Construction Corp.,” not “A. & L. Construction Corp.”  The defendant alleged it never did business with A&L Construction, which had different owners than A. & L., never did business with the defendant, and was dissolved three years before the parties contracted and work begin on the project.

The court explained that A. & L. had actually filed a previous action to enforce its mechanic’s lien which was dismissed for lack of standing.  A. & L. was instructed to re-file an action with its correct legal name and to correct its corporate name on the mechanic’s lien.  While A. & L. filed the current action with the correct name, it did not amend the existing mechanic’s lien.

“The Mechanic’s Lien is Unenforceable!”

A. & L. contended it was a mere scrivener’s error that misspelled the corporate name on the contract and mechanic’s lien. It urges that this minor error should not affect the validity of its mechanic’s lien.

The court, however, disagreed.

It turned to the language of the lien statute which requires the notice of lien state the name of the lienor. It found A. & L. failed to provide any evidence that the spelling was a scrivener’s error besides the plain assertion.  Accordingly, the court held the lien to be unenforceable and granted summary judgment to East Harlem.

The case of A. & L. illustrates the harsh consequences of even a minor error in the realm of mechanic’s liens. The difference between “A&L” and “A. & L.” is miniscule.  It is hardly even noticeable; a difference of two periods and two spaces.  A. & L. had likely taken to referring to itself as the simplified A&L for shorthand purposes, and failed to correct itself on official documents.

To a layperson, the error appears minor and understandable.  However, to the New York court, the error was significant enough to cost A. & L. a $150,229.79 mechanic’s lien.

Attorney for Construction Litigation

Posted on November 24, 2014 by - Preliminary Notices & Construction Credit

When to Use an Attorney Who Specializes in Construction Litigation

Selecting the right attorney has a substantial impact on your ability to secure your receivables. There are many considerations when weighing your options.

Why is it important to utilize attorneys who are experts in construction litigation for construction collection cases?

Companies can’t afford to rely on attorneys that “dabble” in construction law. There is too much at stake and the laws are too complex. Make sure your attorneys are experts in construction litigation.

What are the advantages of having your construction attorney local to the project?

Mechanic’s lien and bond claim laws can vary drastically from state to state, so having an experienced attorney local to the project is a tremendous benefit. The attorney will know the laws specific to that state and may be in close proximity to the project and/or familiar with the parties involved.

What are the consequences if an attorney files a mechanic’s lien in a state where they are not licensed?

Courts have ruled against attorneys who have prepared, signed, filed and pursued mechanic’s liens in a state where they are not licensed to practice law. As a result, any related filing might be ruled invalid.

Should I use a large attorney firm for my construction collection needs?

The presumption by many is that using a large law firm will somehow guarantee better results. This is not necessarily the case. Larger law firms often charge high hourly rates and assign your case to a less experienced associate attorney. Working with a small or mid-sized firm may actually provide your organization with more legal expertise and a better overall value.

When hiring an attorney on an hourly basis, does the hourly rate tell the whole story in terms of cost?

Although the hourly attorney rate is important, the expertise of your attorney and method of billing is critical. Below are some questions to ask when evaluating a construction collection attorney:

  • Do I have a trusted relationship with this firm and/or attorney?
  • Is the hourly rate competitive for the region? (i.e. Hourly attorney fees in New York, NY will be higher than in Des Moines, IA).
  • What is the firm’s methodology for billing?

Consistency is the key!

What Are Joint Check Agreements?

Posted on November 18, 2014 by - Preliminary Notices & Construction Credit

What Are Joint Check Agreements?

No, it has nothing to do with twisting your arm while depositing a check at the bank, although I’m certain some may believe this to be true. A Joint Check Agreement is an agreement between multiple parties, allowing one party to make payment through a check issued to two or more payees. These types of agreements require the consent of multiple parties (i.e. the GC & the Sub or the Owner & the GC) and are often used as an additional tool in managing risk associated with construction credit.

What’s the benefit of a Joint Check Agreement?

The primary benefit of a joint check agreement is the additional security it can provide.

  • General Contractors like joint check agreements because they help to ensure the subcontractor will pay its suppliers with the appropriate funds (i.e. Circumvent robbing Peter to pay Paul).
  • Material Suppliers and other parties contracted with subcontractors like joint check agreements for added security on a potentially risky credit situation. (i.e. perhaps there is a lack of solid credit info on the general contractor)

What information should be included in a Joint Check Agreement?

Let’s break down the contents of a sample Joint Check Agreement provided by The Credit Research Foundation.

First, include the date of the agreement, the invoice(s)/purchase order(s) to be covered under the agreement, your company name & address as well as your customer’s name & address.

Date Purchase Order Number
Your Company Name Your Customer’s Name (Party 2)
Your Company Address Party 2 Address
Your Company City/State/Zip Party 2 City/State/Zip

Gentlemen:

YOUR COMPANY NAME has been requested by PARTY 2 to furnish certain (specify:  parts, components, etc.) on credit under purchase order number: ___________________ dated: ________________. The project is identified by PARTY 3 purchase order # __________________, dated: _________________.

Next, identify the authorized signors (the individual at each company that is permitted to execute this type of agreement) as well as the terms and conditions of the sale.

PARTY 2 and PARTY 3 understand and agree that: (1) the undersigned signors are authorized agents of said companies and are duly empowered to enter into and make a binding agreement on behalf of their respective companies; (2) YOUR COMPANY NAME standard terms and conditions of sale which appear on each of YOUR COMPANY NAME invoice and the application of credit shall govern all sales of goods and/or equipment from YOUR COMPANY NAME to PARTY 2 in accordance with its contract with PARTY 3.

Make sure to include wording that covers the materials/labor provided for the particular project. Including a specific project helps alleviate “robbing Peter to pay Paul” (i.e. monies paid are for that particular project).

Applicable only to the products furnished by YOUR COMPANY NAME and as a condition precedent to furnishing said materials for use and incorporation in the aforementioned project, YOUR COMPANY NAME requests that until it is paid in full, all payments made or to be made by PARTY 3 to PARTY 2 with respect to said project, be made payable by check or checks jointly payable to PARTY 2 and YOUR COMPANY NAME. It is understood that all payments shall be timely and in the form of an immediate and unconditional negotiable instrument. Upon issuance of a check by the PARTY 3, it shall be promptly endorsed by PARTY 2 and delivered to YOUR COMPANY NAME. It is understood that this is a continuing Agreement applicable to the original purchase order and the YOUR COMPANY NAME invoice(s) and to any subsequent billing related to this project only.

Identify what actions should be taken in the event one party fails to uphold their end of the agreement. Lastly, include language prohibiting the altering of said agreement and include spaces for all three parties to sign.

Should PARTY 2   refuse to endorse any joint check tendered by PARTY 3, then upon demand by YOUR COMPANY NAME, PARTY 3 agrees to issue a single party check payable to YOUR COMPANY NAME for the amount shown upon the unpaid invoice (s) relating to the goods/materials furnished to and used by  PARTY 2 under purchase order #: __________________________   dated: __________________.
Notwithstanding any additional contract terms that may now or hereafter exist between PARTY 2 and   PARTY 3, this agreement may not be altered or modified without the written consent of YOUR COMPANY NAME or its authorized representative.
This agreement will assist YOUR COMPANY NAME in fulfilling the requirements of PARTY 2 under its contract with   PARTY 3 and is for the mutual protection of each party. In no way should it be interpreted as casting doubt on the ability, integrity or credit worthiness of any interested party. Duly authorized signors should promptly execute this Agreement in the spaces provided below and upon completion, return this original Joint Check Agreement to YOUR COMPANY NAME. An acknowledgment will be mailed to you.

Your Company Name Party 2 Name            Party 3 Name           
By By By
Title Title Title

At-a-Glance: Joint Check Agreement Content Breakdown

  • The name and address of each party associated with the agreement
  • The name/address of the project to which the materials/labor are being supplied
  • The date the parties entered into the agreement
  • The credit terms
  • The steps to be taken, in the event the agreement is not upheld
  • Signatures of all parties involved

Although joint check agreements are an excellent tool for mitigating risk, there are potential pitfalls. Before entering into Joint Check Agreement, or any contractual agreement, it is always best to have legal counsel review the document & its terms.

Debtor Name Errors in UCC Filings

Posted on November 12, 2014 by - UCC Financing Statements

The Impact of Debtor Name Errors in UCC Financing Statements

Perfection of a security interest involves drafting and executing a sound security agreement, properly filing a UCC Financing Statement and ensuring the filing complies with Article 9 of the Uniform Commercial Code.  When preparing a UCC filing, minor deviations in the name of the debtor can prevent a security interest from being perfected.  Creditors may assume it is enough to simply conduct an online search to determine the correct spelling of a debtor’s legal name. However Article 9-503 (a) states that for a registered entity one must obtain the organic public record.  Minor discrepancies coupled with strict state search logic can add up to a costly mistake.

Unperfected Security Interest

Let’s take a look at a few cases where the creditor failed to perfect their security interest, because searches conducted using the jurisdiction’s search logic did not reveal their UCC filing.

Jurisdiction: Nebraska
Case: EDM Corporation, doing business as EDM Equipment, doing business as NOVI, LLC, Debtor
Hastings State Bank, Plaintiff-Appellant v. Thomas D. Stalnaker, Chapter 7 Trustee of EDM Corporation
Verdict: The Court of Appeals for the Eighth Circuit affirmed the bankruptcy court’s ruling that the bank’s financing statement was “insufficient due to the addition of d/b/a” as part of the debtor’s name.

The bank listed the debtor’s name on the UCC filing with both the debtor’s public record and the d/b/a names.  The debtor’s name was EDM Corporation and its d/b/a was EDM Equipment.  The bank used a non-standard-form financing statement and listed the debtor as “EDM Corporation d/b/a EDM Equipment.”  Subsequently, two separate lenders failed to turn up the financing statement when conducting UCC searches.  The court noted that the standard-form financing statement expressly indicated not to include a d/b/a or other extraneous information in the field for the debtor’s name.  The court emphasized the importance of putting in the exact public record name of the debtor – no more and no less.

Jurisdiction:  Idaho
Case: Wing Foods, Inc., Debtor. Bankruptcy Estate of Wing Foods, Inc., by and through its Chapter 7 Trustee, Gary L. Rainsdon Plaintiff, vs. CCF Leasing Company and B S & R Equipment Company, Defendants.
Verdict:  The court determined the UCC Financing Statement was “fatally flawed” and as a result, the debtor was permitted to avoid the creditor’s security interest.

The creditor, CCF Leasing Company, leased equipment to Wing Foods, Inc. The creditor took steps to perfect a security interest by filing the UCC; unfortunately, the financing statement listed the debtor’s name as “Wing Fine Food.” The court found that the difference in the name was seriously misleading because a UCC search, using the jurisdiction’s search logic, would not have revealed the financing statement.  Because the filing was seriously misleading, the court ruled that Wing Foods, Inc. was able to avoid CCF Leasing Company’s security interest in its Chapter 7 bankruptcy.

Jurisdiction: Texas
Case: In re JIM ROSS TIRES, INC.; dba HTC Tire Pro; dba HTC Tires & Automotive Centers, Debtor(s).
Verdict: The court found the listing of the debtor’s name “seriously misleading” because the search logic used for UCC searches in the state would not have revealed the financing statement.

On the UCC Financing Statement, the creditor listed the debtor by including both the debtor’s legal name and d/b/a – “Jim Ross Tires Inc. DBA HTC Tires and Automotive.” The creditor argued their security interest was perfected, because their filing could be located using a “non-standard wild card search”; unfortunately for the creditor, the court did not agree with their argument.  “Accordingly, the Court finds that the Financing Statements are ineffective to grant security interests in Debtor’s collateral. Although this result is harsh, the Court must examine the result in the context of claims between competing creditors.”

Jurisdiction: Georgia
Case: Receivables Purchasing Co., Inc. v. R&R Directional Drilling, L.L.C.
Verdict: The appeals court affirmed the trial court, which determined the creditor did not have a security interest, because the financing statement was seriously misleading.

The creditor in this case simply added a space in the name of the debtor listing it as “Net work Solutions, Inc.” The creditor requested the Georgia Superior Court Clerks Cooperative Authority (GSCCCA) perform a search: “The GSCCCA did a certified search under the correct name Network Solutions, Inc. The Search did not reveal (debtor’s) financing statement, which…was filed incorrectly under Net work Solutions, Inc.”

Avoid this UCC Filing Mistake

While some creditors attempt to search online for a debtor’s business name, minor alterations to the name or the inclusion of a d/b/a could be fatal to the filing.  We recommend you obtain the debtor’s corporate legal name from the Articles of Incorporation filed with the state and monitoring the entity’s name for any subsequent changes. In addition to confirming your debtor’s corporate legal name, it is important understand the search logic used in the state because including a space where one does not belong or changing “and” to “&” in the debtor’s name may be enough to render a UCC filing ineffective.

No Preliminary Notice? No Mechanic’s Lien for You

Posted on October 28, 2014 by - Preliminary Notices & Construction Credit

No Preliminary Notice? No Mechanic’s Lien for You

About 40 states require a preliminary notice be served upon the owner of the property on which the contractor, subcontractor, or materialman is either performing work or furnishing materials.

Each state sets its own requirements for the preliminary or prelien notice, and state statutes are commonly highly specific as to the language required within the notice, the type of service allowed, and the timing provision of the notice.

A failure to provide the requisite prelien notice in a state where it is required can invalidate your mechanic’s lien.

Should Failure to Serve a Notice Invalidate a Mechanic’s Lien?

In a case arising out of the Court of Appeals in Minnesota, the court addressed the issue of whether a failure to serve a prelien notice on the property owner should invalidate a lien where the contractor claimed to be unaware of the true identity of the owner.

In the case of J. Roux Design & Associates, Inc. v. Backes, et al., Dennis Backes sold a property in Minnetonka, Minnesota to Superior Value Homes pursuant to an unrecorded deed, whereby Superior was to design and construct a residence on the property.  Superior entered into an oral agreement with Vogue Design & Realty, Inc. to design and construct the home.

The companies agreed Vogue would hire the subcontractors and Superior would pay them. Vogue contracted with Roux Design to do construction work on the home, and Roux used subcontractors and materialmen to complete the work.

A payment dispute arose between Roux and Vogue, and Roux filed a mechanic’s lien for approximately $26,000. Roux did not serve any prelien notices before filing the lien, nor did it serve the lien statement upon Superior at all. It served the lien statement only upon Backes and Vogue.

Superior sold the property shortly after the payment dispute between Roux Design and Vogue to Ulf and Anneli Henricksson.

Roux Design commenced lien foreclosure proceedings against all three defendants, Backes, Vogue, and the Henrickssons. The Henrickssons filed a third party complaint against Superior for indemnification, making Superior a party to the suit.

The defendants moved for summary judgment, claiming Roux’s lien must be discharged because it failed to file a prelien notice and failed to properly serve the lien statements. The district court granted the motion, finding Roux’s failure to serve the prelien notice on the owner of the property rendered the lien invalid.

“It held that a lack of knowledge as to the existence of an owner does not excuse the contractor from the prelien notice requirement”

Roux Appealed

On appeal, Roux asserted its lien should be found valid because at the time of contracting with Vogue it did not know Superior had an ownership interest in the property.  It contracted merely with Vogue and Vogue held itself out to be the owner.

The court, however, found this argument unpersuasive.  It held that a lack of knowledge as to the existence of an owner does not excuse the contractor from the prelien notice requirement. Roux had a duty to determine the identity of all owners and serve the requisite notice.

Further, Roux was paid by checks bearing Superior’s name. Therefore, a simple inquiry could have lead Roux to the knowledge of Superior’s ownership interests.

Roux’s ability to foreclose on its mechanic’s lien was invalidated due to its oversight concerning prelien notice.

Always review statute and serve the appropriate notice upon the appropriate parties via appropriate service.

What is a Bond Claim? Whose Bond Are You Going to Claim Against?

Posted on September 30, 2014 by - Preliminary Notices & Construction Credit

A Contractor Supplied a Payment Bond & You Haven’t Been Paid, What’s Next?

You supplied materials to the project, served a preliminary notice as required by statute, have not been paid. Now what?

It’s time to make a claim against the bond. But, what is a bond claim? Whose bond are you going to claim against? Can you only claim against a bond if it is a public project?  These are all great questions!

Before we explore and explain a bond claim, we need to define what a bond is and who the parties within the bond are.

What is a Surety Bond?

The Surety Information Office (SIO) defines a surety bond as “…a written agreement where one party, the surety, obligates itself to a second party, the obligee, to answer for the default of a third party, the principal…”

“Contract Surety Bonds provide financial security and construction assurance on building and construction projects by assuring the project owner (obligee) that the contractor (principal) is qualified to perform the work and will pay certain subcontractors, laborers and material suppliers”

A payment bond is a surety bond that is issued as assurance of payment to certain parties should the principal of the bond breach their construction contract.  If a subcontractor, supplier or materialman is unpaid for services, they may secure their receivables by serving a claim against the payment bond.

Here is an example of a federal payment bond:

Don’t get confused: a payment bond and a performance bond are two different bonds, though they are often issued together. The payment bond protects you when the contractor fails to pay; the performance bond protects the obligee when the principal fails to perform.

What Is a Bond Claim?

A Bond Claim is a written notice informing the prime contractor and/or surety that the claimant (e.g. subcontractor, supplier or materialman) looks to them for payment.  Based on state statute, typically the bond claim must be served upon the general contractor and the surety, however, it is recommended to serve a copy of the bond claim on all parties involved. The more people that know you have not been paid, the more pressure these people will put on the appropriate party to encourage payment.

Frequently, a bond claim notice must be served within 90 days from last furnishing materials or services (e.g. Arizona). However, some state statutes, such as in Colorado, refer the claimant to the terms of the payment bond. (i.e. “Serve the bond claim notice in accordance with the terms and conditions of the payment bond.”)

Are All Contractors Required to Obtain a Bond?

The short answer is “No.”

Each state has its own statute requiring payment bonds on public projects and the Miller Act applies to payment bonds required on federal construction projects. Some statutes may require the general contractor obtain a payment bond on every construction project, and other statutes may only require a payment bond when the total value of the construction project exceeds a certain threshold.

True or False?  Bond claim remedies are only available on public or federal projects.

False! Payment bonds may be required or obtained for any project type. In fact, there are several states that have separate statute specific to bond claims on private projects:  Arizona, Arkansas, California, Florida, Georgia, Kansas, Louisiana, Mississippi, Nebraska, South Carolina, Texas, Utah & Wisconsin.

While a payment bond might not be required by statute on a private project, statute may apply as to the steps required to protect your rights under the private payment bond.  Further, it is possible that a subcontractor may be required, by the owner or the general contractor, to obtain a payment bond on a project!

Best Practice Tips

  • If a there is a payment bond on the project, attempt to obtain a copy of the bond at the time of contract.
  • Confirm the surety is on the Department of the Treasury’s Listing of Approved Sureties.
  • Review the payment bond to ensure you are covered as a potential claimant.
  • Serve applicable preliminary notices in accordance with statute.
  • If you remain unpaid, serve a copy of the bond claim upon all parties.
  • Keep all project documentation in a central location (e.g. invoices, delivery tickets, statement of account etc.)

The Art of Drafting a Perfect Security Agreement for Your UCC Filing

Posted on September 24, 2014 by - UCC Financing Statements

There’s an Art in Drafting a Perfect Security Agreement for Your UCC Filing

Today we take a field trip to the Museum of Art and examine “Starry Night” by Vincent van Gogh. At first glance, “Starry Night” may look like a child swirled a paint brush around, hastily drew a few houses with a black magic marker, and added a church steeple, with some lazy-cartoon-like mountains in the background. But, as we know, a child did not create this piece of art; an artist created this piece – someone who honed his craft to absolute perfection. Every swirl in this painting is deliberate, precise in size and tone – all of its contents make it a single masterpiece.

OK, but what does “Starry Night” have to do with a Security Agreement and the UCC filing process? Often, Security Agreements and artistic masterpieces are incomplete. And while an incomplete piece of art may be on display, with no one judging it as “incomplete,” a security agreement does not have the same privilege.

Perfection, Precision, Masterpiece

Drafting a solid Security Agreement (perhaps not as aesthetically pleasing as “Starry Night”) is also an art form. Designed to mitigate risk and to grant creditors security in the event of debtor default, meticulous details combine to create a perfected security interest, i.e. the UCC-1 Financing Statement.

The most common errors in Security Agreements are often as simple as omitted details. Perhaps it’s a misspelled debtor name, the absence of a granting clause or a vague collateral description. So, what makes a solid Security Agreement?

Correctly Identify the Debtor.

There are oodles of cases demonstrating the devastating consequences of incorrectly spelling the debtor’s name in a Security Agreement or UCC Financing Statement.

Include the Debtor’s Address.

Not only should the debtor’s address be included, but it’s also imperative the address be correct.

Date the Agreement.

Confirm the document is dated – this is a great rule of thumb when your debtor signs any document for you.

Ensure the Signors are Authorized.

It is unfortunate to discover the individual who signed the document does not have the authority to sign, or all partners/members do not sign.

Include the Granting Clause.

A Security Agreement is nothing when the granting clause is missing, after all, it actually grants the security interest.

Clearly Identify Collateral.

This is a touchy subject. Often, collateral descriptions are too vague or too specific. Creating the right balance to ensure you have effectively covered the collateral is tricky.

Reference Governing Law.

Don’t forget to include reference to the governing law.

NCS Can Help

Properly perfecting a security interest through Article 9 of the Uniform Commercial Code is an art form. Make sure all of the required information is included and accurate. If in doubt, seek assistance from a professional.