Will a lender’s notation of its lien on a certificate of title for a vehicle always perfect the lender’s security interest?

Vehicle TitleWe continue our guest blog series with commercial lending attorney Bennett Cohen of the law firm Cohen, Salk & Huvard, P.C. You may also want to check out his eBook: Important Revisions To Article 9′s Rules Regarding Individual Debtors.

Perfection in Titled Vehicles: Will a lender’s notation of its lien on a certificate of title for a vehicle always perfect the lender’s security interest?

Answer: No. The general rule is that perfection in titled motor vehicles is achieved by registering the lender’s lien on the certificates of title. However, a significant exception is that if the vehicles are classified as “inventory” in the hands of the borrower, perfection is achieved solely by filing a UCC against the borrower covering such inventory. Vehicles held for sale or lease (or which are leased) by a borrower who is a vehicle dealer or leasing company would be classified as “inventory” under the Code and require a UCC filing for perfection. When dealing with vehicle inventory, registering a lender’s lien on the certificates of title is ineffective to perfect a security interest in the vehicles. Without the required UCC filing on a borrower’s vehicle inventory, the security interest is unperfected with regard to all creditors, including a bankruptcy trustee.

*Disclaimer

How to Protect Your Client List From UCC Secured Party Searches

Secured Party MaskingUCC searching and filing service providers go to great lengths to keep their customers’ data secure. Technology and in-house procedures provide safeguards to keep your data protected from outside sources. Since service providers, along with state and county filing offices, are the gatekeepers of public records containing transactional information, this is good thing. The nature of the Uniform Commercial Code, however, exposes an important part of a lender’s confidential data to the public:  their client list.

Lenders rely on security interests to manage their risk and perfect their security interest by filing UCC’s, but this means their client list is public record; every debtor on a UCC is that secured party’s customer! With every UCC financing statement filed, lenders basically open up their client list to the public, including competitors.

Some lenders get around this by using a DBA, or trade name, on their financing statement. For lenders that submit a lot of filings, this is not usually the best option. We covered the disadvantages of filing a UCC under a DBA in a previous blog post.

Another solution is to use our UCC Secured Party Masking Service, which we rolled out in July 2014.

When you file a UCC with FCS UCC Secured Party Masking Service, we put our representative’s name on the financing statement so your company remains anonymous as the lender while still maintaining your perfected security interest. Reverse UCC searching will no longer be an option for your competitors, which keeps your client list secure. You will still be able to track all your UCC filings for pending lapses within our portfolio manager in the same manner as before, except now the public record will not reveal your customers and expose your portfolio to attack from competitors through the simple use of secured party searches.

For more information on UCC Secured Party Masking, click here or give us a call at 800.406.1577.

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If a lender discovers that its borrower/mortgagor has transferred ownership of the mortgaged property to a trust or other person or entity, does the lender need to do anything to preserve its mortgage lien?

Real Estate TransferWe continue our guest blog series with commercial lending attorney Bennett Cohen of the law firm Cohen, Salk & Huvard, P.C. You may also want to check out his eBook: Important Revisions To Article 9′s Rules Regarding Individual Debtors.

Real Estate Transfer: If a lender discovers that its borrower/mortgagor has transferred ownership of the mortgaged property to a trust or other person or entity, does the lender need to do anything to preserve its mortgage lien?

Answer: The mortgage will remain a valid mortgage on the property, however, the unpermitted transfer will likely trigger an event of default under the mortgage, giving the lender the right to accelerate the debt and foreclose the mortgage, if the lender desires to do so. If the lender is willing to accept the transfer of the property to the new owner (and obtains the necessary internal bank approval), it is recommended that the following minimum steps be taken:

  1. Appropriate loan assumption and modification documents should be executed.
  2. The executed loan assumption and modification agreement should be recorded against the property.
  3. A date down endorsement to the lender’s loan policy should be obtained to insure the mortgage, as modified by the recorded loan assumption and modification agreement and to reflect title to the property is vested in the new owner.
  4. Updated evidence of insurance would need to be obtained to reflect the new owner.

*Disclaimer

[Important] Notice of Change – New UCC Filing Forms

Beginning July 1, 2014, California state law requires use of the revised forms below to be accepted for filing. The following revised UCC filing forms are available on the Secretary of State’s Forms and Fees webpage found here:

http://www.sos.ca.gov/business/ucc/forms.htm.

Here is a list of the revised forms:

If you have any questions please contact us at 800.406.1577 or write us here.

*Disclaimer

What Is the Best Legal Structure for Your Start-Up?

This is a guest post from Bettina Eckerle of Eckerle Law. She specializes in corporate law and helping companies at every stage of their life cycle.

The questions that invariably come up for all my start-up clients is: Do I have to form a legal entity, if yes, what kind and why? Entrepreneurs have a number of legal structures available when seeking to capitalize on a million dollar idea. Because each type of entity has distinct advantages and disadvantages, it is important to thoroughly explore your options.  While there are a number of different kinds of entities, I am focusing here on sole proprietorship, the LLC, the S-Corporation and the C-Corporation.

Sole Proprietorship

This is the simplest legal structure.  It is not even really a legal structure: you just conduct your business under your own or a business name and do not form a separate legal entity. There is no paperwork required, and there are no formal corporate housekeeping rules to follow. However, you and the business are one and the same, which means that you are responsible for all of the liabilities of the business. In addition, any business income or losses must be reported on your personal tax return.

If you want to establish a one-person business quickly and don’t foresee significant re-exposure, the sole proprietorship may be for you.  I would caution you, though. The lack of formality is usually far outweighed by the risk.  So I would advise you to explore other options.

Limited Liability Company (LLC)

I know, the LLC is the entity of choice among start-up now.  Members of an LLC jointly own and manage the business, and share the profits/losses and any appreciation/depreciation in value of the business.  An LLC is a cross between a partnership and a corporation. As in a partnership, owners enjoy pass-through tax treatment, meaning that profits and losses flow directly from the business to the individual owners. In an LLC, income and loss can be allocated disproportionately among the owners. In contrast, with an S-Corp, income and loss are assigned to each shareholder according to their pro-rata share of ownership. It is important to remember that every business has different financials, so you should consult with a tax advisor regarding your own unique situation.

Like a corporation, an LLC is a separate legal entity that can own assets, sue and be sued. It provides limited liability to its owners, which means your personal assets are shielded from court judgments and debt collectors. However, an LLC may not provide owners with 100% protection from personal liability, especially if fraud or misrepresentation has occurred. LLCs must also follow business formalities, such as registering with the state and adopting  an operating agreement. Still, these tasks are still simpler than the requirements for forming a corporation.

If you are looking for a low-key, flexible, informal solution with pass-through tax structure, an LLC may be a good option. However, if you plan to seek capital from outside investors, such as venture capitalists, you likely need a more rigid business structure.

C-Corporation

A C-Corp is a distinct legal entity, with an existence apart from its owners. It is the most complex and costly business structure, primarily because it requires the most corporate housekeeping and record keeping obligations. However, it also has several key advantages. Most notably, it is not a pass-through entity, so it is taxed separately. In fact, C-Corps have their own tax brackets, which is commonly lower than individual tax rates. Owners are only liable for taxes on profits they receive in the form of salaries, bonuses, and dividends.  Anyone can own shares in a C-Corp and you can create different classes of stock, allowing owners to have varying shares in terms of voting, profits and losses, etc.

C-Corps are the preferred business structure for companies that see fundraising in their near future, whether through seed rounds or from  VCs.

As a draw-back, any corporate structure, including the C Corp involves formalities and compliance obligations, which can be burdensome for people just starting out, i.e: may be infra-structure-deprived. If you incorporate as a corporation, you need to set up a board of directors, file annual reports and other business reports, hold shareholder’s meetings, keep records of your meeting minutes, and generally as a matter of corporate law operate at a higher level of compliance than your business might need or want to deal with. With the LLC, this isn’t the case. LLCs just use an informal operating agreement.

S-Corporation

The S-Corp is a variation on the corporation.  So most of what I said above for C-Corps (other than tax treatment) applies to them as well. An S-Corp is typically chosen for the way taxes are treated — like the LLC, the S-Corp is a pass-through entity with profits and losses flowing directly through the corporate entity to the individual shareholders. S corporations must follow certain requirements:  the number of investors must be limited to 100 and all investors must be individuals and legal residents of the United States..

The S-Corp is preferable when a startup expects to make a profit soon after incorporation and most of that profit will be distributed to the shareholders as a dividend. All shareholders will be taxed on the profits individually. If you intend to reinvest profits back into the company, you should consider a C-Corp.

If you desire pass-through tax treatment and are ok with its limitations, you may want to explore an S-Corp. You can also always change your mind and convert the business to a C-Corp later on.

These are the highlights and should give you something to start with.  Needless to say, do consult an accountant and/or lawyer before you take the first step.  As always, if you have questions or comments, please call, e-mail or tweet me @Bettina Eckerle.

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Is There Any Risk to a Lender Who Files Its UCC Statement After the Loan Closing?

skyscraper-with-coudsDo you have UCC questions?  Attorney Bennett Cohen of Illinois law firm Cohen, Salk & Huvard, P.C., has the answers. Check out his guest post below. You may also want to check out his free eBook on RA9 Revisions to Individual Debtor Names.

Timely UCC Filing: Is there any risk to a lender who files its UCC statement after the loan closing?

Answer: Yes, the obvious risk is that an intervening lien (e.g., another UCC filing or a federal tax lien) can be filed or arise prior to the date of the lender’s UCC filing, thus impacting the lender’s priority position in the collateral. Another less well known risk is that if the lender’s UCC filing is made more than ten (10) days after the loan disbursement, and the borrower files bankruptcy within ninety (90) days after funding, the lender’s security interest or lien can be invalidated in the bankruptcy as a “voidable preference.”

Security Agreement for Pledged Securities Account: Does a lender need to obtain a separate security agreement in addition to obtaining a control agreement signed by the account owner/pledgor, the securities intermediary (brokerage house or bank where the pledged securities account is maintained) and the lender?

Answer: Yes. The control agreement serves to vest “control” of the pledged securities account in the lender, and is not intended to serve as a security agreement.

Control Agreement for Pledged Securities Account: Does the securities intermediary need to subordinate its security interest in the pledged securities account to the lender’s security interest in the pledged securities account?

Answer: Yes. The securities intermediary has an automatic first priority security interest in the pledged securities account by statute (Code Section 9-328), and should be required to subordinate its security interest in the control agreement.

*Disclaimer

If a lender has a security interest in equipment or inventory and such collateral is sold and the proceeds deposited in a bank that is not the lender, can the lender claim a security interest in the deposit account as proceeds of its equipment or inventory?

Do you have UCC questions?  Attorney Bennett Cohen of Illinois law firm Cohen, Salk & Huvard, P.C., has the answers. You may also want to check out his eBook on Purchase Money Security Interests (PMSI).

Deposit Account As Collateral: If a lender has a security interest in equipment or inventory and such collateral is sold and the proceeds deposited in a bank that is not the lender, can the lender claim a security interest in the deposit account as proceeds of its equipment or inventory?

Answer: The lender cannot claim such deposit account as original collateral since the only way for a lender to perfect a security interest in a deposit account at another banking institution under the Code is to take “control” of such deposit account which includes:

  • Obtaining a three-party control agreement between the depositor, the lender and such banking institution (or having the deposit account titled in the lender’s name).
  • Obtaining a security agreement from the depositor which grants to the lender a security interest in the specific deposit account. Nevertheless, the lender may still be able to claim a derivative security interest in the collateral proceeds in the deposit account if the lender can successfully trace identifiable proceeds from the sale of the lender’s collateral under Code Section 9-315(b).

However, such derivative security interest, even if it can be successfully traced, is still subject to a number of risks under the Code, including, without limitation, (i) being primed by a secured party who has taken “control” of the deposit account (which may include the depository bank), (ii) being primed by the depository bank’s common-law right of setoff, and (iii) being primed by a non-collusive transferee of funds out of the deposit account.

*Disclaimer

How California Unsecured Creditors Can Protect Themselves From Bad Debt Losses

313291_5522Many of our clients in California are unsecured creditors, which means they do not file a security interest (such as a UCC) to ensure they are paid for products or services rendered. They essentially ‘front’ their product and expect their invoices to be paid in a timely fashion. Whether they are a wholesale produce distributor, waste management company or an office supply wholesaler, we have seen them experience the same problem—when their clients sell their business, they do not remit unpaid invoices, much less give notice that they’re selling. By the time the unsecured creditor discovers the business sale, it might be too late to file a claim to recover what they’re owed due the California Commercial Code.

When selling or transferring a business or ABC license (liquor license) in California, the sale must be executed according to the rules set forth by the California Commercial Code. This code benefits unsecured creditors because the seller must give a public notice.

From the 2001 California Commercial Code, Compact Edition, Division 6, Bulk Sales Section 6105: Notice; requirements for compliance (b) At least 12 business days before the date of the Bulk Sale, the notice shall be:

  1. Recorded in the office of the county recorder in the county or counties in this state in which the tangible assets are located and, if different, in the county in which the seller is located.
  2. Published at least once in a newspaper of general circulation published in the judicial district in this state in which the tangible assets are located and in the judicial district, if different, in which the seller is located.

There is nothing that states the business owner must notify his creditors directly, which is where we have seen unsecured creditors run into trouble. If unsecured creditors do not submit a claim into the escrow within the 12 day window of the notice, they might not collect what they’re owed. Here are a few ways that unsecured creditors can protect themselves from this:

  • Vigilantly monitor the physical location of their creditor. Some companies have trained their delivery drivers to look in the windows of businesses for “For Sale” signs.
  • Subscribe and monitor the bulk sales section of the “newspaper of general circulation” where their debtors do business.
  • Subscribe to the Pacific Report, a twice weekly notification of all bulk sale notices in California. The report comes with the following data:
    • Business Name and Address
    • Seller Name
    • Buyer Name
    • Last Day to File Claim
    • Recorded Date
    • Escrow Company and Address
    • Escrow File Number

While business owners may not always be forthright about the sale of their business, there are ways to track down the notices and submit a claim.

Click here to lean more about the Pacific Report from First Corporate Solutions.

*Disclaimer

Can a Lender Perfect a Security Interest in a Deposit Account at Another Banking Institution?

We continue our guest blog series on commercial lending this week with attorney Bennett Cohen of the law firm Cohen, Salk & Huvard, P.C. You may also want to check out his eBook: Important Revisions To Article 9′s Rules Regarding Individual Debtors.

Deposit Account As Collateral: If a lender has a security interest in equipment or inventory and such collateral is sold and the proceeds deposited in a bank that is not the lender, can the lender claim a security interest in the deposit account as proceeds of its equipment or inventory?

Answer: The lender cannot claim such deposit account as original collateral since the only way for a lender to perfect a security interest in a deposit account at another banking institution under the Code is to take “control” of such deposit account which includes:

  1. Obtaining a three-party control agreement between the depositor, the lender and such banking institution (or having the deposit account titled in the lender’s name)
  2. Obtaining a security agreement from the depositor which grants to the lender a security interest in the specific deposit account. Nevertheless, the lender may still be able to claim a derivative security interest in the collateral proceeds in the deposit account if the lender can successfully trace identifiable proceeds from the sale of the lender’s collateral under Code Section 9-315(b). However, such derivative security interest, even if it can be successfully traced, is still subject to a number of risks under the Code, including, without limitation, (i) being primed by a secured party who has taken “control” of the deposit account (which may include the depository bank), (ii) being primed by the depository bank’s common-law right of setoff, and (iii) being primed by a non-collusive transferee of funds out of the deposit account.

*Disclaimer

UCC Q&A with Attorney Bennett Cohen

Do you have UCC questions?  Attorney Bennett Cohen of Illinois law firm Cohen, Salk & Huvard, P.C., has the answers. You may also want to check out his eBook on Purchase Money Security Interests (PMSI).

Question: Interplay between Inventory and Accounts—Can a prior UCC filing against a debtor’s inventory prime a lender’s subsequent UCC filing against the debtor’s accounts?

Answer: Yes. Since accounts are “proceeds” of inventory and a secured party is given an automatic security interest in “proceeds” of collateral it files against (subject, however, to various Code rules governing priority in “proceeds”), the first UCC filer against either inventory or accounts will have a first priority security interest in the accounts.

Question: Unauthorized UCC Terminations—When a lender finds a prior filed UCC termination in a UCC search reflecting termination by a prior secured party, can such termination be relied upon as an effective termination?

Answer: No. In order for a filed UCC termination to be an effective termination, the UCC termination must either have been filed by the secured party itself or the secured party must have authorized the filer, in a separate writing, to terminate such UCC filing. It is a business risk for a lender to assume that all prior UCC terminations are effective terminations. Stated another way, if a filed UCC termination was not filed
by the secured party itself or was not authorized to be filed in a separate writing by the secured party, the underlying UCC remains an effective filing, notwithstanding the filed termination.

*Disclaimer

Technology Trends for Legal Professionals

Legal professionals have always endured demanding workloads, strict deadlines and fast-paced environments. Technology has advanced rapidly over the last several years, offering new virtual channels for legal professionals to manage their workloads. We have spotted a few trends and tools from the legal industry and compiled them here.

Tools

Increasing efficiency and maintaining security are top of mind issues for legal professionals. Again, technology has played a huge role in the development of the modern legal professional.

Drobo is a file storage and data protection solution that puts a lot of power into the user’s hands needing a computer science degree. It offers redundant data protection, personal and networked file storage, and it works with all major operating systems.

1Password is an application for Mac, Windows, iOS and Android that remembers all your web passwords, so you’ll never have to enter (or remember) them. Once you create a single password, the app can log you in to almost any web service using a much more secure password. It also stores notes, medical information and credit cards securely—everything you save is protected by military grade 256-bit AES encryption.

Fujitsu ScanSnap Mobile Scanner is a portable device for scanning documents. You can scan receipts, contracts (up to 34 inches long) and even plastic cards with a device that only weighs 12 ounces. Scan your documents into an editable Word or Excel file, or create searchable keywords with a highlighter. The ScanSnap Mobile Scanner is compatible with Mac or PC and is powered by USB.

Online UCC searching and filing with First Corporate Solutions helps legal professionals conduct their due diligence and corporate projects with accuracy and convenience. Broad-based searching tools such as truncated search strings and wildcards to maximize search results returned, or search by filing number.

*Disclaimer: First Corporate Solutions is not affiliated with Drobo, 1Password or Fujitsu.

Trends

The concept of outsourcing legal research is not new to lawyers, but in today’s virtual world it’s incredible what can be accomplished online.

Freelance legal assistants (also called virtual assistants) conduct services including typing, data entry, word processing and digital transcription services.  Some also have experience in e-filings, billing, document management and other administrative work.

Freelance paralegals (also called virtual paralegals) perform online legal research, help draft litigation and corporate transactional documents, and complete e-filings with the court. Many of our clients are paralegals who use our online UCC and lien search system regularly during their course of research.

Did we miss any tech tools or trends? Tell us about them in the comments section.

*Disclaimer

Does a lender need to file a precautionary UCC filing against the lessee of the equipment to perfect the lender’s security interest in the leased equipment?

Do you have UCC questions about equipment leases?  Are you at risk to losing priority to other creditors? Attorney Bennett Cohen of Illinois law firm Cohen, Salk & Huvard, P.C., gets asked questions like this all the time, and has taken the time to write some answers. You may also want to check out his eBook on Purchase Money Security Interests (PMSI).

Precautionary UCC Filings against Lessees of Equipment: Does a lender need to file a precautionary UCC filing against the lessee of the equipment (in addition to lender’s UCC filing made against the lessor covering the lease and the leased equipment) to perfect the lender’s security interest in the leased equipment?

Answer: It is generally recommended that the lender require that a UCC filing be made by the lessor, as secured party, against the lessee, as debtor, describing the leased equipment, and that such filing be assigned to the lender. The reason such precautionary UCC filing against the lessee of the equipment is recommended is because it is difficult to conclusively determine in advance whether a court will classify a particular lease as a “true” lease (in such case, the lessee would have no ownership interest in the equipment to file against) or a lease “intended as security” (in such case, the lease would be viewed as a conditional sale agreement or security agreement, the lessee would be deemed the owner of the equipment and such precautionary UCC filing against the lessee would be essential for the lender’s perfection in the equipment). It should be noted that it is standard in the lease financing industry to require that precautionary UCC filings be made against the lessee.

*Disclaimer

Does a lender need to take possession of the original leases to perfect its security interest in the equipment leases?

Do you have UCC questions about equipment leases?  Are you at risk to losing priority to other creditors? Attorney Bennett Cohen of Illinois law firm Cohen, Salk & Huvard, P.C., gets asked questions like this all the time, and has taken the time to write some answers. You may also want to check out his eBook on Purchase Money Security Interests (PMSI).

Pledges of Equipment Leases: Does a lender need to take possession of the original leases to perfect its security interest in the equipment leases?

Answer: Under Article 9 of the Uniform Commercial Code (the “Code”), a lender can perfect its security interest in the leases (which are classified as “chattel paper” under the Code) by either:

  1. Filing a UCC financing statement covering the leases.
  2. Taking possession of the original leases.

However, a lender who does not take possession of the original leases risks having its security interest primed by another creditor who gives new value to the borrower and takes possession of the original leases. In certain limited situations, it is not practical to take possession of the original leases and some lenders will require that a legend be affixed to each original lease in the debtor’s possession describing the assignment to the lender by name and address (although such legending would need to be monitored and could be easily removed by an unscrupulous borrower, presenting a potential significant business risk to the lender). It should be noted that many lenders employ both perfection methods described above (i.e., UCC filing and taking possession of the original leases) to achieve better protection.

*Disclaimer

First Corporate Solutions Releases New Hampshire to Online System

New Hampshire State FlagFirst Corporate Solutions is pleased to announce the release of New Hampshire data and image library to our online UCC search system. As of Monday, May 5, 2014, active online users can log on to www.ficoso.com and search our reliable state-direct UCC and tax lien data complemented by an expansive library of clear, downloadable document images. This adds a total of 199,195 filings to our online system.

The FCS online system adds value to New Hampshire data by expanding the search logic, adding a filing number search option, and providing a clean, consistent user experience. New Hampshire does not have a free site for UCC searches, so FCS users will enjoy a savings from the state website.

If you have any questions please feel free to contact us at 800.406.1577 or info@ficoso.com.

Must the IRS file a notice of federal tax lien against the exact legal name of the borrower?

Do you have questions about how your perfected security interest will be affected by a federal tax lien? Are you at risk to losing priority in regard to after-acquired collateral in the event a federal tax lien is filed against your debtor? Attorney Bennett Cohen of Illinois law firm Cohen, Salk & Huvard, P.C., gets asked questions like this all the time, and has taken the time to write some answers regarding federal tax liens. You may also want to check out his eBook on Purchase Money Security Interests (PMSI).

Notices of Federal Tax Lien: Must the IRS file a notice of federal tax lien against the exact legal name of the borrower?

Answer: No. Under the Sixth Circuit decision in In re: Spearing Tool and Manufacturing Co. Inc. 412 F.3d 653 (6th Cir.), the IRS does not have to file the notice of federal tax lien against the exact legal name of the borrower. The Court held that the IRS lien “need not perfectly identify the taxpayer.” The Court determined that in evaluating an IRS filing, the critical issue is “whether a reasonable and diligent search would have revealed the existence of the notices of the federal tax liens under these names.” The court concluded that the bank had not conducted a “reasonable and diligent” electronic search because it failed to search common variations of the corporate name of the debtor, and as a result, the notices of IRS tax liens were sufficient under federal law, and the IRS’s lien had priority over the bank’s lien. As a result of this case, lenders are encouraged to obtain a federal tax lien search on the borrower’s exact legal name and all possible name variations (including any name used in the borrower’s past federal income tax returns and in borrower’s E.I.N. application).

*Disclaimer

Does the filing of a notice of federal tax lien against a borrower prime an existing lender’s prior perfected security interest in all of the borrower’s present and future assets?

Do you have questions about how your perfected security interest will be affected by a federal tax lien? Are you at risk to losing priority in regard to after-acquired collateral in the event a federal tax lien is filed against your debtor? Attorney Bennett Cohen of Illinois law firm Cohen, Salk & Huvard, P.C., gets asked questions like this all the time, and has taken the time to write some answers regarding federal tax liens. You may also want to check out his eBook on Purchase Money Security Interests (PMSI).

Effect of Federal Tax Liens: Does the filing of a notice of federal tax lien against a borrower prime an existing lender’s prior perfected security interest in all of the borrower’s present and future assets?

Answer: No, not as to all of the assets, but a lender is at risk with regard to certain after-acquired collateral, as well as for certain future advances made to the borrower, as described below.

The basic priority rule is that a lender will have priority ahead of the IRS in collateral owned by its borrower on the date of the federal tax lien filing, if the lender’s security interest in such collateral is perfected prior to the date of the federal tax lien filing. Stated another way, by virtue of the tax lien filing, the IRS will gain priority in all of the borrower’s collateral acquired by the borrower after the federal tax lien filing. Important exceptions to this general priority rule are discussed below.

There are two twin 45-day rules that affect a lender’s security interest in after acquired accounts and inventory, as well as priority in the lender’s future advances made to the borrower, and these 45-day rules provide lenders with some limited protection against the IRS.

Under Section 6323(c) of the Federal Tax Lien Act of 1966 (“FTLA”), a lender’s security interest in the borrower’s accounts or inventory is superior to the federal tax lien as to any after-acquired accounts or inventory which come into existence within 45 days after the federal tax lien filing. Thus, lenders are at risk if they make an advance against accounts or inventory on or after the 46th day after the filing of a federal tax lien notice, unless the federal tax lien is paid and released or satisfactorily subordinated to the lender’s security interest.

Under Section 6323(d) of the FLTA, a lender is entitled to priority over the IRS as to future advances made by the lender until the earlier of:

  • 45 days after the federal tax lien filing
  • The lender’s actual knowledge of such filing. The IRS has the burden of showing that the lender had actual knowledge of the tax lien filing.

It should be noted that the lender’s protected future advances made prior to the earlier of 45 days after the federal tax lien filing or lender’s actual knowledge thereof will only be given priority in:

  • collateral in existence on the date of the tax lien filing.
  • accounts and inventory acquired by borrower within 45 days after the tax lien filing.

Thus, a lender’s protected future advances will not enable the lender to claim a security interest in other types of collateral acquired by the borrower within the 45-day period after the date of the federal tax lien, such as equipment, general intangibles or farm products. Many lenders only obtain an annual federal tax lien search on its borrowers. It may not be practical for lenders to obtain more frequent federal tax lien searches on all of its borrowers, but a case could be made that the expense of running more frequent federal tax lien searches on a lender’s higher risk borrowers may be less costly than being primed by the IRS on one or more loan transactions.

*Disclaimer

Delaware to Increase Minimum Tax Fee for Corporations and Annual Tax Fee for Alternative Entities

House Bill 265 w/HA1, HA3/Title 8 has been signed into effect by the Governor of Delaware. The bill is effective immediately, but the state is offering a grace period until July 1,2014 before enforcing the new tax rates.

This Act increases the annual tax assessed on partnerships, limited partnerships and limited liability companies on file with the Secretary of State from $250 to $300 and increases the corporation franchise tax by $100 for those corporations that file on the authorized shares method.

The Delaware Secretary of State has also posted a link to the bill here.

* Disclaimer

Filing Mistakes on UCC1 Financing Statements You Need to Avoid

We have previously posted several tips on how to avoid errors when filing a UCC1 Financing Statement, and in this blog post we’ve rounded up some of the most common mistakes.  Submitting  a UCC1 Financing Statements with mistakes may have legal consequences, so double check your filing for any of the errors listed below to minimize your risk.

1. Failing to file under the exact legal name

A UCC filing must properly identify the debtor to effectively perfect a security interest. To satisfy this requirement, it is critical to use the debtor’s exact legal name on your UCC1 Financing Statement.

For a business name that means the name is it appears on their formal organizing paperwork such as articles of incorporation/organization or partnership agreement.

Determining the exact legal name for an individual can be difficult. In most cases it will be the name on a person’s driver license or state-issued identification card, but it is a good to check the specific state UCC filing rules before filing on individual names to guarantee compliance.

2. Including “dba” notation as part of a debtor name

Examples: Debtor: John Smith dba ABC Trucking or ABC Trucking, Inc. dba Truck World

Secured parties will sometimes include a “dba” name as shown above in an attempt to more clearly identify their debtor. By structuring their debtor names in this way; secured parties are actually failing to file under the exact legal name. A better choice would be to add the tradename as an additional debtor, omitting the “dba” tag from the name.

3. Filing document in the incorrect filing office

Revised Article 9 established that UCCs are filed based on the location of debtor NOT the location of the collateral. Here is an overview:

  • Registered Business: file in their home/domicile state
  • Unregistered Business: file in the state where they have their chief executive office
  • Individuals: file in their state of residence

4. Missing attachment pages

If your Financing Statement requires attachment pages to list out specific collateral, make sure to carefully review all pages of the attachment before submitting the document for filing. Missing attachment pages can cause a UCC to inadequately describe the collateral, which could prove very dangerous in the event of a competing claim.

5. Incorrect filing fee

One of the primary duties of the filing officer is to ensure that proper payment is remitted. A document that is presented for filing with the incorrect filing fee will be rejected.

To guard against damaging filing mistakes, consider working with a service provider that performs a thorough quality review of your documents prior to submission. A well-trained eye can catch many of these before it’s too late.

*Disclaimer

A Factor’s Perspective on Pre-Filed UCC Financial Statements

Under Revised Article 9 of the Uniform Commercial Code, secured parties are permitted to pre-file UCC Financing Statements, meaning they may file their UCC document before official execution of the security agreement provided the secured party receives proper authorization from the borrower. This week, we welcome Steve Capper of Flexible Funding as a guest author on the FCS blog. In this piece, Steve offers some words of caution for borrowers about pre-filed UCC’s.

Enter Steve:

A Factor’s Perspective on Pre-Filed UCC Financial Statements

Beware of Uniform Commercial Code UCC Filings that may be filed on your business by a funding organization that you are just “talking to” or “considering” and not actually doing business with. This could be done by a large bank as well as by a privately owned straight factoring company that purchases accounts receivables.

In some cases, a pre-filed UCC filing on your business is a tactic to get a jump on other funding organizations you may be talking to. It is counting chickens before they hatch. In other cases, when you fill out funding application to be reviewed by a funding company there may be very tiny fine print in the application that allows them to file a UCC …while just looking at you. Because the fine print is so small, and because it is just an application rather than a loan contract/document, many people miss it. Most businesses do not regularly track UCC filings and are usually surprised, and even angry to find about these UCC filings on their business. Sales and business development people for funding organizations rarely call attention to a miniscule UCC authorizing clause, as it may be an obstacle to bringing in an application.

If you need short-fused funding very quickly and are not going with the company that filed a UCC-1 document against you by an authorizing clause in an application, you have to get it terminated very quickly. Sometimes that is easier said than done because they may delay to try to save the deal, or want to take time to resell you on their program. The best way to get the document terminated quickly is to make an authenticated demand for the secured party to terminate their pre-filed UCC. A secured party’s failure to terminate such a UCC filing after having received such can result in serious legal consequences for the funding company.

About the Author

Contributed by Steve Capper, Principal/CEO of Flexible Funding, LLC, San Francisco, CA. Flexible Funding specializes in payroll funding for staffing agencies across the nation. You can visit their website for more information http://www.flexiblefund.com/ or reach them by phone at 800-487-8327.

*Disclaimer

How to Choose a Monitoring Program for Asset-Based Lenders and Factors

In honor of the 2014 Factoring Conference, we compiled some of our favorite tips on choosing a lien monitoring solution, a service that all asset-based lenders and factors need to help mitigate risk. Here is a quick ‘stress test’ you can give your lien monitoring approach to see if it’s up to scratch.

Does your lien monitoring program…

 

Quickly Alert You of Federal Tax Lien Filings?

Many creditors consider Federal Tax Liens the most urgent of all liens because they can prime a perfected UCC. For factors and asset-based lenders, it’s critical to know about a Notice of Federal Tax Lien as soon as possible, so they can act within the 45-day window—remember, a UCC only provides priority protection for 45 days if a Federal Tax Lien is filed.

“In the real world of getting tough deals done, nothing can replace the importance of knowing if and when a Federal Tax Lien is filed.”

– Darrell Pierce, Dkyema Law Group

Notify you of Junior UCC1 Filings and UCC3 Change Statements?

Monitoring debtor names for junior UCC1 filings can reveal if another creditor has taken a position with your debtor and the possible breaking of negative covenants. Monitoring for UCC3 change statements provides creditors timely information on any unauthorized changes to their perfected UCC, such as an unauthorized termination.

Include State Tax Liens and Judgment Liens?

Many secured parties also insist on monitoring for State Tax Liens and Judgment Liens. For State Tax Liens, being alerted right away if their borrower is failing to pay their taxes is vital as it could be an indication of financial distress, while Judgment liens can be a good indicator of character among other things.

The FCS team will be at booth #215 with prizes, networking opportunities and information on our Account Monitoring Program. Please stop by and say “Hi!”

First Corporate Solutions is committed to uncovering name variations and locating involuntary and hidden liens in both our online search system and our manual search efforts. Contact us today for more information on search services: 800.406.1577 | info@ficoso.com

 *Disclaimer