Whether a loan is to expand a business or to finance new equipment, prudent financial professionals take several steps to minimize the risk involved in acquiring a business or closing a commercial loan. Most lenders aren’t going to finance the transaction or make the loan without expecting to be able to foreclose and take possession of collateral in the event of default, or that no other parties (except perhaps Uncle Sam) will have priority to be paid ahead of them.
Article 9 of the UCC requires the lender (secured party) to perfect its security interest in most types of collateral by preparing a UCC-1 financing statement and filing it with the appropriate government agency (most often the Secretary of State or County Recorder). As the lender who has taken the risk and extended the loan, it’s critical to pay close attention to every detail when preparing the UCC financing statement. Even the seemingly smallest of typographical errors could render the filing ineffective and your priority position no more.
But let’s say the UCC-1 financing statement is accurate in all regards when it’s filed, but the life of the loan spans for five years, which is the effective life span of UCC financing statements in every U.S. jurisdiction except Wyoming.
It’s what can happen in those five years that can change your UCC-1 from being perfected to being unperfected.
A business could change its name, move to a new location, open another location, be acquired by a competitor, or buy out a rival. A person could get married or divorced, move to another city, then move again.
Each of these events and a host of others can have an impact on your UCC financing statement, rendering it misleading and ineffective. So regardless of how accurate the UCC-1 was, a change in the borrower’s situation can cause the lender to lose its entire investment in the event of default.
Lien Solutions' goal is to help you understand how to avoid the pitfalls that could put your loan at risk and move you to the back of the creditor line. We’ll show you how to maintain your priority status as a secured creditor, at least in terms of keeping your place in line when it comes to doling out the leftover assets in the event of liquidation or bankruptcy. We’ll provide examples to show the relevance of each situation, what Article 9 says, and how seemingly innocuous events can pose real threats to lenders.
A rose by any other name
Our first situation involves changes in debtors’ names. Let’s look at a hypothetical case of how a deceptively simple thing can place a lender in harm’s way.
Last year, Bingo Bank issued a loan to Beach Blanket Productions, Inc., a California corporation. The bank dutifully listed Beach Blanket Productions, Inc. as the debtor on a UCC-1 filing statement in California. The collateral listed on the financing statement was “all assets.” Later the bank learned the business had changed its name to BBP Entertainment Corp. when Beach Blanket’s bookkeeper called to order new checks, What should the bank do now?
Bingo Bank, as soon as possible, should amend its existing UCC-1 financing statement in order to preserve its secured position as a creditor. Here's why: If a UCC search is conducted by the company under its new (and thus current) name, Bingo Bank’s existing financing statement will not be revealed by California’s standard RA9 search logic as a creditor, as its filing is under the previous name, Beach Blanket Productions, Inc. Therefore, any new creditors issuing loans and making California UCC filing statements using the company’s current name, BBP Entertainment Corp., would not reveal Bingo Bank’s existing UCC-1 and would conclude no existing claims exist on any personal property collateral of the debtor. The bank’s UCC-1 filing, now unable to be located using the debtor’s “correct name” (because it contains only the former company name) has become “seriously misleading.”
Fortunately for secured parties, “seriously misleading” as provided in Article 9 doesn’t always mean “unperfected.” But to ensure interested third parties and potential future creditors are aware of and have actual notice of their filing, it’s in all parties’ interest for Bingo Bank to amend its existing UCC-1 on record to reflect the debtor’s correct name.
Lien Solutions Best Practice: To determine the correct name under which to file when the debtor is an organization, the bank should obtain a certified copy of Articles of Incorporation. To maintain a healthy filing after a name change event, the bank should file a UCC-3 to reflect the change in business name from Beach Blanket Productions, Inc. to BBP.
A walk down the aisle
In our next scenario, Jamie E. Melton is an individual who lives in New Hampshire but owns a business in Massachusetts. As sole proprietor of the business, she is listed as the debtor on UCC-1 financing statements filed by her business lender, Start Up Bank, in both states on July 2, 2014.
The collateral listed on each of the statements is stated as “All Assets.” Soon after her recent spring wedding and honeymoon in Mexico, she came into the bank and presented her newly updated driver’s license to the teller displaying her name: Jamie E. Provencher.
What does Start Up Bank need to do?
At any time a bank becomes aware of a change in the name of a debtor that is an individual, it should undertake certain steps to determine if an amendment to its existing UCC-1 financing statement is warranted. According to UCC Section 9-507 entitled “Change in Debtor’s Name,” if a debtor so changes its name that a filed financing statement becomes “seriously misleading,” the initial financing statement is effective only for collateral acquired by the debtor before and within four months after the change. The initial financing statement is not effective to perfect against collateral acquired by the debtor more than four months after the name change.
Whether seriously misleading also means unperfected, however, requires a careful review by a bank officer or legal counsel to consider important additional information to make that determination:
- What is/are the name(s) of the debtor listed on the UCC?
- What individual debtor name alternative (Alt. A or Alt. B) was adopted in the state of filing?
- Is this a blanket lien or does it cover only specific items pledged by the debtor?
- Was the initial filing made on or before the date that the recent UCC amendments became effective in that state?
Absent a review in every case, the most conservative approach a secured party could take to ensure continued perfection would suggest filing a UCC-3 name amendment to add a new debtor name when the individual name is changed on their state-issued driver license or non-driver ID card.