Best practices for UCC filings and searches

A Uniform Commercial Code (UCC) search uncovers claims or liens against the personal property or assets of an individual or entity debtor, used by that debtor as collateral for a loan.

Due diligence is important when performing UCC searches to make sure no claims on the debtor’s assets are missed. The UCC was originally designed to streamline commerce across all 50 states and territories. Still, the UCC filing and searching process has become more challenging due to legal, technological, and structural changes over the last few years such as the following:

• Increasing use of digital assets in transactions and use as collateral
• Increasing use of electronic filing versus paper filings
• Adoption of new UCC filing forms and questions about the acceptability of older versions

Name change renders a UCC filing “seriously misleading”

The correct name of a registered organization debtor is the name as of the date of filing the UCC form. Corporations and LLCs are formed under one name, but they can change their name after formation. The case of Scarver v. Silverline Servs. Inc. (In re Wastetech, LLC), 605 B.R. 264 (Bankr. N.D. Ga. 2019) highlights the importance of using the current name. Here are the relevant facts:

• The debtor was an LLC formed under the name NTC Wastegroup.
• The debtor changed its name to Wastetech.
• After the name change, the lender filed a UCC-1 claiming a security interest in certain accounts receivable of the debtor pursuant to agreements signed 8/7/17, listing the debtor under its former name of NTC Wastegroup.
• The debtor filed for bankruptcy and the bankruptcy trustee challenged the lender’s claim to have a perfected interest security interest in the collateral.

The bankruptcy court found as follows:

• A UCC search conducted using the correct current name of Wastetech did not reveal the lender’s UCC-1, therefore, the lender’s use of the incorrect name rendered its financing statement seriously misleading.
• The court also found the collateral description inadequate, as the term “certain accounts” was not a general category (listing “all accounts receivable” would be a general category and legally sufficient) and because there were no agreements signed on 8/7/17, the financing statement did not provide a description that reasonably identified the collateral subject to the lender’s security interest.
• Based on both the use the incorrect name and the inadequate collateral description, the lender’s security interest was not properly perfected and was subordinate to the interests of the trustee in bankruptcy.

That case points out the importance of filing a UCC-1 using the current name, even if it’s different from the name the debtor formed under. But what if you filed a UCC-1 using the then current name, and debtor changes its name after your financing statement is filed? If that happens, an amendment (using a UCC-3 form) needs to be filed to change the debtor’s name. If an amendment is filed within four months of the name change, the secured interest remains perfected for all the collateral, including property acquired after the name change. If an amendment is not filed within four months, and the name change makes the filing seriously misleading, the secured party would remain perfected only for collateral acquired before the name change and within four months after the name change.

Listing correct individual names in a UCC filing

Accuracy is just as important when naming an individual debtor in a financing statement. What constitutes a correct individual debtor name depends on the state. There are two options:

• Alternative A: In states that adopted Alternative A, a correct name is the name that exactly matches the name as it appears on the individual’s non-expired driver’s license. This option has been adopted by all but a small handful of states.
• Alternative B: The “Safe Harbor” option. This option gives the secured party the ability to come up with multiple names for an individual. For example, say someone’s driver’s license identifies him as “Steven Alexander Moore III”, but this person files taxes under the name “Steve Moore” and owns property as “Steven Moore”. In an Alternative B state, Steve Moore or Steven Moore may be acceptable as a correct name. Only a few states have this option.

In an Alternative A state, the filing is very clear – use the name exactly as it appears on the driver’s license. However, in Alternative B, the situation is much less straightforward. How can you navigate this?

When in doubt, file against multiple names. Find out what names the individual may have used in the past several years, as well as the addresses they used during this time. (You need to know where they lived to know what states to file in, as you file in the state where the individual debtor resides). The more data you collect the better.

UCC searching checklist

When you conduct a UCC search it’s important to cast a wide enough net to make sure you are not only uncovering the properly perfected security interests against the debtor’s property, but other UCC filings that may or may not be properly perfected. How do you perform an adequate UCC search? The following checklist will help you catch any “hidden liens”:

• Search using the name of a registered organization’s current formation document and an individual’s non-expired driver’s license.
• Search using any past legal names of the debtor.
• Search using any DBAs registered or used by the debtor.
• Search using other names commonly used by individual debtors.
• Search using minor deviations from the correct name.
• Search not only in the registered organization’s current state of formation, but in any former states of formation.
• Search not only in the current state of residence but in states where the debtor may have been located in the past, or if an individual has residences in more than one state, search in each of those states.
• If the collateral is fixtures, minerals, or timber, search in the local jurisdiction where the collateral is located.

Special considerations when the collateral is a digital asset

UCC Article 12, part of the 2022 updates to the UCC, governs how property rights in a CER (controllable electronic record) are transferred. CERs include things like cryptocurrency and NFTs, although these terms are not specifically mentioned in Article 12.

Here are some things to understand about Article 12:

• A key part of the definition of a CER is whether a party can “control” it.
• Only someone who controls a CER can benefit from the “take-free” rule in Article 12, which allows them to take the CER without worrying about property claims against it.

How you perfect a security interest in a debtor’s CER and how you find out if anyone else has a security interest in a debtor’s CERs depends upon whether the state has adopted Article 12. As of the date of publication, 32 states had adopted Article 12 (although with varying effective dates).

• In states where Article 12 is not in effect, secured parties generally treat digital assets as a general intangible and perfect their interest by filing a financing statement.
• In states where Article 12 is in effect, secured parties can perfect by control and can also file a financing statement.
• In Article 12 states, a secured party who controls a CER has priority over creditors who only file a financing statement, even if the secured party gains control after the financing statement is filed.
• The 2022 UCC amendments include transition rules to protect the expectations of parties involved in transactions that took place before the state adopts the amendments. There is an “adjustment date” that lasts at least one year from when the amendments take effect in that state. For instance, a secured lender with a priority security interest in collateral under the old rules will keep that priority during the transition period. This gives the parties involved time to update their loan agreement to meet the new rules.

How do you find out if a debtor has already given a security interest in its CERs?

• Conduct a UCC search. This will reveal if the secured party has filed a financing statement listing digital assets as collateral.
• In Article 12 states, a UCC search will not reveal who has control over the CERs. You may have to depend on the debtor to let you know, or ask for the debtor to provide you control, or take other steps.

Learn more

Contact us to learn more about how CT Corporation can help with your UCC filing needs.

Related article:

"What's In a (UCC) Name? The Consequences of Not Using the "Exact Legal Name"

Frequently asked questions

What does a UCC search show?

A UCC search uncovers any persons or organizations who have made a claim against an individual or entity’s assets or personal property used as collateral for a loan. This search provides details such as the debtor's identity and location, the initial filing date and reference number, the state and date of filing, the secured party's identity and location, and the document's reference number.

What are UCC filings used for?

Uniform Commercial Code (UCC) filings allow creditors to inform other creditors about assets that a debtor has pledged as collateral in a secured transaction. These UCC liens, filed with Secretary of State offices, act as a public notice from the creditor about their stake in the property.

What is a reverse UCC search?

A reverse UCC search allows you to find a list of UCCs using the secured party's name instead of the debtor’s name. Some refer to it as a secured party search.