Service Area: UCC Services

Close Call with Terminated UCC Filing

Posted on March 22, 2019 by - In Other Commercial Credit News

Close Call with Terminated UCC Filing

In a recent bankruptcy case, one creditor squeaked by and maintained its secured position despite accidentally terminating its UCC filing.

Accidental UCC Termination

This tale may sound familiar. It was just a few years ago JP Morgan Chase Bank (JP Morgan) made a similar mistake, which cost it over $1.5 billion. Fortunately in TRINITY 83 DEVELOPMENT, LLC v. COLFIN MIDWEST FUNDING, LLC, Court of Appeals, 7th Circuit 2019, the creditor caught the termination error before it was too late!

Here’s a quick look at the key parties and key dates of the case:

The Parties

– Creditor: ColFin Midwest Funding, LLC (ColFin)

– Debtor: Trinity 83 Development, LLC (Trinity)

Approximate Timeline of Events

– 2006 Trinity borrows $2 million from a bank

– 2011 the bank sells the loan to ColFin

– 2013 the bank recorded a UCC-3, terminating the security

– 2015 ColFin discovers the UCC was terminated by bank in error and records a document cancelling the termination

– 2016 Trinity filed for bankruptcy protection

…And 2019…

During the bankruptcy proceedings, Trinity argued ColFin’s security interest was not perfected, because the UCC filing had been terminated. Unsurprisingly, Trinity backed their argument with the JP Morgan case. The argument didn’t seem unreasonable, after all, there is a clear parallel between JP Morgan and ColFin = terminated UCC filing.

However, the court didn’t agree with Trinity’s argument. Unlike JP Morgan, ColFin caught the termination mistake and rectified the mistake prior to Trinity filing for bankruptcy protection. The law firm Thompson Coburn LLP represented ColFin during these proceedings and summarized in a recent article:

“Here, the lender caught the mistake prior to the bankruptcy filing, unlike the General Motors case, and corrected the mistake. Since ColFin corrected the error prior to the filing date of Trinity 83’ s bankruptcy case… ColFin maintained its first position lien when Trinity 83 went into bankruptcy.”

In addition to correcting the mistake before the bankruptcy filing, no other creditors had filed a UCC during the time between the filing of the termination and the correction.

Did You Know?

Although Article 9 is relatively the same throughout the country, there are nuances in some states. In this case, for example, Illinois law offers an additional protection to the lender. According to the court opinion, “Illinois treats a mistaken release of a mortgage as ineffective between the mortgagor and mortgagee.”

Parting advice from Thompson Coburn LLP, “If a secured creditor mistakenly releases its lien, it should correct the error as soon as possible. If it is diligent, the secured creditor may not be harmed by the inadvertent release, even if the borrower files for bankruptcy.”

Top 5 Reasons You Should File UCCs

Posted on March 11, 2019 by - UCC Financing Statements

Top 5 Reasons You Should File UCCs

If reducing your DSO, mitigating your risk and improving working capital aren’t reason enough to file UCCs, I’ve compiled a list of a few more reasons.

Five more reasons!

#1. Sell More!

A properly perfected security interest gives you the extra security needed to sell to marginal accounts that were previously off limits.

The marginal accounts may have included those potential customers that came to you with little to no credit history, your existing customers who are teetering at the edge of a maxed-out credit line, and even the accounts where you couldn’t quite meet the same price as a competitor.

Sometimes it’s not about beating your competitors in price; it’s quite possible your competitor wouldn’t extend enough credit to this entity — if you can extend the credit, you can get the business. File that UCC!

#2. Fewer Write Offs!

It’s simple. Fewer write offs lower the costs associated with your product.

These lower costs mean you can sell your product at a lower price while maintaining effective profit margins.

As you’d imagine, selling at a lower price makes your company more competitive.

If you are more competitive, you have an opportunity to obtain a larger share of the market. Do the math: more sales + stable profit margins = life is good!

#3. Everyone’s Doing It!

Growing up I used to whine “But Mom, everyone else is!” And she would respond with the ever popular “If everyone jumped off a bridge, would you do it too?”

Well, I probably won’t jump off any bridges, but I absolutely would file UCCs.

UCC filings are a common business practice; just as common as completing a credit application. Think about it, your mortgage, your car loan, an equity line of credit, all have security language written in to the documents you sign — banks won’t just throw money at you without security.

#4. Low Costs!

The overall UCC process is generally quite economical.

The fees (except for a few states) are low and the long-term maintenance doesn’t require significant monetary investment.

For 10 cents per day or less, you can secure collateral in agreement with your customer’s promise to pay.

What’s better than low fees for you? No fees to your customer! Filing a UCC doesn’t cost your customer a thing and contrary to popular belief, a UCC does not hurt their credit.

#5. BECAUSE YOU CAN!

It may seem like I’m shouting and that’s because I am: FILE UCCS BECAUSE IT IS YOUR RIGHT TO BE A SECURED CREDITOR!

OK, no more shouting. I just wanted to be sure you heard me: as a creditor, you have the right to take precautions to protect your interests.

In the unlikely event that your customer files for bankruptcy protection or defaults on the terms within your agreement, a properly perfected security interest elevates your company to a secured creditor position.

I needed a #6 so I could say:

#6. Don’t Be Skeptical!

Let’s look at the facts:

  • Fact: In bankruptcy, secured creditors have priority and are paid before unsecured creditors.
  • Fact: In the event of default, a properly perfected security interest provides the right to repossess.
  • Fact: UCCs will not hurt your sales opportunities, in fact, UCCs promote sales opportunities by providing security when selling to marginal accounts.
  • Fact: UCCs will not impair your customer’s credit rating.
  • Fact: UCCs are a common business practice.

Time for Preparation, There’s No Rest Post-Recession

Posted on February 22, 2019 by - Credit Risk Management, In Other Commercial Credit News

Use this Time as Preparation, There’s No Rest Post-Recession!

FMI has released its 2019 U.S. and Canada Construction Outlooks. The report contains a considerable amount of valuable information, but one topic is forefront: be prepared for the next recession. Today I’ll touch on steps outlined by FMI as well as NCS best practices you can implement to ensure you are prepared for the next economic downturn.

Awesome T-Shirt: “Keep Calm, Stay Focused and Get Ahead of the Next Downturn”

I’m going to emboss it & stick it to my computer as a reminder! The introduction to FMI’s outlook article is titled “Keep Calm, Stay Focused and Get Ahead of the Next Downturn.” Yes, I think it would be a great t-shirt, but more importantly, it’s a reminder that you have an opportunity to ensure you have the working capital and business model to make it through the next downturn.

What did we learn during the Great Recession? Hopefully you learned the value in proactively securing receivables! During the Great Recession, you likely experienced supply chain disruptions, slow pay/no pay customers, depleted liquidity or cash flow issues, and even customer insolvency. What have you done to prevent these experiences going forward?

FMI recommends addressing these 7 hurdles now:

1. Evaluate underperforming departments and employees. If you have been dragging your feet on eliminating a low performing division or a poor performing employee, now is the time to have the conversations. You don’t want this hanging over the business during tough economic times. FMI says, “During the last recession, these types of issues plagued E&C companies for far too long. Leadership that is slow to react and respond can make or break a company.”

2. Be selective in new projects. Select projects within your core competencies. FMI has a saying: “Contractors don’t starve to death; they die from gluttony. They get too much work, too fast, with inadequate resources, and then they get into financial trouble and run out of cash.”

3. Look at the big picture and have a strategy in place. “Living in a reactive mode and not being proactive and taking charge of shaping your own destiny and future can become your biggest detriments.”

I will come back to 4 & 5. Let’s jump to 6 & 7: get your sales game on!

6. & 7. Strengthen existing client relationships, build new relationships, and get your sales folks prepared.

“…educate your people on “how to behave in a recession”—estimators with project selection, field managers with scope management, PMs with cash management, etc. Client interaction across all company levels will increase your presence with clients, give you an inside track and improve collaboration among future leaders.”

4. Know your costs and plan accordingly. “Understanding the total costs for each project and how these costs break down is the first step in knowing where and how you can improve profit margins.”

5. Cash is King! “Conduct a risk analysis on all existing projects slated to complete more than six months out. Identify high-risk projects and how each will be staffed to take to project completion. Leverage and utilize a multiskilled workforce: In-house, self-perform capabilities can mean a difference on margins, time and manpower, while all-around adaptability can make a firm indispensable to satisfied clients.”

And this is where the NCS best practice fits in: implement a UCC and Mechanic’s Lien process.

Supply goods? Renting equipment?

File a UCC, even if it’s “a good, longtime customer” because absolutely no one is safe from insolvency. A properly perfected security interest affords you crucial leverage if your customer defaults, plus, it puts you at the front of the payment line in the event of bankruptcy.

Furnishing to a construction project?

Serve a preliminary notice. Every. Time. The notice is critical when pursuing a mechanic’s lien or bond claim. Many states require the service of a notice in order to proceed with a lien or bond claim. If you fail to serve a notice and you can’t file a lien, you have lost the leverage the law affords – is that a risk you want to take?

Ensuring the process is in place now helps to normalize the process for your internal customers (sales & credit) and your external customers. This is big: NORMALIZE.

UCCs and mechanic’s liens are not to be feared. It is a business practice used by millions and it can be vital to your working capital and subsequent business survival.

Implementing the process now, when economic times are great, helps put a positive spin on UCCs and mechanic’s liens.

It gives you an opportunity to demonstrate to your customers that there is no harm in either process, because everyone is getting paid & happy. Then, when the next downturn comes around, you will spend less time scrambling to secure these rights and battling upset customers – “Why did you send me this prelien notice?!?!” – and more time increasing your sales and, in turn, your working capital.

There’s No Ice Cream in Bankruptcy. Wait, What?!

Posted on February 18, 2019 by - Credit Risk Management, UCC Financing Statements

There’s No Ice Cream in Bankruptcy. Wait, What?!

In bankruptcy, we frequently hear terms like preference payment, claw back, and new value. What do these terms mean? Further, what do these terms have to do with ice cream?

Let me tell you a little story about an ice cream truck and its weekly deliveries to a now insolvent grocery store.

The Ice Cream Truck – Music to My Ears!

Blue Bell Creameries, Inc. (Blue Bell) supplies ice cream and related items to a variety of businesses, including a grocery store chain, Bruno’s Supermarkets, LLC (Bruno’s). Each week, Blue Bell would deliver ice cream to Bruno’s and twice a week Bruno’s would remit payment to Blue Bell.

Soon, Bruno’s payments dropped from twice a week to once a week. Blue Bell continued its routine deliveries, after all, Bruno’s wasn’t paying twice a week, but Bruno’s was still paying within terms. Then Blue Bell began hearing rumors about Bruno’s cash flow problems, even the possibility that Bruno’s was preparing for bankruptcy. Technically, Blue Bell was still receiving timely payment from Bruno’s — what should Blue Bell do?

Blue Bell decided to continue supplying to Bruno’s, all the way to the date of bankruptcy. Soon after Bruno’s bankruptcy filing, Blue Bell found itself scooped into a lawsuit: the bankruptcy trustee wanted to recover ALL payments Blue Bell received from Bruno’s during the 90 days prior to the bankruptcy filing, to the tune of over $500,000.

Ice Cream Break

This period, the 90 days prior to the date of the bankruptcy filing, is also known as the preference period. Payments made during the preference period are often referred to as preference payments. The court opinion defines preference as

“… as defined by § 547(b), a preference occurs when an insolvent debtor transfers money to pay a creditor for a prior debt within 90 days before filing a bankruptcy petition.”

Claw backs and Happy Tracks. One of these is a term for the bankruptcy trustee obtaining preference payments from creditors and the other is a delicious ice cream treat. You guessed it, the act of obtaining these payments is known as claw back. “The trustee will claw back payments from the creditor.” A defense against preference or to alleviate claw backs? New value.

bankruptcy and new value

Back to Blue Bell

Blue Bell recognized and admitted based on 547(b) of the bankruptcy code the trustee could claw back the money Bruno’s paid Blue Bell. (It’s the “ordinary course of business” defense)

But this story wouldn’t be as sweet if it stopped now. Blue Bell argued the payments it received from Bruno’s provided “new value” which is in line with 547(c).

I like the bankruptcy court’s explanation of new value for this case

“… lots of ice cream products that [Bruno’s] was able to sell to its customer in its efforts to remain financially afloat.”

If the court agreed with the new value defense, the trustee couldn’t go after those payments. But the court didn’t agree, stating the new value defense requires the new value to remain unpaid.

There is a confusion related to the idea of remaining unpaid. I’m not going to create a brain freeze by explaining too much about it, but here’s a high level look:

Essentially, Blue Bell wouldn’t have been permitted to use the new value defense because Bruno’s actually paid them for the goods Bruno’s received from Blue Bell — Blue Bell could have used the new value defense if it continued supplying to Bruno’s and Bruno’s didn’t pay them.

Fortunately for Blue Bell, the Court of Appeals determined Blue Bell could use the new value defense, despite payments received from Bruno’s. Why?

In part, it’s because the “one of the ‘principal policy objectives underlying the preference provisions of the Bankruptcy Code’ is ‘to encourage creditors to continue extending credit to financially troubled entities while discouraging a panic-stricken race to the courthouse.’” Despite the rumors, and subsequent realities of Bruno’s fiscal situation, Blue Bell continued to supply its delicious treats.

You can view the Court of Appeals case here: Kaye v. Blue Bell Creameries, Inc.

UCC the Proverbial Sundae Topper

Could a properly perfected security interest have saved Blue Bell from this melty mess? Quite possibly. A properly perfected UCC provides an additional defense against preference payments.

We’ve previously discussed the higher risks of supplying to foodservice, beverage and hospitality industries. This is no different. Never assume, no matter how large your customer is, your customer is immune to insolvency. File UCCs and ensure you are in the best possible position to get paid.

Approve More Small Businesses for Larger Sales

Posted on February 11, 2019 by - Credit Risk Management

Approve More Small Businesses for Larger Sales

By: Pam Ogden President, Business Credit Reports

As originally published in the Credit Research Foundation 3Q 2018 CRF News

Small businesses are a critical component of the American economic engine, contributing about half of the gross domestic product of the US. Companies that undervalue this all-important segment are leaving money on the table.

In any credit deal, you want to extend as much credit as possible without exceeding acceptable risk levels to generate the biggest sales possible. This principle is not limited to only large, well- established companies with dozens or hundreds of tradelines. The same applies to smaller, growing companies that may have more limited credit records. The challenge is in collecting enough information on the smaller company to establish a certain level of comfort on the risk front. The more information, the better, of course.

Smaller Companies Have Thinner Credit Records

Companies that issue credit are not required to report their payment data to all of the credit bureaus. In fact, they are generally not required to report payment activity at all. The credit bureaus all have data acquisition teams whose sole job is to get lenders, manufacturers, distributors, utilities and other companies to send them their account data to build and update the credit bureau’s database.

So, if there is nothing forcing companies to report their payment data to the credit bureaus, what is the result? We get disparate credit records across the various credit bureaus. Each credit bureau has a different perspective on a company. Nobody has the complete picture. This problem is amplified in the case of a small business that doesn’t have many credit relationships to begin with. Each credit relationship makes up a greater share of the complete credit picture. Missing even one or two of these can dramatically change the risk profile of a small company.

Credit managers know that less data on a prospective customer frequently means more risk. Credit policies are written to reduce credit offered when there is less information on a company. This puts smaller companies at a disadvantage in terms of obtaining the credit that they need to grow their business. It also means the company issuing credit to the small business is granting less credit, thereby limiting the revenue opportunity.

Combining Multiple Credit Data Sources is the Key

The problem of incomplete credit records on small businesses is solved by leveraging multiple credit bureaus in the credit granting process. If each credit bureau has a piece of the complete picture, putting them all together delivers a full 360-degree view of the company. With three major credit bureaus and several others with strength in particular industries, the only way to get a complete credit picture of a small company is to pull them together.

Many credit managers employ a first-pull/second-pull practice whereby they check one credit bureau first, and then cascade to additional bureaus for additional information as needed. The drawback with this approach is you are paying for multiple reports to multiple providers and those reports are separate reports. Also, a hit on the first pull may result in a credit approval without proceeding to the second pull, which may indicate a higher credit limit.

A more efficient and economical approach is to utilize a business credit information provider that combines the data and analytics from multiple credit bureaus into one report. This means only one report needs to be pulled by the credit analyst and only one credit vendor relationship needs to be maintained by the credit manager. Also, the total price of a blended business credit report is frequently lower than the total price of multiple credit reports.

Higher Hit Rates

Often, small businesses are declined for credit because no record could be found in the queried database. This is a lost opportunity for the small business applicant and could also be a lost opportunity for the company that is considering issuing credit.

Pulling the data of multiple business credit bureaus into one report results in higher hit rates on small businesses. While one credit bureau may not have any information on a small company, another one might. Checking the databases of two, three or four credit bureaus increases the likelihood of finding a credit record on a small company.

While it may not be practical to query two, three or four credit bureaus separately, using a credit information provider or tool that connects to all of the bureaus gets the job done in one search. This results in higher hit rates and more approvals.

Bigger Sales

Bigger sales require higher credit limits. Higher credit limits require more information on a company that supports the case to grant credit. By pulling together data from multiple credit bureaus, you build a thicker, more complete credit record. With a more complete credit record, credit managers are able to approve higher credit lines which accommodate larger sales.

Credit managers that are able to approve larger credit lines without increasing risk are heroes to their companies. Sales people are happy because Credit granted them room to negotiate a large deal. Management is happy because more revenue is flowing in.

More Prospects for Growth

Today’s small businesses are tomorrow’s medium and large companies. Once a budding company has established a relationship with a vendor, it’s unlikely they will change as long as the provider continues to deliver as needed.

Establishing relationships with companies early in their life cycle enables suppliers to grow their own business and increases the prospects of a long, mutually-beneficial relationship.

In fact, one of the main reasons growing companies switch providers is because another provider is willing to grant more credit than the incumbent. Using a multi-bureau credit solution or tool can establish the relationship on the right foot with larger credit lines and keep it that way as credit lines are extended over the life of the relationship.

More Information Means Less Risk

We’ve covered how pulling together data from multiple credit bureaus into one solution increases revenue, but we’d be remiss if we didn’t also mention the fact that having more information on small businesses helps mitigate risk.

Because the credit bureaus frequently don’t have the full picture on small businesses, the credit bureau used in a single-bureau model may paint a rosy picture of a company while missing a key piece of derogatory information. Pulling together multiple credit bureaus’ data into one report reduces the chances of missing a key negative factor.

The Key Takeaway

Don’t leave money on the table as a result of no-hits and thin credit records on small businesses! Access credit reports that pull all the credit bureaus together into one search and one report for stronger hit rates and a more complete credit picture. With a comprehensive picture, you can issue higher credit limits and minimize your risk.

Would you like access to comprehensive credit reports without the hassle of contracts?

Arbitration, Mediation, Lawsuit – What’s the Difference?

Posted on January 18, 2019 by - Credit Risk Management, In Other Commercial Credit News

Arbitration, Mediation, Lawsuit – What’s the Difference?

Over the holiday break, I spent some time reading articles I’ve (shamefully) had bookmarked for way too long. One of these articles reviewed the pros & cons of arbitration in construction disputes, although for me, it better explained the similarities and differences of arbitration and a lawsuit.

Construction Arbitration: The Pros and Cons by Jason Strickland of Ward and Smith, P.A.

Arbitration vs. Mediation vs. Lawsuit

I don’t think I have ever confused a lawsuit with arbitration or mediation, but I have certainly confused arbitration with mediation. Here are key features explained by Strickland:

“Mediation is a settlement conference in which the parties meet (typically in person) and use a third-party neutral to act as a settlement facilitator.  The third-party neutral is called the mediator.”

It’s important to note, the mediator can’t force a settlement – which I didn’t know. I assumed the mediator has the same powers that an arbitrator has.

“A lawsuit is conducted in a court of law and usually is initiated by a plaintiff filing a complaint, in which the plaintiff will ask for some form of relief from the defendant.”

In the NCS world, a lawsuit is often referred to as “suit to enforce…” a lien or bond claim.

Now, this explanation of arbitration is new to me, in part:

“Arbitration is essentially a lawsuit but without court involvement.”

Wow. “Arbitration is essentially a lawsuit but without court involvement.” Yes! That’s a great explanation. Why? Because arbitration is binding, just like a legal decision.

Mind. Blown.

“The parties agree… to submit their dispute to arbitration rather than to pursue a lawsuit in court.  The parties’ agreement gives the arbitrator the power to issue a decision as to the parties’ rights and obligations, and such decision will be legally binding on all parties. Thus, arbitration is very different from mediation because the third-party neutral provides a legally binding decision.  However, arbitration is not mutually exclusive with mediation.  In many cases, parties will have a dispute resolution provision in their contract that will allow, or require, the parties to mediate first, and if the mediation is unsuccessful, to then submit their dispute to arbitration.” – Jason Strickland

The Differences (Pros & Cons) Between Arbitration and Lawsuits

Strickland reviews several differences between arbitration and a lawsuit. Here’s a quick table to break down Strickland’s points.

So, who wins? Arbitration or Lawsuit?

Obviously, it will depend on your circumstances and contractual language, but both options have their pros & cons. A key benefit in arbitration is the efficiency; with a less formal environment and the rarity of appeal, it can prevent a case from dragging on. On the flip side, construction disputes typically involve a myriad of parties, which can be easier to accommodate within a court/lawsuit setting.

Blanket UCC Filings & Your Frequently Asked Questions

Posted on January 14, 2019 by - UCC Financing Statements

Blanket UCC Filings & Your Frequently Asked Questions

What is a Blanket UCC Filing?

A Blanket UCC filing is a security interest in all the assets of your customer on a non-priority basis, eliminating potential conflict with your customer’s primary lender. The priority or payout in a bankruptcy is determined by the filing date (first in time, first in right). The UCC filing elevates the status of your accounts receivable to that of a secured creditor.

Blanket filings are applicable when providing financing, selling services, or in situations when your customer “consumes” or otherwise does not stock your goods.

Why Choose a Blanket Filing?

Let’s hear from expert, Cindy Bordelon, NCS’ UCC Services Manager!

“When determining the type of UCC to be filed, you first must define your goal.  Do you want to take a priority interest in your goods and be able to repossess? Or, would you rather take a security interest in all of the customer

’s assets?  If your goal is “all assets,” clearly identify the collateral and have your customer grant that interest by executing a Security Agreement.  With the Security Agreement signed, you can proceed with your blanket filing, knowing your position is the day and time the UCC filing is recorded. As a best practice, I recommend always conducting a UCC search before filing. This search will tell you who may be ahead of you and what your potential position may be, helping you to make a good credit decision.”

Is there a Filing Deadline?

Much like other credit remedies, there are “deadlines” for filing a timely Financing Statement. If you are filing a Blanket UCC, the filing should be recorded prior to lending or shipping.

What if My Customer Defaults or Files for Bankruptcy Protection?

If your customer has defaulted on payment(s) and you have filed a Blanket UCC, you could place the outstanding debt with a collection agency or file suit against your debtor.

  • If your customer filed Chapter 7, file a secured proof of claim.
  • If your customer filed Chapter 11, file a secured proof of claim and monitor for distribution.

What If My Customer Sells Its Business?

Companies sell businesses all the time. The primary reason a company sells its business is because it is in fiscal distress, and selling the business is a means of escaping the debt. If they can escape the debt, how can a UCC possibly help? Your UCC filing acts as a lien on the business; therefore, before title passes from one party to another, the lien should be acknowledged and either settled or renegotiated.

Who Wants to Hear a Story?

Here’s a story of a new restaurateur, whose creditors secured via Blanket Filings, and the fate of the restaurateur’s secured & unsecured creditors in a Chapter 7 bankruptcy.

Chef Charles is going to start a restaurant. He’s worked in the restaurant industry his entire working life and thinks “OK, I’m pretty good at this. I know how to run a restaurant, and how to make foods that are delicious and attractive, plus I can create an environment where people will want to dine.”

Chef Charles creates his business plan and determines he needs start-up capital, so he goes to the bank with his business plan and a request for $20,000. The bank reviews his plan and decides to lend the $20,000 to Chef Charles, and the bank perfects their security interest.

Chef Charles is ready to start. Various vendors will solicit Chef Charles regarding different materials and services he may need, and each vendor that successfully sells their goods to Chef Charles will need to decide whether they are going to sell on open credit terms, via credit card or cash in advance. If the vendor decides to sell on open terms, the vendor will need to further decide whether they will sell on a secured or unsecured basis.

Chef Charles has selected his vendors. Of his numerous vendors, four of them have taken a security interest and filed a UCC.

Secured Creditor 1: $10,000

Secured Creditor 2: $10,000

Secured Creditor 3: $5,000

Secured Creditor 4: $10,000

We’ll assume the remaining vendors have opted to sell on unsecured open terms.

Business is underway! At any given time, Chef Charles has $61,000 in assets.

Unfortunately, 3 years later Chef Charles becomes a statistic, when his business fails, and he files for Chapter 7 bankruptcy protection.

What happens to his creditors? It’s simple, Chef Charles’s assets will be liquidated and creditors will be paid by priority. Creditor priority is based on first in time, first in right.

The bankruptcy trustee is going to liquidate Chef Charles’s $61,000 in assets and begin paying his creditors.

The bank was the first party to lend and take a secured interest, so they will be the first paid, then the other vendors who filed UCCs will be paid in the order in which they secured their interest.

Once the secured creditors have been paid, there is $6,000 remaining, and that $6,000 will be disbursed on a pro-rata basis to all general unsecured creditors.

In this case, Chef Charles has 100 unsecured creditors that were each owed $1,000. Each of these creditors will receive $60 (based on the pro-rata disbursement) or 6 cents on the dollar

More questions on Blanket Filings, contact us!

UCCs Have Priority Over 503(b)(9) Claims

Posted on December 17, 2018 by - Credit Risk Management, UCC Financing Statements

503(b)(9) Claims & Consignment Agreements are No Match for Properly Perfected UCCs

Businesses file for bankruptcy protection; it is an unfortunate and uncontrollable reality. Considering the likelihood of debtor default, some creditors take unnecessary and avoidable risks relying on reactive recovery. Secured creditors, however, wisely mitigate these risks through the proactive protection afforded to creditors under Article 9 of the Uniform Commercial Code (UCC).

Proactive Takes Priority

It’s true. In bankruptcy, a properly perfected security interest, in compliance with UCC Article 9, has priority over unsecured creditors, creditors with administrative claims, 503(b)(9) claims, and even consignment agreements. If you attended CRF’s Fall Forum, the Bankruptcy Judge Panel – Three Judges/One Verdict reinforced the priority UCC filings have over 503(b)(9) claims and consignment agreements.

The proof is in Sections 506 & 507 of the bankruptcy code. Section 506 defines what is considered a secured claim and Section 507 dictates the payout priority of claims.

Ultimately, the payout priority in a Chapter 11 filing is:

  1. Secured Creditors (e. creditors who have a perfected security interest)
  2. Administrative Expenses (e. costs associated with filing & processing the bankruptcy)
  3. Unsecured Creditors (e. creditors without a security interest)

Secured creditors are paid before all other claims, to the extent of the pledged collateral. After secured creditors have been paid, payments are made to creditors with administrative claims. The administrative claims may include costs associated with the management of the bankruptcy (i.e. attorneys), post-petition claims and 503(b)(9) claims. Among those paid last in a bankruptcy, if paid at all, are general unsecured creditors.

“Who Needs UCCs? We File 503(b)(9) Claims”

Yes, 503(b)(9) claims can be advantageous for an unsecured creditor. The bankruptcy code was amended in 2005 to include a new administrative claim: 503(b)(9). With the addition of 503(b)(9) claims, some creditors became complacent. The availability of a 503(b)(9) claim seemed to misleadingly allay creditor concerns, “Nah, I don’t need UCC filings. We just file a 503(b)(9) to get paid.” This somewhat false sense of security can easily cost creditors millions of dollars.

Under 503(b)(9), creditors may file a claim for “the value of any goods received by the debtor within the 20 days before the date of commencement of a case under this title in which the goods have been sold to the debtor in the ordinary course of such debtor’s business.”

As you can imagine, there are challenges with 503(b)(9) claims. High-profile cases are in heated debate over the definition of “received by” for the 20 day rule. And, of course, there is the question of what constitutes a “good” because services are not covered under these claims, and whether those goods have been sold in the ordinary course of business.

As an aside, a member of the panel at CRF’s Fall Forum, Judge Christopher S. Sontchi, Chief Judge of The United States Bankruptcy Court for the District of Delaware, has presided over several cases determining “goods” and “receipt.” Notably, in one case, Judge Sontchi looked to the UCC definition of goods and subsequently held that electricity is not a “good” under 503(b)(9).

To be clear, a UCC filing is not without potential obstacles. Your UCC must be properly perfected and there is a narrow margin for error. But, ensuring a UCC has been properly perfected is less cumbersome than proving goods are goods, defining date of receipt and verifying goods are sold during ordinary course of business.

We Sell on Consignment, No UCC Necessary

“Why would I file a UCC if I’m selling on consignment?” Because the law allows you to establish priority as a secured creditor! A simple consignment agreement is often viewed by the courts as a “secret lien” and may not be enough to protect you if your debtor defaults or files for bankruptcy protection, as there is no legal/recorded document identifying your title to the goods provided to the debtor.

If the debtor files for bankruptcy protection, the inventory the debtor has on hand is gathered up and sold off to pay creditors (secured creditors first and then the unsecured creditors). Without the UCC filing identifying you as a secured creditor and specifically identifying your goods, the inventory you supplied automatically becomes property of the estate.

Is a UCC required for consignment sales? No. Creditors are not required to file a UCC. In default or bankruptcy situations, when a creditor is selling on consignment, there is a chance the creditor could argue it is “commonly understood” the debtor engages in consignment sales. But making that argument seems shaky at best, not to mention inefficient – how much time would it take to successfully make that argument vs. filing the UCC and granting a security interest at the beginning of the relationship?

UCCs are Payment Priority

Please understand, UCCs are not a guarantee; there are no recovery guarantees in bankruptcy; after all, 100% of nothing is nothing. However, without a properly perfected UCC, you are just another unsecured creditor, wading in an overcrowded shallow pool for payment. With a properly perfected UCC, you are a payment priority.

Article was originally published in the Credit Research Foundation 4Q 2018 CRF News