Article 9 of the Uniform Commercial Code can be very beneficial to creditors and allows the credit professional to feel more comfortable while selling to a customer who does not meet normal credit standards. However, stories continue to flourish about UCC filings that are rejected by trustees in Bankruptcy proceedings and judges in civil litigation. UCCs’ must be filed correctly or they are useless, leaving the creditor just as exposed as if the sale had been made on unsecured terms. While they are not as frequent as they were prior to RA-9, mistakes do abound. It is the responsibility of the credit professional to make sure that the commonly made mistakes do not occur in UCC filings especially when outsourcing this important procedure to others.

We have addressed UCCs’ in previous editions but in light of the amended bankruptcy laws taking effect in October we think it important to address the most common mistakes made when filing and perfecting security agreements under the UCC. 

• Failure to file under the debtors’ true legal name. RA-9 no longer provides for “safe harbor” by utilizing trade names or DBAs. Filings must contain the legal name as it appears on incorporation papers or partnership agreements. A partnership defined as “an association of two or more persons to carry on as co–owners of a business for profit.” While no particular form of contract is necessary to create a partnership, a partnership contract usually identifies the partners and whether they are general or limited. Don't guess; make sure you have the correct information. Information reported in credit reports, credit applications and from other creditors should be verified. The instructions on the majority of states’ UCC forms inform the filer that the use of DBAs and trade names is optional. Failure to have the correct legal name is grounds for the filing to be rejected;  
   
• Failure to use the debtor's correct legal entity. The uniform UCC financing statement Box 2a specifically asks for the type of organization. If the box states it is a corporation when it is actually a partnership than a trustee or creditor has cause to ask the court to reject the filing. This is as important as not having the correct legal name of the debtor;  
   
• Failure to file in the required jurisdiction. Filing is no longer done in the state where the collateral is located but rather where the debtor is incorporated or has its’ principal place of business when a proprietorship or partnership. Also, each state has its own requirements concerning fees and type of filing form;  
   
• Failure to amend changes in the debtor's name, address, or legal entity. When the filing does not reflect the correct debtor information a creditor may lose its’ standing as a secured creditor. Any time a debtor moves, filings should be amended.  This is especially important if the debtor moves to another state.  In that case, the creditor may file an “in-lieu” filing in the new jurisdiction, as required by the new state. Never assume UCC requirements will be the same as they were in the state where the filing was originally made;  
   
• Failure to provide an adequate description of collateral on the documentation. Although RA-9 does not require specific identification of collateral as the previous Code. Creditors should provide a description whereby the specified collateral can be easily discernible from other collateral;  
   
• Failure to establish a first priority, The order in which bankruptcy claims are paid, as established by the Bankruptcy Code. When filing a Purchase Money Security Interest  or consignment existing secured creditors in like collateral must be notified that a new filing is being perfected. Failing to notify prior secured creditors when a conflict of collateral exists is grounds for losing ones' priority. This is just one reason why it is important to conduct a secured party search before and after filing a UCC;  
   
• Failure to file continuation statements prior to the five-year expiration. Six months prior to expiration, a continuation filing should be made so that there is no lapse of protection when the initial filing expires. Many secured creditors fail to establish procedures for follow-up and forget this step;  
   
• Failure to notify other secured creditors when a conflict of collateral exists upon renewing a previously filed consignment or PMSI. New creditors may have obtained security during the five-year period of your first filing. Upon renewal all creditors have to be notified just as though this was the initial filing.  
  
• Failure to create a security interest prior to shipment by perfecting the filing according to the requirements of the debtor's jurisdiction.  The procedure when filing a PMSI is different from filing a security agreement. It is imperative to know the difference;  
  
• Make certain your Agreement corresponds to your filing. Many creditors try to incorporate everything into one Agreement thus making their intention as to what they are filing cloudy. If the trustee or creditor cannot understand what the secured creditor is attempting (PMSI, consignment or general security) then they will have an easy time convincing a judge to rule against the filing. A credit professional will have three separate agreements. A security agreement, a PMSI agreement and a consignment agreement.

It is quite easy to overlook any one of these points and end up as an un-secured creditor. Whether you prepare and file your own agreements or use a filing service, make certain that the personnel involved in preparing and filing the UCC documents are fully aware of these common mistakes and have procedures in place to insure they do not occur.  

I 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 Bankruptcy.