Are you struggling to collect on a business debt? You may be able to find legal recourse under the Uniform Commercial Code (UCC). The UCC is a comprehensive set of laws governing all commercial transactions in the United States, including secured transactions. A secured transaction is a loan or purchase that is secured by collateral, and is specifically covered by Article 9 of the UCC. Common secured transactions include a bank loaning a business money so the business can buy inventory, or a company selling a business equipment on credit. Often, these debts go unpaid.
In order for party with a legal right to take possession of collateral in the event of the debtor’s failure to pay, the creditor must take certain steps to become a secured party. These steps are known as an attachment of a security interest.
Under the UCC, a security interest generally does not attach unless three basic requirements are met, as follows:
- value be given for the security interest
- the debtor has rights in the collateral (or power to transfer the collateral to a secured party); and
- the debtor “authenticates” a security agreement.
In order for a secured party to safeguard its legal rights in the event that other parties are asserting an interest in the same piece of collateral, the secured party must take additional steps known as perfecting a security interest.
A security interest in collateral is “perfected” by filing a UCC 1 Financing Statement. A UCC-1 financing statement is a legal form that a creditor files to give notice that it has or may have an interest in the personal property of a debtor. The UCC specifies that the following must be included in a Financing Statement:
- the name of the debtor
- the name of the secured party; and
- an indication of the collateral.
Further, under the California Commercial Code, a Financing Statement is effective for a period of five (5) years after the date it is filed. The effectiveness of a filed Financing Statement lapses on the expiration of the five (5) year period unless before the lapse a Continuation Statement is filed, which will act to renew the effectiveness of the Financing Statement for an additional five (5) year period.
Upon lapse, a Financing Statement ceases to be effective and any security interest that was perfected by filing the Financing Statement becomes unperfected. When two or more secured parties have unperfected security interests in the same collateral, generally the first to attach has priority.
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