Wednesday, October 6, 2010

Pre-Authorization of UCC 1 Financing Statement

The typical loan/credit scenario unfolds that a creditor will run various credit checks on a potential debtor and, as part of that search, will run a search of all existing UCC financing statements on the debtor. After approval, the creditor will then prepare documents, set up the customer, and prepare whatever business preparations are necessary for that creditor's line of business. The credit department, having done its due diligence, then green lights the transactions knowing that they are holding a first lien position and away we go.

However, this particular scenario can cause some probems since many things can happen to the debtor after they apply for credit and before the actual purchase of the goods intended by the loan transaction. Even setting aside those nefarious characters out there, even honest business people, particularly when setting up a new business, are applying for credit at all sorts of institutions. So what is a prudent credit department to do?

Well, best practices would dictate that not only should a creditor "re-check" the UCC statements and credit reports prior to first shipment (depending on the length of time of the delay that is typical between that business approving credit and first delivery), there is one other way to ensure the best lien position possible. What is that?

Pre-filing the financing statement (UCC-1).

In Texas and under UCC 9-509(a)(1), a creditor can pre-file a UCC-1 financing statement with authorization from the debtor. What's more, the "first in time" rule, even if the transaction is later consummated, would allow the creditor to be ahead of any subsequent filed similar UCC-1 financing statements (unless they have special priorities, like purchase money security interests).

So how does one get authorized? Well, there must be some intent from the debtor to grant some future security interest, so getting the debtor to sign a "pre-authorization" letter (or you could include same conspicuously in your initial credit application) should do the trick. Basically, if the debtor authorizes the pre-filing in writing, you will meet the standards of 9-509(a)(1). A simple signed letter can also do the trick. Now it should be noted that you will still have to terminate the financing statements according to the rules as if the transaction occured should the transaction not occur.

So don't wait for the loan file to be complete before filing your UCC-1's...file the financing statement at the very beginning and establish / lock in your security interest priority.