Uniform Commercial Code (UCC) can be complicated between debtor name, search logic, and filing procedures. But getting it right can save your company a myriad of problems. Getting and staying organized, paying attention to detail, and keeping close track of the changes that can affect your lien statuses can be easy with the help of a few best practices.
View the recorded webinar here.
*This is a direct transcription and may contain inaudible portions
Anu: Welcome to our webinar, What You Need to Know for UCC Searching and Filing. My name is Anu Shah, and I will be your moderator. Joining us today is Lacey Bower. Lacey works out of CSC's corporate headquarters in Wilmington, Delaware, and has been with the company for over eight years. She works with banks, lenders, lessors, attorneys, and corporations of all sizes. And, with that, let's welcome Lacey.
Lacey: Thank you very much, Anu. So, welcome to today's session. I want to talk a little bit first about CSC and why we know so much about UCC. We've been around for 115 years, we're headquartered in Wilmington, Delaware, and we've been providing lean-related services for over 60 years. Last year, we processed about 6 million UCC transactions, and we monitored 8 million, and we are currently the largest US-owned provider of lean-related services.
Some of you may also be familiar with some of the other things we do, like helping companies with their entities and managing their litigation. We're the largest corporate domain registrar in the world, and we also provide traditional services like registered agent and entity formation.
So what we'd like to talk about today, though, is the recipes for success with UCC. But first, there are some questions we all need to ask ourselves when we're doing UCC work, and then we need to talk about the best practices for both searching UCCs that are already filed, filing UCCs, monitoring our portfolio for any changes to our debtors that could impact our position, and then some of the tools that we have here at CSC to help you.
We're going to finish that up with a demonstration of CSC's financial systems, CSC's financial online. It is a UCC portfolio management tool. And then, we'll open it up for some questions at the end of today's call.
So some questions we should ask ourselves before we get started: are you following the best practices for searching and filing every time, and do you know what they are? Do you have your debtor's name correct on your filing every single time? That's going to be really important. And, do you monitor your portfolio for changes to your debtor's information that could impact your position?
So starting off with searching, we'll go over some best practices for running UCC searching. The first thing we need to know is what name should we start with and, really, on individuals, the starting point for your name, post-2010 UCC Article Nine amendments, is going to be the individual's driver license. If you're going to be searching on a company, a registered organization, an LLC, a corp, then really the name that you need to use is what's called the public organic record and, in the case of registered organizations, that's going to be their formation document or any amended or restated articles of incorporation.
If you're searching for UCCs where there is collateral administered by a decedent’s personal representative, you will search the name of the decedent, and if you're searching for UCCs where the collateral is held in a trust and that trust is not a registered organization, you won't search on the trustee, which is a common mistake we see, but you do want to search on the name that's put forth in the trust document. Only if there is no name would you then go ahead and search on the set lore.
And one thing we need to be really careful of, you could be searching on the name that should be what's on the filing, but the onus is always on the searcher to uncover any filings that could be out there with a name variation. So you need to be very careful to search for common variations because the onus will be on you to find.
And that's what makes searching out of the state incredibly difficult. Now, if you work in one state it's not quite so hard because maybe it's a state that has a really good search engine and you work there everyday, and you're really comfortable with how the search engine works, and so you can formulate your search criteria in a way that's going to uncover name variations and give you a good search.
A lot of us, though, are searching out in multiple states, and that can be problematic. Not all states' search engines are created equal, and a lot of them don't give great instructions for how the search engine actually works. So, unless you understand how that state's search engine . . . how their logic is going to work in minute detail and how the search will perform under every single circumstance, and how the state has historically indexed their filings – so how they normalize the name – then it's going to be extremely risky to go ahead and search solely [inaudible 00:05:07]. We'll take the pull-down.
And I want to provide some examples of . . . because not all of us have the same search issues. But I want to provide an example of one of the things that can make searching difficult. So you'll see, there is a screenshot up of an actual debtor box on the UCC-1 form, and we went out to a state, and I believe this was in Pennsylvania but the search was performed a while ago, so don't quote me on that, but the search engine at the time said, on the state's site, "Enter the beginning of the debtor's name," that was it. So the debtor is The McKernon Group, Inc., and we filed this UCC so we knew it existed.
So we went ahead and we ran a search, and we searched on “The McKern”, thinking maybe somebody might have spelled McKernon wrong, and we wanted to make sure we picked it up. And when we ran that search we actually got no results back, it said there were no filings at all. We knew that was not the case.
So we thought, well, sometimes people take off noise words like "the" or "of" or "and", so we took off the word "the" and ran the same search and, again, we found not even a single UCC file. So we ran it a third time as “The McKernon Group” and this was interesting. On this search we did find some filings; however, we did not find the filing that we had filed.
So we plugged on, we put the exact legal name of the company in that we knew was on the filing and, again, this search actually returned nothing, there were no results at all found. So we searched again, dropping "the", and this time, lo and behold, we found our filing. However, some of the filings that we saw in the previous searches didn't pop up. So we searched again on just “McKernon” and, again, we found our filing but not all filings, and then we searched on “McKernon Group, Inc.” with "The" at the end, and it was the same scenario; our filing was found but the filings from previous searches, not all of them came up.
And so, we were very confused by this. We seemed to have followed the directions from the state, pretty much, to a tee, even accounting for a noise word at the beginning, and so we called the state and what they told us was, their search engine, for the first two searches, we weren't going to find anything because they don't disregard spacing, so if you put a partial word in you will not get any results. For the next two, or the next one, “The McKernon Group” search without the corporate indicator, our filing did not come up and the reason for that was the person there who was indexing the filing was indexing everything with the word "the" at the end of the filing.
However, this state also has electronic filings, so we did find some filings out there and the reason for that was, if a filing came through and was e-filed, there was no human involvement and the filing went into the index of the public record exactly . . . with the debtor's name exactly as it appeared on the filing. However, our filing had some exhibits and the system was sensitive to that, so we had to paper file it, and so the person who was indexing it was indexing it differently than how their system was indexing it.
The search with The McKernon Group, Inc., nothing was found because, unbeknownst to us, there's a character limitation for how many characters can be in your search in this state, and we exceeded the character limitation. So, never were we going to be able to run one search in this particular state and find all these filings, and I'm pretty creative but, quite frankly, I would never have thought that things could be filed differently and indexed differently based off whether they were e-filed or paper filed.
So now we've talked about some of the perils of searching, let's go ahead and talk about the filing side. And here's where we're going to talk about debtor names again. So, getting the debtor name right on your filing, even though we know we have to look for variations – they could be out there – is super imperative. The goal of filing, really, is so that you're going to be searchable and other people can find you, but also so that if you have to enforce your rights as a secured party, your filing is out there. So we have to understand, how did the 2010 amendments to UCC Article Nine really change the way we use our debtor name, and then what are the best practices for filing against different types of debtors.
So individual debtors, let's talk about people, consumers, first. There really were only two options put forth with the 2010 amendment. There was Alternative A and Alternative B. Alternative A was also called the only/if approach, and basically what it says is the name that's on the filing for your consumer needs to be the name exactly as what appears on their driver’s license. If, and only if, they do not have an active drivers license would some other form of identification work, or maybe, potentially, use the surname and the first personal name.
This is very strict for filers, but it puts us all on an equal playing field because we know, get the drivers license on every single filing. Now, I think, at the time it was enacted, there were about ten states that didn't go with this option. However, most of them have kind of decided to switch over, and so most introduced legislation at a later time, switching to Alternative A.
I believe there's only about five jurisdictions that use the second approach, which is called the safe harbor – or Alternative B – approach. What this approach says is that the name that's on the driver’s license could be perfected, but other names could work as well, like the surname and first personal name. This is a lot more forgiving for the person doing the filing but, like I said, not many states are currently following this method. And here's just a little map that we keep up to date, showing you the Alternative A – the navy states – and the Alternative B, sort of the light blue states.
Now, we also have some resources that are available for figuring out what your drivers license or your debtor's name should be. There's a little drivers license checklist. It's out on a site we'll talk about a little bit later called CSC Transaction Watch, which has a lot of great job aids but you can certainly download this when we put the site up. It's just a job aid to determine what name should you be using, and what would be a secondary source of the debtor's name should they not have an active drivers license.
Those are individuals – driver’s license, driver’s license, driver’s license, that's pretty much it.
For corporate debtors, though, we need to make sure that we're using the public organic record. So, for corporations, LLCs, registered organizations, that, as I mentioned, will be the formation documents or any amended or restated articles. If you're working with some sort of non-traditional entities like a government charter entity like your farm credit bank, then you're going to use the name that is on the charter document. If you're going to file against a business trust like those commonly found in Massachusetts, you will use the name that's on record, filed with the state under state law, and if you have an entity like a Fannie Mae or Freddie Mac that was created by legislation, the correct name or the public organic record would be the name that . . . the statute, basically, that created the entity.
It's really important when you're doing your UCC filing to get the name down perfectly, down to the punctuation and the spacing. Now, capitalization doesn't matter, the names are not case-sensitive on UCC filings, but the smallest variation in a name could have a court throw out a secured party's claim. So here's just a few examples.
Here's a company called Network Solutions, Inc., and there was a UCC filed on them, and the name on the UCC had "Net space work", and in this case the court decided that this was seriously misleading, this space between Net and Work, and the secured party lost the claim for $80,000.
Punctuation, also, super, super important. Here's a company called K.W.M. Electronics Corporation. The name on the UCC in the debtor box was without punctuation. The secured party put in a claim and, again, the court said that that was seriously misleading not to have the punctuation, and the claim was for $295,000 and was denied.
And something we see all the time, the corporate indicator, the Inc. or LLC or PC, whatever it might be. Dropping that could have bad consequences. So here's a filing where the formation documents has “Tyringham Holdings, Inc.”, but the debtor name on the UCC was just “Tyringham Holdings”, missing the Inc., and again, this is one of those scenarios where that was found to be seriously misleading and the secured party lost the claim for $310,000.
So we know what name we should be filing on now, we know what our source document for the name should be, but where should we file? So the general rule of thumb when you're doing a filing is to file in the central filing office, which is usually the Secretary of State or division of corporations, where the debtor is located.
There are some exceptions to this. There are two states that don't really have a central filing office. That would be both Georgia and Louisiana. Georgia is trying to centralize through Coweta County, and that's where we file through. But, Louisiana, everything gets filed at the parish. There's also some exceptions to where you file based off what type of collateral is securing the filing. That would be things like fixtures, if you had collateral that was timber to be cut or minerals to be extracted, those things are going to get filed in the county where a mortgage would be recorded.
So it says file where your debtor is located, but what constitutes location? Is it where your collateral is, is it where the debtor's at? It's not. So, individuals, the location is wherever they principally reside. If you did have somebody who was a snow bird that splits time between somewhere cold and somewhere warm, then I would absolutely file in both jurisdictions. But, for companies, where you want to file at is where the organization itself has its articles of incorporation. It doesn't matter where the collateral is located if it's not one of those collateral exceptions. It matters where that company has their articles at.
So we do have companies that get filed on in the United States that don't have filing requirements. For example, I'm filing on a company in the United States but they're an international company, so I'm going to file that in the District of Columbia. That's a jurisdiction without filing requirements. If you you're filing on a debtor who's a registered organization under federal law, then you'll file wherever that law tells you to, or in the District of Columbia. And, if you have a non-registered organization, then you would go ahead and file at the principal place of business.
So we did put our pull-up about monitoring and, lo and behold, now we're going to talk about it. So we can monitor your portfolio for lots of different things, and I'm sure a lot of you are using services like that, or you're doing it internally, but there are some changes that can impact your lean position, things like a change in your debtor's name or status. Obviously, we all know UCCs are good for five years, except in Wyoming where they're good for ten years, for some reason. But it's crucial to monitor your portfolio and make sure that you're aware of any changes and that you're not going to let filings that still have active security agreements to lapse. So there are some simple ways CSC has done to automate these things and send you alerts when they occur.
So let's talk about the most common need that is out there, and that's expiration tracking. So, anything that we file for you – whether you're using our online portal or you're working with our customer service team – can be tracked for expiration. We basically would email you when you have filings that are about to lapse. You tell us how far in advance you want to be notified, and then what's really nice for those of you who might use our online portal, you can actually automatically continue filings by clicking a little button and having all the information pre-filled from the original filing into a UCC-3. But you let us know how often you want to be notified, how far in advance, and who those reports should go to.
So that's the most common monitoring, which most of you appear to be doing. But the most common post-perfection event that's going to need your prompt attention would be, actually, a change in your debtor's name. So let's take a look at a case study here.
Here's a company that was called Factory Direct, LLC. And we've all seen this with the furniture stores, every week they're going out of business and then there's a new one there, like, that opens the next day. So, Factory Direct, LLC, changed ownership, they were purchased. And the new owner said, "Factory Direct, LLC, we don't like it. We're going to call you Lifestyle Home Furnishings, LLC," and they changed their name.
However, they didn't tell the bank that was carrying the loans that they changed the company's name, so the bank didn't amend their UCC filing or file a new UCC to cover themselves. And then, I guess, things didn't work out for Lifestyle Home Furnishings, LLC, because they filed for Chapter 7 bankruptcy. Well, there was a proceeding filed to avoid the bank's security interest, and what happened was the court pretty much determined that, because the bank did not amend the UCC to reflect the correct debtor name, even though they weren't notified, they became unperfected four months after the name change. So knowing about a name change is a big deal.
All right, let's proceed, and let's talk about some of the tracking services that we just mentioned. So we talked about name changes being a big deal. We have a corporate tracking service, and what this does is it will track a company in its state of incorporation for changes to their name, changes to their entity's status – so maybe they were in good standing and now they're revoked – or changes to their entity ID number with the state because that could be a good sign that they've been merged out of existence And basically, you get a little email with a before and after snapshot, so if your debtor does have a name change, you're in the know.
For those of you who are doing all-asset type filings that maybe are not traditional lenders, we also have a service that's mostly used by your industry called Debtor Tracking. I've seen a lot of security agreements with some of the asset-based lenders that state that the debtor is not to take additional funding until they've been paid back. Well, how do you know if they take additional funding?
Well, one way would be to actually track the debtor and see who files on them. So that's what Debtor Tracking does, it sends you an email any time a filing pops up in a specific state on your debtor, and it will tell you, you know, a termination, a continuation, a UCC-1, it'll tell you the name of the other secured party, and it will give you a link so that you can see the tracking results. I've even seen lots of companies use this to track themselves so they're aware when a UCC is filed on them, and I've seen some attorneys use it in some scenarios where, I guess, they weren't getting a warm fuzzy and they wanted to make sure that the debtor wasn't terminating the filing themselves, which does happen. So this is a great service to use if you need to track your debtor and make sure that they're according to the terms of your agreement.
We can also track your debtors for bankruptcy, and I find this is a service extremely useful, particularly through, like, equipment manufacturers. Obviously, you don't want to spend the time building custom pieces of equipment, and then ship it to find out that your debtor has filed bankruptcy the day before. So, for anyone that has physical equipment that would need to be recovered in the event of a bankruptcy, this is a great service. It's super fast, we notify within 24 hours of the bankruptcy being filed so we're a lot faster than those letters that come out from the bankruptcy court and, if you have physical equipment that would need to be recovered, you're in the know and you can hopefully get out there before somebody else snatches and grabs it.
So we talk about searching, we know how to file, we know the names we're going to use, we know where to file at, we know that we need to monitor our portfolio for different things. Let's talk about some of the tools we have. Now, some of these tools are services we offer, some of them are free out on different websites. So I want to talk first about secured party representation, especially since we have a lot of people who do all-asset type filings.
Secure party representation was developed by our in-house counsel, Paul Hodnefeld, and it was designed for our customers who have a problem with competitors. Anyone can go out to any state and search, not only by the debtor's name but by the secured party's name. By doing this, I can pull your client list. I can see all your debtors you filed on, their name and their address. And so, if we're in a very competitive industry like factoring or merchant cash advances, that's a real problem. I don't want people to poach my clients. The public record was not meant to be a marketing tool.
And so Paul developed a service where we represent you on your UCC as a secured party to prevent just that from happening. We pioneered this service, we've been doing it nearly ten years; we've quite a few clients that use it. So if that's something that you have a need for, if you're an existing customer, please contact your account manager, or if you'd like more information, please feel free to put your name and email in the Q&A box and someone can send you some information, either myself or part of my team.
So Transaction Watch, we mentioned this briefly. Transaction Watch is our website that gives you updates on legislative changes as well as just filing changes. It's not just for UCC, although we have a great UCC section on it maintained by Paul, and it's completely free. The website's just csctransactionwatch.com, and you can sign up to be notified any time there is a change that could impact how you work.
So I will warn you, if you are primarily a financial services professional, you might want to sign up just for alerts about UCCs or you will tend to get things like, "The State of Delaware will be closed today from 12:00-5:00 for their company picnic," so you may not care about that.
Expert's Corner. Expert's Corner is on both Transaction Watch and our CSC Financial online portal. It is basically a blog that Paul writes where he will summarize a case every month that is interesting for the rest of us. And I'll show you that we will have a live demonstration of CSC Financial, so we'll be able to pop into that and take a quick look.
The last thing I do want to mention, especially for those of you out there who are doing lots of filings, CSC does business-to-business integrations with loan origination systems, Salesforce, lots of different systems that people use to manage their client database. The beauty of it is, if you're using, say, Laser Pro as your loan origination system, we're building integration with them so there's no need to recant formation. The way business-to-business services work, everything happens within your system and then you send it into our system, and that creates orders for you for searches, filings, and then we email back the results because, obviously, especially if you're a bank, you don't want anyone coming into your system – not good. So if that's something you have interest in as well, please let us know.
You can see, it's just some additional information about secured party representation. I did forget to mention, if you do get a lot of UCC inquiries coming in, debtors calling, saying, "Why do you have this filed on me," well, this centralizes those inquiries. When we're the secured party representative, you've told us exactly who those should go to so they don't float around your company.
You can see, here's a little screenshot of CSC Transaction Watch. Again, if you'd like to visit that site, it's just csctransactionwatch.com. All of the job aids and information on it are free and informational.
Anu: So, as Lacey mentioned, we do have one last question for you on the screen, "Would you like to be contacted by UCC specialists?" We'll keep that up during the Q&A session so you can make your selection. Also, just as a reminder, you can download a copy of today's materials from the Handouts box, and if you'd like to see what other webinars CSC offers click on the Free Education Webinars link in the Join Us For More box.
Thank you to everyone who joined us today. We hope to see you next time.