If you’ve borrowed money for your business or used credit to purchase goods, then a lender may have filed something called a UCC-1 financing statement against you. Here’s what you need to know.
A UCC-1 form, or a UCC filing, is simply a notice that a lender has a claim on specific assets. By filling out a form, the lender simply establishes that they have a legal interest in certain property or inventory. To them, it means business as usual. But to you, it means a lot more.
This form registers the fact that the lender lent you money and holds a security interest in your stuff. Once it is filed, anyone who wants to see can know that the lender has a claim on the items listed. It’s a signal to the public that there’s a security interest on those assets. And it’s a safeguard for the lender if you default.
That record protects the lender against the creditors you already have and against the creditors you’ll have in the future. It’s a warning to other creditors that they have a right to the stuff. For the lender, this is part of their ‘getting paid back’ insurance.
Why go to that trouble? It’s true, courts can treat an unrecorded agreement as a “secret lien.” An unfiled deal can leave the creditor holding a secret lien that may not give it protection if the business defaults or declares bankruptcy. To protect themselves from ‘secret liens,’ lenders put their claim on file. Just another way for them to ‘get their money back’ and not get stuck holding the bag for someone else.
Here is where it matters to you. Say things go wrong: the business may default and you may file bankruptcy. If this happens, the court will gather up the inventory and sell it. The court will pay the secured creditors first, then the unsecured creditors. This is what a lender’s UCC-1 gives to them — they are ‘first in line’ if you go bankrupt. The hard truth is, there might not be enough money to pay everyone off. The possibility is that there might be nothing, nada, zip left once the secured creditors finish taking their share.
It doesn’t have to be a lender. A vendor can also file a UCC-1 on you. It serves the same purpose and function. It’s recorded notice that the vendor has a security interest in certain items. That includes suppliers who sell on consignment. Basically, the consignor (the supplier) remains the owner of the goods. The consignee (your company) possesses the goods and attempts to sell them to others. The consignor’s security interest attaches to the sale proceeds if the goods are sold. If the goods aren’t sold, you can just return them.
Consignment sits at the center of one well-known case. Sports Authority, for example, filed complaints against more than 150 of its own vendors shortly after it filed for bankruptcy (some sources say as many as 165). Essentially, their argument is that these vendors were selling them inventory on consignment, and because they failed to file a UCC-1 filing, that the claims are unsecured. If the judge agrees with this, then the inventory Sports Authority has in their possession would be thrown into the pool to be sold, and the secured lenders would be paid first. Had the vendors filed in time, their claim might have ‘jumped the line’ of other creditors. The DIP lenders, the lenders financing the bankruptcy, got a first lien interest in all the assets not already subject to a perfected security interest. The vendors who did not file a UCC-1 within 30 days of shipment may not have a first priority interest.
It’s not necessary to file a UCC. It’s an option. It’s something a creditor can do. It’s something a creditor would do in their own ‘self-interest.’ Picture how it looks from their side: “I’m in the ‘lending money’ business. I need to get my money back. To make sure I get my money back, I put my interest on file. I have ‘first dibs.’ I will not be the one holding the bag.”
A smart creditor will sign a security agreement clearly designating the inventory, look for other creditors who have liens and notify them, file UCC-1 in the correct jurisdiction(s), ideally before the business takes possession of the goods. The security agreement defines the property and gives the lender a claim on it. The UCC-1 financing statement creates a public record of that claim. All these things show that the lender or supplier is serious about getting paid back.
Check to See if There’s a UCC-1
For you, the practical lesson is to know where you stand. Not every creditor you owe has filed a UCC-1. Some have; some have not. In any case, there’s a big difference between secured and unsecured creditors. Check to see if there’s a UCC-1. Check to see which items they might have a right to. You should know who has filed, which of your inventory has been filed against, and which creditors have no filing at all. If you look for new credit, a careful lender will run the same search and see what is already on file. And if things do end in bankruptcy, keep this in mind. If there’s money, what a UCC-1 on file means is the lenders get paid first, before the suppliers who didn’t file a UCC-1. Basically, the UCC-1 lenders are ‘first in line’ creditors in your bankruptcy.
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.
