The Real Deal On UCC Article 9: ARE YOU OVERLOOKING THESE BEST PRACTICES?

A recent survey revealed how UCC professionals are managing their search, filing and monitoring responsibilities after the 2010 Amendments... but not everyone is following best practices. Find out where you stand with this in-depth look at the survey results and what they mean for the UCC Article 9 industry.Though most UCC Article 9 professionals agree that it is important to monitor filed UCC records for content or status changes, a large percentage of them still don't monitor their lien portfolios for anything besides expiration (lapse) dates.That's just one of the findings of a recent survey conducted by Corporation Service Company® (CSC®), which polled more than 2,000 UCC professionals for their insightson searchingand filing procedures and best practices, the 2010 Amendments to UCC Article 9, and more."We were overwhelmed by the industry response to our inquiry," says Mark Rosser, vice president for CSC. "We'll be working with the data we've collected for some time, but we've already drawn some interesting conclusions about what matters to UCC professionalsand where some standard operating procedures might be falling short of accepted best practices."DemographicsFor its survey, CSC polled UCC Article 9 professionals with lenders, lessors, factors and law firms. Of the more than 2,000 UCC professionals who participated, more than 1,200 answered all 34 survey questions. (Note: This was not intended to be a scientific survey and may not proportionally represent responses by the size of industry, organization membership, or publication circulation.)The majority of survey respondents worked for banks (43%) and law firms (23%). Respondents were overwhelmingly female (71%) and the most common age range was 46-55 (31%) Most survey respondents were (usually electronically) searching and filing UCC records at the state level through a third-party UCC service provider or directly with the jurisdiction.So what did participants have to say about their UCC searching and filing procedures? And just how closely are they following best practices?SearchingMost respondents categorized themselves as very or somewhat familiar with filing office standard search logic, but not that familiar (or not at all familiar) with the operation and programming of filing office unofficial search logic. That might not be a problem for searchers who use a third-party UCC service provider, but it could pose a serious risk to those who conduct their searches independently-online, by phone, or in person through the jurisdiction.Failure to understand the search logic of a specific jurisdiction could result in missing "hidden" liens that may be fully effective In that case, the searcher could be surprised to learn, at the worst possible time after the debtor defaults, that its security interest is subordinate to the records it missed during the search. The best practice, then, is to rely on searches only if the searching party understands that search logic in minute detail-or to use a provider who has that level of understanding."Case law indicates that the courts expect searchers to do two thingsconduct a diligent search and exercise reasonable diligence while interpreting the results," says Paul Hodnefield, associate general counsel for CSC and a frequent speaker and writer on UCC Article 9 news and issues"The primary risk is that the searcher will lose priority because they'll miss an effective security interest or lien. Losing priority can be just as bad as being unperfected, which can be just as bad as being unsecured."Another searching red flag: names being searched. Most survey respondents said they search exact names (84%) and name variations (71%). However, only 38% search former names of the debtor, 34% search the names of entities merged with or acquired by the debtor, and 21% search in prior jurisdictions for ayear after the debtor has relocated, which can trigger a change in the governing law.Financing statements filed against those names can remain effective for some time, so the best practice is to include them as part of a diligent search"It is, of course, important to search the current, correct name of the debtor-that always has to be done," says Hodnefield. "But there can be financing statements out there under former names or the names of acquired businesses that bind that debtor and encumber the debtor's assets. And records filed in previous jurisdictions can remain effective for up to one year after the debtor relocates if there has been a change in the governing law."FilingThe 2010 Amendments to UCC Article 9, now enacted in almost all states, clarified that the source of a registered organization debtor name is the public organic record, including any amendments. And indeed, 69% of survey respondents are using the public organic record (defined to include the formation documents for a corporation or LLC) to do that.However, 67% are also using state business entity online databases, 41% good standing certificates, 23% information provided by the debtor and 13% credit reports. Some respondents indicated that turnaround time, cost, and concerns over reliability were factors in using a debtor name source other than the public organic record."I'm not always authorized to spend the money to obtain the documents we need," one paralegal confessed. Other respondents wrote that they still see some reliance on filing office records and certificates and that the biggest impact of the 2010 Amendments was the need to use organization documents rather than good standing certificates for name verification purposes.The only sufficient source of a registered organization name is the public organic record, says Hodnefield. "A filer must only use the business entity database and other sources as the source of a registered organization name if it is prepared to accept the risk of incorrect debtor names in the database that will render its financing statement seriously misleading."When it comes to individual debtor names, most survey respondents (70%) said they request a copy of the driver's license to verify the name-now a best practice, post-2010 Amendments. Determining the correct name of an individual debtor using the driver's license was one of the biggest impacts of the 2010 Amendments on many organizations. As one bank employee responded in the survey, the challenge was "coming up with a comprehensive way to file forms and collect information on individuals that will meet both kinds of adopted amendments," referring to the "Alternative A" and "Alternative B" options in § 9-S03(a)(4).However, many respondents (45%) said they never ask the debtor to update them if their driver's license changes, and 59% said they never check in with the debtor to see if the name on their license has changed. These additional steps could help the secured party remain perfected and retain priority if the debtor changes their name."Unfortunately, the driver's license is not a public record," says Hodnefield. "There is no easy way to identify changes to the driver's license. The secured party can check with the debtor periodically to ask whether there have been any changes and include a provision in the loan documents that requires the debtor to immediately notify the secured party of any changes to the driver's license. Otherwise, the only way to know for sure is to require the debtor to periodically produce his or her driver's license for inspection."MonitoringMost survey respondents said they follow the industry best-practice of monitoring upcoming expiration/lapse dates for financing statements in their UCC portfolio. Only 15% are not tracking lapse dates at all.However, 39% said they do not track additional UCC records filed against their debtors by other secured parties. Forty-five percent do not monitor corporate records for possible changes to registered organization debtor names. And 43% do not monitor bankruptcy filings by debtors.These post-filing changes can have a significant impact on priority, so they are crucial to monitor. In fact, 84% of respondents agree (with 60% strongly agreeing) that changes in a debtor's name or status may affect perfection and priority, and 80% strongly agree or somewhat agree that it is important to monitor filed UCC records for content or status changes."We don't track, but we run updated searches from time to time," one paralegal wrote. "We would if a cost-effective, reliable service were offered to us," an attorney volunteered."UCC professionals clearly agree that it's a best practice to monitor their portfolios for possible changes in status," Rosser says. "But it seems like many people have not yet put that best practice into effect. That's a clear area for future improvement as asset-based lenders look to enhance risk management and insulate their UCC portfolios."ConclusionWhat did this landmark survey tell us about the UCC Article 9 industry? First, that there is actually a great deal of consensus among UCC professionals about searching and filing best practices. However, procedures have not quite caught up with best practices in all areas. Especially in light of the 2010 Amendments to UCC Article 9, UCC professionals will need to take extra care to avoid the common pitfalls outlined above and be even more diligent than usual in order to remain perfected and protect their priority.Jen Mathews is the UCC & document recording marketing manager for Corporation Service Company (CSC). For more information about CSC's survey of UCC professionals and to download an infographie of the results, visit www.uccsurvey.com.