Common Mistakes in UCC Filings Presented by Jack Holzknecht and John T. McGarvey

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1 Common Mistakes in UCC Filings Presented by Jack Holzknecht and John T. McGarvey Question: I know that if I have a dba loan that I file the UCC under the individual's name. Can I list the dba as the second debtor? If so, what do I put for the type of organization? Answer: No. The individual and the d/b/a are the same debtor. By filing a financing statement under the individual s name, your security interest is perfected. Listing the d/b/a as a second debtor without the requisite organizational information could result in rejection by the filing officer. This answer is based on Revised Article 9 of the model Uniform Commercial Code and may be subject to state variations; we therefore strongly suggest you contact your local counsel. Question: What is the correct way to perfect on CD's? (certificated, uncertificated, consumer, commercial, in house, other financial institutions) Answer: Revised Article 9 clarifies the proper treatment of nonnegotiable or uncertificated certificates of deposit. An uncertificated, or book entry, certificate of deposit is a deposit account on which perfection is achieved through either possession, if with your bank, or a three party control agreement if with another institution, whereas a nonnegotiable certificate of deposit would be a deposit account only if it is not an instrument. Because of the risk that a nonnegotiable certificate of deposit could be an instrument under the definition of Revised Article 9, the best practice is to take possession of the CD as though it is an instrument and also perfect as though it is a deposit account. If the certificate of deposit is an instrument (negotiable and transferable in the ordinary course of business by endorsement or assignment) possession is the only means of perfection. If the CD is issued by another financial institution, unless you are confident that it is an instrument (unusual today) and you take possession, assume that it is a deposit account, take possession, and use a three party control agreement as the means to perfect. See, Official Comment 12 to UCC This answer is based on Revised Article 9 of the model Uniform Copyright Jack Holzknecht and John T. McGarvey, Authors. 1

2 Question: Do I file a UCC on life insurance? Answer: UCC 9-109(8) states that revised Article 9 does not apply to a transfer of an interest in or an assignment of a claim under a policy of insurance, other than an assignment by or to a health-care provider of health-care-insurance receivables. Therefore, no UCC filings are necessary. Instead, a bank should enter into a three party agreement with its customer and the insurance company wherein the interest of the bank is recognized. Most life insurance companies have an approved form. This answer is based on Revised Article 9 of the model Uniform Commercial Code and may be subject to state variations; we therefore strongly Question: I have an existing UCC filing. I do a new loan and take additional collateral. Is it ok to add the collateral to the existing UCC? If so, can I also add a debtor? Answer: Yes. Assuming that either the original obligation still exists or credit is still available to the debtor, as in a revolving line of credit, you should be able to rely on the existing filings. As long as the existing financing statement describes your collateral, you are perfected upon the attachment of the security interest taken in the new security agreement. However, if you need to add collateral by amending your financing statement, the amended financing statement is effective as to the added collateral only from the date of the filing of the amendment. See UCC You can also add a new debtor by amending the financing statement. However, the amended financing statement is only effective as to the new debtor from the date of filing of the amendment. See UCC 9-512(d). Additionally, it is important to note that an intervening secured party may have obtained a PMSI on a particular item of collateral. This answer is based on state variations; we therefore strongly Question: When I do an FSA or SBA loan laser pro adds additional wording to the UCC. I have a UCC filing for business assets with the additional wording for an FSA (or SBA) loan. Can I use the same UCC each time I do an FSA (or SBA) loan with the same collateral? If I do a new loan for business assets that is not a FSA (or SBA) loan can I use my existing UCC? Answer: This question depends on what the additional wording is and is therefore unanswerable. However, see the answer to question 4 above. We strongly suggest you contact local counsel. Question: I have a loan for an individual with a grantor (a different person). I know I file the UCC under the grantor's name but can I list the individual as the second debtor? If so, what if they live in different states? Do I file in the state of the grantor, the debtor, or both? Copyright Jack Holzknecht and John T. McGarvey, Authors. 2

3 Answer: You perfect only in the name of the debtor that has granted the security interest and in the state of that debtor s principal resident. Unless your debtor has signed a security agreement, or other form of authorization to file a financing statement, you have no right to file a financing statement listing that debtor s name. This answer is based on Revised Article 9 of the model Uniform Question: What is the collateral classification for an annuity account? Answer: In general, insurance policies are excluded from Revised Article 9 by UCC 9-109(8). However, annuities seem to be the exception to the exception. They can be treated as either general intangibles, requiring perfection by filing, or instruments, requiring perfection by possession. Most authorities, though, treat them as general intangibles. This answer is based on Revised Article 9 of the model Uniform Commercial Code and may be subject to state variations; we therefore strongly Question: Does Western Kentucky have a central filing office for farm crops? Answer: No. You are no longer required to include a property description when perfecting a security interest in crops. Therefore, you file only with the Secretary of State s office. This answer is based on Revised Article 9 of the model Uniform Question: Is it better to list specific equipment on the UCC such as "...including but not limited to the attached list" or no list at all? If we have a blanket lien filed first and someone else has a UCC for a specific item would we be first on the specific item? Answer: In general, a financing statement covering all equipment perfects a secured party s interest in exactly that and gives it priority over any subsequent secured parties. However, a later secured party can obtain a PMSI, which would give it priority over your security interest in that particular piece of equipment, if it provided the debtor with the money to purchase the equipment and perfects its security interest within 20 days of when the debtor obtains possession of the collateral. This answer is based on Revised Article 9 of the model Uniform Question: If I am filing a UCC for crops do I need to check the ag lien box on the UCC? Answer: This question depends on why the bank has an interest in the crops. If a secured party takes crops, which are defined as farm products, as collateral for Copyright Jack Holzknecht and John T. McGarvey, Authors. 3

4 a loan it is not an agricultural lien and the agricultural lien box should not be checked. An agricultural lien, as defined by UCC 9-102(5), means an interest, other than a security interest, in farm products. You would need to read UCC 9-102(5) to see if your interest in the crops falls within the definition of an agricultural lien; however, it would be unusual that a bank would have an agricultural lien. This answer is based on Revised Article 9 of the model Uniform Question: If we have a loan for a building and the fixtures, do we need to file a UCC on the fixtures? If so, do we have to file at the state level or can we just file with the county? Answer: Your mortgage should be drafted to also function as a financing statement pursuant to UCC 9-502(c). If it is effective as a financing statement, your security interest will be terminated as of the date the mortgage is released. All fixture filings are to be filed with the office designated for the recording of a mortgage so you don t have to file at the state level. However, you may also perfect on fixtures by filing in a state s central filing office. A central filing on fixtures is effective as to lien creditors and other secured parties filed centrally, but will not prevail over a subsequent interest filed in the real property records. This answer is based on Revised Article 9 of the model Uniform Commercial Code and may be subject to state variations; we therefore strongly suggest you contact your local counsel. Question: When taking an Assignment of Rents, what is the best method of perfecting? a. File on the real property at the county? b. File a UCC at the central office? c. File both at the county and the central office? Answer: Most assignments of rents are taken in conjunction with a mortgage and filed in the real property records, however, rent also fits under the category of accounts as defined by UCC 9-102(2). An assignment of accounts is generally perfected by filing with the central filing office, unless it falls within the exception set forth in UCC for isolated assignments and then it is perfected by attachment. Dual perfection should be the rule. This answer is based on Revised Article 9 of the model Uniform Commercial Code and may be subject to state variations; we therefore strongly suggest you contact your local counsel. Question: Under the new Article 9, is there ever any reason to file a UCC in more than one state? Answer: This is a very broad question and cannot be answered with any specificity due to the multitude of possible scenarios. However, it is important to Copyright Jack Holzknecht and John T. McGarvey, Authors. 4

5 note that the most important reform in revised Article 9 was the simplification of the filing system. In general, you should only file in the state where your debtor is located. This answer is based on Revised Article 9 of the model Uniform Question: When doing a lien search, is there any reason to search in more than one state, or has the Revised Article 9 taken care of that? Answer: You should still search both the state and county levels (for dual or local filing states) until all financing statements have been transitioned under revised Article 9. This will occur 5 years after the date of enactment in your particular state (AZ may have a longer transition period). In most states, the transition period expires June 30, Until then, financing statements could still be found only where the collateral is located. This answer is based on state variations; we therefore strongly Question: Our bank has been in the habit when making a new obligation and Security Agreement, referring to existing UCC filings that secure another loan. In this case, we do not file new UCC's, but rely on existing filings. Are we in danger of being unsecured in this instance? Answer: Assuming that either the original obligation still exists or credit is still available to the debtor, as in a revolving line of credit, you should be able to rely on the existing filings. As long as the existing financing statement describes your collateral, you are perfected upon the attachment of the security interest taken in the new security agreement. However, if you need to add collateral by amending your financing statement, the amended financing statement is effective as to the added collateral only from the date of the filing of the amendment. See UCC Additionally, it is important to note that an intervening secured party may have obtained a PMSI on a particular item of collateral. This answer is based on state variations; we therefore strongly Question: Are fixtures considered local filings? Answer: Fixture filings are considered local filings as they are to be filed in the office designated for the recording of mortgages pursuant to UCC This answer is based on Revised Article 9 of the model Uniform Commercial Code and may be subject to state variations; we therefore strongly suggest you contact your local counsel. Question: When filing, can a DBA go along with an organization's name in line 1a? Copyright Jack Holzknecht and John T. McGarvey, Authors. 5

6 Answer: No. If the debtor is a registered organization, the only name to use, pursuant to UCC 9-503, is the name of the debtor as indicated on the public record of the debtor s jurisdiction of organization. You should not use the d/b/a. This answer is based on Revised Article 9 of the model Uniform Commercial Code and may be subject to state variations; we therefore strongly suggest you contact your local counsel. Question: Where should you terminate locally filed UCC's that are not real estate secured? Answer: A termination statement should be sent to the office in which the financing statement it is terminating is filed. The only type of amendment that local filing offices have the authority to file is a termination. This answer is based on Revised Article 9 of the model Uniform Commercial Code and may be subject to state variations; we therefore strongly Question: If there are two debtors on the original filing, should both debtors be listed on the termination? Answer: If you intend to terminate as to both debtors, you do not list a debtors name but terminate the financing statement by file number. If you intend only to release a single debtor, you amend by deleting the debtor s name as provided in lines 5 and 6 of the Amendment form. This answer is based on Revised Article 9 of the model Uniform Commercial Code and may be subject to state variations; we therefore strongly Question: If we are aware that mail no longer goes to the address on the original filing, should an amendment to update the address be done? Answer: Though an incorrect address does not make a financing statement insufficient, it is important to keep it updated. The premise behind Revised Article 9 is notice to third parties. This answer is based on Revised Article 9 of the model Uniform Commercial Code and may be subject to state variations; we therefore strongly Question: How can we get signed up for electronic filing in state of Tennessee? d. ANSWER: After a review of the Tennessee Secretary of State s website, it does not appear that Tennessee has the capability of electronic filing yet. For information related to document filing and UCC searches, we recommend you contact the Tennessee Division of Business Services at (615) We also recommend you contact local counsel. Question: If there are two debtors on the original filing, how should the lender file the termination, if they only want to release one of the debtors? Copyright Jack Holzknecht and John T. McGarvey, Authors. 6

7 Answer: If you intend to terminate as to both debtors, you do not list a debtors name but terminate the financing statement by file number. If you intend only to release a single debtor, you amend by deleting the debtor s name as provided in lines 5 and 6 of the Amendment form. This answer is based on Revised Article 9 of the model Uniform Commercial Code and may be subject to state variations; we therefore strongly Question: ABC Corp, Inc. dba Smith's Glass Company. We know the Organization is 'Corp' for 1e, but what would the company be classified as for 2e? Answer: To properly complete the financing statement, you would put ABC Corp., Inc. as the name of the debtor on line 1a of UCC1 and then proceed to complete the remaining parts of section 1. Section 2 of UCC1 is only used for an additional debtor. The d/b/a name of the company is not an additional debtor and should not be used in the financing statement. Therefore, nothing should go in section 2e. This answer is based on Revised Article 9 of the model Uniform Question: We have a portable metal building that is not attached to real estate. Do we do a regular UCC with the state or a fixture filing? or both? Answer: If it is truly not attached to the real estate, the central filing is the most important, however, this is an instance where we would advise filing both ways. This answer is based on Revised Article 9 of the model Uniform Commercial Code and may be subject to state variations; we therefore strongly suggest you contact your local counsel. Question: Is my understanding correct-we only to file with the Secretary of State (National) unless there is real estate involved and you would then file with County & State? How can we find out what States do not issue an origination number Answer: In general, all filings are to be made in a central filing office unless they cover as-extracted collateral, timber to be cut or the collateral is goods that are or are to become fixtures, which should be filed in the office designated for the recording of a mortgage in the county in which the real property is located. To determine whether or not a state supplies an organizational ID number, you would need to look at that particular Secretary of State s records regarding registered organizations. This answer is based on Revised Article 9 of the model Uniform Commercial Code and may be subject to state variations; we therefore strongly Question: Back on the life insurance as collateral...is it necessary to take possession of the actual insurance policy? Copyright Jack Holzknecht and John T. McGarvey, Authors. 7

8 Answer: Life insurance is excluded from the scope of revised Article 9 by UCC It is generally subject to the common law of assignments. A bank can obtain from the life insurance company the form of assignment (three party agreement) that it will accept and acknowledge. This answer is based on state variations; we therefore strongly Question: Could you not file on the specific annuity and skip the category to ensure perfection? Answer: Annuities are generally thought not to be excluded from revised Article 9 and are treated as either an instrument, requiring perfection by possession, or a general intangible, requiring perfection by filing. Most case law tends to lean toward treating them as general intangibles. This answer is based on Revised Article 9 of the model Uniform Commercial Code and may be subject to state variations; we therefore strongly Question: If a filing was assigned to a new secured party and this filing was subsequently continued by the original secured party (although not the secured party of record due to the assignment) and the continuation was accepted by the filing officer, who is the secured party of record related to that filing statement? Answer: Any filing must be authorized to be effective. If the original secured party did not have the authority to file the continuation, it could be a problem. To properly answer this question, it would be necessary to have more facts and perform more legal research into what for us is a first impression question under Revised Article 9. This answer is based on Revised Article 9 of the model Uniform Commercial Code and may be subject to state variations; we therefore strongly Question: If Real Estate is the only collateral, does a filed mortgage perfect your security interest? Answer: Real property is excluded as collateral from revised rticle 9. Therefore, you cannot have a security interest under revised Article 9 in real property. This answer is based on Revised Article 9 of the model Uniform Commercial Code and may be subject to state variations; we therefore strongly suggest you contact your local counsel. Question: I just want to make sure I understand adding collateral. I understood you to say you may add collateral to an existing filing even when we are taking a new obligation (loan). Did I understand correctly? Answer: You may add collateral to an existing financing statement whenever necessary by amending the financing statement. However, pursuant to UCC the amended financing statement is only effective as to the added collateral Copyright Jack Holzknecht and John T. McGarvey, Authors. 8

9 from the date of its filing. This answer is based on Revised Article 9 of the model Uniform Commercial Code and may be subject to state variations; we therefore strongly Question: We have a UCC from a loan done in 2002-We are doing a new loan using the same collateral- We are giving the customer additional money-do we need to file a new UCC? If they received a loan from a different lender in the mean time can we still use an old UCC? Will we have our original position or will the other lenders lien come first? Answer: Assuming that either the original obligation still exists or credit is still available to the debtor, as in a revolving line of credit, you should be able to rely on the existing filings. As long as the existing financing statement describes your collateral, you are perfected upon the attachment of the security interest taken in the new security agreement. However, if you need to add collateral by amending your financing statement, the amended financing statement is effective as to the added collateral only from the date of the filing of the amendment. See UCC Additionally, it is important to note that an intervening secured party may have obtained a PMSI on a particular item of collateral. This answer is based on state variations; we therefore strongly Question: On an in lieu financing statement, should the collateral be described using the new definitions (such as the super generic) or use the language used on the original filing? Answer: If your security interest effectively covers all of the debtor s assets, you may use a super-generic description or the language from the original filing. This answer is based on Revised Article 9 of the model Uniform Commercial Code and may be subject to state variations; we therefore strongly suggest you contact your local counsel. Question: If I were adding additional collateral to an existing financing statement, would a pre-search need to be done to make sure no filing exists on the collateral we are adding? Answer: Yes, because pursuant to UCC the amended financing statement is only effective as to the added collateral from the date of its filing. Thus, if a secured party has already filed a financing statement covering the additional collateral, their interest will be prior and superior to yours. This answer is based on Revised Article 9 of the model Uniform Commercial Code and may be subject to state variations; we therefore strongly suggest you contact your local counsel. Question: If doing an individual credit loan to a married person can you file the UCC-1 with both spouses names as the debtors? (Wisconsin loan) Copyright Jack Holzknecht and John T. McGarvey, Authors. 9

10 Answer: No, not unless the other spouse has an interest, other than a security interest or other lien, in the collateral, pursuant to UCC 9-102(28). This answer is based on Revised Article 9 of the model Uniform Commercial Code and may be subject to state variations; we therefore strongly suggest you contact your local counsel. Question: If you have a general partnership (with no partnership documents recorded at the state level) made up of two individuals residing in different states. Where do you record? Answer: If the partnership is registered, then the debtor is an organization. You would file in the state in which the organization was registered. If the partnership is not registered, then the debtors would be the individuals and you would need to file in the state in which they reside. If the debtors reside in two different states you would need to file a financing statement in each state. This answer is based on Revised Article 9 of the model Uniform Commercial Code and may be subject to state variations; we therefore strongly suggest you contact your local counsel. Question: If we have an existing filing and extend new credit to our borrower and using existing filing for our new loan; Would we need to do a pre-search to make sure no other filings exist. It was my understanding that we would not be perfected for our new loan if a filing was in behind our existing filing. It was explained to me that if we had an existing filing, that filing was tied to the specific security agreement for that loan and we couldn't tie a new security agreement to the existing filing. Answer: Assuming that either the original obligation still exists or credit is still available to the debtor, as in a revolving line of credit, you should be able to rely on the existing filings. As long as the existing financing statement describes your collateral, you are perfected upon the attachment of the security interest taken in the new security agreement. However, if you need to add collateral by amending your financing statement, the amended financing statement is effective as to the added collateral only from the date of the filing of the amendment. See UCC Additionally, it is important to note that an intervening secured party may have obtained a PMSI on a particular item of collateral. This answer is based on state variations; we therefore strongly Copyright Jack Holzknecht and John T. McGarvey, Authors. 10