Commercial LendingUCC – Taking & Perfecting Security Interests in Business Assets

Security Interests under UCC• Types of Collateral• Attachment• Perfection• Notice• Borrower vs. Owner / Grantor• Types of Borrowers / Grantors of Security Interest in Business Assets

Common Types of Collateral – Business Assets • Accounts: Inventory:

• Chattel Paper: Other: as extracted collateral, commercial tort

claims, farm products, • Equipment: general intangibles,

goods, vehicles,proceeds, after acquired property

• Fixtures: accession, Purchase Money Security Interest (PMSI)

Attachment & PerfectionCollateral Attachment – occurs when

(1) value given by creditor to debtor, (2) debtor has rights in collateral, (3) written security agreement executed by parties, describes collateral

Methods of Perfection:1. Filing UCC-12. Possession3. Control4. Automatic upon Attachment

Accession, proceeds, future advances, after-acquired property

Affirmative statement in Security Agreement; automatic attachment upon change to proceeds

Filing

Accounts (deposit, receivables) Security Agreement, Control Agreement Filing or possession (lockbox)

As Extracted Collateral (oil, gas) Security Agreement Filing with real property records

Chattel Paper, Instruments, Stocks, Investments, Tort Claims, Letter of Credit, Securities

Security Agreement, Control Agreement Possession if paper document, filing if electronic, or notice and control if held by third party

Consumer goods, goods, PMSI goods Security Agreement Filing or notice and control

Equipment, Inventory Security Agreement Filing or possession of Title if vehicle or manufactured home (listing on vehicle records)

Farm Products (crops, livestock, supplies) Security Agreement Federal Filing System for Crops, Filing

Fixtures (affixed to real property) Security Agreement Filing and filing with real property records

General Intangibles (good will) Security Agreement Filing

Purchase Money Security Interest in Goods or Software *(NOTE: PMSI in inventory, livestock and fixtures have different methodology of perfection)

Security Agreement (PMSI) File prior to debtor receiving possession of goods or within 20 days after debtor receives possession of goods

Owners, Debtors, Borrowers, Grantors – oh my!It is important in taking and perfecting a security interest to accurately list the person or entity involved and their role.

Owner or Grantor is the person who owns the collateral or property and is granting the creditor the right to secure the debt or obligation by taking an interest in that collateral or property. The owner / grantor does not have to be the debtor / borrower. A third party may grant a security interest in their property to secure the debt of another person. There has to be consideration if a creditor is seeking to enforce that obligation, so it is recommended that the creditor know that there is “consideration” between the borrower and owner and document that in the Security Agreement. For example when lending to a sole practitioner you may want to attach and perfect your interest in the ownership shares or units of the borrowing company. Filing a UCC against the borrowing entity does not perfect your interest in the owner’s shares or units since ONLY the individual owner “owns” those shares or units, not the business entity.

Debtor or the Borrower is the person who owes the debt to the creditor. Debtor is the terminology used in the UCC filing. Borrower is the terminology used in the legal loan documents. Debtor or Borrower may also be the Owner or Grantor.

UCC-1 and UCC-3 FORMAT FOR NAMING DEBTOR:Individual Debtors – on the UCC form list Last Name, First Name

Corporations, Limited Liability Companies, Partnerships Debtors– on the UCC form list the exact legal name of the company as shown on their formation documents

Trust Debtors – on the UCC form list the Trust Name as set forth on the Certification of Trust (do not list the date or Trustee) Correct: The Brown Family Trust Not Correct: Jean Brown, Trustee of The Brown Family Trust dated July 1, 2001

WHERE TO FILE THE UCC-1 AND UCC-3:In the state where the individual residesIn the state where the corporations or LLCs are registered / formed.In the state where the partnership has its principal place of businessIn all states where (1) Trustee lives, (2) principal office/address of Trust is located, and (3) property / collateral is located

CHANGE IN LOCATION OR DEBTOR:If there is a change in location of the collateral or the principal address of the Debtor, you must file a UCC-1 within 4 months after the move in the new state. If the collateral is transferred to a new Debtor – you have one year to file UCC-3 against the new Debtor.