For example, the following changes have been made to check boxes on the UCC-1 financing statement:. The secured party for example, the bank can, but is not obligated to, file an information statement if it believes that an amendment to its financing statement was not authorized.
The debtor has always been authorized to file an information statement. Michigan will accept the old forms until July 31 st , but after that a creditor must use the new forms. If the name of a debtor needs to be changed due to the new rules, there is a five-year transition period ending on June 30, during which current filings will remain effective notwithstanding the new rules. All filings still must be timely continued or renewed, and the debtor name must be corrected on the continuation or renewal.
Due to the detailed requirements of filing including notification , most creditors prefer to use a qualified service. However, if you wanted to file a financing statement on your own, you must first make sure you have all the proper documents. You would then submit these documents to the central filing office in the state the debtor resides or its business is registered. This is commonly done electronically. When it is filed appropriately it gives public notice that a creditor has a security interest in collateral belonging to the customer documented in the statement.
Upon request at the filing office, you can obtain notification of acknowledgement when the filing is complete. A specific number is assigned to each UCC filing for identification and will be provided with the requested acknowledgement.
This number is referred to as the file number. Furthermore, the date and time of the filing is critical given the hierarchy of security interests by date. The filing office where the documents were submitted is the place that maintains the records of the financing statement and any attached documents. At least annually all states must review their filing-office rules to ensure compliance and effectiveness.
A creditor can search for records of financing statements by the debtor name or file number if they know it. However, the filing office must communicate the refusal within two business days from receiving the record. Method of communication depends on the state requirements.
Each state also has statutory requirements of holding public record documents that would dictate when they can destruct written records of financing statements.
It is important for the creditor to know the rules of priority and determine the steps necessary to ensure that he is protected. Remember that the UCC -1 must be filed — your security agreement is worthless until the filing is complete. In most cases, if there is bank financing, they will usually have a perfected blanket UCC -1 that takes priority.
This why it is important to do a thorough search of all prior filings to determine the effectiveness of your filing. As indicated earlier, many times a bank or other secured lender will have a blanket UCC-1 that gives it priority interest in all inventory and proceeds of the debtor. However, there is way to secure goods and proceeds before they are shipped. A PMSI grants a security interest to the trade creditor sold on credit terms for the price of the goods sold.
A key advantage gained by a PMSI is that it gives the creditor access to co-mingled funds not specifically identifiable by the creditor or the courts. AND if any of a number of conditions are met, one being:. Assuming that you have filed all of the necessary paperwork and perfected your security interest, there may come a time when a customer defaults on the agreement.
At that point there are several options available to you to enforce your lien against the collateral. As a creditor you may deduct reasonable attorney fees and collection expenses incurred during the repossession of your collateral.
As a creditor you can sell, lease, license, or otherwise dispose of any or all of the collateral covered by the security agreement as long as it is reasonable to both parties. If you are going to dispose of the collateral, you must send notification to the customer and any secondary lien holder unless they waive their right to the disposition of the collateral.
In most cases a day notice is sufficient. All proceeds that are received over and above any debt owed must be returned to the customer or to a subordinate security interest holder. The customer would still be liable for any deficiency amount that is owed after the collateral is seized. Upon default you may require your customer to assemble the collateral and make it available to you at a place of your choosing and is convenient for both you and your customer.
Notice of disposition should include a description of the collateral to be sold, leased, or licensed, the method of disposition, charges associated with the sale or disposition, and time and place of the disposition. We will sell lease or license the following collateral privately sometime after this date.
You may request an accounting by call us at telephone. We have your collateral and because you broke promises in our agreement we will sell description of collateral at a private sale sometime after date.
The money that we get from the sale after paying our costs will reduce the amount that you owe. If we get less money than you owe, you will still be responsible for the difference. If we get more money than you owe, you will get the excess unless there is a secondary lien holder. You can get the property back at any time before we sell it by paying us the full amount you owe, including our expenses. For a balance owed please call us at telephone. We are also notifying other individuals who may have an interest in this collateral or who owe money under your agreement.
List names of other possible lien holders if any. This does not require you as a creditor to dispose of the collateral Does not apply to consumer transactions. In consumer transactions collateral must be disposed of within 90 days after taking possession or within a longer period to which the customer and secondary lien holders have agreed to. The customer or a secondary lien holder has the right to redeem the collateral for full payment of the obligation at any time prior to disposition.
Sports Authority initially filed Chapter 11 bankruptcy to reorganize its structure and become a much smaller retailer of sports merchandise and clothing. However, in the midst of the initial bankruptcy proceedings the creditors became aware that Sports Authority was listing inventory as an asset when the inventory was in fact part of consignment deals and therefore not assets of Sports Authority but still assets of suppliers creditors.
This critical issue forced Sports Authority into Chapter 7 bankruptcy because it had been overstating its assets and blurring the true financial disarray it was in. During the bankruptcy the court ordered Sports Authority to start liquidating its assets which caused an argument over the proceeds of the sale of consignment items. The UCC is a standardized set of business laws that regulate financial contracts. It has been fully adopted by all states in the U.
Louisiana has not fully ratified the code, although it has adopted a version of Article 9. The code itself has nine separate articles. Each article deals with separate aspects of banking and loans.
The UCC better enabled lenders to loan money secured by the borrower's personal property. The UCC was drawn up and ratified by most states in the s. A recent addition to the code covers corporate electronic payments. The UCC undergoes frequent revisions that address specific articles. Under Article 9, if a debtor defaults on their debt, the creditor may repossess the secured property. For example, suppose that Alex brings a computer to be serviced by Sam.
Upon completing the repairs, Alex does not have the funds to pay for the work so Sam keeps the laptop as collateral. Under state laws in general, if Alex and Sam are residents of the same state, and the business they are engaged in takes place in that state, then there would be no further complications.
However, if Alex and Same reside in different states and the transaction occurs across state lines, then without the UCC, a legal controversy might ensue if the laws of the two states differ.
Legal differences between states might even be significant enough to prevent or deter Alex and Sam from doing business with each other in the first place. The UCC helps resolve this potential problem by harmonizing commercial law across different states.
In this case, if both states have adopted the UCC, then Article 9 states that Sam may keep the computer until payment is received. Attachment and perfection are the two most important legal concepts used to describe the events that create a security interest under Article 9. Attachment can be said to happen when a security interest is effectively created between a debtor and a creditor. This is usually provided for in the agreement between the two parties. Perfection happens when a creditor is able to establish themselves in a position of priority or dominance over other creditors who may have a claim on the same collateral.
The creditor who has priority may seize the collateral in order to satisfy the debt if the debtor defaults. Creditors who do not have priority do not have first dibs on the collateral.
A financing statement must be filed as a matter of public record in order for perfection to occur. The first creditor to file a financing statement is granted first priority; the second is granted second priority; and so on. Public records are an important tool under Article 9 because they provide a record for creditors to understand any security interests that precede theirs in priority. Therefore, a second-priority creditor has no grounds to complain about prior security interests that are a matter of public record.
The UCC undergoes periodic review and revision to clarify the laws and update the provisions based on new technologies and economic realities. In , Article 9 was revised to substantially modernize and expand the scope of what can be used as collateral to include credit card receivables, electronic chattel paper, accounts receivable , and business inventory.
Although Article 9 goes into great detail to incorporate the many loans secured by various types of collateral, there are still disputes over who has ownership priority of an asset subject to a security interest transaction.
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