A creditor that takes a security interest in assets of a debtor to secure the debtor's obligations will, for most types of assets, "perfect" the security interest by filing one or more financing statements in the appropriate filing office. Under the Uniform Commercial Code (the "UCC"), the financing statement is required to contain the names and addresses of the debtor and secured party, a description of the collateral and, in certain cases, other information. If the security interest is not perfected, then it would not be enforceable against a trustee in bankruptcy for the debtor, and would be subordinate to the security interests of any other secured parties of the debtor which have perfected their security interests.
A court may determine that a security interest has not been properly perfected because of mistakes made by the secured party in preparing or filing a financing statement. Recent court decisions serve as reminders that there are many traps for the unwary which can adversely impact a secured party attempting to properly perfect its security interest.
This article describes some of these traps and gives practical advice which can help a secured party avoid them.
- Use of Correct Name of Debtor. The financing statement must contain the correct name of the debtor, nothing more and nothing less. In one recent case, the debtor's name in the financing statement included a "doing business as" name, as well as the debtor's correct name. The financing statement was filed in Nebraska. In finding that the incorrect name of debtor was included in the financing statement, the court based its decision upon the fact that the Nebraska Secretary of State's search engine, using Nebraska's standard search logic, did not reveal the financing statement filed by the creditor. This is a common test used by courts in determining whether a financing statement was deficient for failing to include the correct name of the debtor. Search logics vary, but if the correct name of the debtor (nothing more and nothing less) is shown in the debtor's name section of the financing statement, all search logics should identify the name; therefore, this is how the debtor's name should be set forth. Entities such as corporations, limited liability companies, limited partnerships, and, in some states, business trusts are formed by the filing of a certificate or other charter documents with the applicable state office (usually the secretary of state). This certificate, together with any amendments thereto which have changed the name, should show the correct name of the debtor. Creditors should review recently filed certified copies of the debtor's charter documents and all amendments to make sure the correct name is being used, rather than relying on documents generated by the debtor showing its name. This practice is especially advisable because debtors often use "doing business as" names in their agreements.
- Place to File. Secured parties are often held
not to have perfected their security interests because the
financing statement was filed in the wrong place. Under Sections
9-301 and 9-501 of the UCC, a financing statement should be filed
in the appropriate filing office in the state where a debtor is
"located," except that financing statements filed to
perfect security interests in fixtures, timbers or minerals should
be filed with the local filing office where a mortgage on the
related real property would be filed. Section 9-307 of the UCC
provides that, with certain limited exceptions, the
"location" of a "registered organization"
(e.g., corporations, limited liability companies, limited
partnerships, and, in some states, business trusts) is the state
under whose laws it was organized. So, for example, a corporation
incorporated in Pennsylvania is deemed to be located in
Pennsylvania. A debtor who is an individual is deemed located in
the state of the individual's principal residence. A debtor
that is an organization (but not a registered organization) and has
only one place of business is deemed located at its place of
business, and if it has more than one place of business, is deemed
located at its chief executive office. Once you determine the
location of a debtor, you then need to determine the office in
which you actually file your financing statement. In most states,
the filing office for collateral other than fixtures, timber or
minerals will be the secretary of state's office, but this is
not always the case. For example, in Maryland, the filing office is
the Maryland Department of Assessments and Taxation, and in Georgia
financing statements are filed with the superior courts of the
various counties.
Secured parties should also keep in mind that there is certain collateral in which a lien is perfected other than by filing a financing statement under the UCC. This includes, for example, certain ships and aircraft, motor vehicles that do not constitute inventory, and copyrights. There is also collateral which can only be perfected under the UCC by means other than by filing, such as deposit accounts, which are perfected by taking "control" of such accounts under Section 9-104 of the UCC. - Description of Collateral. Collateral must be described in a financing statement in a way which reasonably identifies the collateral. Section 9-108(b) of the UCC provides that a description would reasonably identify the collateral if it identifies the collateral by specific listing, category, quantity, computational or allocational formula or procedure, or any other method if the identity of the collateral is "objectively determinable." Consequently, it is important to be as specific as possible. For example, for a security interest covering only certain pieces of equipment, such pieces should be specifically identified with, among other things, the serial number of each piece of equipment if there is any. Often a security interest is granted in all of certain types of collateral such as accounts (the term used in the UCC to refer to accounts receivable) and inventory. If that is the case, then the description could be "all now owned and hereafter acquired accounts, accounts receivable and inventory, of the debtor." Sometimes all or substantially all of the assets of the debtor are pledged. Although Section 9-504 of the UCC permits a supergeneric description in the financing statement such as "all assets of the debtor" or "all of the debtor's personal property," such a description is not, according to Section 9-108(c) of the UCC, sufficient if used in a security agreement. Consequently, a specific description should be used in the security agreement, but the "all assets" or "all personal property" type of description could be used in the financing statement. In any case, a secured party will be deemed to have a security interest in the lesser of the collateral described in a financing statement or that described in the security agreement so, except as mentioned in the preceding sentence, the descriptions in both the financing statements and the security agreement should be the same. There are a few types of assets, such as commercial tort claims, which must be identified specifically, even if the collateral includes all commercial tort claims.
- Obtaining Authorization to File. Financing statements are not signed, and normally the secured party files the financing statement. However, in order to make a valid filing, the secured party must have authorization to file from the debtor. This is typically done by including such an authorization in a document signed by the debtor, such as the loan agreement or security agreement.
- Timely Filing. Under the Federal Bankruptcy Code, if a filing is not made to perfect a security interest within 30 days after the security interest is granted, it may be set aside as a preferential transfer by the debtor's trustee in bankruptcy if the bankruptcy takes place within a year after the security interest is obtained. Consequently, it is important to have the financing statement filed within such 30-day period.
- Continuation of Perfected Status. Section 9-507 of the UCC provides that if a debtor changes its name, then unless an amendment to the financing statement with the new name is filed within four months, the original financing statement is ineffective to perfect a security interest in any assets acquired by the debtor after the end of such four-month period. Section 9-316(a) of the UCC provides that if the debtor changes its location to another jurisdiction, a new financing statement will have to be filed in the appropriate office of the new jurisdiction within four months after the change in order to continue the perfected status of the original security interest. If not timely filed, any collateral acquired by the debtor after the end of such four-month period will not be perfected by the original financing statement. Since the UCC contemplates that a registered organization's location can't change, this would apply if the debtor is an individual who changed his or her principal residence to another state, or if the debtor were an organization (but not a registered organization), and moved its place of business (if it only has one) or moved its chief executive office (if it has more than one place of business) to another state. In addition, a financing statement will become ineffective unless a continuation statement relating thereto is filed within the six-month period (not before, and not after) before each fifth anniversary of the original filing. Consequently, if any of the secured obligations are unsatisfied during that time, a continuation statement should be filed within such six-month period. A financing statement filed before the period beginning six months prior to the fifth anniversary will not be effective, and some secured parties make the mistake of filing too early.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
