UCC-1 Lien
If you took a merchant cash advance (MCA), you may be surprised to learn that there is now a UCC-1 lien on your business property. The MCA said it was buying your future receivables, not giving you a loan. But the fact is that a purchase of accounts receivable is still governed by Article 9 of the Uniform Commercial Code, just as if the accounts had been pledged as collateral on a loan. Therefore factors and MCAs and others who buy accounts receivable must file a UCC-1 to perfect their ownership interest, and it doesn’t matter how the deal is structured.
Getting the debtor’s name right on the UCC-1 is critical. For an organization it needs to match the name in its charter or founding documents, including capitalization, spacing, and periods or commas. A DBA or trade name can never take the place of the legal name. Other specifics on the form are far less important, though, because this is a notice system, the form is usually a single page, and it can simply say “all assets.” If you want details, you are expected to call the debtor or the secured party of record. That secured party of record may be the lender itself or just an agent. Either way, it is the first line of contact and the one responsible for the secured party’s UCC obligations until it is replaced.
A filing is a public notice. When a UCC-1 has been filed against a certain category of assets - say, equipment or inventory - a later lender who tries to take a security interest against the same assets generally can only get a junior position, subject to that first filing. This ”first to file” rule acts as a check on subsequent lenders. Junior positions are not often economically secure.
MCAs have found a way around that. A UCC-1 by itself doesn’t give the first lien position in a business checking account. For that you need control of the account. And the UCC generally removes liens from the money you withdraw from the account. So an MCA can fund a business even after it has already pledged all its assets to another lender, and then pay itself back by automatic withdrawals from the checking account. The money comes out free and clear of any liens, while the other lender is left with a collateral base that is weaker than it was and a business whose primary checking account is always being drained of working capital.
If that describes your account, this is where we come in. At Delancey Street, our senior advisors negotiate with funders and lenders for less than the full amount owed. We do not sell another loan.
Secured Parties Who Want to Remain Anonymous
UCC-1 filings are public, and that can be a problem. Some MCAs have used their competitors’ filings to determine their competitors’ customers. In fact, if one factoring company is listed as the secured party in 50 UCC-1 filings around the country, then those 50 businesses are essentially a public client list. And then the MCAs start marketing to those businesses with different financial products.
Because factors and other secured lenders are trying to keep competitors from finding out where to start poaching their clients, they have begun hiding behind DBAs and the name of their own representative on UCC-1 filings. The UCC lets a secured party, rather than naming itself, name a representative, and the secured party’s relationship to that representative does not have to be disclosed on the form. Now, corporate service providers act as representative for secured parties who want to remain anonymous. So if you run a business search for a lien against your company, you might find a name you have never heard of.
In one real case, the company discovered several blanket UCC-1 filings against all of its assets. The company’s officers had no knowledge of the party claiming the liens. That party turned out to be a mere representative for a secured party that wanted to stay anonymous. When the company called, the representative would not identify the lender and would not comment on the debt at first. In fact, the company was directed to fill out an online request form and communicate with the representative through a portal. It was then the secured party’s prerogative whether or not to contact the company.
Pre-filing a UCC-1 is an accepted and widely used practice. Once a deal doesn’t close, the prefiled UCC-1 is normally terminated. But sometimes, someone forgets to release it. Since there was no funding, there was no obligation, and therefore no security interest. But the blanket lien lingers as a long-term blemish. That is what had happened in the case above, and it took the threat of litigation and weeks, and a great deal of time and money, just to find out who filed it and get it released.
The Right to Request an Accounting
The UCC gives you the right to request an accounting from a secured party, and the secured party is supposed to do so within 14 days. That’s the rule: it applies to a secured party, not a buyer of accounts. Factors and MCAs like to claim they’re buyers, not creditors, but a recourse factor or MCA will have a hard time arguing it’s really a buyer. Deciding if a transaction is a true sale or a disguised loan typically involves a complicated analysis. Some MCAs are likely lenders, and others are not.
What happens if there is a lien on the business from a name you don’t recognize, or a funder won’t respond when you ask for an accounting? Sometimes the question turns legal very quickly. It is important to understand that we are not a law firm. If litigation is the right path, we connect the owner to an independent attorney.
A lien on a specific asset usually follows the asset, even if you sell it to someone else. The exceptions are too numerous to mention here, but there are a lot of them. To a buyer of your assets, this can make it hard to know that he or she is getting clean title. To a lender that wants to refinance your assets, it may be hard to find out how big the debt is or who holds it. Opaque or anonymous liens can interfere with selling, borrowing against or refinancing assets.
So why do MCA companies file UCC liens? Because Article 9 reaches a purchase of receivables just as it reaches a loan. To perfect its interest, the funder has to file that lien, which puts other lenders on notice. But the real leverage the funder has is the automatic withdrawal from your checking account. If you are weighing your options, start with a conversation. We’ll tell you upfront if your case can’t be won, or if there’s a cheaper way to handle it. The initial consultation is free and confidential, and if Subchapter V is the smart move, we’ll direct you to bankruptcy counsel.
