In the context of SBA lending, properly perfecting security interests in required collateral is one of the most important steps in closing a SBA loan. For personal property collateral, lenders obtain a security agreement from the borrower and file a UCC-1 financing statement against the borrower securing a lien on the borrower’s assets as required by the SBA loan authorization. While it may seem like a routine exercise, there are potential pitfalls that may render a lender’s security interest invalid. In taking care to properly complete, file, and amend a UCC financing statement, lenders can protect their lien priority in an event of a borrower default or any subsequent bankruptcy proceedings.
Article 9 of the Uniform Commercial Code, as adopted by all fifty states, governs transactions concerning security interests in most personal property collateral. A financing statement is sufficient only if it (1) provides the name of the debtor, (2) provides the name of the secured party or a representative of the secured party, and (3) indicates the collateral covered by the financing statement. See UCC §9-502(a).
Lenders should note that the name of the debtor, if a registered entity, is the name most recently filed with or issued or enacted in the public organic record in the entity’s jurisdiction of organization. The public organic record is most often the name that appears on the entity’s articles of incorporation, organization or formation. This does not include trade names or fictitious business names. Additionally, lenders should refer to the jurisdiction of organization, not other jurisdictions where the debtor is registered as a foreign entity. If the debtor is an individual, the financing statement should include the surname and first personal name of the debtor or the name of the individual as indicated on a driver’s license that the state has most recently issued to the individual and that is not expired. Any error in the debtor’s name may render the financing statement ineffective.
A financing statement sufficiently indicates the collateral it covers if the financing statement provides (i) a description of the collateral pursuant to UCC §9-108 or (ii) an indication that the financing statement covers all assets or all personal property. Lenders should include a more detailed description of the collateral in its security agreement, which must include a grant of a security interest to Lender and be signed by the Debtor in order to properly perfect lender’s security interest in the collateral. Courts have held that a generic collateral description in a security agreement is insufficient to properly evidence a security interest, as the collateral description must reasonably identify the collateral.
Assuming a lender has properly prepared its security agreement and financing statement, the lender then has to file in the correct jurisdiction. Typically, the filing is made at the secretary of state’s office of the debtor’s jurisdiction of organization (as discussed above). Priority of lien related to fixtures, which are goods that have become so related to particular real property that an interest in them arises under real property law, is established by filing in the real estate records where the real property is located. For certain specific collateral, perfection and/or priority may be established by a separate filing system. For example, liens on vehicles are accomplished by placing the lien of record on the vehicle’s title documents.
A financing statement is effective for five years from the date of filing. In order to properly continue a financing statement, such continuation statement may be filed only within six months before the expiration of the five year period. Any continuation statement filed prior to the six months before the financing statement expiration date or after the expiration date will not be valid. If a continuation statement is timely filed, the initial financing statement will continue to be effective for an additional five years from the date of expiration of the original statement (i.e. not the date of filing the continuation statement).
This article provides a general discussion of preparing UCC-1 financing statements, and is not intended to cover all issues and nuances regarding creation, filing, perfection and priority related to personal property security interests. For assistance with secured transactions, business litigation, creditor’s rights, and SBA compliance, contact the attorneys at Starfield & Smith, PC at 215-542-7070 or email us at email@example.com.