What are “Standard Search Logic” and the Model Administrative Rules?

The amount of liens filed in a given state’s filing office can number in the millions making accuracy, and the ability to uncover name variations,  paramount when analyzing search results. Each individual Secretary of State filing office has a set of rules called “standard search logic” that determines what search results will show for a given search. Here’s the official definition:

Standard Search Logic: The search logic used by a filing office to determine which filings will appear on an official UCC search of that jurisdiction.

iacaThe Model Administrative Rules (MARS) were developed by the International Association of Commercial Administrators (IACA) to standardize search logic for all state filing offices, which was one of the goals of Revised Article 9. Adoption of these rules is, unfortunately, not mandatory, but MARS are still important because they set the framework for standard search logic. Standard search logic sets rules for how words, abbreviations and symbols will be interpreted and delivered as search results by a search engine.

Here are a few examples of MARS search logic:

  • Spaces and punctuation are disregarded
  • “&”equates to “and”
  • No distinction between upper and lower case letters
  • Words and abbreviations at the end of an organization name that indicate the existence or nature of the organization (“noise words”) such as inc, llc, association, incorporated etc. are disregarded (but note that MARS leaves it to the states to determine what constitutes these “noise words”). Most if not all states recognize the following as “noise words”: Corp., Corporation, Incorporated, Inc., Limited Liability Company, L.L.C., Limited Partnership, L.P .

Keeping track of each state’s standard search logic can be a chore, and many people choose to use a UCC service provider to ensure they’re getting the most out of their search results. The FCS online UCC search system has the innovative broad-based search tools (like wild cards and truncated search) to uncover name variations and assure you’re getting the results you need.

[Image Source: Official IACA Logo]

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Why Would a Lender Establish a Security Interest for a Loan?

Secured TransactionsIf you’re new to the Uniform Commercial Code (UCC), you’ll need a few basic definitions before we answer that. We’ll start you off with a few terms that are the building blocks of UCC search and filing procedures.

Secured Transaction: This is a loan in which the lender acquires a security interest in collateral that belongs to the debtor.

Security Interest: This is a lender’s claim to collateral that a debtor has provided for a loan. A security interest in granted once a security agreement is reached between the debtor and lender (secured party) via a financing statement.

Financing Statement: This is a form (UCC-1 / Fixture Filing) that a creditor files to post public notice of a security interest for the purpose of perfecting the interest. This also includes any subsequent records relating to the initial filing.

Collateral: This is an asset (or assets) that guarantees the loan will be repaid. If the debtor forfeits the loan, the creditor will claim the collateral to cover the debt.

The main reason that a lender would establish a security interest for his loan is to achieve priority over additional creditors. A secured transaction generally has priority over an unsecured transaction, and priority between multiple secured lenders is determined by who filed his financing statement first.

If this topic interests you, check out our free, on-demand webinar The Basics of Lien Priority, presented by Attorney Bradley B. Clark.

As always, consult your legal counsel if you are unsure of any definitions or procedures.

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How Does UCC Secured Party Representative Service Work?

Secured Party Representative ServiceUCC Secured Party Representative Service is a new service from FCS that provides protection for secured lenders by using a representative’s name (instead of their own) on the Secured Party box on UCC Financing Statements. We’ve had some questions about how it works so we’ve outlined the process in this blog post. But before we get to that, we wanted to point out part of the RA 9 Amendment that makes our UCC Secured Party Representative Service possible. 

Under Revised Article 9, UCC Section 9-502(a)(2), a financing statement must provide the name of the secured party or representative of the secured party. They key to FCS Secured Party Representative Service is that the code allows “a representative” of the secured party to appear on the UCC financing statement, which is where we come in. Here’s the excerpt from RA9:

§ 9-502. CONTENTS OF FINANCING STATEMENT; RECORD OF MORTGAGE AS FINANCING STATEMENT; TIME OF FILING FINANCING STATEMENT.

(a) Subject to subsection (b), a financing statement is sufficient only if it:

(1) provides the name of the debtor;

(2) provides the name of the secured party or a representative of the secured party; and

(3) indicates the collateral covered by the financing statement.

When you file a UCC-1 with our UCC Secured Party Representative Service, we put our representative’s name on the financing statement. In the instance of an inquiry, FCS will promptly forward all authenticated inquiries to you, the secured party, to respond directly.  You’ll still perfect your security interest when you file a UCC-1, but we’ll help limit your exposure to competitors’ secured party searches.  Secured party searches will no longer be an option, which keeps your client list secure from competitors. You will be able to keep track of all your UCC filings within our UCC portfolio manager just the same as without the service.

To learn more about UCC Secured Party Representative Service, click here or give us a call at 800.406.1577. 

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What’s the difference between a “lapsed” and “purged” UCC filing?

Lapsed vs. Purged UCC filingWe’re back at it with more UCC terminology and definitions! Last week, we discussed the difference between “active” and “effective” UCC filings, and this week we’re moving on to the definitions of “lapsed” and “purged” filings.

Lapsed UCC filing: The filing has passed its effective period and no continuation has been filed.

Purged UCC filing: The filing has been removed from the index and is no longer searchable in most state systems.

While neither filing is sufficient to perfect your security interest, there is an important difference between the two terms. A lapsed UCC filing will often remain in the state’s index (or within a third party’s database, such as the FCS online UCC system) for up to a year after its lapse. This means that a lapsed UCC filing is (most likely) still searchable, and UCC searchers will often searched for lapsed, or inactive filings, within a database for reference purposes as part of their due diligence process.

A purged filing has been removed from the state’s index, which means it is no longer available for search. Some state filing offices do keep records of purged filings in a separate database, but it is not mandatory for states to do so. A service provider may not be able to provide information on purged filings, depending on the capabilities of the provider and the state filing office’s practices.

As always, if you are unsure of any definitions or procedures, consult your legal counsel immediately.

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Cloud Computing in the Legal Industry

Cloud Computing

The use of cloud-based services has been a huge topic in the legal field for the last couple years. We’ll examine several issues surrounding cloud services for legal professionals using data from recent studies, as well as anecdotes from legal professionals, to discuss ethics involved with the use of cloud computing.

A major concern for legal professionals and law firms when it comes to adoption of cloud services is security. More specifically, many of their concerns revolve around the ethical code they could potentially violate if their data is breached.

When people outside the legal industry use cloud services, they understand that there might be some level of threat to the security of their data, but they choose to use them anyhow because of the convenience or cost savings offered. For lawyers, however, there are ethical concerns to the data they have been entrusted to keep confidential. In the 2013 International Legal Technology Association study, the threat of data leaks to government entities was a concern to those surveyed who felt cloud services are generally unsecure.

Another grey area when it comes to ethics in the cloud is ownership of data. In the same ILTA study, ethics was the second most voiced concern about cloud computing, just behind security. Legal professionals need to feel secure that they hold complete ownership of their data, no matter where it’s stored. This is a valid concern, given that only 44% of legal professionals admitted to reviewing the service provider’s privacy policy, according to the 2013 American Bar Association Tech Survey.

The use of cloud services is up among legal professionals, and it will be interesting to see the movement in 2014. Check back soon as we examine some of the best and brightest cloud-based technology tools for legal professionals.

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Image via marabelo 

Kentucky UCC and Lien Data Added to FCS Online UCC System

Kentucky State FlagFirst Corporate Solutions is pleased to announce the release of Kentucky data and image library to our online UCC search system. As of Monday, August 4, 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.

FCS adds value to Kentucky data by including data on expired filings (not currently available on the state website) and providing a clean, consistent user experience.

Not an FCS customer? Contact us today for a free consultation and system demonstration at 800.406.1577 or info.ficoso.com/fcsonline. If you’re new to online UCC and lien systems in general, check out the blog post Evaluating State UCC Search Options.

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

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What’s the Difference Between an “Active UCC Filing” and an “Effective UCC Filing?”

Definitions The Uniform Commercial Code contains many terms and phrases that are esoteric to the commercial lending industry—they have a very specific meaning within the code. The definition can be crucial to your due diligence efforts, so it’s important to know the difference. One instance we’ve come across is the difference between an “active UCC filing” and an “effective UCC filing,” which can affect on your due diligence. First, let’s cover the definitions.

1. Effective Filing: The filing is sufficient to perfect a security interest according to Revised Article 9 standards.

2. Active Filing: The filing is indexed and discoverable within a jurisdiction’s searchable indexes.

For a UCC-1 to be considered an effective filing it must meet the following criteria:

  • Filed in the correct jurisdiction
  • Not lapsed or terminated
  • Conditions of creating a security interest are met
  • Minimum filing standards for UCC-1 are followed

The key point is that not all active filings are effective filings. Since RA9 has been implemented, a UCC-1 is usually displayed in a filing office as active until one or more years past the lapse date, regardless of termination. Many filing offices will purge filings after the one year cushion after the lapse date. If a UCC-1 has been properly terminated, it would of course not be considered an effective filing. The status of an effective filing is not determined by UCC searchers, and can often only be interpreted by a court.

As always, if you are unsure of any definitions or procedures, consult your legal counsel immediately.

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Control Agreements Effect on Priority Position

This is a guest post from 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.

Control Agreement for Pledged Deposit Account: Does the depository bank
need to subordinate its security interest in the pledged deposit account to a lender’s
security interest granted in the pledged deposit account?

Answer: Yes. The depository bank has an automatic first priority security interest
in the pledged deposit account by statute (Code Section 9-327), and should be required
to subordinate its security interest in the control agreement. If the depository bank will
not agree to subordinate its security interest, the only other way for the lender to obtain
priority in the pledged deposit account is to have the account titled in its name.

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.

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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.

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How to Protect Your Client List From UCC Secured Party Searches

Secured Party Representative ServiceUCC 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 Representative Service, which we rolled out in July 2014.

When you file a UCC with FCS UCC Secured Party Representative Service, we put our representative’s name on the financing statement. FCS will receive all authenticated inquiries and forward them to the secured party to respond directly, all while still perfecting your 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 Representative Service, 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.

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[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.

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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.

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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.

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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.

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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.

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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.

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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