Friday, 06 April 2018 00:00

UCC Origination: Part II

The UCC lien protects lenders from authorizing additional loans that contain the same assets as collateral. It allows them to maintain their financial interests. UCCs are public record and proper due diligence should be done as a part of the loan application process to determine which assets are already collateralized. These liens are managed under the Uniform Commercial Code, the code attempts to enforce uniformity in how state jurisdictions process UCCs.
It’s important to know that in most cases, a UCC filing will not have any direct impact on business operations. If no additional borrowing needs exist and the debtor does not default on the loan, then the UCC lien should cause no concern.
However, starting a loan application process there are risks associated with having a UCC filing against assets that need to be considered. Three main risks exist when a UCC lien remains active against a debtor. First, a UCC may prevent a debtor from obtaining additional financing. This is the most common effect a UCC can have to a debtor since lenders usually want their debtor to be lien free prior to finalizing a loan. Secondly, a UCC can impact a credit report. It won’t impact the actual score, but it will appear which will give insight into borrowing history. Thirdly, there is the risk of losing secured assets. Until the loan is paid off, there is always potential the property could be seized if there is a default.

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Published in UCC
Thursday, 05 April 2018 00:00

UCC Origination: Part I

Where does a UCC originate from?
Typically when a debtor (entity or individual) agrees to pledge assets to a secured party, usually a lender, for a loan or line of credit, a security agreement is signed. The security agreement provides the secured party with the ability to use specific assets as collateral. Once the loan is finalized, a UCC lien is filed against the assets pledged, which gives notice of the lender’s rights to the public.
On average UCC’s follow strict priority, the first secured party to file a lien against a debtor will have first rights to that asset or assets listed on their particular UCC. In the situation of a defaulted loan, the lender is essentially holding their ‘spot in line’ to collect on those assets pledged.
For example, if there is a piece of equipment that Lender A filed a UCC on, and Lender B also files a lien on the same piece of equipment, Lender A has first lien position rights to the equipment. If the debtor has defaulted and the equipment is being sold to pay debts, Lender A will be paid off first, and Lender B will receive any leftover funds after the first priority lien position is completely repaid.
There are two types of collateral for a UCC: Blanket or Specific.
A blanket lien takes ALL current, and at times, future assets of the debtor as collateral. This UCC is common for traditional, SBA and alternative bank loans. Traditional and SBA bank lenders use blanket liens to fully secure the loan. All assets of the debtor are factored into the lending decisions. When businesses do not have a lot of hard assets for a loan, they may seek out an alternative lender, at times it’s the only way to get funding when there is not enough assets to satisfy a standard loan. Blanket liens are preferred because the loan is secured with all debtors assets instead of just a single asset. The underwriting process is typically more flexible when dealing with a blanket lien, it allows lenders to provide funding more quickly. Also, lenders are usually willing to take a 2nd or 3rd position when the loan is short-term.
Conversely, a UCC can lay out specific collateral items. This type of lien protects one or more assets to secure the loan or credit agreement. Specific collateral liens are most common for loans that have a specific purpose, such as inventory or equipment financing.
The following are some common types of specific assets that might be listed on a UCC filing:
  • Commercial instruments (such as drafts or promissory notes)
  • Equipment (multiple types)
  • Inventory
  • Investment securities
  • Large operating equipment
  • Letters of credit
  • Office equipment
  • Real Estate (including fixtures)
  • Receivables
  • Other goods or intangibles owned or used by the debtor
  • Vehicles

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Published in UCC
Monday, 13 November 2017 00:00

If the Debtor's Name Changes

A proper financing statement must provide the name of the debtor, and there are fairly strict requirements for the sufficiency of the debtor’s name.  (See UCC§§ 9-502& 9-503.)  If the debtor’s name changes such that the name on the financing statement no longer matches the debtor’s name closely enough to avoid being seriously misleading when measured after the name change, the effect of the financing statement is limited.
A financing statement that previously sufficiently provided the name of the debtor but that would be seriously misleading if measured after the name change still provides the secured party with two things:  continued perfection for collateral acquired before the name change and a four-month opportunity to amend the financing statement to provide the debtor’s new name and extend the effect of the financing statement.  (See § 9-507(c).)
A security interest perfected by a proper financing statement remains perfected despite the debtor’s name change with respect to assets of the debtor as of the date of the name change or acquired within four months thereafter.  (See § 9-507(c)(1).)  Practically, it will be important to have a detailed and current collateral list, to have some evidence regarding what assets the debtor had and when those assets were acquired.  Imagine a credit transaction,shortly after the name change, where a competing party gives value to the debtor and the debtor grants a new security interest.  The new secured party obtains a UCC search report using the debtor’s new name, which report does not reveal the existing filing using the debtor’s old name.  Having taken on too much debt, the debtor promptly defaults, and the new secured party takes possession of the debtor’s assets.  You want to recover your collateral from the competing secured party.  Among other things, you will need to prove which assets are your collateral, hence the need for a detailed and current collateral list.  Fortunately, the UCC allows for continuing perfection and priority, at least in certain collateral, despite the name change. 
Within four months after the name change, a secured party can amend its financing statement to provide the debtor’s new name and preserve the perfection and priority, despite the name change, even in assets of the debtor acquired more than four months after the name change.  (See § 9-507(c)(2).)  A “late” amendment – that is, one filed more than four months after the name change – would work like an amendment adding a debtor; it would provide perfection and priority only from the date of the amendment.
There is good reason to include a term in your agreement that requires a debtor to notify you immediately if the debtor changes its name.  Prudence also suggests periodic monitoring, in case the debtor fails to notify you.  And, in any case, there is good reason to act promptly if you learn of a debtor name change.
NOT INTENDED TO PROVIDE LEGAL, ACCOUNTING OR OTHER PROFESSIONAL ADVICE AND SHOULD NOT BE RELIED UPON AS SUCH.
Published in UCC
Say you are a secured party with a filed financing statement.  For whatever reason, you obtain a search report for filings naming your debtor.  The report shows your unlapsed financing statement, but, unexpectedly, it also shows a termination of your financing statement!  What can you do to try to create evidence and provide notice that a termination statement was unauthorized?
Who filed the termination statement?  There are important differences among terminations filed by the debtor, filed inadvertently or improvidently by the secured party, or filed by someone other than the debtor or the secured party.
A debtor is entitled to file a termination statement under certain circumstances, including where the debtor properly demanded a termination from the secured party but the secured party failed to respond or where the debtor did not authorize the initial financing statement.  See §§ 9-509(d) & 9-513 (a)&(c).  Outside of these circumstances, and absent authorization by the secured party, a termination statement filed by the debtor is unauthorized.
A termination statement filed by a secured party is probably not “unauthorized” even if it is inadvertent or improvident; in other words, a termination statement “filed by mistake” is nonetheless a filed termination statement, and “unwise” or “regrettable” does not mean “unauthorized.”  An inadvertent termination statement could arise, for example, where a secured party seeking to file a continuation or some other amendment accidentally selects the termination option.  An improvident termination statement could arise, for example, where a secured party files a termination statement after Loan 1 is paid in full without realizing that the security interest for Loan 2 is also perfected by the same financing statement.  A hybrid of inadvertent and improvident could occur where the secured party mistakenly files a termination statement for the financing statement connected to Loan 2 when the secured party meant to terminate the different financing statement connected to Loan 1.  In any case, a termination statement filed by the secured party is seldom unauthorized.
A termination statement filed by someone other than the debtor or the secured party, or an agent of either of them, is more likely to be unauthorized.  One situation that arises from time to time involves a new lender/secured party filing a termination statement purporting to affect the financing statement of the “old” lender/secured party.  Another situation involves some other filer creating a typo in the identification of the initial financing statement in an otherwise proper termination statement and accidentally connecting their termination statement to your initial financing statement. These are examples of unauthorized termination statements.
What if it is truly an unauthorized termination statement?“A person may file in the filing office an information statement with respect to a record filed there if the person is a secured party of record with respect to the financing statement to which the record relates and believes that the person that filed the record was not entitled to do so under Section 9-509(d).” § 9-518(c).  The form is a UCC-5 Information Statement.  The information statement must indicate that it is an information statement – which the form inherently does – and requires just two data elements: the file number for the initial financing statement to which it relates, and the basis for the filer’s belief that the person that filed the termination statement was not entitled to do so under § 9-509.
A sample statement of the basis for a claim of an unauthorized termination statement might be something like:
The person filing the purported termination statement was not the secured party, was not authorized by the secured party, and was neither the debtor nor an agent of the debtor acting under circumstance where a debtor could be entitled to file a termination statement after a failure of the secured party to do so in a timely manner.

What is the effect of filing an Information Statement?  Well… The UCC specifically states that “[t]he filing of an information statement does not affect the effectiveness of an initial financing statement or other filed record.”  § 9-518(e).  The logic is that an unauthorized termination is not effective in the first place, and the information statement is merely a flag rather than a correction.  There is utility in filing an Information Statement to draw attention to unauthorized termination.  It flags the unauthorized filing which should prevent subsequent reliance on the effectiveness of the unauthorized record; imagine your office decided not to file a continuation because someone erroneously believed the financing statement had been terminated. It contributes to the integrity of the filing office’s database; flagging errors makes the system more accurate and reliable for everyone.  And it creates some evidence of the secured party’s diligence in monitoring its financing statements; whether it is a competing secured party, a bankruptcy trustee, a regulator or auditor, your boss, or anyone else asking, wouldn’t you prefer to be able to show that you recognized the issue and flagged it?

NOT INTENDED TO PROVIDE LEGAL, ACCOUNTING OR OTHER PROFESSIONAL ADVICE AND SHOULD NOT BE RELIED UPON AS SUCH.

Published in UCC
Article 9 of the Uniform Commercial Code requires that a financing statement, to be effective, must indicate the collateral that it covers.  A common and useful practice is to specify types of assets that are collateral using UCC Article 9 definitions of asset types.
Some common asset types defined under UCC Article 9 include accounts, chattel paper, documents, equipment, general intangibles, instruments, inventory, and investment property.  See § 9‑102.  It is important to be aware of the UCC Article 9 definitions.  Though many people would be prompted to search for a definition of uncommon terms like chattel paper or general intangibles, many people fail to realize that otherwise ordinary terms like accounts, documents, and investment property have specific meaning under UCC Article 9.  Here are some common misunderstandings:
An “account” is a “right to payment of a monetary obligation…” with certain specific exclusions, notably including “deposit accounts.”  See § 9-102(a)(2).  Typically, a bank account is a deposit account, but a bank account is rarely, if ever, an “account.”
A “document” is a “document of title or a receipt of the type described in § 7-201….”  Books, business records, databases, customer lists, invoices, receipts, bank records, manuals, logs, and the like are not documents under the UCC Article 9 definition.  The UCC Article 9 definition of “document” involves two more issues; it makes explicit reference to another article of the UCC, Article 7, and incorporates an implicit reference to still another article of the UCC, Article 1.  The explicit reference to § 7-201 is easy to see; the use of “document of title,” which is defined in UCC Article 1, is more difficult to appreciate.  See § 1-201(b)(16).
TIP:  Article 1 of the Uniform Commercial Code includes a batch of approximately 40 definitions, including common words like “agreement,” “money,” and “security interest.”  Article 1 also separately describes concepts such as “notice” and “value” and provides guidance on the difference between leases and security interest.  Article 1 applies to all transactions under the UCC (see § 1-102).  Familiarize yourself with Article 1!
“Investment property” does not rely on the investor’s intention, so things like precious metals, artwork, or other rare goods do not become investment property simply because one acquired them “as an investment.” Under the UCC Article 9 definition, investment property “means a security [], security entitlement, securities account, commodity contract, or commodity account.”  See § 9-102(a)(49).  By the way, every one of those things is also a defined term under the UCC, some of which require reference to UCC Article 8.
Some people also overlook the context necessary to select an appropriate collateral type.  As an example, the tools and machines that one can rent at the local rental shop may look like equipment to the renter but they are inventory to the rental company.  (Remember, “inventory” includes goods for lease.  See § 9‑102(48).)
Again, it is a useful practice to specify types of assets that are collateral using UCC Article 9 definitions, but doing so requires an understanding of the definitions.  Start with § 9-102, but don’t stop there!
NOT INTENDED TO PROVIDE LEGAL, ACCOUNTING OR OTHER PROFESSIONAL ADVICE AND SHOULD NOT BE RELIED UPON AS SUCH.
Published in UCC
Earlier this year, the Consumer Financial Protection Bureau published some “supervisory observations” based on its vision of the implementation of the Fair Credit Reporting Act. One area with respect to which the CFPB expressed concern was “data accuracy.” Specifically, the CFPB observed that, generally, credit reporting companies (CRCs) had less-than-ideal data governance policies, procedures, and practices.
One data accuracy issue involves the level of certainty that one requires regarding identification of a consumer before including information on that consumer’s report. The CRCs aggregate information from myriad sources, and those sources have varying standards and formats for the information they provide. The CRCs sought to screen the information they received to identify consumers, but instances did occur where inaccurate information was included on some consumer reports.
Consider a credit report concerning John Q. Publik. Imagine that the state where Mr. Publik resides provides civil judgment information, but the state does not report middle initials. What should a CRC do with data that identifies “John Publik” and otherwise appears consistent with other known information about John Q. Publik – include it or not? Imagine that the tax authorities provide tax lien information, but there are 50 John Q. Publiks in the database. Again, what should a CRC do with data that identifies “John Q. Publik” and otherwise appears consistent with other known information about a particular John Q. Publik – include it or not?
The bar is being raised for the level of certainty that CRCs will be expected to have before they include information on consumer reports. One near-term effect of this change is that CRCs will remove information currently being reported, including civil judgment and tax liens, that does not satisfy enhanced standards for positive identification of the debtor. Likewise, going forward, CRCs will not include new information that does not satisfy enhanced standards for positive identification of the debtor. On one hand, the accuracy of some credit reports could be improved because there will be fewer “false positives”: liens or judgments reported as affecting a consumer other than the consumer to which they really apply. On the other hand, the completeness of credit reports will be diminished because there may be more “false negatives”: liens or judgments that do affect a consumer but which are nonetheless not reported because the identifying information was not robust enough for the CRC confidently to include the information.
Creditors and other users of credit reports should consider augmenting their due diligence by obtaining judgment and tax lien searches from a trusted source – understanding that the CRCs may leave a gap.
When looking to uncover civil judgments, request searches at the court database in the county [or counties] indicated as the consumer’s recent and previous residences. Also, if you are concerned about any liens filed against particular real estate, request a property search in the county where the real estate is located. Lastly, you can request searches for judgments in the federal district indicated as the consumer’s recent and previous residences.
When trying to find tax liens, request searches to be performed at the centralized tax lien database in the state [or states] indicated as the consumer’s recent and previous residences. This search reveals tax liens on personal property assets, analogous to a UCC‑type security interest. Again, if you are concerned about particular real estate, be sure to order a search where the property is situated. This search reveals tax liens that may be recorded on real property.
The stated roll-out for the changes to the credit reports is on July 1, 2017, but it is likely that some reports are changing already. Do not delay in updating your due diligence practices!
NOT INTENDED TO PROVIDE LEGAL, ACCOUNTING OR OTHER PROFESSIONAL ADVICE AND SHOULD NOT BE RELIED UPON AS SUCH.
Published in Lending
Wednesday, 29 March 2017 00:00

Corporate Entity Considerations

When an individual does business, the law considers he or she a “sole proprietor.” Sometimes a business or organization grows beyond one individual, and there might be cause to consider forming an entity. Entities can provide for the division of ownership, division of profits, formalization of governance, insulation from liability, and some preparation for continuation of business, all depending on entity type and certain choices and conduct as an entity.
Common entity types include general partnership, limited partnership, limited liability partnership, limited liability limited partnership, corporation, and limited liability company. Each is briefly introduced below. 
general partnership (GP) is often referred to merely as a “partnership,” though it is helpful – and more precise – to call it a general partnership. General partnerships are the oldest form of business organizations. To form a general partnership, nothing more is required than that two or more persons agree to carry on business together; however, there are potential advantages to formalization of the partnership agreement and registration of the partnership. Typically, in a general partnership, management, profits, and rights to partnership assets are split equally among the partners, and there is no insulation of partners from the partnership’s liability. A limited partnership (LP) can involve partners that are “limited” as distinguished from “general,” though there must always be at least one of each, a general partner and a limited partner. Formal documentation and registration in the appropriate office are necessary to formalize the formation of a limited partnership. In a limited partnership, there can be distinctions between the management participation, division of profits, and rights in partnership assets as between general partners and limited partners. Typically, though general partners are exposed to liability for partnership obligations, limited partners are not.
A limited liability partnership (LLP) is a general partnership that has completed a formal election to insulate partners from liability for partnership obligations. Likewise, a limited liability limited partnership (LLLP) is a limited partnership that has completed a similar formal election. The formal election involves preparing, signing, and filing specific documents, and there can be consequences – including that the election is ineffective – even for relatively minor errors; consider consulting an attorney for more information on this point.
A corporation (Corp. or Inc.) is formed by the filing of articles of incorporation. A corporation is significantly different than a partnership insofar as its existence is entirely separate from anyone else; a partnership requires partners, but not so for a corporation. For a corporation, the division of ownership, division of profits, and formalization of governance all depend on the formative document (usually articles of incorporation) and other governing documents (usually including bylaws). There are standard rules provided in state statutes, but there are myriad combinations and permutations possible by agreement. Typically, shareholders are insulated from liability – beyond risking whatever amount they invested to purchase shares.
A limited liability company (LLC) is a formed by the filing of articles of organization. A limited liability company is somewhat like a hybrid, having some similarities to a corporation and some similarities to a partnership. For a limited liability, the division of ownership, division of profits, and formalization of governance all depend on the formative document (usually articles of organization) and other governing documents (usually including a member control agreement and an operating agreement). As with corporations, there are standard rules provided in state statutes, but there are myriad combinations and permutations possible by agreement. Typically, members are insulated from liability – beyond risking whatever amount they invested to purchase membership interests.
Note that, while the formation and structure of an entity has some effect on issues like insulation from liability, conduct also has some effect. The behavior of owners and management can affect whether the structure has a “typical” effect; forming an entity is an event, but behaving as an entity is a process.
Also note that there are important considerations and requirements regarding taxation of entities and the tax consequences of particular structures, choices, and conduct that are beyond the scope of this article. Consider seeking advice from a qualified professional regarding the tax-related aspects of entities.
NOT INTENDED TO PROVIDE LEGAL, ACCOUNTING OR OTHER PROFESSIONAL ADVICE AND SHOULD NOT BE RELIED UPON AS SUCH.
Published in Legal
Wednesday, 15 March 2017 00:00

DBAs & Assumed Names

Individuals, that is, human beings, are what the law calls “natural persons.” A natural person’s full name, as given at birth or as later legally changed, is the individual’s true name. Some entities, like corporations and limited liability companies, are formed by the filing of articles of incorporation or articles of organization with an appropriate filing office. The true name of such an entity is whatever name is specified in the filed formative document. Some entities can be formed other than by filing “articles” with any particular office: a general partnership, for example. The true name of a general partnership includes the full name of each partner. There are still further rules for determining the true name of other entities or organizations. 
Sometimes it is useful to use a name other than one’s true name. In that case, one can assume a different name, an assumed name, also sometimes called a “DBA” because one is “doing business as” the assumed name. However, there are requirements for, and limitations on, assumed names. 
In some jurisdictions, including Minnesota, one cannot do business under a name other than one’s true name without registering an assumed name. There are penalties for noncompliance with this requirement, and one could be exposed to claims if somebody else already has rights in a particular name. 
Generally, a new assumed name must be distinguishable from all existing assumed names in the particular jurisdiction. Some characteristics of an assumed name may be “standardized,” also, meaning that “and” and “&” may be considered to be the same and “ViZionarY” and “Vizionary” may be considered to be the same. It is prudent to search for existing assumed names before deciding on a new assumed name.
Also, one cannot use an assumed name that includes a designation as an entity of a type other than what one really is. For example, Murphy Washington could not assume “M. W. Corporation,” and XYZ Corp. could not assume “XYZ Partnership.” 
And while successfully registering an assumed name satisfies a requirement to do so before doing business under that name, it does little more. Specifically, though it would prevent somebody else from registering that assumed name in the same jurisdiction, it does not prevent others from using that name or from registering that name in another jurisdiction. There are legal protections available for trademarks and service marks, and there may be legal protections available to prevent certain other uses of names; consider consulting an attorney for more information on this point. 
Capitol Lien can assist with determining true names, checking the availability of new assumed names, registering assumed names, and filing amendments involving assumed names. 
NOT INTENDED TO PROVIDE LEGAL, ACCOUNTING OR OTHER PROFESSIONAL ADVICE AND SHOULD NOT BE RELIED UPON AS SUCH.
Published in Due Diligence
Tuesday, 01 November 2016 00:00

State Office Closures

November 2016

November 8 - Election Day
DE, HI, IL, IN, MD, MI, MT, NJ, NY, RI

November 11 - Veterans Day
ALL States

November 24 - Thanksgiving
ALL States

November 25 - Day after Thanksgiving* 
AL, CA, CO, DE, FL, GA, IA, IL, IN, KS, KY, MD, ME, MI, MN, MS, NE, NH, NC, NM, NV, OK, OR, PA, SC, TN, TX, UT, VT, VA, WA, WV
*Observance Name varies by Jurisdiction

Published in Jurisdiction Updates
Wednesday, 26 October 2016 00:00

Perjury Language

To improve access to the courts and to facilitate the electronic filing of court documents, a new Minnesota Statute became effective not long ago, stating that, unless specifically required by a court rule, a document need not be notarized to be filed with a Minnesota state court.  In other words, there is no general requirement for notarization, and any historical practice or common usage that implies a notarization requirement, such as calling a document an “affidavit,” does not actually require notarization.

Instead, a document that requires “verification upon oath or affirmation” can achieve that characteristic with the inclusion of simple "perjury language.”   The text suggested by the statute is “I declare under penalty of perjury that everything I have said in this document is true and correct.”  Minn. Stat. § 358.116.  That text must appear immediately above the signature, and the document must, somewhere, include the date of signature and the county and state where it was signed.

Example:

* * *

I declare under penalty of perjury that everything I have said in this document is true and correct.

Signed [DATE] in [COUNTY], [STATE].  _____________________________

Importantly, this change only directly affects the requirements for filing a document with a Minnesota state court.  It does not directly affect any documents that must be verified to satisfy a requirement other than a Minnesota state court rule, and it does not directly affect any document that must be acknowledged as opposed to verified.  (For example, under Minn. Stat. § 523.23, subd. 3, a Minnesota short form power of attorney must be acknowledged, and under Minn. Stat. § 507.24, to be recordable, a real estate conveyance must be acknowledged.)

So, for documents to be filed in a Minnesota state court, many documents that had historically included notarization can avoid the involvement of a notary public and now use “perjury language” instead.  However, there are numerous other requirements for notarization, such as in the acknowledgment of real estate documents, that are unaffected by the recent statutory change.

NOT INTENDED TO PROVIDE LEGAL, ACCOUNTING OR OTHER PROFESSIONAL ADVICE AND SHOULD NOT BE RELIED UPON AS SUCH.

Published in Legal
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