As we have discussed on this blog on several occasions, a UCC Financing Statement is only effective if it gets the debtor name right. A UCC Financing Statement that fails to properly identify the debtor by their legal name will not offer the secured party priority status to collect should the debtor default.

In the years since RA9 took effect, several conflicting court decisions have left UCC filers with no clear guidance on how to name their debtors on UCC Financing Statements. As a result, secured parties are often unsure of how best to name their business and individual debtors to avoid being deemed seriously misleading by the courts in the event of a competing claim.

Perhaps the most important and most broadly applicable changes included in the proposed amendments involve new rules and clear-cut instructions for naming registered business and individual debtors on UCC Financing Statements.

The proposed amendment package also includes changes regarding:

• Maintaining perfection following a debtor relocation
• Requirements for transmitting utility filings
• The definition of a registered organization
• Changes to National UCC forms
• Change from Correction Statement to Information Statement
• Various other issues in the current version of RA9

The above listed changes are scheduled to go into effect in 2013 and thirteen states have already adopted the proposed amendment. Join us on November 08, 2011 at 11:00 am PDT for a free webinar, Impacts of the Upcoming Changes to Revised Article 9, to learn how you can prepare for the new Revised Article 9.

Register today! https://www1.gotomeeting.com/register/975247033

Our special guest speaker for this event will be Darrell W. Pierce of Dykema Law Group. Mr. Pierce served as a member of the Article 9 Study Committee for the Permanent Editorial Board for the Uniform Commercial Code, as Chair of the Article 9 Filing Project and as a primary drafter of the International Association of Commercial Administrators’ Model Administrative Rules for Article 9 filing offices. He is a frequent lecturer and writer regarding UCC matters.

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Here’s why:

Locating Tax Liens

Many state filing offices are responsible for administering tax liens in addition to UCC records. In some cases, these involuntary liens are even maintained on the same searchable index as the UCC filings. This can pose a problem for searchers because the Uniform Commercial Code does not govern tax liens. This means that the parties who file tax liens (Internal Revenue Service, Employment Development Department etc.) are not held to the same strict debtor naming conventions as those who file UCC documents. These agencies may file under slight name variations that would cause an active tax lien not to reflect on an exact name search. A search that includes name variations would help locate tax liens that have named the debtor outside the Uniform Commercial Code’s Revised Article 9 guidelines.

Indexing Errors

Human error can occur at any point during the filing process, even at the filing office. Once the filing officer accepts a document for filing, party names and addresses along with other pertinent filing information are manually indexed into the public record. If the filing office commits a typographical error when inputting the debtor name, a properly completed, perfected UCC Financing Statement may fail to show up on an exact name UCC search. A search that uses broad-based logic to uncover similar names will help locate filings that have been mis-indexed at the filing office.

Check back next week when we debunk another common misconception about UCC and Corporate Due Diligence!

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Focusing on the “Who, What and Where” of searching is a great way to be certain your search effort is comprehensive.

Who to Search

The first step is to determine what party names to search. You will want to take a moment to compile a list of all of the names and variations of those names under which liens could be filed.

Here are a few pointers to get you on the right track:

• Check corporate records to determine the legal name before performing searches on a business.

• Utilize online search systems that allow for broad-based name searching to reveal name variations.

• Watch out for jurisdictions that use Revised Article 9 (exact name) search logic. Searches performed in these jurisdictions will not include any similar names.

What to Search

The types of searches you perform to evaluate a prospective borrower will likely be based on a variety of factors including your relationship with the applicant, credit reporting information, the amount of the loan and your organization’s internal policies and procedures.

The following represents a common pre-funding due diligence search package:

• UCCs (and available tax liens or judgments) at the state level

• UCCs/fixture filings, tax liens and judgments at the county level

• Civil litigation at the State Court of General Jurisdiction

• Civil litigation at the U.S. District Court

• Bankruptcy at the U.S. Bankruptcy Court

Where to Search

Every public record has a specific place where it should be filed, based on the type of record and statue in that specific jurisdiction. Searches must be performed at the appropriate filing office to ensure reliable results.

Here are some tips to help determine where to search:

• UCCs on a Business Name – State of organization (domicile state)

• UCCs on an Individual’s Name – State of primary residence

• Fixture Filings – County where the collateral is located

• Tax Liens – Depending on the jurisdiction, they could be filed with the state, county or both. Keep in mind that filing offices often maintain tax lien records on a separate index from their UCC or Fixture Filing records.

Check back next week for another installment of The Three Phases of Due Diligence!

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According to the Law Library,  Secured Transactions are, “Business dealings that grant a creditor a right in property owned or held by a debtor to assure the payment of a debt or the performance of some obligation.”

In a little more detail, a Secured Transaction is financial arrangement where a creditor acquires a security interest in property that is owned by a borrower. Secured Transactions typically involve personal property, though they may include real property in some instances. In a Secured Transaction, the borrower pledges rights to the property (collateral) in order to secure the loan. This arrangement minimizes risk for the creditor since they can repossess or foreclose upon the collateral should the debtor default.

The rights and responsibilities of both parties are detailed in a signed Security Agreement. The creditor will then usually file a UCC Financing Statement to give public notice of their interest in the collateral. Filing the UCC Financing Statement also serves to secure a priority position for the creditor to collect if the borrower fails to meet his or her financial obligation.

Article 9 of the UCC underwent a major revision in 2001 to bring about improved clarity and increased uniformity across state lines. Several important changes came out of Revised Article 9 including:

• Elimination of signature requirements
• Standardized National UCC Financing Statement Form
• Supergeneric collateral language is acceptable
• Filing by debtor location

Be sure to check back next week for more information on UCC Financing Statements!

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When searching for liens as part of a prefunding search package, it is important to know where liens could be filed. The last thing any lender wants is a surprise lien! In order to be certain you’re getting the results you think you are; searches must be performed for the right records at the appropriate filing office.

Here are some tips to help determine where to search:

1. Revised Article 9 sets forth that UCC Financing Statements filed against businesses are to be filed in the state of organization. UCCs filed against individuals must be filed in their state of residence.

2. To uncover liens relating to collateral that is affixed to real property, be sure to search for fixture filings at the county level. Fixtures are to be filed in the county where the collateral is located.

3. In many jurisdictions, tax liens can be filed with either the state or the county. An exhaustive tax lien search in these jurisdictions will include a search of both state and county filing offices.

And remember, tax lien records are often maintained on a separate index at state filing offices. A UCC only search in these states will not reveal tax liens of record.

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Searching for the right party is imperative when coordinating due diligence search efforts. This may seem simple, but keep in mind that liens could be filed under business names, individual names, aliases or nicknames, even fictitious business names. So, how can you be sure you are searching for the right name?

Here are a few pointers to get you on the right track:
1. Check corporate charters to determine the exact legal name before performing liens searches on a business.
2. Utilize online UCC search systems that allow for broad-based name searching to reveal name variations.
3. Be mindful of jurisdictions where exact name or Revised Article 9 search logic is employed. Searches performed in these jurisdictions will not include any similar names on your search result.

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