Service Area: UCC Services

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.

Malls and Tickle-Up Effects of Retail Bankruptcies

Posted on November 9, 2020 by - In Other Commercial Credit News, Mechanic's Liens & Bond Claims, UCC Financing Statements

Shopping Malls Suffering From Bankruptcies

OK, so “trickle-up effect” may not be a thing, but retail bankruptcies are on the rise and the impacts aren’t limited to the suppliers of inventory and the retail employees. As stores liquidate and close locations, shopping mall owners are losing tenant revenue, leading to their own bankruptcies.

Over 20 Big Name Retailers Have Filed for Bankruptcy in 2020

I won’t rehash the entire list here, but the ever-growing retail bankruptcy casualties of 2020 include Tailored Brands, Lord & Taylor, Ascena, Sur La Table, Lucky Brand, Neiman Marcus, Modell’s Sporting Goods, J. Crew, Centric Brands, Pier 1, and popular anchor store J.C. Penney.

If those that have filed isn’t enough, over a dozen other retailers are at risk of bankruptcy in 2020. According to Retail Dive, retailers like Express, J. Jill, Rite Aid, and DSW are high risk; not to mention recent headlines made by stores like Guitar Center and Petco.

The reality is retail wasn’t exactly thriving prior to the pandemic, but the pandemic has certainly not done the industry any favors. Brick & mortar retailers have been struggling to compete with the ease and variety of online shopping. Add in the complexities of a pandemic, and it’s a perfect storm for insolvency.

Recently, two large shopping mall entities have filed for bankruptcy protection: Pennsylvania Real Estate Investment Trust (PREIT) and CBL & Associates Properties (CBL). How large is large? Bloomberg states the two entities account for over 87 million square feet of real estate across the U.S. and CNN Business says PREIT and CBL own about 130 malls nationwide.

Both PREIT and CBL stated a decrease in revenue from uncollected rents, a decline in consumer traffic, and existing debt in the billions, led to the bankruptcies. According to one report, more than 30 of CBL’s tenants have filed for bankruptcy in 2020.

PREIT’s bankruptcy petition estimates the company’s assets are $50M to $100M with liabilities of $1B to $10B (yes, billion), and it anticipates there will be enough funds to pay unsecured creditors. Its list of top creditors includes claims ranging from $800,000,000 owed to Wells Fargo Bank and over $200,000 owed to various construction companies.

CBL’s bankruptcy petition (which includes its 176 affiliates) estimates assets and liabilities are between $1B to $10B and anticipates funds will be available to pay unsecured creditors. Its list of top creditors includes a claim of $1.3B owed to Delaware Trust Company and several hundred thousand owed to various construction companies and suppliers.

Why These Bankruptcies Matter if You are Supplying Inventory to Retail

You don’t need me to tell you the heightened risk in retail, but you may want to look at these risks from a different angle. What happens if these malls close? What happens to the tenants and their unsold inventory? YOUR unsold inventory. File UCCs, even in consignment situations. In recent years we have seen the impact of unsecured consignment sales (um, Sports Authority bankruptcy) – you can’t afford to be unsecured in this economic climate.

Why These Bankruptcies Matter if You Are in Construction

In these two cases, not only are the various retail tenants at risk, but every company that is furnishing or has furnished to any improvement to these properties is also at risk. Yes, I’m talking to you – you, the company that furnished a new HVAC system, replaced the escalator, fixed the roof, and even replaced the store front glass in a remodel. Ensure you are securing your mechanic’s lien rights on every project, because the viability in the retail industry is growing weaker by the day.

UCC Filing: Right of Repossession Without a Breach

Posted on September 28, 2020 by - Credit Risk Management, UCC Financing Statements

Your UCC Filing Provides You with the Right of Repossession, Just Make Sure You Don’t Breach the Pizza, Er… the Peace.

With a properly perfected security interest, your UCC filing provides you with the right of recovery, including repossession of collateral (your inventory or equipment). You can repossess collateral if you can do it without breaching the peace. So, if a landlord has filed its UCC and the tenant defaults, can the landlord change the locks on the building or is that considered a breach of peace? Let’s find out!

The Deliciousness of a UCC Success

A recent Michigan Court of Appeals case, Wells Fargo Bank NA v. Vicky Richter Enterprises,  highlights two of my favorite things: the success of a UCC filing and pizza.

The tenant (a pizza restaurant) was behind in rent. The new landlord had agreed to continue renting to the tenant, as long as the tenant paid the agreed upon rent (which included past due amounts) and signed a security agreement granting the landlord a security interest in “all current and subsequent personal property and trade fixtures located on the leased premises.”

As you’d imagine, the tenant failed to pay timely & when it did remit payment, the checks were returned for insufficient funds. The tenant told the landlord it was in negotiations to sell its business.

The tenant listed its restaurant equipment for sale on Craigslist. The owner of another restaurant inquired about the equipment & agreed to purchase the equipment for $40,000.

Serving Up UCC Win #1: Red Flags

The buyer ended up backing out of the sale. Why? “He did not want to assume the unpaid arrearages still attached to the lease…” The UCC flagged the potential buyer of the additional debts, thus protecting the landlord’s security interest.

The Sauce, I Mean Saga, Continues

With the tenant in default, the landlord made several attempts to contact the tenant, including stopping by the pizza shop multiple times during business hours. But the shop was closed.

The landlord’s attorney recommended it secure the property to prevent the tenant from selling the assets. The landlord had the locks on the building changed, and the landlord prepared to auction the trade fixtures and some equipment, with the intention of using the funds to repay city and state tax liens.

Of course, with the locks changed, the tenants were unable to access the property which certainly got the attention of the tenant. The parties ended up in court. On appeal, the tenant claimed the landlord was unreasonable in changing the locks on the building, because it breached the peace.

The Court of Appeals found the landlord did not breach the peace and relied on Article 9-609: Secured Party’s Right to Take Possession After Default.

Delivering UCC Win #2: No Breach of Peace

In accordance with MCL 440.9609 (Michigan’s Article 9), if the debtor defaults, the secured party may:

(a) Take possession of the collateral.

(b) Without removal, render equipment unusable and dispose of collateral on a debtor’s premises under section 9610.

The court explained, the landlord did not breach the peace by changing the locks, it simply enforced its properly perfected security interest. Further, the landlord didn’t change the locks to prevent the tenant from conducting business (which could have been deemed a breach of peace), it changed the locks to protect the collateral (equipment and fixtures) from being sold.

Too Cheesy?

Come on, I know you were totally waiting for the cheese! In all seriousness, economic conditions are wreaking havoc on the foodservice industry. Can you afford the risk if one of your customers defaults? What if 5 of your customers default? You can, and should, protect yourself. Don’t get burned – get the dough! File a UCC.

Equipment UCC Filings Best Practices

Posted on September 14, 2020 by - UCC Financing Statements

Selling Equipment? Here’s Our Best Practices for Equipment UCC Filings

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

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

UCC Filings Provide Immense Benefits for Creditors

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

Considerations when Filing a UCC on Equipment

Sale or Lease

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

Two Steps to Perfect a Security Interest

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

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

Priority

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

Collateral Description

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

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

Debtor Name

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

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

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

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

Multiple Pieces of Equipment

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

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

UCCs May Need to Be Terminated

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

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

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

Your Credit-Granting Processes & COVID-19

Posted on July 6, 2020 by - Credit Risk Management, Mechanic's Liens & Bond Claims, Preliminary Notices & Construction Credit, UCC Financing Statements

The Impact of COVID-19 on Your Credit-Granting Processes

We recently asked our clients whether the COVID-19 pandemic is impacting their credit-granting processes. While I expected to see an increase in collection efforts and more stringent credit-granting processes, I was surprised to see over 70% of respondents indicate they are not filing more UCCs and/or mechanic’s liens as a result of the current economic conditions.

Credit-Granting Processes, Payment Terms, Credit Checks, & Bankruptcy

1. Has your current credit-granting process become more stringent due to COVID-19?

Over 56% of respondents advised their credit-granting processes have become more stringent. In any kind of economic downturn, credit-granting processes should be reevaluated and buttoned up where necessary. If you haven’t taken this opportunity to review your process, you should. This should include reviewing payment history, an understanding of the debtor’s cash flow, and ensuring secured transactions are implemented at the time credit is granted.

2. Have you received requests for extending payment terms from your customer?

An overwhelming 75% of respondents said yes, they are receiving requests to extend payment terms. This is of no surprise. When cash slows, folks start asking creditors for some leeway with payment terms. While it may not be a big deal to grant one customer extended terms, can you afford to grant every customer extended terms? You need a clear idea of how “extended” you can go and whether you have the cashflow to sustain these long payment periods.

Extending terms can quickly snowball out of control – your customers ask you for extended terms, eventually you ask your own creditors for extended terms, then your creditors are asking the same… you can see how this can quickly get out of control.

Think about this: 61% of subcontractors are unable to cover late payments with cash on hand

It’s important you also keep in mind the longer credit terms are, the older a receivable becomes; the older a receivable becomes, the harder it is to collect.

3. Have you increased the frequency of credit checks on your customers?

Only 46% of respondents have increased the frequency of credit checks. Initially I didn’t think much of this statistic; I didn’t find it alarming. But then I took a moment to reflect on the bankruptcies we’ve been seeing. This year we are seeing well-known, long-standing companies succumb to bankruptcy. Healthcare, retail, and foodservice industries have been hit especially hard lately.

  • In 1 hour of an 8-hour workday, 88 businesses close their doors for good
  • OpenTable recently reported that up to 25% of restaurants may close permanently due to the pandemic.
  • In 2019, there were over 5,000 healthcare industry bankruptcies

You should be evaluating your existing customers’ credit on a regular basis. Whether you check quarterly on higher risk clients and semi-annually or annually on lower risk clients, it is in your company’s best interest that you maintain a current credit picture on all customers.

4. Are you monitoring your customers for bankruptcy?

38% of respondents advised they are not monitoring their customers for bankruptcy, while 62% indicated they are. Monitoring your customers for bankruptcy is an excellent practice. Especially in the event a bankruptcy is filed because bankruptcy proof of claim deadlines can sneak up fast. If you aren’t currently monitoring your customers, you should be.

Secured Transactions & Collection Efforts

These next two survey questions go hand in hand, so I’d like to review them as a pair. I’d rather see these statistics inversed. Ideally, folks would be using secured transactions and that would reduce the need for additional collection efforts.

5. Are you filing more UCCs and/or mechanic’s liens because of current economic conditions?

Over 70% of respondents have not filed more UCCs or mechanic’s liens.

6. Have you increased your collection efforts?

76% of respondents have increased their collection efforts, and 24% have not.

I mentioned earlier that I wasn’t too surprised to see an uptick in collection efforts and more stringent credit-granting processes. But I am surprised that UCC filings and mechanic’s lien activity are down. Because the UCC filing and mechanic’s lien filing processes are two of the greatest proactive risk-mitigating tools available, vastly improving collectability of receivables.

Here’s What We Know about Secured Transactions

  • 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 the costs associated with chasing receivables.

For those of us in credit from 2008-2010 (during the recession), we saw firsthand how devastating the impact unsecured receivables could have on a business. Why would we open ourselves back up to that kind of heartache? If we learned anything from 10 years ago, it should be that we need to implement proactive protective measures and practice them regularly.

I’m going to leave you with one last statistic. I keep this statistic written on a sticky note at my desk, to serve a staunch reminder that my goal is to ensure I’m providing you with the information necessary to improve your credit-granting processes.

Did You Know: 30% of business failure is due to poor credit-granting practices.

Construction Notice of Delay and COVID-19

Posted on April 27, 2020 by - In Other Commercial Credit News

Construction Notice of Delay and COVID-19

Are you furnishing to a construction project? If so, should you send a Notice of Delay? The National Law Review posted an article entitled “Contractors:  It’s Time to Send Your COVID-19 Notice” written by R. Thomas Dunn of Pierce Atwood LLC, suggesting that contractors send a formal COVID-19 Notice of Delay as soon as possible to notify their contracting party of any delays and/or additional costs on their construction projects.

In his article, Dunn explains the time to send the notice is now. The notice is an opportunity to maintain open lines of communication during this uncertain time.

“This is not an adversarial notice. Your contracting party will understand the impacts experienced and should appreciate the proactive approach in communicating the COVID-19 impacts.  If discussions have occurred between your contracting party, I would still send a formal notice as to avoid further legal defenses down the line.  Also, providing the formal notice creates a structure that is helpful in creating a productive communication pathway regarding the delays/costs incurred and ways to mitigate them.”

Review the Notice of Delay with Your Legal Team

We recommend that you and your legal team review your contracts to determine whether a Notice of Delay is required. If a Notice of Delay is required, confirm the terms of your agreement to ensure the correct parties are served and served by the appropriate method (fax, email, certified mail, registered mail, etc.).

In addition to the information required to be included per your contract, it is recommended, to include a description of the expected impact of the delays and/or additional costs, the impact on the supply chain or labor chain, if applicable, and when you expect to be back to normal. Updates to the notice should be provided as additional information is known.

Notice of Delay Samples

Dunn provides a template for the Notice of Delay in his article:

[VIA EMAIL / FED EX / CERTIFIED MAIL – Contract Requirement]

[Name/address listed in contract]

RE:  Notice of Delay and Increased Cost Due to COVID-19 Pandemic on Project _____________

Dear ___________:

The COVID-19 Pandemic, which has been declared a national emergency by President Trump on March 13, 2020 [and _______________ (local authorities)] has caused unanticipated delays and increased costs to the above-referenced Project that were beyond the Contractor’s control.  See Sections _____ of the Contract.

In particular, Contractor has experienced the following delays and impacts to project performance: _________________.  [If applicable,] the project has been suspended since ____________(date).

Contractor requests a time extension of ____ days at this time in response to the COVID-19 delays and impacts.  Contractor invites the Owner to participate in a conference call to discuss this request for a time extension and to outline a plan to reduce the impact on the Contract Time and Contract Price.

In addition, Contractor is experiencing increased costs resulting from the COVID-19 pandemic including ______________ (explain).  Contractor is collecting its costs and will provide updated information to the Owner in the near future.  In the meantime, we are available to discuss different options to reduce the amount of costs incurred in connection with the Project.

Contractor reserves all rights and remedies it has pursuant to the Contract and is confident it will be able to get through these events with Owner and all project participants.  Please contact me to discuss these issues and, again, we will provide periodic updates as soon as possible.

The Associated General Contractors of America have also provided a sample copy of the Notice of Delay COVID-19 letter.

NOTICE OF POTENTIAL DELAY AND RESERVATION OF RIGHTS

(Check Contract for person(s) to send letter and manner required to send i.e. fax, email, certified or registered mail)
Insert Date

Re: COVID-19 Pandemic

To Whom It May Concern:

We are all aware of the ongoing outbreak of the Coronavirus 2019 (COVID-19), which was recently declared a pandemic by the World Health Organization and the President and Governor have declared a national and state emergency, respectively. Although the situation continues to evolve rapidly, (Insert Company Name) remains fully committed to pursuing the completion of our work in a safe, diligent and reasonable manner under the current circumstances. We must recognize, however, there is a strong likelihood that we will encounter certain delays as a result of this pandemic.

We anticipate our work will be delayed and our productivity will be negatively impacted by the cumulative effect of this outbreak. Potential impacts may include, but are not limited to, labor shortages due to infection or quarantine as well as material shortages and significant delays in lead times as a result of factory closings across the globe. In addition, we are monitoring whether there will be a mandatory shut down. At this time, it is not be possible to quantify the delay or compute the impact costs.

While this notice may seem premature, our contract requires that we furnish you written notice of any delays in a timely fashion. Accordingly, pursuant to the terms of our contract, please consider this correspondence to be our formal notice of potential delays to our performance through no fault of our own and that are beyond our control, including, but not limited to, changed conditions, constructive suspension of work, constructive change, force majeure/act of God, etc. (Insert Company Name) hereby reserves all rights it may have under our contract and applicable law to protect its legal and commercial interests, including without limitation the right to seek an extension of time and an increase in our contract price. Please keep records as you deem appropriate to confirm any extensions or increased or unabsorbed costs if we do, in fact, submit same. I can assure you that we are evaluating all options to minimize and mitigate the impact to your Project. As more information becomes available, we would like to discuss our options for successfully completing this Project.

We will continue to keep your project representatives informed of these delays and their effect on overall job completion. We will diligently seek to minimize to the best of our ability, the effects of these delays on our work. Your cooperation in minimizing these impacts are appreciated as work our way through this unprecedented event.

NCS Stands Ready to Protect Your Rights During this Difficult Time

NCS has included the basic template from the Associated General Contractors of America within our Online Services Account Management portal for our clients.

Adjustments will need to be made based on the requirements of your contract and/or the information that is available to you. When finalized, the document should be signed by a person who is authorized to bind your company.

Call 800-826-5256 or email SecureYourTomorrow@ncscredit.com with any questions.