Here’s why:

Locating Tax Liens

Many state filing offices maintain tax lien records in addition to UCCs. In some cases, the tax liens are housed on the same index as UCC filings. The problem with that is that while UCC filers must endure strict scrutiny of their debtor names, the IRS is not held to the same standard when filing a Notice of Federal Tax Lien. In several key cases, the courts have favored the IRS over a secured creditor even though the IRS has not used the exact legal name of the taxpayer on the Notice. A search that includes name variations would help locate Federal Tax Liens that have imprecisely named the debtor.

Indexing Errors

A search to include name variations can also uncover UCC filings that have been mis-indexed at the filing office. Once a document is accepted for filing, the pertinent filing information is abstracted from the document and input into the state’s searchable index. The indexing of filings is a largely manual process and mistakes happen. Consider a UCC record that gets the debtor name right, but is misspelled on the state’s UCC index – this document will not be located using an exact name search even though it may be an active, perfected financing statement.

To reveal name variations, try using private online search system that offers broad-based name searching options such as wildcard characters and stem/truncated search logic. These features are designed specifically to help locate critical filings that might be missed using an exact name search methodology.

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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 officer
• 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!

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The concept behind lien-monitoring is that the sooner a creditor knows about a lien, the sooner they can act to protect their interests. These programs run interval searches on debtor names to check for any new filing activity and then provide timely updates to alert a creditor to potential threats. What follows is an overview of items creditors tend to include in their monitoring efforts.

Federal Tax Liens

Many people consider Federal Tax Liens the most urgent of all liens because, in some cases, they can prime a perfected UCC. For asset-based lenders in particular, it is critical to know about a Federal Tax Lien as soon as possible as there is only a 45 day window after filing of the tax lien where the UCC will provide a creditor with priority protection for newly made advances or taxpayer receivables.

UCC3 Change Statements

Monitoring debtor names for UCC3 change statement is important for two reasons. First, it may reveal that another creditor has amended the debtor name or address on their filing, alerting you to a change that may need to be made on your own filing. And secondly, a creditor can watch to see if any unauthorized changes are being made to their own UCC, such as a fraudulent termination.

State Tax Liens and Judgment Liens

Many secured parties also elect to monitor for State Tax Liens and Judgment Liens. For State Tax Liens, a lender would want to know right away if their borrower is failing to pay their taxes as it could be an indication of financial distress. Furthermore, in some states, in certain situations a State Tax Lien can prime a UCC much like a Federal Tax Lien. With Judgment Liens, they may not have the ability to trump your filed UCC, but they certainly are a good indicator of character.

New UCC Financing Statements

Lastly, creditors often monitor for new UCC Financing Statements to learn of any new junior creditors. Most standard security agreements have restrictions on the other kinds of financial arrangements a borrower can enter into. A newly made UCC Financing Statement could represent the breaking of a covenant.

If you decide to begin monitoring your accounts, be sure to do some solid research up front. And remember, liens can be filed at either the state or county level. For the most comprehensive coverage, look to a service that searches both state and county filing offices.

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Review Search Parameters

Your UCC search report will indicate the parameters that were used to perform the search. Review these parameters closely to make sure your instructions were followed and the report was produced according to your specifications. Here you should be checking that the proper name was searched free of spelling errors, the search was performed in the correct filing office and that all requested lien types were included in the search effort.

Note the Index Date (aka through date)

When a UCC document is accepted by the filing office and assigned a date and filing number, the pertinent document information must then be entered into the state’s indexing system. This process takes some time, so the UCC index is always at least a day or so behind today’s date.

A UCC search should list an index date to inform you of how current the lien information is. If your search report does not reference an index date, contact your searcher immediately. Outdated lien information can impede your ability to determine current filing status, accurate party names and priority of claims.

Examine the Results

The results section of a search report details a chronological listing of the UCC and lien filings that were located based on your search criteria. The scope of information reported here may vary based on the data source, but most will include, at minimum, a date of filing, filing number, debtor name and secured party name. A more comprehensive search report will also disclose party addresses, type of collateral and filing lapse date. Any information not abstracted onto the search report can be learned by reviewing document images.

You will need to examine the search results carefully to determine if an existing claim would jeopardize your ability to collect on debts, taking into account the filing date, collateral and status of any items listed on your search report.

When hiring a private service company to perform UCC research on your behalf, consider asking for a sample search report up front to familiarize yourself with their reporting style and to confirm that the information you need will be included on your results report.

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It isn’t “cheating” to let your searcher know that you are expecting certain records to turn up. Any party or lien information you can provide at the outset of the project will greatly improve the quality of your final results. Public records research is not an exact science; filing office records are idiosyncratic and abstracting pertinent information from the index can require some finesse.

Typographical errors occur, filings get indexed incorrectly, and subsequent filings get attached to the wrong original document. If a search does not yield the anticipated results, a well-informed searcher can take additional steps to locate the document and proactively work with the filing office to have the index corrected. Sending them back later to check for a missing lien will only add to your cycle time.

Your searcher wants to do a good job for you. By sharing what you already know, you arm him or her with the information they need to perform thorough research and investigate inconsistencies in the data on your behalf.

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Don’t Wait to Initiate

When processing times are slow, it is critical to initiate your public records requests as soon as possible. Many lenders order copies of corporate documents or lien searches near the end of their funding cycle as a means to confirm what a prospect has already disclosed. To avoid delayed closings, consider moving this step closer to the beginning of your discovery process, thereby allowing the filing office more time to fulfill your request.

Put a Rush on it

Many filing offices offer search, retrieval and filing services on an expedited basis. You can work with your service provider or contact the filing office directly to learn if the documents you need are available on a rush. Keep in mind that expedited services come at a premium cost, so you will want to inquire about additional fees before initiating your request.

Look to Online Solutions

For some transactions, you may be able to eliminate working with the filing office altogether by partnering with a service company that offers an online search and filing tool. Many companies maintain private databases for UCC and lien searches that deliver instantaneous search results and document images. These online systems often include a UCC filing component that can file your documents via electronic transmission to the filing office for quicker turn around.

The general public and even private service companies are at the mercy of the local filing offices. These offices cannot process work any more quickly than their volume of work and staffing levels will allow. Incorporating some or all of the suggestions discussed here though, can ensure you get the best turn around time available for the documents you require.

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Filing and Recordation Taxes (AL, FL, MD, TN)

Alabama, Florida, Maryland and Tennessee have special rules that may require the payment of taxes at the time of filing UCC documents. Any taxes due are in addition to the appropriate filing fee for that document.

Font Requirement (IL)

In the state of Illinois, the Secretary of State’s office requires UCC filers to type all debtor and secured party names in all capital letters in 12-point font using Times New Roman style type.

Debtor Notification (IN)

Indiana law requires a debtor notification process. For UCC1s and UCC3s filed in Indiana, the debtor must receive a copy of the filed UCC record within 30 days of filing.

Collateral Limitations (UT, WY)

Utah and Wyoming have enacted character limitations for collateral descriptions. The state of Utah accepts no attachment pages and allows for only 250 characters per page. Wyoming requires UCC filer to submit collateral descriptions in excess of 300 characters on a disk.

Note that this is not intended to be a comprehensive list of all state-specific UCC filing rules. Rather, the purpose of this post is to get you thinking about the importance of researching state requirements prior to submitting UCC documents for filing. To guard against rejected filings and potential loss of priority, consider working with a service company that is well versed in nationwide UCC rules and requirements.

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You can follow this link to the National UCC Financing Statement form and Instructions: http://www.iaca.org/downloads/forms/ucc1.pdf

The UCC1 Financing Statement form contains three main sections: debtor information, secured party information and collateral description. What follows is a brief discussion of the each of these sections:

Debtor Information

Sections 1 and 2 on the form are designated for listing the debtor or debtors by name and address. A debtor can be an individual person or a business entity.

Multiple debtors may be included on a single filing with up to two showing on the face page of the form and additional debtors identified on an additional party addendum form.

In order for a UCC filing to be effective, it must reflect the exact legal name of the debtor. Check back for future blog posts on this topic!

For business debtors, additional information such as type of organization, jurisdiction of organization and organization ID may be required. Be sure to check the filing requirements of your specific jurisdiction prior to submitting your UCC filing.

Secured Party Information

Section 3 of the UCC Financing Statement form is used to identify the secured party’s name and address. The Secured Party is the lender or creditor to whom the debtor has pledged the collateral.

In the event of multiple secured parties, creditors may be listed on an additional party addendum page or The Code permits a single secured party to be listed in a representative capacity for additional creditors. Check with your legal counsel to determine how best to structure your specific UCC Financing Statement.

Collateral Information

Section 4 is where the secured party will detail what items the debtor has offered as collateral to secure the loan. The collateral description must reasonably identify the collateral that is described in the signed security agreement. A UCC filer can list the collateral in box 4 of the UCC Financing Statement form or on attachment or exhibit pages.

Remember, always confer with your legal or risk management department to determine best UCC filing practices specific to your type of transaction.

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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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This week’s post provides a conceptual overview of the Uniform Commercial Code.

First published in 1952, the Uniform Commercial Code (UCC) is a collection of provisions that govern commercial transactions in the United States. The code itself is not law, but rather a compilation of suggested best practices that the individual states can interpret, adapt and enact into law in their jurisdiction. At present, versions of the UCC have been adopted in all 50 states, the District of Columbia and several U.S. territories.

The purpose of the UCC is to provide a consistent foundation, across state lines, for commercial transactions. Further, the code seeks to establish clear guidelines for the rights and responsibilities of the parties involved.

The code consists of a series of articles, each addressing a specific category of commercial activity such as sales, leases, bank deposits etc. The article of particular importance to those of us in the public records industry is Article 9, which discusses secured transactions.

Check back next week for more information on Article 9 of the Uniform Commercial Code!

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