Perspectives

In the world of commercial finance, risk management is essential-and one of the most important tools available to creditors is the Uniform Commercial Code (UCC). If your organization extends credit or leases high-value equipment, understanding how to leverage the UCC can mean the difference between secured and unsecured recovery in a default situation.

What is the UCC?

The Uniform Commercial Code is a standardized set of laws governing commercial transactions in the United States. Article 9 of the UCC specifically addresses secured transactions, enabling lenders and sellers to file legal claims against the collateral that backs a loan or a line of credit.

At the heart of this process is the UCC-Financing Statement-a public filing (usually with the Secretary of State) that puts the world on notice: a creditor has a legal interest in the debtor’s property.

Types of UCC Filings

There are two primary types of UCC filings:

General (or Blanket) Filings: These cover all of a company’s assets, not just a specific item. anks often use blanket liens to secure lines of credit or loans, giving them the right to repossess a borad range of assets if a default occurs.

Specific Collateral Filings: These narrowly define the collateral-such as inventory, accounts receiveable, or equipment. This approach is commonely used by vendors or leasing companies who want to secure interest in a particular asset or class of assets.

Within specific collateral filings, a Purchase Money Security Interest (PMSI) stands out. PMSIs allow the creditor to leapfrog others in terms of priority, provided certain requirements are met, including early notification and timely filing.

Getting it Right: Filing Procedures

To perfect a security interest and maintain priority, a creditor must:

1. Obtain a signed security agreement– This could be part of a credit application, a promissory note, or a stand-alone document.
2. File a UCC with the correct information:
   • Full legal name and address of the debtor
   • Creditor’s name and address
   • Precise description of the collateral (e.g., “Debtor’s inventory…now owned or hereafter acquired…”)
3. Monitor expiration dates: UCC-1 filings are active for 5 years and require a continuation statement within 6 months of expiration.

Stay tuned for Part Two, where we’ll walk through priority disputes, enforcement in default, bankruptcy implications, and what happens when businesses merge or reorganize.

When a customer files for Chapter 7 bankruptcy, it’s crucial to act swiftly and strategically to protect your company’s financial interests. Below is a practical to-do list for credit managers and finance professionals navigating this complex process.

• Confirm the filing

Verify the bankruptcy filing by obtaining the case number and confirming the court’s jurisdiction.

• Comply with the Automatic Stay

Cease all collection activities immediately to avoid potential penalties for violating the automatic stay.

• Obtain the Petition and Mailing Matrix

Review the bankruptcy petition and mailing matrix to ensure your debt is listed correctly Confirm your company’s mailing address to receive important notices.

• File a Proof of Claim

Submit a timely proof of claim to establish your right to receive any distributions from the debtor’s estate.

• Review Recent Transactions

Examine transactions within the last 90 days for potential preferential payments that may be subject to crawlback.

• Evaluate Fraud Concerns

If you suspect fraud, consider pursuing and adversary proceeding to challenge the discharge of the debt.

• Confirm Lien and Bond Rights

Ensure your lien or bond rights are presereved. These rights may offer additionaly protections, even during bankruptcy.

Take Action Today

Navigating a customer’s bankruptcy requires attention to detail and expert legal guidance. Wagner, Falconer & Judd specializes in protecting creidtor’s rights. Contact us to ensure your business is positioned for the best possible outcome in Chapter 7 cases.

Small businesses are a pillar of the American economy. In 2005, Congress enacted Bankruptcy Abuse Prevention and Consumer Protection Act to allow small business owners easier options for reorganization.

After almost 15 years, Congress realized small business debtors were the least likely to have a successful reorganization while still having a high number of small business failures.

On August 23, 2019, Congress passed the Small Business Reorganization Act (SBRA). The SBRA is a Chapter 11 reorganization bankruptcy under the new subchapter, Subchapter V.

The SBRA has new requirements as to which individuals or entities will qualify under Subchapter V, as well as new procedures. These features were added to allow small business to avoid some of the burdensome costs and time typically associated with a Chapter 11 bankruptcy.

The highlights of the SBRA are as follows:

1. Debt limit has a baseline of total debt at $2,725,625;
2. Elimination of the absolute-priority rule for creditors;
3. Appointment of a trustee, similar to those appointed in Chapter 12 and Chapter 13 of the Bankruptcy Code; and
4. Less strenuous disclosure statements and more debtor-friendly rules governing the plan requirements.

The complexity of filing bankruptcy for small businesses owners and small business debtors may be lessened by these new changes, the option to file under Subchapter V will keep many businesses operating.

The changes brought forth by the SBRA are exciting and a welcoming change to the law. There are many factors for small business owners to consider before filing of a reorganization bankruptcy. As always, it is best to consult with your LegalShield provider firm for a more detailed analysis.

Posted on April 14, 2020