UCC 201: Advanced Issues for Searchers and Filers
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Know the basics of Uniform Commercial Code (UCC) searching and filing, but need a deeper understanding of purchase money security interests, fixture filings, and portfolio management? Then join us for a deeper look into more complex issues that can trip up UCC searchers and filers.
Join Russ Lash of CSC® for a free follow up to our UCC 101: The Basics of UCC Searching and Filing webinar to learn best practices surrounding:
- Purchase Money Security Interests (PMSI)
- Fixture Filings
- Post-Filing Pitfalls
This webinar is important for real estate, commercial, and corporate paralegals, legal assistants, legal secretaries, analysts, commercial loan officers, and anyone who works with UCC search and filing.
Annie: Hello, everyone and welcome to today's webinar, "UCC 201: Advanced Issues for Searchers and Filers. My name is Annie Bruxelles, and I will be your moderator. Joining us today is Russ Lash.
Russ Lash is a Financial Account Manager at CSC. He is responsible for building relationships with customers. Since joining CSC in 2010, Russ has improved the customer experience by shortening workflow turnaround time and decreasing processing time, including improving Uniform Commercial Code delivery time. And with that, let's welcome Russ.
Russ: Thanks, Annie. Welcome, everybody to the UCC 201 webinar, the sequel to the UCC 101 webinar that was given in May. I hope everybody had a chance to see that as well. I look forward to showing this to everybody today.
Before we begin the webinar content, I would just like to give a little bit of background about CSC. We are the business behind business. We were founded in 1899. So we've been around a pretty long time, almost 120 years. We're headquartered in Delaware.
We've spent over 60 years serving the financial industry, pretty much around the time of the inception of the UCC, Uniform Commercial Code. Over 6 million UCC transactions processed annually and over 8 million UCC transactions monitored. CSC is also the largest U.S.-owned provider of the following services: lien, registered agent, entity and litigation management, and digital brand services.
The agenda for today is to discuss PMSI, fixtures, post-perfection pitfalls, CSC resources, CSCFinancialOnline demo, and then also close up with questions and answers.
Purchase money security interests, what is a PMSI? Well, according to UCC Article 9, a PMSI is a special type of security interest that enables those who finance a debtor's acquisition of goods to acquire a first priority security interest in the purchase-money collateral. That's even if another creditor holds an earlier perfected security interest. So the point of this would be prioritization.
It's used by a seller of goods to secure the prices, a person who advances the funds to enable the debtor to acquire the rights of the goods. Also, PMSIs provide a super-priority for the PMSI secured party limited to the good that they enabled the debtor to acquire.
So purchase money security interest concepts, what does this mean? So eligible secured parties would be the seller of goods, a lender that finances the acquisition of goods, or a consigner of goods. Now, the burden of proof, what this means is the secured party has the burden of establishing the extent to which the security interest is a PMSI. Strict compliance is essential.
So what we have here is we have an illustration. It's a pretty good illustration showing how a PMSI works and also the priority of it. So you have the secured party. They filed a UCC on all assets in 2010. Then a year later, another secured party filed a UCC on equipment. So then another year later, another secured party then filed a PMSI UCC on a laser wigit model 1234.
So what this tells us is that the SP3, secured party 3, has priority in a specific machine. So this has the priority. That's the point of the PMSI is priority. So the secured party 1, in 2010, has the priority in all other assets, including all other equipment. So what this also means is that SP2 is probably out of luck.
How is a UCC record filed to perfect a PMSI different from any other UCC record? Well, what this means is it doesn't require a special form. There's no statutory requirement to indicate the financing statement is a PMSI. And also the general collateral sufficiency rules will apply.
PMSI perfection deadlines, the general rule. So what makes this a little bit different than a regular UCC-1 filing is that with a PMSI, the secured party must perfect the PMSI before or within 20 days after the debtor receives possession of the collateral.
Now, there are some exceptions to the 20-day rule. Let's follow up here on the bullet points: PMSI in inventory, consignments, livestock PMSI, which would include domestic farm animals, aquaculture, non-uniform state amendments, and then also the consumer goods.
PMSI in inventory perfection requirements. PMSI must be perfected before the debtor receives possession of the inventory collateral. So here, on a PMSI in inventory or consignment or the other ones that were listed before — for example, livestock and those — the 20-day rule does not apply. So, in notice requirements, the secured party must send an authenticated notification to the holder of a conflicting security interest. That would be by way of a letter. So the recipient must receive the notification before debtor receives possession of the inventory. The notice is effective for five years, and also the notice has specific content requirements.
Consignments. So when a consignor's interest is a PMSI in inventory. The rights of the consignee would be the consignee is deemed to have rights and title to the goods identical to those of the consignor. The consigned goods are subject to the claims of creditors and also purchasers for value. So the PMSI requirements for consignment is to perfect by filing before the debtor receives possession of the consigned goods, send notice to the holders of conflicting security interests, or ensure notice is received before debtor receives possession of the consigned goods.
PMSI in Inventory - General Guidelines. So these are the steps with the PMSI in inventory. First, you file the UCC. Second, you run a search to identify other secured party creditors. Now, what you want to do is you want to make sure that the through date of the records, the UCC records should be after your filing date. Then you want to send PMSI notices or PMSI notices. What that is, is it's a letter that you're going to send to the identified secured party creditors. Then finally, you deliver the inventory collateral.
This right here shows a PMSI whitepaper. It's available for download in the Resources Widget. This was written up by our associate counsel, Paul Hodnefield, and there's a lot of useful information.
UCC Fixture Filings, that's the next one other than a PMSI. UCC fixture filings, what is a fixture anyway? General filing guidelines and also filling out the addendum.
Something that's probably been weighing on your minds — we get a lot of questions about this at CSC — is what is a fixture? Well, generally, fixtures are goods that have become so related to a particular real property that an interest in them arises under real property.
So what this means is there are several things that are taken into consideration in the determination of what a fixture is — ease of removal, degree of fixation. So what that means is how easy or how difficult is it to remove that from the property? Is it bolted down? Is it wired in? Those kinds of things you think about.
Intention of the parties, what is the use of that fixture? Is it something that's really so related to that fixture? Is it necessary to that fixture? Then also, how essential is the presence of the fixture to the functioning of the real property? Again, how important is it to that fixture or to that property?
So we have some examples here of what a fixture would be and what not a fixture would be. The thing is ultimately it is up to the courts to decide what a fixture is and what a fixture is not. So you notice here, in this section, you have fixtures. You have grain bins, airplane hangars, theater chairs, irrigation equipment. Those all sound like fixtures. But one court can decide that these are fixtures, and another court could decide over here in the not fixtures column that these are not fixtures. You notice that grain bins and airplane hangars are in both columns. Large engine and hog buildings.
So what happens is when a debtor is in default, when it goes to the courts, then ultimately the courts will determine the fixtures on a case-by-case basis.
So the best practice would be when you have a question of that, as far as fixtures, if there's any question, treat goods as both fixtures and personal property.
But what that means is filing guidelines. So you have two types of filings with this. You have the fixture filings, and then you have filing on fixtures. So they're sort of similar, but they're also different too.
So the UCC fixture filings are generally filed in the county in which a mortgage would be recorded on the affected real property.
Now, what's different in a filing on a fixture is that it's actually done in the centralized filing office in the state which the debtor is located, sort of like a regular UCC-1. So a mortgage will also cover the fixtures or may also cover the fixtures.
So you might ask yourself what forms to file. If I have a fixture filing or a filing on a fixture, how do I this?
Well, on a filing on a fixture, you want to file the UCC-1 form. So that's really no different than a regular UCC-1. But a fixture filing is that you're going to file the UCC-1 form, but you're also going to file an amendment, and the amendment will be with that UCC-1 form. I can show you later, when we get to CSCFinancialOnline, how that works in the filing center portion.
Fixture filing location example, so here we have an example. We have an example here that the debtor is a Delaware corporation, but the fixtures are or will be located at a property in Harris County, Texas. So you have two types of filings. You have a filing on the fixtures, and then you have a fixture filing. So a filing on a fixture you would file at the Delaware SOS. Now, a fixture filing, because the fixtures are or will be located at the property in Harris County, then you want to file at the Harris County Clerk in Texas.
Here's an example of filling out the addendum. This is what the addendum would look like on a filing for a fixture filing. You notice here you have two red arrows, and they're in Sections 13 and 14. When you are in the filing center of CSCFinancialOnline, I can show you where you need to check to denote that this is a fixture filing.
You want to make sure that you want to mark the box, "This financing statement is to be filed for the record or recorded in the real estate records (if applicable)." Then also, you want to check, "Is filed as a fixture filing."
So, to summarize, here's kind of like what sets the filing on fixtures and fixture filings apart. So a filing on fixtures, it's filed in a central filing office where the debtor is located. The priority may be subordinated to recorded real estate interests. It's also effective for five years. Whereas a fixture filing is a little different. It's filed in real estate records where mortgage would be recorded on the related real property. Priority would be based on the file date against both filing on the fixtures and recorded real estate interests.
Post-perfection Pitfalls. What this covers is we offer a few different types of tracking services at CSC. Portfolio monitoring encompasses the expiration tracking, debtor tracking, corporate tracking, and also bankruptcy tracking. So, with portfolio monitoring, this encompasses let's say you do a due diligence search, a UCC search, and then you file the UCC. Well, at that point, you're not done because you want to see what's going on in the activity of that debtor that you filed against. You want to see if they filed bankruptcy. You want to see if maybe perhaps down the road they change names, if they fell out of good standing, what's going on with that. Maybe they're not paying their taxes.
Also, that based on whatever your security agreement is, you want to know if they're taking out more money somewhere else. Sometimes with security agreements, that is a stipulation that in order to take out more money, you want to be paid back first. So that's also a way to track these debtors to make sure that you're going to perfect your lien.
So, with portfolio monitoring, changes in your debtor's name or status can affect your lien position. It is crucial to monitor your portfolio for changes and to prevent lapsed filings. Also, there are simple, automated ways to receive alerts when things change.
So the first is expiration tracking. Expiration tracking actually comes with the filing service that when we file the UCC on your behalf, expiration tracking will come with that. What that means is we'll monitor your filings, and we'll let you know when they're approaching expiration dates. We'll email you that. You can actually just look that up as well in CSCFinancialOnline. You can view copies of acknowledgements. Filing numbers are auto-populated into the UCC-3.
The flexible reporting, what that means is that you can have them sent to you on an email report, or you can view them manually, if you want, in CSCFinancialOnline. Also, the notification frequency of your choice, you can get those daily, weekly, or monthly, or however you want if you want those reports sent to you.
Case Study. The most common post-perfection event that requires prompt secured party action is a change in the debtor's name. So we have actually a real-life example here of what happened with a debtor. So the company name, it was a furniture company called Lifestyle Home Furnishings, LLC. So the point of this is the failure to file the debtor name amendment leaves the lender partially unperfected.
So like a lot of furniture companies, when they change ownerships, they change names. So the ownership of Factory Direct, LLC changed. Now, the new owners, they didn't like the name Factory Direct. So they changed it from Factory Direct, LLC to Lifestyle Home Furnishings, LLC. Now, the debtor didn't notify the bank of the name change. So that was a problem. Now, as a consequence, the bank did not file an amendment or a new financing statement.
So then, a few months later, on April 7th, 2008, the debtor then filed for Chapter 7 bankruptcy. So, as a result, the trustee filed an adversary proceeding to avoid the bank's security interest and moved for a partial summary judgment on the grounds that the bank became unperfected four months after the debtor changed its name.
Corporate Tracking. Corporate tracking will notify you when a corporate debtor either changes its name, falls out of good standing, or dissolves or merges.
Debtor tracking alerts you when new filings against your debtor, including new lending and terminations, even yours. Debtor tracking will send you email alerts with links to the tracking results, also allowing you to evaluate any findings and request copies if needed.
Bankruptcy Tracking. Any delay in responding to bankruptcy filings can be costly. So, with bankruptcy tracking, we'll monitor court records and compare them to your copies of acknowledgments, filing numbers auto-populated into UCC-3, flexible reporting, and notification frequency of your choice. So that means if you file a UCC against a debtor and that debtor files for bankruptcy, you'll be notified about that by email.
CSC Resources. We do have some other resources available, not just the tracking, but also something called Secured Party Representation. They're also called SPRS. What this means is that UCC financing statements are public record. That means that anybody can access your customer list. So, by using CSC as a secured party representative, it will prevent competitors from identifying filings, in which case the SPRS will centralize the inquiries. So what this means is that somebody wants to run a search on your business and they want to find your customers. Well, with SPRS, we'll actually shield your name from the index. So instead of having your name as a secured party, it will just simply say in the index CSC. So that way sometimes people will use the UCC index for unscrupulous reasons, and so this will protect you from that.
CSC Blog. CSC also provides you with an archive of filing closings, office closings and communications, pending and new legislation, and UCC Article 9 updates, whitepapers, filing guides, and upcoming webinars.