Best Practices: Protect your UCC Lien Priority and Avoid Intervening Liens

In the context of SBA lending, properly perfecting security interests in required collateral is one of the most important steps in closing an SBA loan.  For personal property collateral, lenders obtain a security agreement from the debtor and file a UCC-1 financing statement against the debtor securing a lien on the borrower’s assets as required by the SBA Terms and Conditions.   While it may seem like a routine exercise, there are potential pitfalls that may result in a loss of lien priority.  In taking care to properly complete and timely file a UCC financing statement, lenders can protect their lien priority.

Where to File

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 or does business.  If the debtor is an individual, the financing statement should include the first personal and the surname name of the debtor as indicated on a driver’s license that the state has most recently issued to the individual and that is not expired or another government issued identification, such as a passport.  State laws must be consulted for any variation in UCC filing requirements pertaining to individual debtors.  Any error in the debtor’s name may render the financing statement ineffective.  For individual debtors, the filing jurisdiction is based on the individual debtor’s principal residence, which may differ from the jurisdiction issuing the driver’s license or where they work.

When to File

Pre-filing the UCC-1 financing statement in advance of closing can protect lien priority.  Debtors may be entering into other contracts with third parties at or around the time of closing that could potentially interfere with a lender’s lien position.  For example, if the debtor is a franchise business, a franchisor may have a right to file a UCC-1 lien against the debtor’s assets pursuant to the franchise agreement.  If a debtor is obtaining financing from a seller in a change of ownership, the seller note could be secured by a subordinate lien against the debtor’s assets.  While a subordination agreement may be obtained to document lien priorities from a franchisor or seller, most lenders prefer to have their UCC-1 lien reflected in first lien position in public records.  In order to be authorized to pre-file a UCC-1 financing statement, a secured creditor must have received a written authorization from the debtor that is signed and identifies the collateral subject to the security interest of the secured creditor. The UCC-1 financing statement can then be filed in advance of closing and will become effective as of the recording date once loan funds are advanced at closing.   Some lenders obtain pre-authorization consent in their commitment letters that are signed by the debtor and replaced by a signed security agreement at closing.

Being proactive pre-closing, can avoid headaches for lenders post-closing in ensuring their UCC-1 lien priority.  For assistance with secured transactions, creditor’s rights, and SBA compliance, contact the attorneys at Starfield & Smith, PC at 215-542-7070 or visit us at www.starfieldsmith.com.