Common Mistakes to Avoid When Filing UCC Financing Statements: A Guide for Lenders and Borrowers
November 10th, 2023
In the world of commercial lending, securing debt financing is a crucial aspect of business operations. Uniform Commercial Code (“UCC”) financing statements play a vital role in this process, serving as a legal document filed by a lender to secure their interest in the borrower's personal property. However, navigating the complexities of UCC filings can be challenging, and even a minor error can lead to significant consequences for both lenders and borrowers. In this article, we will explore some common mistakes to avoid when filing UCC financing statements, offering valuable insights for lenders and borrowers alike.
- Incorrect Information: One of the most prevalent mistakes in UCC filings is providing inaccurate or incomplete information. Any mistake in the debtor's name, address or other essential details can render the filing ineffective. Lenders must ensure that they obtain accurate information from borrowers and meticulously verify it before submitting the UCC financing statement. Spelling and punctuation of the debtor’s name should be reviewed against the organization’s charter, certificate of incorporation or formation to ensure against mistakes. This is to ensure that liens are not being filed against the wrong party and so that future lenders may be able to conduct accurate UCC filing searches.
- Including a DBA in the Name of the Debtor: Oftentimes UCC filings will include a DBA reference in the name of the debtor. This is a mistaken belief that this inclusion will help clarify who the identity of the debtor party. Including a DBA instead obfuscates the true legal name of the debtor party. When filing UCCs, it is best practice to stick to the legal name provided from formal organizational documents or a state license if filing against an individual.
- Insufficient Collateral Description: Another frequent error is a vague or inadequate description of the collateral. UCC filings must clearly specify the assets being used as collateral for the loan. Failing to provide a detailed and accurate description can lead to disputes in case of default, potentially jeopardizing the lender's claim to the assets. A UCC filing may include an “all assets” description, but only if it is further backed by a security agreement between the parties that lists explicitly the agreed upon collateral.
- Filing in the Wrong Jurisdiction: UCC filings are typically made at the state level, and each jurisdiction has its specific rules and requirements. Filing in the wrong jurisdiction can result in the loss of priority over other creditors. Lenders must carefully research and select the appropriate jurisdiction based on the borrower's location and the type of collateral involved. For organizations, UCCs should be filed where the organization is incorporated. For example, if a limited liability company is incorporated in New York, the UCC should be filed in New York. With respect to individuals, a UCC should be filed in the jurisdiction where they are domiciled.
- Untimely Filings: Timing is crucial when it comes to UCC filings. Waiting too long to file after the creation of the security interest or failing to renew the filing within the specified timeframe can lead to loss of priority. Lenders must establish clear internal processes to ensure timely filings and renewals, minimizing the risk of losing their security interest. Filing immediately after the creation of the security interest in order to perfect the security interest on time is vital.
- Failure to Conduct a UCC Search: Borrowers should also be proactive in avoiding UCC filing mistakes. Conducting a UCC search before applying for a loan can help them identify any existing filings against their assets. This step allows borrowers to address potential issues, such as inaccurate information or unauthorized filings, before they become obstacles in the lending process. Similarly, lenders should always conduct UCC searches against a borrower prior to lending to ensure that they will not be primed by other liens on the borrower’s assets.
- Neglecting Continuation Filings: UCC filings have expiration dates, and lenders must file continuation statements within the specified timeframe to maintain their security interest. Typically these are renewed every five years for common UCC filings, and can be filed within six months of the upcoming expiration date. Overlooking the need for continuation filings can result in the automatic termination of the security interest, leaving both lenders and borrowers unprotected in case of default.
Understanding and avoiding these common mistakes is essential for lenders and borrowers seeking debt financing. Diligence, accuracy and timely action are key factors in ensuring the effectiveness of UCC financing statements. Lenders must meticulously verify borrower information, provide detailed collateral descriptions, file in the correct jurisdiction and adhere to filing deadlines. Borrowers, on the other hand, should conduct UCC searches, address any issues promptly, provide the most up-to-date information to the lenders and be aware of their obligations regarding continuation filings. By avoiding these pitfalls, both parties can navigate the UCC filing process successfully, ensuring that the lenders have a perfected security interest and that borrowers are in compliance with their representations.
For more information about UCC filings and related topics, reach out to Mehak Rashid.