It usually starts with a phone call. One of your customers, holding a letter from a lender, wants to know what is going on. That customer is the account debtor for the borrower, and the letter asks it to start paying the lender directly. If you are behind on a secured business loan or advance, you probably already know who sent it.
A UCC lien notice is a written notification from a secured lender to one of the borrower’s customers - called the account debtor - requiring the account debtor to make payments directly to the secured lender. The letters are based on rights under Article 9 of the Uniform Commercial Code, which every state has adopted. Some states have made minor changes, though, and the section numbers may vary. Check your state’s version. The section numbers used here follow New York’s version.
The lender is now proceeding to collect payments directly from customers. The lender can do so under the Uniform Commercial Code Section 9-607, which gives a lender who has a perfected lien on accounts receivable the right to collect those receivables directly, with or without the borrower’s cooperation. The lender sends written notice to your customers (account debtors) telling them to pay the lender directly. After receiving that notice, the customer is legally required to pay the lender. If the customer pays you instead, it still remains responsible for paying the lender. In short, the customer can get stuck paying the same invoice twice.
The letter usually does not come out of nowhere. Typically, before a UCC notice gets sent out, the lender will issue the borrower a notice of default and opportunity to cure, usually about 10 days or whatever the cure period in the loan agreement. If that stage has already been reached, you are already in trouble. In addition to collecting receivables, the lender can also draw directly from a deposit account on which it has a perfected lien.
Contact the Customers Immediately
So what do you do? Contact the customers immediately. Explain the law clearly and calmly. Give them information, be transparent. Don’t leave them in the dark. Don’t shame or blame them. It’s not their fault. And whatever you do, do not tell them to ignore the letter and keep paying you. That would be asking your customer to double-pay. If it pays you instead, it does not escape its obligation; it still has to pay the lender. Ask them to work with you while you sort things out.
Then turn to the lender. If you’re behind, there’s likely a very short window to catch up on past-due amounts. At this point, you can still try to negotiate a settlement instead of waiting for the lender to move to the next step. This is where a business debt settlement company like Delancey Street comes in: our senior advisors negotiate with funders and lenders for less than the full balance owed, and we do not sell you another loan.
The Lender’s Options
It also helps to know what the next steps look like if nothing changes, because the lender’s options do not stop at your receivables. Under Section 9-609, a lender can ask the borrower to assemble its collateral and the lender can then take possession, so long as the borrower cooperates. Under Section 9-610, it can take the collateral and sell it. The sale must be commercially reasonable. Ten days’ notice after default is commercially reasonable in a non-consumer deal. (Section 9-612.) It may sell at public auction or privately; a private sale is often defended with a third-party valuation.
A commercially reasonable sale can take roughly 100 days if the borrower cooperates: a 10-day cure, 60 days to market and auction, and 30 days for a buyer to close and remove the collateral. A private sale may be quicker. A lender can also seek a court order to turn over the collateral, and the sheriff may repossess it. Court procedures can be slow, costly, and vary by state. They are not governed by the UCC.
How Much Room You Have
Why does that matter? Because the timeline tells you how much room you have. Pull out your loan documents. Is there a cure period, and how long is it? If you are still within it, there’s time to act before matters escalate. How much have you missed? What can you realistically bring forward to stay current? If you’re on top of things, there might still be time to negotiate a deal.
You should consult with an experienced business finance attorney. We are not a law firm; when litigation or bankruptcy is the right call, we refer owners to a vetted independent attorney.
This letter is a serious escalation. While some lenders may be lenient, relying on goodwill is risky. A UCC notice is not a final sentence. You still have choices. A first consultation with Delancey Street is free and confidential, and if a cheaper option exists, we will say so on the first call.
