Service Area: UCC Services

Your UCC Filing and Repossession: Do Not Breach the Peace or the Pizza

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. 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, the economic conditions amid this once-in-a-lifetime pandemic, are wreaking havoc on the foodservice industry. It is estimated the industry will lose $240 billion in sales this year – BILLION. 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 burnt – get the dough! File a UCC.

Equipment UCC Filings Best Practices

Posted on September 14, 2020 by - UCC Financing Statements

Selling Equipment? Read Our Best Practices for Equipment UCC Filings

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

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

UCC Filings Provide Immense Benefits for Creditors

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

Considerations when Filing a UCC on Equipment

Sale or Lease

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

Two Steps to Perfect a Security Interest

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

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

Priority

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

Collateral Description

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

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

Debtor Name

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

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

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

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

Multiple Pieces of Equipment

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

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

UCCs May Need to Be Terminated

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

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

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

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.

Kansas UCC Filing & the Wrong Debtor Name: It’s a BIG Deal

Posted on April 20, 2020 by - UCC Financing Statements

Did You List the Debtor’s Name Incorrectly on Your Kansas UCC Filing? Because, the Accuracy of the Debtor’s Name Is a BIG Deal

Filing UCCs may seem simple. I often hear folks say “Meh, it’s no big deal. I just gotta fill in the blanks.” But those folks are wrong. The details of UCC filings are absolutely a BIG deal – the details are the difference between being a secured creditor and an unsecured creditor. The details are the difference in recovering hundreds of thousands and collecting pennies, or worse. One creditor learned a hard lesson with their Kansas UCC filing, when they failed to heed the accuracy warning: the difference is in the details.

The Case of Dewey Dennis Preston or D. Dennis Preston or Dennis Preston?

CNH Industrial Capital of America, LLC (CNH) entered into two Retail Installment Sale and Security Agreements with Dewey Dennis Preston (Preston) for the finance of farm equipment. CNH filed two UCCs, and on each of the UCCs CNH listed Preston’s name as Preston D.Dennis (with a period & no space between D. and Dennis). According to the court opinion, CNH listed Preston in the surname box and D.Dennis in the first personal name box.

Let me back up a second & give you a bit of information on Preston’s name. His full legal name is Dewey Dennis Preston, but he goes by D. Dennis Preston (a period after D and a space between D. & Dennis). Preston’s Kansas driver’s license lists his name as Preston D Dennis (no period after D and a space between D & Dennis).

Kansas UCC 9-503 specifically states the UCC sufficiently identifies the debtor if the name on the UCC is as it appears on the unexpired driver’s license: “if the debtor is an individual to whom this state has issued a driver’s license or identification card that has not expired, only if the financing statement provides the name of the individual which is indicated on the driver’s license or identification card.”

CNH argued its security interest is valid, however, CNH did not list the debtor’s name on the Kansas UCC exactly as it appears on the individual’s unexpired driver’s license:

Court Says: “…the Court finds that under Article 9 of the Kansas Uniform Commercial Code, which requires the use of Debtor’s name on financing statements as stated on his driver’s license, CNH’s security interest in untitled personal property is unperfected and therefor CNH’s claim is properly treated as unsecured in Debtor’s proposed plan.” Ouch!

The court furthered “Both of CNH’s financing statements state Debtor’s name as “Preston D.Dennis.” “Preston” is in the box for Surname, and “D.Dennis” is in the box for First Personal Name. The “Additional name(s)/initial(s)” box is blank. Because Debtor’s name stated on his driver’s license is “Preston D Dennis,” without a period and with a space, Article 9 of the Kansas Uniform Commercial Code regarding financing statements requires the conclusion that CNH’s financing statements were was “seriously misleading,” and not saved from that fate by the “safe harbor.” CNH’s financing statements are therefore ineffective.

Remember UCC 9-503(a)?

You must correctly identify and list the debtor’s name on the Financing Statement in compliance with UCC 9-503(a). Whether it is a registered entity or an individual, Article 9 says:

  • Registered Entity: list the name on the Financing Statement as it appears in the public organic record
  • Individual: 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.
    • 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.

It’s straightforward. If it is an individual, review their driver’s license and list their name on the Financing Statement exactly as it appears on the unexpired driver’s license.

Compliance is King with Kansas UCC

Use caution when identifying your customer on the UCC filing, whether it is an organization or an individual. If it’s an individual, carefully list their name exactly as it appears on their unexpired driver’s license.

Personal Guarantee Enhanced by UCC Filing

Posted on March 30, 2020 by - UCC Financing Statements

Did You Know a UCC Filing Enhances a Personal Guarantee?

A personal guarantee (PG) is an individual’s legal promise to repay credit issued to a business for which they serve as a representative. Then, in the event the business is unable to repay its debt, the individual is personally responsible to pay the debt.

A PG signifies that the lender (obligee) can lay claim to the guarantor’s assets in case of the borrower (obligor) default. It is equivalent to a signed, blank check without a date. The obligee is generally not required to seek payment from the obligor’s assets before going after guarantor’s assets. (see BusinessDictionary)

The lender’s actions are usually based on whose assets are easier to take control of and sell. Once signed, a PG can only be cancelled by the obligee.

Personal Guarantees are Effective

PGs are an effective and popular credit tool; however, there are some things to take into consideration.

  • A PG is just that — a guarantee by that person. It gives the creditor a chance to attach to the assets of the individual. If the personal guarantee has been signed individually, but the assets are in the names of both spouses of a married couple, the PG could be limited. Additionally, most states have homestead protection laws which protect homeowners from losing their homes to creditors. In this case, the debtor’s largest asset (their home) may be excluded from the personal guarantee.
  • In order to enact its rights to a personal guarantee, the creditor must sue and get a judgement against the PG. This can be costly and time consuming.
  • You don’t know how many personal guarantees the debtor has signed. The debtor may give you a personal guarantee, but they may have given the same guarantee to several other creditors.

UCCs Enhance Personal Guarantees

A properly perfected security interest can reduce risks associated with personal guarantees.

  • A UCC filing gives you an interest against the assets of the business — not just the individual. If the business is a registered entity or partnership, chances are the assets of the business are much more plentiful than the assets of the individual.
  • UCC filings create a system that establishes the priority of creditor claims, without going to court and suing each other. This minimizes the time and costs involved.
  • With UCC filings, you know who has a stake the debtor’s assets (collateral), because UCCs are registered in the public record.

Remember, a personal guarantee is an individual’s promise to repay credit issued to a business for which they serve as a representative. This means, the personal guarantee attaches to the assets of the individual. Whereas, a properly perfected security interest grants you an interest in the assets of the business. (The assets of the business are most likely greater than the assets of the individual.)

Don’t assume a personal guarantee is enough; file a UCC!

Your Credit Management Arsenal & COVID-19

Posted on March 19, 2020 by - Credit Risk Management, In Other Commercial Credit News, Mechanic's Liens & Bond Claims, Preliminary Notices & Construction Credit, UCC Financing Statements

COVID-19 and Your Credit Management Arsenal

If you extend credit, you are vulnerable to risk — whether furnishing to a single construction project or selling on revolving terms. This vulnerability grows exponentially in the midst of tragic events, such as the COVID-19 pandemic. Although economic loss is inevitable, you have the power to mitigate the loss through UCC filings, mechanic’s liens, and a fully loaded credit management arsenal.

Credit Management Requires Innovation

Credit Management isn’t simply about reducing risk. It’s reducing risk while promoting long term growth and improving sales. Now more than ever, credit requires innovation. Fortunately, in the era of Big Data, innovation is at your fingertips.

It is imperative to examine and fully understand the data and the potential implications. Listen to industry experts and analysts; review credit indexes, credit reports and bankruptcy reports, as well as lien filings & foreclosures. It’s vital to analyze the collective opinions and statistics to effectively create a comprehensive credit picture.

Technology and Data Sources that Assist Credit Professionals

Technology has proven to be an immense asset; mining the right data is a challenge faced by many. Credit reports, state and county recording offices, industry trade/credit groups and message boards, and even online reviews provide pertinent information. Keep these in your credit management arsenal —

Credit Reports

Credit bureaus have compiled information relevant to a business’s credit, analyzed the data, and provided it for consumption as a trustworthy recommendation. Credit professionals use credit reports to review an entity’s viability.

Credit reports are likely to include general financials (payment trends, debt to income, outstanding collections/judgments, UCC filings, DBT), though some comprehensive reports provide additional bits of relevant data, such as the entity’s status with the Secretary of State.

Compliance with Secretary of State

A business should be in good standing with the Secretary of State. A lapse in compliance with the Secretary of State can be an early warning sign of an entity’s financial distress, though this information is frequently overlooked. If a corporate search reveals a status of anything other than “active,” it is worth further exploration.

A company’s corporate status could change for a multitude of reasons, including a change in the company name, the dissolution of the company or neglecting to file an annual report or changing the formation type.

Our research discovered, in an average year, 23% of businesses experience a change in their corporate status with the Secretary of State. Of these changes, over 10% of businesses dissolve or close their doors. As we navigate the current crisis, these numbers are likely to increase exponentially.

Industry Trade & Credit Groups

In many instances, your peers could be one of your greatest resources. Although credit-granting processes and credit management have evolved, common issues remain: debtor isn’t paying timely, debtor is providing a “pay-when-paid” excuse, debtor has little credit history, etc. These aren’t new issues for credit professionals and your peers have encountered them time & time again. Take advantage of the experiences of others – of course, please do so at a safe distance! (Too soon?)

Mechanic’s Lien Activity

A review of mechanic’s lien filings may uncover, among other valuable information, significant financial distress. If a business has been party to several mechanic’s lien filings, red flags fly, as this party has been unpaid. Unless they have an abundance of working capital, several filings should raise concern.

Accounts Receivable

Don’t overlook the valuable information within your own accounts receivable (AR) payment trends and behaviors provide additional insights. The trend of accounts 30 days beyond terms (or 60, 90, 120), is an early warning sign of stifled cash flow.

When negative trends appear in AR, it provides an early opportunity to evaluate the collectability of past due accounts. If collection efforts are necessary, creditors should leverage the security of mechanic’s liens and UCC filings.

Keep in mind, trends from AR do not have to be negative to provide valuable information. Data is what you make of it. Positive trends in AR (i.e. fewer clients 30+ DBT) likely correlate to a company’s growth and/or improved working capital.

Competitive Intel

Credit reports and mechanic’s lien activity provide obvious benefits for analyzing credit, but they can also provide valuable competitive intelligence. Know what your competitors are doing. Are they filing UCCs? How much credit are they extending via open and/or revolving lines of credit? Are they filing mechanic’s liens? Are they entangled in mechanic’s liens, indicating money issues?

Bankruptcy Information

In the fall of 2018, retail and restaurants landed at the top of Standard & Poor’s Distress Ratio list: “As of Nov. 15, the retail and restaurants sector has the highest distress ratio at 19.5%, followed by telecommunications at 15.6%.”

Several major restaurant chains and retailers have filed for bankruptcy in an economic boom; imagine what will happen over the next 6 months – 1 year.  Some experts believe the restaurant industry is an early predictor of the overall economy — if restaurants are down, other facets of the economy will soon follow.

Of course, restaurants aren’t the only entities filing for bankruptcy. The healthcare industry is facing the enormous task of caring for those who have fallen/will fall ill. As if caring for the ill wasn’t enough, hospitals were already struggling financially.  There have been nearly 5,000 healthcare industry bankruptcies in the last 5 years. Unsecured creditors have been receiving, if anything, pennies on the dollar – pennies!

Regardless of the economic state of the country, understand and remember that bankruptcy will always be a risk. Do not become complacent. Remain vigilant and take precautions to ensure you are a secured creditor.

Credit Management Arsenal

Credit Management requires an array of accessible resources and considerations. Credit reports should provide a company’s net worth, payment history, likelihood of default, and credit limit recommendations, even UCC filings and collection placements. Periodically review the company’s status with the Secretary of State. Monitor and review mechanic’s lien activity, whether related to your customer, project or competitors. File UCCs on all customers and monitor for bankruptcies.

We are here to help you establish and maintain a successful credit risk mitigation program. I feel like an infomercial when I say this, but don’t wait – you need to get these processes in place now.

We are in this together!

UCC Collateral Description: What You Should Include

Posted on March 16, 2020 by - UCC Financing Statements

What Should You Include in Your UCC Collateral Description?

A perfected security interest is nothing without a collateral description. A properly perfected security interest requires compliance with Article 9, which includes a Security Agreement and the subsequent filing of the UCC-1 Financing Statement with collateral descriptions in both. In today’s post, we’ll review what to include in a UCC collateral description.

What Is a Sufficient Collateral Description According to Article 9?

First, what is collateral? Collateral can be either tangible or intangible. Some forms of tangible collateral are consumer goods, equipment, inventory and farm products. Some forms of intangible collateral are instruments which include any written evidence of the right to receive money, documents of title and receipts, chattel paper, accounts, general intangibles, healthcare receivables and supporting obligations.

Then, what makes a collateral description sufficient? Article 9-108 provides the following:

(a) Except as otherwise provided… a description of personal or real property is sufficient, whether or not it is specific, if it reasonably identifies what is described.

(b) [Examples of reasonable identification.]

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

(1) specific listing;

(2) category;

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

(4) quantity;

(5) computational or allocational formula or procedure; or

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

Watch Out for these Common Collateral Mistakes

Collateral descriptions will vary based on the collateral used to secure the credit; however, there are key pieces of information that are sometimes overlooked or inadvertently omitted.

  • Don’t Forget the After-Acquired Collateral: phrases like “now owned or hereafter acquired” or “now existing and hereafter arising” are technically not required under Article 9, but experts agree it is smart to include the phrasing so as to not limit recovery.
  • Don’t Add Limiting Language: be careful when identifying collateral located at a specific address or acquired within a certain time frame. Adding limits to the language could do more harm than good. (Check out this post for an example of limitation by address.)
  • Say What You Mean, Mean What You Say: be aware of what may or may not be included in “all compassing” phrases such as “all proceeds thereof.” If you expect the security interest to include all accounts/accounts receivable, it’s best to include those terms in the collateral description.

Remember 1st Source Bank?

Remember the 1st Source Bank case? In this case, the key issue was whether the language describing specific heavy machinery and “all proceeds thereof” included the debtor’s accounts and accounts receivable.

1st Source Bank arranged for the lease or sale of certain equipment to K & K Trucking and J.E.A. Leasing (Debtors), which was subject to a security interest that was described in the UCC filing according to the above language. The terms “accounts” and “accounts receivable” were not included in the description of the collateral.

Subsequent to the 1st Source Bank UCC filing, the Debtors entered financing contracts with several other banks. These other banks, in turn, filed UCCs which specifically identified “all accounts receivable now outstanding or hereafter arising” as part of the collateral description.  When the debtor defaulted, these banks took control of the collateral, including the accounts receivable.  1st Source Bank objected based on its claimed priority security interest.

The issue before the court was whether the language referring to “all proceeds thereof” was sufficient to put future creditors on notice that 1st Source Bank held a security interest in “accounts” and “accounts receivable.”

The court determined “all proceeds thereof” did not include “accounts” and “accounts receivable.”

Why? Because “Although the statutory definition of the term ‘proceeds’ appears admittedly broad, accepting [1st Source Bank]’s interpretation of the statute would render the term ‘accounts’—a category defined separately in Chapter 9—meaningless. See Tenn. Code Ann. § 47-9-102(a)(2).”

Consequently, 1st Source Bank’s security interest was not perfected with respect to accounts and accounts receivable, providing the other banks a priority status even though their filings were recorded after 1st Source Bank.

Collateral is Key

Because the collateral that underlies a security interest is the key protection afforded to creditors in the case of debtor default or bankruptcy, collateral must be properly described in UCC filings. The description of collateral needs to put prospective creditors on notice so that prospective creditors have reason to inquire further about existing security interests. Be careful, there’s a fine line between being too specific and too generic.