The Uniform Commercial Code (UCC) is a massive set of laws in the United States regarding commercial dealings. Article 9 of the UCC deals specifically with secured transactions, which allow the lender to hold a security interest on the borrower’s property if the borrower defaults or files for bankruptcy.
So what does a business borrower need to know about the UCC? Here are some basics of how UCC filings are searched, how they are filed, and some practical advice for getting one prepared.
Puts the Public on Notice
A UCC financing statement, often called a UCC1, is usually filed with the Secretary of State. It puts the public on notice about what collateral the borrower is pledging. That could include things like inventory, machinery, equipment, receivables, stocks, bonds.
An example. If a borrower later goes to a second lender and offers collateral the borrower already pledged to the first lender, the second lender’s due diligence check of the public records will discover that the collateral has already been pledged. The second lender will either decline to fund the loan or will accept the risk, depending on the collateral’s value.
There is a catch: Article 9 only works in the event of default. For the lender to receive the protection of Article 9, the financing statement must be drafted properly and be filed in the appropriate location. This becomes particularly important when the borrower files for bankruptcy.
Once the borrower files bankruptcy, a trustee is appointed who assumes control over the borrower’s remaining assets. The trustee sells all of the borrower’s remaining assets and distributes the proceeds to the various creditors according to a priority, with the first in line being any secured lenders that filed properly. For this reason, the UCC1 is important to protect them from third parties (such as the trustee).
How to Draft and Submit a UCC Filing
The foremost thing you need to keep in mind is that the name of the debtor needs to be the EXACT legal name. It must match the way it appears on the formation document or charter or state office where the debtor was formed.
In the US, generally you file in the state where the company was formed, though there are exceptions. In many other countries, filing is done where the collateral is located.
Even if the business was founded outside the US, a UCC could be filed on collateral in the US. For loans that have that component, it’s the job of the lender to see whether they’ll look at the laws of the country where the debtor is formed and consider provisions like Article 9.
If the debtor is a registered organization like a corporation or LLC, then it is filed against in its state of formation. If the debtor is not a registered organization, then it is filed against in the location of its chief executive office.
If the debtor is a business entity formed outside the US, then it is not registered under Article 9.
Example 1: If the debtor is a company formed in France, with its main executive office in New York, the statement would be filed against New York. Some filers, for added protection, also file against Washington DC.
Example 2: A corporation formed in France with chief executive offices in France. If France does not have any type of UCC system, it is filed against in Washington, DC.
Example 3: A corporation formed in Canada, say, which is headquartered in Toronto, with assets in New York and California, will be filed in Canada. That is where the head office is, and Canada has a UCC-type law (PPSA). Again, you could also file in DC. Consider filing in New York and California since Canada filings are done where collateral is, so have both bases covered.
The UCC1 is good for five years in every US state except Wyoming, where it’s ten years. If there is still a debt at the end of the period, it can be continued or else it lapses.
Timing Is Everything
The UCC is a ”notice filing system.” Every single filing is stamped and receives a “date” “time” and “number.” If I file before you, and we are both securing the same collateral, my filing gets priority. However, if I file before you but use the wrong debtor name or file in the wrong office, then my filing does not work and I have no priority.
Let’s say a borrower takes out a business loan at two different banks. Each bank accepts a pledge of the borrower’s receivables and business equipment as collateral. Now let’s say that the borrower defaults. Whichever bank filed first has priority over the other. That is why timing is everything when it comes to filing.
Before a lender will decide to lend the borrower money and file their own UCC, they will first search the public record and learn about existing liens. That is, which assets have already been used as collateral. They also research any earlier secured loans the borrower took on.
To make sure nothing’s already been pledged, the due diligence search looks for previously-filed UCC statements, liens against those assets from the state or the federal government, liens from judgments, and pending or past lawsuits or bankruptcy cases.
Don’t just take the borrower’s word that you’re the only one pledging that collateral. Their word may be inaccurate, or they may have left something off, so don’t forget to double check with a due diligence search of the public record.
Searching for and filing UCCs is often a complicated and difficult process in the United States. Even without worrying about timing and name, it is often not easy to figure out where to file, especially when there is collateral in multiple states and countries.
Disclaimer: The information above is designed for general information only, and is not legal advice.
About Delancey Street
Delancey Street is a premier, and award winning, business debt settlement company that helps business owners nationwide. Our goal is simple: help you escape debt in a safe and legal manner. Based out of New York, we can help in 49 of 50 states. We tell you how it is; because your business and future is on the line.
