UCC filings: The good, the bad and the litigious
Under the Uniform Commercial Code (UCC) there are certain governing rules designed to ensure consistency in how companies, corporations and LLCs do business. Hence the name, the UCC was created to establish some uniformity in commercial transactions across the country.
Although states conform to the general rules, they may have additional or slightly different requirements that can affect the legality of filings. The UCC filing is used to provide public notice and perfect the security interest to establish order with other creditors to satisfy a debt. In general, it does not apply to overseas transactions, nor typically to real estate, employment and service contracts, which fall under state or general contract law.
How filing a UCC-1 can protect companies
A UCC-1 filing or financing statement is filed, usually with the secretary of state’s office in the borrower’s state, when a business extends credit to a borrower. The filing is submitted in the state that the individual debtor resides in, or the state of formation if the debtor is an entity. It establishes the creditor’s priority as a secured party, which can help to recover all or part of the money or assets owed in case of bankruptcy or default. An unsecured creditor, on the other hand, is at the back of the line in court judgments when assets are distributed to satisfy creditors.
Possible filing pitfalls
Of course, fraudulent filings will be rejected and possibly subject to criminal proceedings. But even legitimate filings can be problematic in cases of:
Incorrect name of borrowing entity. UCC filings must be letter-perfect. For example, they must spell out the correct legal name of the debtor as specified in its articles of incorporation or partnership agreement. Something as simple as substituting a numeral instead of a spelled-out number, an ampersand instead of an “and” or appending the DBA name (a big no-no) can call the filing into question. It may be rejected by the secretary of state upon filing or later by the court if the lender sues for redress.
Wrong jurisdiction. UCC-1s must be filed in the state of formation if the debtor is an entity or in the state of residency if the debtor is an individual. When the collateral is considered real property (a parcel of land and everything that is permanently attached to the land) a UCC filing is also filed in the county where the real property is located.
Missing information. All the correct boxes must be checked and collateral for the loan identified. In a few states additional information may be required, so in those cases state-specific forms – not the national form – should be used.
Lapse of filing. UCC-1 filings are good for five years. If the debt hasn’t been repaid, a UCC-3 continuation must be filed within six months (not sooner) of the expiration date. Overlooked, the filing can lapse, along with the lender’s secured interest – a potentially expensive paperwork error.
Amending a UCC-1
Things change, and the remedy is executing a UCC-3 filing. These are issued to:
Make a correction or amendment to an existing UCC-1. For example, the legal name and address of the borrower or type of collateral may have changed since the original filing.
Transfer the rights to the collateral in an existing UCC-1 to a different party.
Continue a UCC-1 beyond the original five-year term. Technically, these continuations can go on indefinitely, as long as the continuance is filed within six months of the expiration date of the original UCC-1, with subsequent continuances filed within six months of the anniversary of the original lapse date.
Terminate the UCC-1 when the debt is repaid, removing the lien and restoring the collateral title to the owner. This can also result in an expensive mistake if a lien is mistakenly terminated before the loan is repaid.
Managing a UCC portfolio
While UCC filings can help protect a business entity by establishing a lien on the collateral a borrower supplied and securing a place in line for repayment should a lawsuit ensue, they only work if the statements are properly executed, filed, managed and tracked. Keeping an eye on lapse dates of continuations, for example, can get complicated, and if there are multiple UCC-1 filings for different loans with the same debtor, it can be easy to terminate the wrong one. A robust entity management system can help mitigate risk and protect assets by tracking expiration dates, flagging filings that need to be renewed, helping ensure accuracy and following multi-state filing requirements.
When the shoe’s on the other foot
A UCC filing can be helpful documentation to a business filing a lawsuit or when service of process occurs when one entity provides notice to another that it is about to pursue legal proceedings against it. It requires a response. A company, corporation or LLC must designate a registered agent to receive any service of process papers and ensure they make their way to the appropriate legal counsel for action.
However, if the in-house registered agent has too many other responsibilities or is away from the office, forgets about the papers or fails to forward them to the appropriate person, problems can snowball. Failing to show up in court can result in a default judgment, a potentially huge award to the plaintiff and bad press for the defendant entity.
Enlisting the services of a professional registered agent can free up employees for other tasks while ensuring there is someone in charge of reviewing, recording and forwarding documents to the appropriate person or persons within the company in a timely fashion.