Now you may wonder, what do "Flies, a Camel's back and UCC Financing Statements have in common? Why would we even put them in the same sentence? Well, they are a reminder a reminder of the importance of UCC Financing Statements. A reminder none of us should forget.
How is it a reminder? Well, it goes like this. As one of my partners (who will go unnamed) once told me, "completing UCC Financing Statements is a lot like picking the flies off the back of a camel it can be a very tedious and unpleasant task to make sure everything is done just right and you don't miss anything, but it is very important to the client." Not that any of our clients are like camels, but both the lender and the camel are a lot happier if the job is done right and both suffer and are unpleasant, perhaps downright ornery, if the job is done wrong.
Actually, I don't know what happens if the camel herder fails in his job with the flies, but I do know (from reading cases no first hand experience here) what can happen if not enough attention is paid to completing UCC Financing Statements. The results of the latter can be very unpleasant and even disastrous to the lender. And that is what this letter is all about, a reminder of the importance of being very careful about your UCC filings and an overview of some of the many things which need to be carefully accomplished in order to ensure your UCC filings are done correctly. So as you get ready to prepare or review that next set of UCC Financing Statements, here are a few things to remember:
1. A "name" - what's in a name? Perfection or not perfection, that's what. Just be one letter or symbol off in the debtor's name and you may lose your perfected position even if you do everything else correctly. In one recent case, the absence of one little hyphen in the debtor's name resulted in loss of perfection for the lender.
The name of the debtor as listed on the UCC Financing Statement must be the debtor's correct legal name. And how do you obtain that name? The answer is not, "Ask the debtor". I am no longer surprised by the number of CEO's, presidents and other corporate officers that simply do not know the correct legal name of their businesses, even when they were the founders. If the debtor is a corporation, LLC, limited partnership or other registered entity, obtaining a good standing certificate is the best means of determining the correct name.
2. What "address" do you use to complete the debtor box on a UCC Financing Statement? Sounds like a simple question, but again the failure to include the correct address has resulted in the loss of perfection, even when all else has been accomplished correctly. (Do you see a theme developing here?)
The Uniform Commercial Code requires that you include the correct "mailing" address for the debtor. The reason is not important. The rule to remember, however, is. You must use the correct "mailing address". In many cases the mailing address is not the same as the address you were given to find the debtor's office or the address you used for sending the loan proposal by overnight delivery. For example, look at this law firm, we have two different addresses - one for mail and one for hand delivery and those two addresses are in two different towns. And it is not just this law firm, we have all seen instances where a business's mailing address is very different from its physical location. As another example, I worked on one loan where the main facilities were all located in New Jersey, but all mail went to an office suites location in the Mid-West. If you sent a letter to any of the New Jersey facilities, it would likely be returned stamped "Addressee Unknown". How do you determine which address is a mailing address? Check the debtor's mail as part of your due diligence, or ask the local post office. Debtor's counsel in connection with their opinion letter on "perfection" can also be very helpful on this point.
3. What about the Secured Party box on the Financing Statement? Again, the UCC imposes certain very specific requirements with which you must comply of risk loosing your perfected security interest. For example, in the Secured Party box you need to include an address. However, for the Secured Party it does not have to be a mailing address. Rather for the Secured Party you must provide an address from which information concerning the security interest may be obtained. That address does not need to be the address of the loan officer on the file, it simply needs to be an address from which the information concerning the security interest may be obtained. Again, you need include the correct address or risk losing your otherwise perfected position.
4. The property description should be fairly straight forward, but people continue to make mistakes in this area. First, to the extent your security agreement contains a lengthy, detailed description of the collateral, the UCC Financing Statements should have the same lengthy, detailed description. Another tip although many attorneys and lenders like to simply include a phrase similar to "See Attached Schedule A" in the property description box of the UCC Financing Statement and then attach the lengthy description in a multiple page attachment, that is not really the best approach. As we all know, attachments can and do become separated and lost, or perhaps only the last page of a five page attachment is lost. Has that ever happen to you? And if it did, were the pages labeled something like "page 1 of 5" so a party searching the record would at least arguably be put notice that they should look for 5 pages? Even if you do follow that careful approach, we believe it is a better approach and simply a very good idea to include a shorter description on the UCC Financing Statement naming all the major categories of collateral covered by the filing, such as "all accounts, inventory, fixtures . . ." and then ending with a statement such as "and all other property described in Schedule A attached hereto."
Although the process of describing the collateral for blanket liens should become easier when the revisions to Article 9 are adopted in the governing state, until then, lenders and their counsel need to carefully deal with the approach of lengthy detailed collateral descriptions.
5. Fixture filings can be more difficult then they first appear. Often fixture filings are obtained when no mortgage is obtained and therefore no title report is involved. To perfect in fixtures, however, you need to file the financing statement in the county where the property is located and where a mortgage would be filed. In many cases it is fairly simple to determine which county the facility with the fixtures is located in. But not always. The location of county borders can be quite surprising and we have seen many instances of a business located in one county having its street address and mailing address located in a neighboring county. So before you file those important fixture filings, you need to make a check of the true location of the real property in question. If you determine to go without a title search, then the tax bills can be a reliable (although not infallible) source of that information.
Fixture filings also require that you list the name of the record owner of the real property if the debtor is not the owner. The typical mistake here is to assume that the name of the landlord and the record owner are the same. However, that is often not the case. In each instance where fixture filings are being made, you need to find an appropriate method to confirm the name of the record owner. Again, the tax bills can be one source of reliable (although not infallible) information in this area.
The above are only a sample of some of the major issues to review and consider when preparing UCC Financing Statements. Obviously, the above is not an all encompassing list of items which must be considered and addressed. Each filing is unique in some manner and must be carefully prepared. However, if you remember only one thing from this letter, remember the one principle rule in preparing Financing Statement and in caring for camels make one mistake and it does not matter that you did everything else perfect, you might still get kicked for the one fly you missed in the only spot that matters.