UCC Files: The Legal Shortcut Around Bankrupt Customers

David Worrell
Tue, 01 Jan 2013 00:00:00 +0000

Imagine the panic I heard on the phone last month from a friend whose main customer was facing bankruptcy.

My friend recently sold a train car full of product, but before the customer had finished paying for the goods, his company was heading toward a complete dissolution (called a Chapter 13).

My friend was frantic. He did not have a UCC filing on the merchandise and was about to lose the whole amount to the bankruptcy process.

Unfortunately, this is a pretty common occurrence. The Great Recession sent lots of companies to the brink, and those companies rarely paid their suppliers or vendors. It was like a chain of dominos … a customer couldn't pay you, and pretty soon you couldn't pay your suppliers either.

It was too late for my client, but you can learn from his mistakes. If you sell products -- any products -- you need a UCC filing to protect your accounts receivable.

UCC filing is shorthand for “Uniform Commercial Code Filing” which is a really long way of saying that the seller can register a “lien” on the asset being sold. So even though you sell something, you retain ownership on it until it is completely paid off.

A UCC could have saved my friend tens of thousands of dollars.

Just like the bank holds a mortgage on your house, a seller can hold a UCC filing (also called a lien) on merchandise delivered to his customers. The UCC filing tells the whole world that money is owed and the asset (the merchandise or your house or whatever) is still “owned” by someone else.

Its not hard to get a UCC filing; procedures vary only slightly from state to state. The best place to start is with a commercial lawyer and/or the Secretary of State’s office in your state. But be careful … as my client found out, the UCC filing must be in the state of your customer’s legal domicile – that means the same state in which their company is registered.

If you live in Arizona, but deal with a company that happens to be registered in Delaware, you’ll have to file in Delaware.

So what happened in the end? This is interesting, because it was such a close call. Although my friend did not file a UCC when he sold the product, there were TWO banks that did have a UCC filing for loans that they had made to the same company (the buyer).

Fortunately for us, the banks filed in the WRONG STATES, which helped us to negotiate with the customer and the banks to hold a fire sale on the product and distribute the money between my client and the banks.

All's well that ends well, but there was a lot of needless headache, and everyone lost money in the end. If my client had done a UCC filing before selling the product, he would have been able to walk in and take the product back – think “repossession.” It’s the same thing that happens when a car dealer repossesses a car.

So next time you are selling a big item, or selling anything to a company on credit, consider a UCC filing against your customer. For just a few dollars you can save yourself days of heartburn and maybe even save your company.

Want to know more? Leave a comment or connect with my blog to ask any business finance question you can think of! (And for UCCs in particular, don't forget to get some advice from a lawyer!)

Dedicated to your ("repossessable") profits,

David