The Dow Jones for the second week in thirty days has
closed over ten thousand giving optimists reason to speculate the
recession is finally coming to a close. Others would reason that corporate
downsizing, responsible for increasing unemployment to over ten percent,
coupled with continued bankruptcy filings and bank failures has
strengthened balance sheets while income statements have remained sluggish
and are responsible for the improved Dow. Regardless of the position one
takes the reality is that revenue is down, unemployment is up and
bankruptcies and bank failures continue to increase. U. S. debt has
increased nearly $3 trillion in 2009 – five times what had ever before
been borrowed in a single year prior to 2008 when the debt increased by
more than $1 trillion for the first time is U.S. history – and the year
is still not over. The effect of the recent bankruptcy filing of CIT, the
major floor-plan and account receivable financial institution, still
remains to be realized and the upcoming holiday season will be the
deciding factor for major retailers as to whether some will continue
operations in 2010.
For those commercial businesses that will survive
this economy many are looking at their credit operations and asking what
more can we do to protect our account receivables, the second most
important asset for any business. The choice is to continue as an
unsecured creditor or take advantage of the laws that give creditors the
option of guaranteeing their accounts receivable as a secured creditor.
This is especially important in a climate where banks, in spite of
government urgings, continue to be reluctant to lend money and the
utilization of credit cards as an alternative source of funds is becoming
more restrictive and difficult to manage.
In North America, both Canada and the U.S. have laws
that provide for creditors to secure their sales. In the U.S. the law that
provides for creditors to secure their credit sales is contained in the
Uniform Commercial Code, specifically, Article Nine. Under Article Nine
the creditor may secure sales, consignments, bailments, rentals, and
leases. In Canada the law is contained in the Personal Property Security
Act and in turn responsible for the creation of the Personal Property
On more than one occasion over the years in this
newsletter, we have advocated the reasons to be a secured creditor not
only from the standpoint of protecting and recovering the firms’ assets
but also from allowing firms’ assets to be used by other creditors to
secure their position. We have often said; “why
would one allow their competitor to use their assets to recover their
We will not again belabor our opinion about the
importance of being a secured creditor. Instead we will address the most
common questions brought to us about how to become a secured creditor and
what is necessary to perfect a secured position.
We want to emphasize that the following responses to
frequently asked questions is not legal advice. It is information that can
be found on any state website. Legal questions should always be addressed
to ones corporate attorney and/or counsel.
What is a financing statement?
A UCC financing statement (also referred to as a UCC-1) is a short,
simple record filed for the purpose of giving constructive notice of a
secured party's interest in property of the debtor. It provides the
name and address of the debtor, the name and address of the secured party
and a description of the debtors’ property being used as collateral. In
contrast, the real property secured creditor will record the security
instrument itself (mortgage or deed of trust) to give constructive notice
of a consensual lien on real property. While a financing statement
is a short and simple record, Article 9 devotes twenty-seven sections to
the filing system.
How does one perfect a financing statement?
To perfect a security interest by the filing of a financing
statement where a financing statement is a permissible method of
perfection, the financing statement must be sufficient, it must
be effective, it must be filed, and it must be filed in
the correct location. We explore each of these requirements in
A financing statement is a record that contains certain
information. The record may either be written or in electronic form.
To be a sufficient record, the financing statement must provide
the name of the debtor and the name of the secured party (or
representative of the secured party) and must indicate the collateral
covered by the financing statement).
A financing statement is effective only if filed by a person entitled
to file it. Typically, the secured party files the financing statement.
The secured party is entitled to file the financing statement if the
debtor authorizes the filing. The debtor provides such authorization
by either becoming bound under the terms of a security agreement or by
giving the secured party authorization to perfect a financing statement.
Under RA-9, authorization by the debtor may be included in a sales or
credit agreement. Note that a financing statement is neither signed
by the debtor nor secured party to be effective.
A financing statement is deemed filed when the filing office to which
it is sent accepts it for filing. Acceptance of a financing statement
by a filing office will routinely take place when the financing statement
is communicated to the filing office accompanied by the requisite filing
fee. Filing fees are specified in a state's version of the U.C.C.
The filing office is obligated to index financing statements accepted
for filing, generally by the name of the debtor, but a mistake in indexing
by the filing office does not affect the effectiveness of the financing
statement. For this reason only the legal name of the debtor should appear
on the financing statement. Trade names, doing business as, and trade
styles should not appear on the financing statement.
Where is the correct location to file a financing statement?
To perfect the security interest the financing statement must be filed
in the correct location. If filed only in an incorrect location,
even if sufficient and even if effective, the financing statement will not
perfect the security interest. When the debtor is a corporation the
financing statement should be filed in the state where the debtor
corporation is incorporated regardless of where the corporate office is
located or where the secured property is kept or shipped to. When the
debtor is a partnership or a proprietorship the filing is in the state
where the debtors’ headquarters office is located.
How long is the financing statement good for?
Generally, the financing statement is effective for five years from the
date of filing. At the end of the five year period, absent renewal, the
effectiveness of the financing statement lapses. It may be renewed for a
five-year period (and for successive five year periods) through the filing
of a continuation statement, UCC-3, during the last six months of the
five-year period. A continuation statement not filed within the
six-month period is ineffective.
What is a UCC search?
If the filing of a financing statement is a permissible method of
perfecting a security interest, someone wishing to know whether someone
else claims a security interest in personal property or fixtures of the
debtor must search for a financing statement in the appropriate location.
Any person may initiate a search with the secretary of states office and
obtain the relevant information by submitting a request, form UCC-11, to
the appropriate filing officer.
How much does it cost to file a financing statement?
Filing fees vary by state and can normally be found on the state web
site or by calling the secretary of states office. At this time the
minimum state filing fee is $5.00 and the maximum is $84.00. Several
states today charge more for a paper filing than an electronic filing.
We wish you well.
The information provided above is for
educational purposes only and not provided as legal advice. Legal advice
should be obtained from a licensed attorney in good standing with the Bar
Association and preferably Board Certified in either Creditor Rights or