The Uniform Commercial Code (UCC) is a set of laws governing commercial transactions, like the sale of goods. In addition to commercial transactions, the UCC covers secured transactions, also called security interests, in which lenders hold the right to seize a borrower's collateral should the borrower default on a loan. The UCC also addresses negotiable instruments. Negotiable instruments refer to a specific document, such as a check, that is used to guarantee payment by a set date.
If you deal with any type of commercial transaction, you should know which UCC filings apply to you and the best practices for filing UCC forms.
Are UCC filings standard across each state?
It is important to note that each state or jurisdiction may have specific laws about secured transactions, commercial transactions, and negotiable instruments. However, the UCC is described as uniform because it provides stability and consistency amongst companies operating in different states. Therefore, the UCC makes laws uniform from one state to the next.
There are several types of UCCs. However, the most basic and common is UCC-1. A UCC filing can be described as a financing statement. Essentially, UCC filings are legal forms that creditors file to provide notice that the creditor has a security interest in the personal or business property of a debtor. Personal property is usually used as collateral in a secured transaction, such as a loan.
If you have any questions about which UCC forms your company may have to file, our experienced commercial lawyers can better help you to understand when a UCC filing is needed and its processes.
Why are UCC filings important?
Not all commercial transactions will require a UCC-1 filing. For example, if someone pays for a product or service using cash, there is no loan or debt. Hence, a UCC filing would not be necessary. However, if you decide to lend money or provide financing and someone incurs a debt, then a UCC-1 filing may be needed.
A UCC-1 financing statement is important because it protects the lender. While a person may intend to repay a loan or debt, unforeseen circumstances can affect their ability to fulfill their promise of paying that debt. A UCC-1 filing ensures that you are a secured party.
In other words, if something occurs that will prevent a person from paying their debt, such as death or bankruptcy, then your UCC-1 guarantees that you will receive either all or some of what is owed to you once a court divides the debtor's assets.
Importance of Being a Secured Creditor
Secured creditors are one of the first parties to receive their owed debt. On the other hand, if you do not file a UCC-1, you may be considered an unsecured creditor and may never receive any form of payment or collateral.
If the borrower has more than one lender, the first lender to file will be the first in line for the borrower's assets. Receiving one of the first places in line to ensure payment motivates lenders to file a UCC-1 as soon as the loan is originated.
In summary, filing a UCC-1 provides protection and reduces the risks of making loans or entering into a lease agreement.
Information Included in a Financing Statement
Certain information must be included when filing a UCC-1. The filing should always indicate whether the debtor is an individual or a company. Basic information regarding the company should be included in the filing as well.
The borrower's name must match that organization's name in the public record. For example, the name must be the same as the name on the company's articles of incorporation or operating agreement. Regarding filings for individuals, the name must match the name on an unexpired driver's license in the principal place of residency. The lien can only be perfected if names match exactly.
Some states, such as Delaware, have safe harbor laws which allow multiple names to be accepted even if the name is not listed on the driver's license.
Description of Collateral
The UCC states that a description of personal or real property is sufficient as long as it reasonably describes the property, whether specific or not. However, some states may not consider a “super-generic” description adequate to reasonably describe the collateral or property listed.
The UCC provides examples of a reasonable description, which should reasonably identify the collateral and include:
- A specific listing;
- The category of the type of collateral;
- Type of collateral, as defined in the UCC;
- The quantity;
- The computational or allocational formula or procedure; or
- Any method that objectively determines or identifies the collateral.
If any of this information regarding the borrower, lender, and description of collateral is excluded, then the filing could be rejected. This will then make it difficult for a lender to collect on the loan in the event of a default.
Where to File
Because of recent changes to the UCC, the location of the collateral no longer determines where a UCC-1 filing can be filed. Filings are usually made with the secretary of state's office in the state where either the individual debtor lives or the debtor's organization is registered or incorporated.
If real property is included in the collateral, then a UCC-1 should also be filed with the county recorder's office in the county where the debtor's real property is located.
Secretaries of states have websites that make filing a UCC-1 much simpler. The websites include instructions and what forms are needed to complete the filing. There are national UCC-1 forms available. However, to prevent any issues in the future, it is always best to use forms specific to your jurisdiction.
While completing the forms required for filing, it is very important that you read all instructions carefully and that you use the debtor's exact legal name and contact information.
Prices and fees for filing a UCC financing statement may vary by jurisdiction. There may also be additional fees for each debtor listed on the filing. Be sure to check prices and determine the total cost before completing a filing.
Conducting Relevant Searches
When the UCC filing is complete, it is made public. As a result, users can search the pertinent databases to see whether a UCC lien is held against a specific debtor. For the exact name of the debtor, they can also search the secretary of state's website in the state where they live or where the company is registered. Similar search features can be found in commercial UCC search engines.
When searching, it is crucial to emphasize that the debtor's name must be correct. When it comes to an organization, the name can be verified by searching the secretary of state's website for the organization's incorporation documents. For an individual, it is recommended to attempt multiple different name variations to make sure the search returns all pertinent information, especially in a safe harbor jurisdiction.
What are UCC-3 Forms?
UCC-3 forms have multiple purposes. Companies can use this form for:
However, it is crucial that when filing a UCC-3 form, you only use one form for one purpose (i.e., only one of the purposes mentioned above). If a form contains both an amendment and an assignment, or an amendment and a continuation, the state will likely reject the form.
Always be sure to file the forms in a logical sequence. If the company adds a new debtor, you must add the debtor first before filing a continuation form.
Further, ensure that you have permission from all secured parties involved before making any changes.
Mistakes to Avoid When Preparing UCC Filings
Minor errors on UCC filings can result in a rejection which can have a negative impact on the priority of the lender's interest in the collateral. Some mistakes are more damaging than others, but knowledge of any of these common mistakes can reduce the risk of your filing being rejected. Here are some of the common mistakes made while preparing UCC filings:
- Indicating the incorrect names of the debtor in the name field. Reviewing the charter document and any changes for registered organizations and the unexpired state-issued driver's license or unexpired state-issued ID for individual debtors is the best method to ensure that you have the correct debtor's name. The name on the UCC filing must match the name of these sources.
- Providing the incorrect UCC-1 file number. The UCC-1 file number on an amendment filing (i.e., on a UCC-3 form) must be provided with extra care by filers. The state can reject the filing if there isn't a matching number in their database.
- Failure to include all of the debtor or lender's information, name, or changes to address. To index the filing in their records, most states treat changes to the debtor or secured party's name or address as "new parties." Therefore, the filing must have the necessary debtor or SP information, or you will be at risk of being denied. You must also include the debtor's name when reporting a change of debtor address.
- Attempting to file continuations outside of the permitted six-month continuation window. Continuations can only be filed six months before the lapse date. Any attempt to submit a continuation statement before that deadline will be rejected. Even though a filing office may accept a UCC-3 continuation after a lapse, a court would probably conclude that the original filing lapsed and was not continued due to the statute's explicit phrasing. Section 9-515(c) says, “The effectiveness of a filed financing statement lapses on the expiration of the period of its effectiveness unless before the lapse a continuation statement is filed…Upon lapse, a financing statement ceases to be effective and any security interest…that was perfected…becomes unperfected…” (emphasis added).
You might want to consider hiring a skilled service provider to file your UCC financing statements given the difficulty and significance of correctly completing a UCC financing statement form. Doing this can steer clear of pointless delays, denials, and other challenging situations.