Service Area: UCC Services

Commercial Credit Management Tips for UCCs

Posted on January 27, 2020 by - Credit Risk Management, UCC Financing Statements

10 Tips for Commercial Credit Management of UCC Filings

It’s part two of our three-part series of Commercial Credit Management Tips from NCS. Previously we provided favorite tips for Collections, today let’s review UCCs.

Commercial Credit Management Tips for UCCs

Tip #1: Timely File Your UCCs

You should always file your UCC-1 before you ship goods to your customer. As soon as you have the signed Security Agreement, file your UCC to ensure you’re a secured creditor. To properly perfect your security interest, you must understand the different types of UCC filings and the respective filing deadlines. Failure to meet deadline requirements may jeopardize your position as a secured creditor.

  • PMSI in Equipment (US Filing)– the UCC-1 must be filed no later than 20 days from the date your customer receives the equipment.
  • PMSI in Equipment (Canadian filing)– the PPSA must be filed no later than 15 days from the date your customer receives the equipment.
  • The definition of “receipt” is hotly contested in courts; to be most conservative, NCS calculates based on the date you first shipped equipment to your customer.
  • PMSI in Inventory or Consignment– the UCC-1 must be filed, a reflective UCC search performed, and notification letters should be sent and received prior to shipping inventory to your customer. Shipping inventory before you’ve completed these steps may result in an unsecured status.
  • Blanket– the UCC-1 should be filed prior to shipping goods to your customer.

 Tip #2: The Proper Time to Terminate a UCC Filing

When should you terminate the original UCC Financing Statement? Section 9-513 of the Uniform Commercial Code states that a secured party must terminate a UCC filing within 20 days of a request from the debtor if any of the following exist:

  • There is no obligation secured by the collateral and no indication there will be a future obligation
  • The financing statement covered consigned goods that are no longer in the debtor’s possession
  • The debtor never authorized the filing of the original financing statement

Otherwise, the UCC filing will remain active until the 5-year lapse date. This can cause financial complications between the debtor and their bank. NCS Tip: Terminate your UCC filings in a timely manner.

Tip #3: Understand the Difference Between A Corporate Certificate and Articles of Incorporation

The UCC 2010 Amendment changes to Article 9 regarding the debtor name state that when filing a UCC on a registered organization, you must review the “public organic record” (i.e. Articles of Incorporation) to verify the entity legal name including any amendments and reinstatements.

The state’s public record (Corporate Certificate) is a representation of the public organic record that has been data entered. This is insufficient because there can be clerical errors in the name that could deem the UCC filing seriously misleading and may leave you unsecured.

Tip #4: Monitor for Name Changes

Are you aware that if your customer changes their name you must amend your UCC Filing or your security is jeopardized? Section 9-507 (c) of the UCC tells us that we have 4 months to amend our UCC filing when the debtor name changes. If not amended, the UCC filing is not effective to perfect a security interest in collateral acquired by the debtor before or within four months after the change. Make sure your Security Agreement requires the debtor to advise you of any changes to name, address, or organizational structure. It is the secured party’s responsibility to ensure the UCC filing is updated and contains the correct information. Best practice is to monitor your customer for change.

Tip #5: Maintain Priority in Inventory

When continuing a Purchase Money Security Interest in inventory filing, be aware of the requirement to re-notify the previously secured creditors. Section 9-324 of the Uniform Commercial Code outlines the requirements to establish priority in inventory. It states that the secured party must send notification to the holders of any conflicting security interests, and that the holders of these conflicting security interests receive the notification within five years before the debtor receives possession of the inventory. This means in order to maintain priority upon continuation, all previously secured parties will again need to be notified. Failing to do so will jeopardize your priority position in your goods. NCS Tip: Make sure you are searching and notifying when you continue your PMSI UCC Filings

Tip #6: Protect Your Inventory with Warehouse Filings

Are you storing your inventory in a third-party warehouse? If so, you should file a UCC-1 Financing Statement to publicly announce your ownership. Under Article 7 of The Uniform Commercial Code, the warehouseman may have a lien against your inventory. If the warehouseman’s business were to fail, their bank may unknowingly liquidate your inventory. Filing a UCC-1 Financing Statement will let everyone know who the inventory belongs to and keep your interest safe.

Tip #7: When Selling Under Consignment, Review the Secured Transaction Provisions

If you are selling under consignment you may want to review the secured transaction provisions. Consignment falls under Revised Article 9. In order to have priority rights over a previous secured interest, the consignor must now comply with the same rules that apply to a Purchase Money Security Interest in inventory. Meaning, if you are selling under consignment, you must get a consignment agreement signed; file a financing statement; and search and notify all previously secured creditors. If you do not, you risk losing your inventory to previously secured creditors.

Tip #8: When should I file a Fixture Filing?

A fixture is defined as goods that have become so related to real property that an interest in them arises under real property law (Article 9-102[41]). A few examples are gas/fuel pumps, ovens, and external signs. If your UCC Security Agreement calls out “fixtures,” you should consider filing a UCC Fixture. The Fixture filing will be filed at the county level against the real estate and will appear on a title search. This will alert potential buyers/sellers that the debt needs to be paid before the title of the property can be transferred.

Tip #9: Conduct A Reflective Search After Every UCC Filing

Often, we take for granted when a UCC is instantly recorded online that all is well. BUT how do you know your filing will appear in a UCC-11 search? Each Secretary of State office has their own software to house UCC filings that sometimes can be unreliable or outdated. The only way to determine if your UCC filing is indexed correctly is to conduct a Reflective Search. If that Reflective Search does not display the filing, you have a problem.

Tip #10: UCC and Default

If your customer has defaulted on payment(s) and you have filed a Purchase-Money-Security-Interest UCC, you need to determine whether you would like your equipment/inventory (aka goods) back.

  • If you do not want your goods back, you can place your claim with an attorney to file suit. By filing suit, you may receive Judgment, which allows you to garnish accounts and/or attach to assets.
  • If you do want your goods back, and your customer has the goods, you have the right to repossess without disturbing the peace.

If you are unable to peacefully repossess the inventory/equipment, you could take legal action by filing a temporary restraining order or by filing suit against your debtor.

The Retail Bankruptcy Apocalypse

Posted on November 15, 2019 by - In Other Commercial Credit News

Run! It’s the Retail Bankruptcy Apocalypse

“The Retail Bankruptcy Apocalypse!” A phrase you have likely heard or read in the news; perhaps written in scary font from a 1950’s horror movie. The consistent roll call of retail bankruptcies is wreaking havoc on ill-prepared suppliers. While apocalyptic may be a bit of an exaggeration, retail bankruptcies are, without question, harmful to creditors. What can you do to protect your business from retail bankruptcy?

Secured Transactions – Even on Consignment

Article 9 of the Uniform Commercial Code (UCC) provides an opportunity for trade creditors to secure their goods and/or accounts receivable by leveraging the personal property assets of their customer. Properly perfected security interests via UCC filings will mitigate (though not eliminate) risk.

In retail, creditors frequently engage in consignment sales. Creditors will tell us, “It’s alright, we sell on consignment, we’re protected.” But that’s not always the case **cough cough, Sports Authority, cough cough**.

How does a true consignment work? The consignor/owner retains title to the delivered goods, while the consignee/recipient holds and attempts to sell the goods. If/When those goods are sold, the owner’s security attaches to the proceeds of the sale. If the consignee is unable to sell the goods, they can simply return the goods to the owner. However, to maintain title to those goods, you must perfect a security interest via a UCC filing.

But Wait, There’s More!

In addition to filing UCCs, there are other steps you can take to protect yourself in the event your customer files for bankruptcy.  Here are some additional tips from Stephanie Wickouski’s article, Avoid a Catastrophic Loss from a Customer’s Bankruptcy – Five Tips. 

Up first? Recognize the warning signs of default or financial distress.

“These signs include increasing degrees of lateness in paying invoices and communication anomalies. Communications might be irregular in a variety of respects, ranging from uncharacteristic unresponsiveness to effusive assurances that all is well and “the check is in the mail.” A troubled customer may also try to appeal to the vendor’s sense of loyalty, in order to lull the vendor to continue to supply goods despite growing delinquencies.”

Next? Ensure you have established terms & conditions.

“Terms and conditions which provide for interest and legal fees if payments are delinquent, or damages if the conditions are violated, potentially increase the amount you can claim and recover in the event of a bankruptcy.”

And? Consider withholding shipments until the account is current.

“Once payments are delinquent, consider moving to COD (cash on delivery) for new orders, or declining to ship further goods until the account is brought current.”

Wickouski also mentions you may want to move to consignment terms. However, be aware that even consignments should be secured through a UCC filing.

Then? Watch deliveries & mind the 20-day clock.

“State law generally gives vendors a right to reclaim goods from an insolvent buyer within 20 days of delivery. If the buyer files bankruptcy, the reclamation period is extended to 45 days. Payment for goods delivered within 20 days of the bankruptcy may be entitled to a priority of payment.”

Lastly? Maintain communication.

“It’s always better to be communicating regularly with a customer. Even if things head south, vendors who are regularly in touch with a customer fare better in a bankruptcy than those who do not. Frequent communication with a customer will allow you to know more about the customer’s circumstances (and to know it earlier). This knowledge will allow you to make more informed decisions to manage the account.”

  Questions? NCS can help!

Not a Secured Creditor? Aim To Be Critical Vendor

Posted on October 4, 2019 by - In Other Commercial Credit News

If You Aren’t a Secured Creditor, Maybe You Can Be a Critical Vendor

You want to be a secured creditor! This is our mantra, it’s what we do: Securing Your Tomorrow. We want your company to always be in the best possible position to get paid, but we know there may be times when you will opt out of securing your receivable. If your customer files for bankruptcy protection, and you are not a secured creditor, do you know which creditor class you fall into? I hear your eyes rolling… I mean, I hear you saying, “We’d be an unsecured creditor, Kristin.” But, did you know that might not be the case? You may be a critical vendor.

You Always Want to Be a Secured Creditor

Secured creditors are at the front of the payment line when a debtor files for bankruptcy protection. You always want to be a secured creditor. (Yes, I’m going to hammer that notion home!) So who gets paid after the secured creditors?

#1: secured creditors

#2: administrative expenses

#3: unsecured creditors

The classes of secured & unsecured creditors are self-explanatory; secured creditors have perfected a security interest, whereas unsecured creditors are creditors without a security interest. The second group of people — “administrative expenses” — can encompass many different creditors.

Jason B. Binford recently wrote an article on critical vendors in bankruptcy & he said “Creditors will jostle for position in an attempt to be included in claim classes that take priority over general unsecured claims.”

I now picture creditors as concert goers, jostling their way through a sea of people trying desperately to get to the stage. I think the only way I could be more entertained is if they were jousting creditors!

Who Are These Jostling Creditors?

According to Binford:  “A creditor who provides goods and services to a debtor following the bankruptcy filing is entitled to administrative expense claims that must be paid in full in order for debtor to confirm a plan of reorganization,” or “A creditor who provides goods delivered to the debtor within 20 days prior to the bankruptcy filing is entitled to an administrative expense claim for the value of such goods.” (Psst! These creditors that delivered goods within 20 days prior to the bankruptcy filing may try to rely on 503(b) 9 claims.)

Then There Are Creditors Who Aim to be a Critical Vendor

Oooohhhh, sounds… well, it sounds critical. For creditors that don’t qualify under the administrative claims class or as priority for providing goods within 20 days, being identified as a critical vendor may be the only way to avoid the pit of general unsecured creditors.

So, how can a creditor become a critical vendor? First the creditor needs to convince the debtor that it should be designated as a critical vendor. Once the debtor is convinced and the creditor has been added to the ‘elite list’ of critical vendors, the court must be convinced.

While each jurisdiction determines critical-ness differently, here are the common tests applied by the courts, according to Binford.

  • dealing with the creditor is virtually indispensable to the profitable operations of the debtor;
  • a failure to deal with the creditor risks probable harm or eliminates an economic advantage disproportional to the amount of the claim; and
  • there is no practical or legal alternative to payment of the claim.

Passing these common tests will likely earn you a spot as a critical vendor. But, being a critical vendor may not be all glitz and glamour.

“Designating a claim as critical will usually come with strings attached. As a condition to being paid, the creditor likely will be required to provide the debtor with reasonable credit terms for a particular period of time. Thus, debtors can use critical vendor motions as leverage to obtain post-bankruptcy credit terms from parties that otherwise would likely require the debtor to pay in advance. Critical vendors incur a relatively small amount of risk in providing credit on a go-forward basis to the debtor. If the debtor later falters in bankruptcy and is forced to liquidate, the creditor will have an administrative expense claim for such post-bankruptcy receivables. While administrative expense claims will not be paid in full if a debtor is ‘administratively insolvent,’ such a claim is greatly preferred to general unsecured status.”

Don’t Be a Threat – Actually, Just Don’t Be Unsecured

Binford warns creditors about threatening to stop supplying to the bankrupt debtor. These threats, such as “Pay this pre-bankruptcy-past-due-amount or I stop all shipments to you”, can be viewed as a violation of the automatic stay. Creditors vying for critical vendor status should probably hire an attorney to assist them to avoid any missteps. However, I stand by my opening statement: you should always be a secured creditor! Then, as a secured creditor, you won’t have to jostle or joust to win over the powers that be.

It’s A 180 On The 180 Equipment, LLC Decision

Posted on September 23, 2019 by - UCC Financing Statements

It’s A 180 On The 180 Equipment, LLC Decision: The Collateral Description of “See Attached”

An Illinois Court of Appeals has reversed the Bankruptcy Court’s decision in 180 Equipment, LLC v First Midwest Bank, which had allowed the bankruptcy trustee to avoid the security interest of First Midwest Bank.

Recap of Events from What Happens When a UCC-1 Collateral Description References the Security Agreement?

180 Equipment, LLC (180 Equipment) obtained a loan from First Midwest Bank (Bank) and granted Bank a security interest in 26 specifically identified “categories of collateral, including accounts, chattel paper, equipment, general intangibles, goods, instruments and inventory and all proceeds and products thereof.”

In its Financing Statement, Bank identified the collateral as “All Collateral described in First Amended and Restated Security Agreement dated March 9, 2015 between Debtor and Secured Party.” However, Bank did not include the Security Agreement with the filing of its Financing Statement.

When 180 Equipment filed for bankruptcy protection, the trustee argued that Bank’s security interest was unperfected because it failed to sufficiently describe the collateral. “The trustee… contends that the mere reference to the collateral as being described in the amended security agreement does not suffice to indicate, describe or reasonably identify any collateral.”

Bank argued the filing of the Financing Statement was enough to put other creditors on notice. “…the purpose behind the filing of a financing statement is merely to provide notice to third-party creditors that property of the debtor may be subject to a prior security interest, and that further inquiry may be necessary to determine the identity of the collateral.”

The Bankruptcy Court’s decision? The Bankruptcy Court agreed with the trustee. Bank’s Financing Statement failed to sufficiently identify the collateral. Referring to the Financing Statement, the Bankruptcy Court states “Rather, it attempts to incorporate by reference the description of collateral set forth in a separate document, not attached to the financing statement. The financing statement, on its face, provides no information whatsoever, and therefore no notice to any third party, as to which of the Debtor’s assets First Midwest is claiming a lien on, which is the primary function of a financing statement.”

The Appeals Court Reversed the Bankruptcy Court Decision

As mentioned above, Bank argued its Financing Statement was enough to put other creditors on notice. Although the Bankruptcy Court ruled against Bank’s argument, the Court of Appeals agreed with Bank.

How did the Appeals Court determine Bank’s Financing Statement complied with Article 9? In the Appeals decision, the Court focused on the plain language of Article 9. Specifically, the Court reviewed §9-502, §9-504 and §9-108. These sections are paraphrased below:

9-502: Financing Statement is sufficient if it includes the name of the debtor, the name of the secured party, and indicates the collateral.

9-504: Financing Statement is sufficient if it provides “a description of the collateral pursuant to Section 9-108” or “an indication that the financing statement covers all assets or all personal property.”

9-108: Examples of Reasonable Identification include “(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.”

Did I indicate a possible trend? In its decision, the court aimed to define “indicates.” Ultimately, if the Financing Statement indicates the collateral description, the requirements under §9-502 are satisfied.

“…the ordinary meaning of ‘indicate’ is to serve as a ‘signal’ that ‘point[s] out’ or ‘direct[s] attention to’ an underlying security interest. That plain reading of the text allows a party to ‘indicate’ collateral in a financing statement by pointing or directing attention to a description of that collateral in the parties’ security agreement.”

That definition of indicates means Bank’s Financing Statement’s reference to the Security Agreement is sufficient — because it directs subsequent creditors to the Security Agreement.

The Appeals Court states the onus lies with subsequent creditors. If a creditor’s search turns up a Financing Statement and the Financing Statement references the collateral in the security agreement (e.g. “See Security Agreement), the creditor should then request a copy of the Security Agreement to confirm whether there is a conflicting interest in the collateral.

“While financing statements and security agreements both must describe the collateral, ‘the degree of specificity required of such description depends on the nature of the document involved—whether it is a security agreement or a financing statement…’ The ‘prudent potential creditor would request a copy of the security agreement,’ and ‘need look no further than the security agreement’ to resolve questions about the adequacy of the collateral description. The different treatment of these two documents highlights the distinct function each serves under Article 9: the financing statement provides notice of an underlying security interest, while the security agreement creates and specifically defines that interest.”

What a Win! But, Take Precautions

Although the Court of Appeals has reversed the Bankruptcy Court’s decision, as a best practice you should ensure the Financing Statement provides a collateral description, and if attachments are referenced the attachments should be recorded with the Financing Statement.

Filing a UCC on an Individual? List the Name as It Appears on the Unexpired Driver’s License

Posted on September 9, 2019 by - UCC Financing Statements

If You Are Filing a UCC on an Individual, You Should List the Individual’s Name as It Appears on Their Unexpired Driver’s License

Until a Court Case Drops and Mucks It All Up

I can’t begin to tell you the number of times I have said or written some variation of “… when filing a UCC, always list the individual’s name as it appears on the unexpired driver’s license …” I’m certain if you run a query via the NCS blog for “9-503(a)” you will find oodles of information. I’ve said it oodles of times, because it’s true; it’s right there in UCC Article 9! It’s true, until a court case drops and mucks it all up.

UCC 9-503(a)… I Feel Like a Broken Record

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 lays it out:

  • 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. Should I repeat one more time? List the debtor’s name exactly as it appears on the unexpired driver’s license. I do sound like a broken record… do folks still play records?

The Court Case That Mucked It Up

I’ll do my best to break this down –

  • The Jurisdiction: Wisconsin
  • The Debtor: Jeffrey Ossmann
  • The Arguing Secured Parties with an Interest in Same Collateral: Northside Elevator, Inc. and Bremer Bank

2014

Jeffrey Ossmann (Ossmann), a farmer, obtained two loans from Bremer Bank (Bank). In turn, Ossmann and Bank executed a security agreement and Bank filed a UCC. On the Financing Statement, Bank identified Ossmann as “Jeffrey A. Ossmann” which was the name on Ossmann’s unexpired license.

2016

In 2016, Ossmann was issued a new license. The name on the new license was “Jeffrey Alan Ossmann“.

Time Out! Under ordinary circumstances, what should Bank do right now (if it was 2016 and within four months of the name change)? Yes, Bank should file an amendment and list the debtor’s name as “Jeffrey Alan Ossmann.” Good! Back to the timeline.

2017

Northside Elevator, Inc. (Northside) had been selling seed and fertilizer to Ossmann. When Ossmann was unable to pay the balance, an agreement was executed and Northside filed a UCC. On the Financing Statement, Northside identified Ossmann as “Jeffrey Alan Ossmann” which was the name on Ossmann’s unexpired license.

2018

Northside claimed its security interest took priority over Bank’s because Bank’s Financing Statement did not correctly list Ossmann’s name as it appeared on Ossmann’s unexpired license. (“Jeffrey Alan Ossmann” for those still with me.)

The Blah-Blahs

As with many court proceedings there is a great deal of information, but only small bits are of interest to me; this is what I call the blah-blahs. The case goes on to review the various bits of Ossmann failing to pay, descriptions of the collateral, the legalities of Northside appealing the Circuit Court’s ruling in favor of the bank, and the relevant bits of Article 9: correctly identifying the debtor, what is seriously misleading, standard search logic and what constitutes minor errors/omissions.

Standard Search Logic, Not So Standard?

Northside claims that Bank’s security interest is unperfected, because a search on “Jeffrey Alan Ossmann” (Ossmann’s license name when Northside filed its UCC) did not reveal Bank’s UCC filing.

“Northside asserts that the name ‘Jeffrey A. Ossmann’ on Bremer Bank’s financing statement renders the statement seriously misleading, under WIS. STAT. § 409.506(3), because a search of DFI records using the name ‘Jeffrey Alan Ossmann’ did not reveal Bremer Bank’s financing statement.”

Clearly, the tricky business with the search is due to the variance of middle name vs. middle initial. To offer clarity, the court explained the search logic.

“(1) NAME SEARCHED. A search request shall set forth the full correct name of a debtor or the name variant desired to be searched and specify whether the debtor is an individual or an organization. The full name of an individual shall consist of a first name, a middle name or initial, and a last name, although a search request may be submitted with no middle name or initial and, if only a single name is presented, it shall be treated as a last name… A search request shall be processed using the name in the exact form it is submitted.”

OK, this makes sense. Northside did a search by the debtor’s full correct name: Jeffrey Alan Ossmann. Bank’s filing did not appear in the search result, which would make Bank’s Financing Statement seriously misleading / unperfected. So, what’s the problem? According to the court, Northside didn’t use a logical search.

“Section DFI-CCS 5.04(1)(e) provides: ‘For first and middle names of individuals, initials shall be treated as the logical equivalent of all names that begin with the initials, and no middle name or initial shall be equated with all middle names and initials.'”

Huh?

Essentially, a search for “Jeffrey A Ossmann” should display all Jeffrey Ossmanns with either a middle name beginning with “A” or the middle initial “A.” In theory, a search for “Jeffrey A Ossmann” would display results for Jeffrey Armstrong Ossmann, Jeffrey Awesome Ossmann, Jeffrey A. Ossmann, etc. So, the court is saying, if Northside had simply searched by “Jeffrey A Ossmann” it would have seen Bank’s existing UCC filing.

In fact, the court stated the following –

“A searcher who fails to take advantage of the DFI’s search logic cannot later complain that a financing statement is seriously misleading if that statement would have been disclosed if the searcher had availed himself or herself of the search logic.”

** Screeching Record Noise Plays Here **

“We conclude that, because a search of the name ‘Jeffrey Alan Ossmann,’ using the DFI’s search logic, and any permissible name variations permitted by that logic, would have disclosed Bremer Bank’s financing statement, that statement is not seriously misleading.”

Wait, What? Why? What?

I’m going to say it: I don’t agree with the court in this case. I understand the court’s reasoning, in that I understand the usefulness of a vague search (“Jeffrey A Ossmann”). But I don’t understand how Northside can comply with Article 9 and then get burned for doing so. Northside identified the individual by the unexpired license and searched the records by the same name. Northside complied with Article 9.

There’s a Lesson Here

Despite my frustration with the court in this case, there is a useful lesson here. When searching, take the extra minute to search a logical variation of the name. What’s considered logical? Well, that’s for another post, but in this case if there is a middle name, try a quick search using just the middle initial and not the full middle name.

Furnishing Labor and Performing Labor Are Different

Posted on August 12, 2019 by - Mechanic's Liens & Bond Claims, UCC Financing Statements

According to Oklahoma Court of Appeals, Furnishing Labor and Performing Labor Are Different

An Oklahoma Court of Appeals has determined mechanic’s lien rights don’t extend to a party furnishing labor, because under Oklahoma statute, furnishing labor and performing labor are not synonymous.

Protecting Lien Rights in Oklahoma

When you are furnishing to a private project in Oklahoma, you secure your right to file a mechanic’s lien by serving a prelien notice upon the owner and prime contractor within 75 days from last furnishing materials or service. The prelien notice may not be required if you are contracting directly with the owner, if the lien claim is less than $10,000, if the lien claim is for retainage only, or if the project is a non-owner-occupied residential project.

If you need to file a lien and you contracted with the contractor or the subcontractor, you should file the lien within 90 days from last furnishing. However, if you contracted with the owner, the lien deadline is within 4 months of last furnishing.

Oklahoma Court of Appeals States Furnishing Labor & Performing Labor Aren’t the Same

The Case: Advanced Resource Solutions, LLC v. Stava Building Corporation & Mid-Continent Casualty Company v. McDermott Electric, LLC

The Parties:

  • General Contractor: Stava Building Corporation (Stava)
  • Subcontractor: McDermott Electric, LLC (McDermott)
  • Sub-Sub and/or Supplier: Advanced Resource Solutions, LLC (ARS)

The Chain of Events

Stava hired McDermott as an electrical subcontractor for the construction on the Luther-Walmart project. McDermott contracted with ARS, a temporary staffing agency, and ARS provided temporary laborers. The contract between McDermott and ARS was “laborers for commercial construction on an open account.”

ARS provided laborers to McDermott on this open account, for the construction on the Luther-Walmart project, for several months. When McDermott failed to pay over $100,000 in outstanding invoices, ARS filed a mechanic’s lien. After the lien was filed, Stava filed a bond to discharge the lien from the property.

After Stava posted the bond, the question of whether ARS held a valid lien claim came up. Stava argued that Oklahoma’s lien statute states the lien claimant “must have performed labor” to have a valid claim. This is an excerpt of Stava’s argument from the court decision:

“ARS was a professional employer organization (PEO) and did not “perform labor” as required under the lien statutes. Therefore, ARS, a supplier or provider of labor, was not within the class of persons entitled to assert a mechanic’s lien in Oklahoma.”

Of course, ARS disagreed, claiming it is a “…temporary staffing company, as it was the direct employer of the licensed journeymen and apprentice electricians that worked on the Walmart Project. Thus, it was the employer that furnished labor within the meaning of the lien statutes and therefore a proper lien claimant.”

 The Court Says

“ARS merely furnished labor, licensed apprentice and journeymen electricians to McDermott, who then actually labored. Furnishing labor is not the same as performing labor.”

Unfortunately for ARS, the Court of Appeals determined ARS is not within the class of parties entitled to mechanic’s lien rights. Why? Because technically, ARS wasn’t the party performing the labor, ARS provided people who performed the labor.

Is this a distinction without a difference?

No, as it turns out, the Court of Appeals decision indicates that statute may have afforded ARS lien rights if it were a contractor instead of a subcontractor. In other words, the statute specifically includes ‘performs’ labor or ‘furnishes’ labor under the statute for contractors, whereas the statute for subcontractors only includes ‘performs’ labor, not ‘furnishes’ labor.

“In the present case, under the contractor statute, § 141, any person who performs labor or furnishes labor, materials, or equipment under a contract to make improvements to real property shall have a lien on the real property for the value of that labor, materials, or equipment. However, under the subcontractor statute, § 143, the Legislature choose to limit potential lien claimants to those who actually perform labor or furnish materials or equipment. The Legislature did not include those who furnish labor.”

Did ARS Have Other Options? UCCs Maybe?

After reviewing this case, I spoke with Cindy Bordelon, NCS’ in-house UCC expert and manager. We discussed the details of the case and I asked Cindy whether ARS could have filed a UCC when it initially contracted with McDermott.

“Yes! Based on the case information, ARS provided the laborers on an open account, essentially extending credit.  Article 9 allows the securing of an ‘Account’ which is defined by 9-106 as ‘any right to payment for goods sold or leased, or for services rendered.’ With a signed security agreement granting the security interest, ARS could have filed a UCC on McDermott.”

Even though ARS says they provided the laborers for a specific project, the Luther-Walmart?

“Certainly. Actually, since it appears ARS provided the laborers on an open account, McDermott could have used the laborers on any project, and a valid UCC filing could have protected ARS.”

If you furnish labor (i.e. temporary staffing) or if you furnish materials & are too remote for lien rights, you may want to consider implementing UCCs.

Prep to Collect: Key Collection Questions & Important Documentation

Posted on July 22, 2019 by - Credit Risk Management

Prep to Collect: Key Collection Questions & Important Documentation

You’ve gone around and around with your debtor for weeks, maybe even months, but still haven’t received past-due payments. You decide you need collection assistance and think about hiring an attorney. These four collection questions can help determine the best debt recovery plan for your business and better assist in communicating with and demanding payment from your customer.

Four Questions to Consider When Placing Your Collection with an Attorney

How Much Am I Owed?

The amount of money you’re owed can greatly impact how you proceed with the collection process. If it’s a larger past-due payment and/or from a high-risk account, you may want to bypass an in-house placement and send your case right to an experienced attorney for review.

How Past-Due Is the Payment?

It’s important to know exactly how long your receivable has gone unpaid. There could be a pertinent underlying reason for late payments, such as your debtor experiencing financial distress, or maybe there are payment issues higher up the ladder of supply. It’s critical to get out in front on the collection process because the longer an amount goes unpaid, the harder it is to collect. Some studies indicate that after six months the collectability of a past-due amount can be reduced by as much as 52%.

Am I Involved In an Ongoing Dispute with the Debtor?

If you’re involved in an ongoing dispute with the debtor, over issues such as invoice discrepancies or quality-of-work, it could result in late payments. Therefore, we recommend placing your collection with an attorney who will work quickly to resolve dispute(s) and ultimately get you paid.

Is It a Secured Amount?

If you have security in place, such as a UCC filing, mechanic’s lien or bond claim, we recommend attorney involvement to best leverage your security. For example, if you have a lien on an unpaid project, an attorney can assist in resolving the balance owed, including, if necessary, foreclosing on that lien. Similarly, if there is a UCC in place, an attorney can proceed with replevin action or repossession through the courts.

Importance of Documentation in the Collection Process

Why Do I Need Supporting Documentation?

Any collection professional needs thorough, up-to-date information to best demand payment from your debtor. Providing the proper documentation at the start of the collection process will allow an attorney to efficiently and effectively handle your claim – putting you in the best position for receiving payment.

What Type of Documents Do I Need?

Supporting documentation? The more the merrier! Every collection attorney requires basic information such as the debtor’s full name, physical address and the amount owed. However, we recommend you also provide any additional paperwork that supports your claim. This could include signed invoices, written contracts or agreements, proofs of delivery and/or bills of lading. With access to proper backup documentation, the collector can speak more intelligently regarding your claim and even speed-up the collection process.

Important Documents to Include

  • Contract or Agreement
  • Credit Application
  • Invoices and Statement of Account: this should include copies of returned / NSF checks
  • Purchase Orders
  • Proof of Deliveries
  • Personal Guarantee
  • Trade References
  • Correspondence & Notes: this could include emails, letters (demand letters, payment requests & notices) and documented phone conversations
  • Corporate Certificate: this should include your debtor’s legal identity, including whether it is a corporation, partnership or proprietorship
  • Credit Report

Unfortunately, there’s no sure way of determining the collectability of a past-due account. Therefore, it’s best to weigh the costs against the potential debt recovery and be proactive in your efforts – start taking steps to secure future receivables today.

Are you caught up in past-due payments and need some collection expertise? Let our national network of attorneys, specializing in secured and unsecured commercial collections, help get you paid!        

Selling Fuel on Consignment? Don’t Forget to File a UCC!

Posted on July 19, 2019 by - In Other Commercial Credit News, UCC Financing Statements

In Bankruptcy, Who Has Priority Over the Proceeds from Consigned Goods? Depends on Whether the Consignment is Governed by UCC Article 9

Selling Fuel on Consignment? Don’t Forget to File a UCC!

In a bankruptcy proceeding, who has priority over the proceeds from consigned goods? Is it the bankruptcy trustee or the consignor of the goods? The answer in this case depended on whether the consignment was governed by Article 9 and then whether the consignor filed a UCC-1 Financing Statement. Spoiler alert: the consignment was governed by Article 9 and the consignor did not file a UCC. The bankruptcy trustee wins.

Let’s Take a Drive

I commute from one side of the city to the other, which means a I rack up a ton of fuel-perks from the local gas station. This morning, as I scolded myself for not stopping to gas up last night, a large fuel truck struggled to pull into the gas station. As I pulled out of the gas station, trying to navigate my tiny Scion around this enormous fuel truck, I started wondering:

“If this gas station goes out of business, how does the fuel provider recover its money? Does it file a UCC? Is fuel considered inventory or is it consignment?”

I spent the rest of my commute wondering what the fuel provider could do to protect itself in the event of its customer’s bankruptcy or default — the perks of a life in secured transactions.

I finally made it to work and began perusing recent fuel-related bankruptcies, and there it was: a decision in the Pettit Oil Company (Pettit) bankruptcy. The decision addressed what a creditor should have done to protect its interest in consigned fuel.

The Consignment Arrangement

Pettit is a bulk petroleum product distributor. IPC (USA), Inc. (IPC) consigned fuel to Pettit, Pettit would then sell the fuel to customers. However, instead of Pettit paying IPC for the fuel sold, Pettit’s customers would pay IPC directly and IPC would then pay Pettit a commission on the fuel sold.

A little odd for a consignment arrangement? Sort of, but the outcome remains the same. We typically see consignment sales work like this: creditor consigns goods to debtor > debtor sells goods to customer > customer pays debtor for goods > debtor pays creditor after the sale. The title to the goods still passes after the sale of the goods, but the payment chain is slightly different.

The key here is the arrangement was classified as a true consignment.

The Issue Before the Court

At the time of the bankruptcy filing, Pettit had fuel on hand as well as some cash proceeds from customers who inadvertently paid Pettit instead of IPC. IPC claimed the fuel and cash proceeds in Pettit’s possession belonged to IPC, while the bankruptcy trustee argued the fuel and cash proceeds belonged to the bankruptcy estate.

Court’s Decision

First, the court needed to determine whether this consignment was governed by Article 9. Once the court deemed the consignment as true consignment and governed by UCC Article 9, it had to decide which party had priority in the fuel and cash proceeds.

Truthfully, the hard part was determining whether the consignment was within Article 9 – determining priority became easy: did the creditor (IPC) properly perfect its security interest? Nope – IPC didn’t file a UCC-1.

“Article 9 of the UCC governs the priority and perfection rules related to security interests in goods (which can include agricultural products), and the UCC ‘treats a consignment as a security interest for all practical purposes.’ Retention of title affects the types of remedies available to consignors (like IPC) in their efforts to recover goods after a default, but the Ninth Circuit explained: ‘title is irrelevant to whether IPC or the Trustee has a priority in the goods and proceeds.’ Ultimately, because the UCC treats Pettit (the consignee) as having an ‘ownership interest’ and IPC (the consignor) as having a ‘security interest’—and IPC (admittedly) never perfected that security interest—the Trustee prevailed.” –  Consignment, the UCC, and You – Protecting Your Goods and Their Proceeds, by Mirco Haag & Joseph Welch

Something to Think About During Your Commute

If you sell on consignment, are you properly perfecting a security interest? If you aren’t, why not? While this example was related to fuel, there are any number of sales situations where consignment applies. Remember our posts on the Sports Authority bankruptcy?

The fact is, Article 9 affords you an opportunity to take security. Yes, it is certainly possible that a bankruptcy court determines your consignment sale is not governed by Article 9, thus not needing a UCC – but why risk it?