The Uniform Commercial Code, or UCC, is a set of rules governing sales contracts between  merchants, or between a merchant or non-merchant. A merchant is an individual with special knowledge of a particular business or enterprise. Usually, the merchant has gained this knowledge by having worked in that business for a significant time period. The UCC governs matters related to contract formation, interpretation, and breach. 

Most states have incorporated UCC rules into their own laws. A “UCC filing” refers to the filing of a specific UCC form with a state’s Secretary of State Office. The form that is filed is known as the UCC-1 Financing Statement (UCC-1). The UCC-1 filing is a legal notice filed by a creditor (a person to whom money is owed). Through filing the notice with the state Secretary of State and paying a fee, the creditor announces that it has the right to obtain property of a debtor. 

The debtor is someone who has defaulted on a business loan made to it by the creditor. The UCC filing allows the creditor to hold on to the debtor’s personal property until the debtor pays off the loan. The personal property can take the form of the debtor’s business inventory and equipment. Once the debtor pays off the loan, the creditor must file a “notice of discharge,” or “notice of termination of lien,” which states that the loan has been paid back. 

The notice of discharge also states that the lien on the debtor’s property no longer exists. The UCC-1 is filed with the office of the state Secretary of State. Generally, if more than one creditor is owed money by the debtor, the creditor who files the UCC-1 first is given priority (called priority of lien) over the other debtor.

What Are Common Legal Issues in a UCC Filing?

Filing a UCC-1 form is NOT the filing of a lawsuit. A lawsuit is filed by a plaintiff against a defendant, with the clerk of the court. A lawsuit is an adversarial proceeding, meaning two parties have a dispute, to be resolved by a court. In contrast, a UCC-1 form is filed by a creditor, with the state Secretary of State’s Office. The creditor does not use the form to demand damages or compensation. 

Rather, the creditor simply identifies the collateral (equipment or inventory) associated with its loan, and states that the collateral is subject to a lien. A creditor may, deliberately or negligently, file an unauthorized UCC-1 form. “Unauthorized” means that the filing is not a legitimate lien, and that the debtor does not in fact owe money. If a creditor files an unauthorized lien, then, a debtor may initiate a court proceeding to have the lien removed, and for damages.  

Various issues can arise with respect to a UCC filing. For the filing to be valid, the creditor must enter the precise legal name of the debtor. The only document that is guaranteed to reveal the name is the debtor’s Articles of Incorporation or Articles of Organization. These documents must be filed with the Secretary of State. 

Some Articles may list the business name along with the phrase “DBA” or “FKA.” “DBA” means “doing business as.” “FKA” means “formerly known as.” A company might refer to itself in the Articles of Organization as “Smith Corporation, doing business as Jones Inc., formerly known as Smith and Jones, Inc.” Some of the “DBA” and “FKA” entities may still have assets.To ensure all possible names of the business are included in the filing, a creditor should least each “DBA” and “FKA” as a separate debtor.

The creditor must enter all other debtor information the form requires exactly as that information appears in the Articles. This means, for example, that if a business is identified in the Articles as “Smith and Sons,” filling out “Smith & Sons” is incorrect, and could result in the Secretary of State’s Office returning the UCC-1 to the creditor. If the form is returned because information has not been entered, the creditor will have to then submit the correct information. Using numerals instead of written numbers  (“3” instead of “three”), punctuation, and extra spaces, where this language does not appear in the Articles, can also result in the return of the UCC-1 Form. 

Finally, the UCC-1 form must correctly indicate where the debtor is incorporated (which state). The UCC-1 form must also describe the collateral included in the lien (the equipment and inventory) and the name of the creditor. This information must be free of typos. The collateral need not be described in extensive detail. It must, though, be described in enough detail for a person reading the UCC-1 form to know what the collateral consists of. 

For example, if the collateral is a 1969 Ford Taurus, the form can state this. The form need not state “The 1969 Ford Taurus with automatic transmission, power steering, fuel injection control,” etc. However, merely stating “a car” is insufficiently vague.

How Are UCC Filing Resolved?

A UCC filing can be terminated once the loan has been paid back. The creditor can terminate the filing by filing a notice of termination and paying the filing fee. The notice serves as notice “to the world” that the lien has been paid off. Under the UCC, lenders should file a termination statement, which removes the UCC-1 filing, no later than a month after payment of the debt. 

Lenders often fail or forget to terminate a UCC filing. If a lender has not removed the UCC-1 filing, the debtor should send a written request to the lender, asking that the lender terminate the filing. This is one way to ensure termination of a UCC filing. Once the lender receives the request, the lender has 20 days to terminate the UCC filing. A lender may also, as an alternative to termination of a UCC-1 filing, give the debtor the termination statement. Once a debtor receives this document, the debtor should file the document with the office of the Secretary of State.

Under the UCC, a UCC-1 filing is valid for a period of five years from the filing date. The UCC-1 lapses,or becomes ineffective, if that period of time expires. For a creditor to obtain an extension of this time, the creditor must file UCC-3 continuation form before the five years are up. The UCC-3 continuation form amends the UCC-1, to extend that document’s validity for five more years. 

A creditor cannot file the UCC-3 form simply because the creditor feels like doing so. For a creditor to file the form, the loan must not have been paid back at the end of the five-year period. There is a specific deadline for the filing of the UCC-3 continuation form. A creditor seeking to file the UCC-3 continuation form, must do so within 6 months of when the UCC-1 filing is set to expire. 

Do I Need a Lawyer for Help with a UCC Filing?

If you need to file, amend, terminate, or request termination of a UCC-1 Form, you should contact a commercial lawyers. An experienced business attorney near you can advise you as to how to properly fill out and file a form, or how to terminate or request its termination.