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COMMERCIAL FINANCE 701: The UCC, secured transactions & personal property liens

Commercial Finance 701 is a continuing series on commercial loans written exclusively for the Mississippi Business Journal. This series is geared to lenders, developers, investors and transactional attorneys.


The Uniform Commercial Code (UCC) has swayed many a law student to question a future career in business law.  A semester of UCC law, using a small font, 3-inch thick textbook chock-full of tedious definitions and mind-numbing concepts, bores even an otherwise indefatigable accounting grad.  Our topic is limited to secured transactions.

BACKGROUND.  A smidgen of background information on the UCC is in order.  You should know the UCC is NOT uniform from state to state.  In legal circles, a preceding “Uniform” in a legislative act is a squawking red herring and, in this context, means a law is based on a model act recommended for adoption by the various jurisdictions.  Standardization is, however, illusive, as legislative bodies often make substantive amendments to model acts.

The UCC is the model of model acts, having been adopted – in some version – in all 50 states, the District of Columbia, the U.S. Territories, and by Native American tribes including the Mississippi Band of Choctaw Indians.

THE BASICS.  Let’s assume a construction loan secured by land, improvements, fixtures, materials, supplies and equipment.  The lender, naturally, will file a deed of trust (aka mortgage) covering the real estate and fixtures.  But what about the personal property such as materials, supplies, and equipment?  For those items, your typical deed of trust isn’t enough and we’ll need to turn to Article 9 of the UCC.  In this somnolent section, we learn how borrowers grant, and lenders perfect, liens on most types of personal property.   There are three important concepts: attachment, perfection and priority.

1.  Grant of Lien – Miss. Code Ann. §75-9-201, et seq. The borrower “grants” a “security interest” on described personal property via a “security agreement.”  The lien “attaches” the moment all three of the following have happened, regardless of order: (a) the security agreement is executed and delivered; (b) the borrower has rights in the collateral; and (c) value has been given by the lender.

2.  Perfection – Miss. Code Ann. §75-9-308, et seq. The lender next “perfects” the lien, establishing lien priority (first lien, second lien, etc.).  Perfection as to most types of personal property is accomplished by filing a UCC-1 Financing Statement (UCC-1) in the appropriate government office – typically the Secretary of State in the state the borrower is organized.  The filing fee is around $10, and the filing puts the world on constructive notice of the lien.

3. Priority – Miss. Code Ann. §75-9-317, et seq.  As to lenders with competing liens on common collateral, it is oftentimes a race to the proper filing office to determine the senior lien position.  The priority for liens on most types of personal property collateral will be determined in this manner.

WHAT COLLATERAL?  The description of collateral in a security agreement – a private agreement that is not recorded – should be specific.  A “supergeneric” description such as “all assets of debtor” fails, but use of defined collateral categories (goods, inventory, equipment, etc.) is acceptable.  The UCC-1, however, is merely a “notice” document with much looser description requirements, permitting even a supergeneric listing.

EXCEPTIONS TO THE RULES.  Of course, there are exceptions to the general rules.  Our first exception is the type of personal property.  Depending on the type of collateral, the UCC may permit or even mandate a method of perfection other than the filing of a UCC-1, such as titled property (vehicles), airplanes (FAA), vessels (Coast Guard), brokerage accounts (control agreement), fixtures (land records), and cash (possession).

The second exception deals with property that can be perfected multiple ways. Take, for instance, competing liens on a promissory note.  A lender can perfect its lien by filing a UCC-1, but the lender that takes possession of the note lands the senior lien (regardless of the order of perfection).

The third exception is a non-UCC lien such as a legal JUDGMENT and a government TAX LIEN.  These can be tricky as the filing rules vary, with some liens recorded in the local courthouse and state tax liens recorded on the MDOR’s new online state tax registry database.  A properly enrolled judgment or tax lien creates a lien on real and tangible personal property of the debtor.

WHAT’S IN A NAME?  Deciding who holds title to collateral sounds easy, but it can be knotty. Whose name is on the bill of sale or invoice?  Who paid for it?  Obtaining a lien from a parent company does not create a lien on property owned by a wholly owned subsidiary.  When in doubt (including when various affiliated entities are involved), all entities with possible ownership interests should sign the security agreement and be named as debtors in the UCC-1.

UCC SEARCHES.  One of the benefits of the UCC is the ease in conducting lien searches.  Rather than travel to a particular county and rumble through courthouse records as is usually the case with land records, in most states a party can conduct an online, electronic search of UCC records filed with the applicable state filing office. You should review the entity formation documents to determine the correct name and state of formation.  In Mississippi, the Secretary of State is the state repository of UCC filings.  Delbert Hosemann, an energetic-tax-attorney-turned-Mississippi-Secretary-of-State runs an exemplary, up-to-date, user and fee friendly, UCC operation.  www.sos.ms.gov/BusinessServices/Pages/UCC.aspx.

NUANCES.  There are scads of nuances and rules. How long is a UCC-1 effective?  What if the borrower changes its name or domicile, merges with another company, or is dissolved?  Does it matter if the personal property is tangible or intangible?  Lenders should remember that a purchase money security interest may allow one lender to leap-frog another lender as to newly acquired and financed acquisitions.  Mechanics’ liens can be a problem.

CONCLUSION.  As a nebulous rule of thumb, the old adage that “possession is 9/10ths of the law” has some paltry validity, particularly in rural areas.  As for commercial loans, strict adherence to the Article 9 is preferable.

» Ben Williams and Molly Jeffcoat Moody are attorneys engaged in an active commercial law practice at Watkins & Eager PLLC.   Ben and Molly are both recognized by Chambers USA and Best Lawyers in America.   Ben was selected as Best Lawyer’s 2016 Project Finance Lawyer of the Year in Jackson, Mississippi.   Additional information is available at www.watkinseager.com.


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