CT Lien Solutions Blog

Partial assignment surviving termination of original lien by original SP

We recently received the following question from a reader:

If XYZ bank:
1. has a blanket lien
2. grants a partial assignment of accounts receivable to ABC Corporation
3. then files a termination of its original lien

Will ABC's partial assignment of accounts receivable survive the termination?

The answer is yes. Once the partial assignment was made, there would be two secured parties (SP) of record. When the first SP filed the termination statement, it would only terminate its own interests, not the entire filing. The SP of record remains perfected.

 

Debtor-filed termination statements

Recently we received the following question from a reader:

[Secured Party X] filed a UCC-1 against us, ABC Debtor, Inc., in April 2010 based on a project we were doing with them. The project was completed and no outstanding debt or liability exists, and we will not incur any additional debt or liability with [Secured Party X]. My question is:  Can we as Debtor file our own UCC-3 Termination? We are having trouble locating the correct people at [Secured Party X] to request this.

Here is our response:

Yes, you can file a UCC-3 termination statement if there is no existing obligation. Section 9-513 allows a debtor to file a termination statement under limited circumstances. First, the debtor must send an authenticated demand to the secured party, and if the secured party does not file a termination statement (or send a termination statement to the debtor to be filed) within 20 days, the debtor may file a termination statement (9-509(d)). The authenticated demand can be sent to the name/address of the secured party indicated on the financing statement. The Official Comment to section 9-516 provides that this is sufficient, as indicated below:

9-516 (Official Comment 5)

5. Address for Secured Party of Record. Under subsection (b)(4) and section 9-520(a), the lack of a mailing address for the secured party of record requires the filing office to reject an initial financing statement. The failure to include an address for the secured party of record no longer renders a financing statement ineffective. See section 9-502(a). The function of the address is not to identify the secured party of record but rather to provide an address to which others can send required notifications, e.g., of a purchase-money security interest in inventory or of the disposition of collateral. Inasmuch as the address shown on a filed financing statement is an "address that is reasonable under the circumstances," a person required to send a notification to the secured party may satisfy the requirement by sending a notification to that address, even if the address is or becomes incorrect. See section 9-102 (definition of "send"). Similarly, because the address is "held out by (the secured party) as the place for receipt of such communications (i.e., communications relating to security interests)," the secured party is deemed to have received a notification delivered to that address. See section 1-201(26).

Call for content suggestions!

We want to make sure our blog postings cover the areas you're most interested in. What do you want to read about? Use the "Comments" link below to share your thoughts and help us shape future content!

Lapsed UCC filings

Recently we received the following question from a reader:

If a UCC has lapsed about one month prior to the secured party filing a continuation, is the continuation effective, or should the secured party file a new UCC? If the secured party should file a new UCC, must the secured party obtain authorization from the debtor, or is the underlying security agreement signed by the debtor at the time of the initial UCC filing valid authorization for the new filing?

It’s a common question, and here’s our response:

Section 9-515 provides that “Upon lapse, a financing statement ceases to be effective and any security interest or agricultural lien that was perfected by the financing statement becomes unperfected, unless the security interest is perfected otherwise. If the security interest or agricultural lien becomes unperfected upon lapse, it is deemed never to have been perfected as against a purchaser of the collateral for value.”

So, once the financing statement lapsed, the filing of a continuation (which likely would not be accepted by the filing office) would not have any legal effect. The secured party should file a new UCC-1 financing statement.

Fortunately, the secured party does not need to obtain any additional authorization from the debtor. The underlying security agreement, signed by the debtor initially, continues to provide authorization for the secured party to file a new financing statement.

Hot topic #3 - Continued perfection of security interest following change in governing law

We love getting questions and comments from our readers, so keep them coming! Today’s post is in response to a question we received regarding UCC provision 9-316, or the continued perfection of a security interest following a change in the governing law.

As a little review for those of you who are not well-versed in the UCC RA9 and its new amendments to take effect by 2013, this section of the code primarily addresses the effect on a security interest in after-acquired property in the event of a change of the debtor’s location, or a new debtor becoming bound by the security agreement. As part of the new amendment package, new subsections (h) and (j) are created, which address two narrow situations. First, it addresses situations in which collateral is acquired by a debtor after the debtor’s location to a new jurisdiction. Second, it addresses collateral acquired by a new debtor, when the new debtor is located in a different jurisdiction than the original debtor.

The question from our reader is as follows:

• Assuming we properly file a financing statement in the New State on the New Debtor/Survivor within the four-month or one-year period, what do we do with the filing on the Old Debtor in the Old State? Let it lapse? Does its continued existence provide any retrospective priority? Do we continue it in the Old State or In-lieu it to the New State?

Our UCC business consultant Tim Hall provides the following response:

• Generally, when the situation involves only 9-316, the new filing (in the new location) generally “moves” the interests from the original jurisdiction to the new jurisdiction. It is common practice for the new filing to specifically reference the original filing information (and some secured parties will attach a copy of the original filing) when filing in the new jurisdiction. This is similar to how a “financing statement in lieu of continuation” was filed during the transition period. There is no need to take any action upon the original filing when the transaction involves only 9-316.

Have a burning question you want answered? Submit it to CT Lien Solutions and you may see an answer in an upcoming blog post!

Hot topic #2 - Pre-filings and terminations

We often get asked the question: “When to file?” Keep in mind that when entering a transaction, pre-filing serves as notice to a claim, and can save the party from the expense and hardship of constant diligence throughout the life of the deal. Though it may be true in your business that the majority of deals never actually close, for those that do, the effective date becomes the date of the pre-filing, not the date of the closing! Wouldn’t you rather lock in a place in line (hopefully first!) instead of risking other secured parties jumping in ahead while the deal is being worked? Not only do you secure your position through pre-filing, but you avoid the need for update searches as the deal is worked.

This sometimes spurs more questions. A recent one we fielded relates to an interesting scenario: Three parties are all pursuing a transaction. The first two parties each file pre-filings, but it is a third bank that closes. That bank needs the first two parties to terminate their filings. What should the bank do? While there are various ways to handle this, one option is for the bank to stipulate that the debtor must tell the first two parties to terminate, with a notice, say 20 days. After that notice, if the parties have not terminated, the debtor is authorized to terminate the filings itself.

As always, CT Lien Solutions is here to advise on your public records searching and filing queries. Have a question? Email it to info@ctliensolutions.com.

Hot topic #1 - The battle of the factors

You asked, we answered. One of our readers—a factor providing Accounts Receivable funding to businesses seeking working capital—submitted a complicated hypothetical for discussion.

Here’s the scenario:

• The backstory: Client has a bank UCC lien on file, covering accounts, based on a term loan of $1M. Accounts Receivable history averages $2M. Factor deems it’s okay to be the second UCC lien on accounts and goes into the deal.
• Trouble stirs: Factor files a second UCC on accounts, subordinate to the banks. All goes well for some time. Then…factor learns that New Factor has stepped in and taken over. New Factor has had client sign a factoring agreement. New Factor bought the bank note secured by the first UCC on accounts. New Factor filed a third UCC on accounts relating to the factoring agreement.
• He said/she said:
  • New Factor is asserting that it has all rights to the accounts because of the first UCC lien on accounts assigned to it from the bank.
  • Factor had actual notice of the term loan and the limits on the term loan when it went into the deal.  
• So who’s got claim??

This seems to be a very common scenario in the factoring industry. We asked a few of our UCC consultants for their thoughts, and here’s what they had to say:

-------------------------

While there are details missing that might be pertinent to the overall rights, a critical piece of criteria might lie with the security agreement. This document—not on the public record—might give more information as to the limits of the term loan agreement. Also, it’s a little unclear as to whether New Factor has a third factoring agreement, or whether it has merely purchased the note relating to the initial factoring agreement.

Let’s assume the following, though. There are three factoring agreements/security agreements. As such, each of the three security agreements (factoring agreements) may or may not identify specific accounts that are covered (as stated above, this depends on the language of the security agreement). We’ll assume that the security agreement identifies specific accounts. There are three financing statements filed, each of which relates to a specific security agreement. Each of the secured interests is limited to the value indicated in the security agreement, which it appears is $1M for the first but is unknown for the subsequent transactions.

Given the above scenario, New Factor is basically going to take over whatever rights the initial lender had, which are known to Factor and were contemplated when it entered into its initial deal. Whether those rights are exercised by bank of New Factor is somewhat irrelevant. Factor is going to maintain the same second position it had, and New Factor will have third position regarding the accounts subject to the third security agreement and filed financing statement. Again, the issue is somewhat dependent upon whether the specific accounts are identified or whether the security agreement uses a generic reference to “account.”

The practical result here will be New Factor “buying out” the first Factor at some point. The hitch in that transaction will be the fees and costs, as these agreements can be harsh.

-------------------------

Has anyone else run into a similar scenario? Let us know what you think.