A UCC Uniform Commercial Code-1 statement is a legal notice filed by creditors to publicly declare their rights to potentially obtain the personal property of debtors who default on the commercial loans they grant. These communications, often abbreviated as "UCC-1", are usually printed in local newspapers to raise awareness of the creditors` intentions. These communications, which are required for all business loans under the Unified Commercial Code (CDU), set a relative priority for which specific assets can be seized and in what order, while consolidating the collection order in cases where there are multiple lenders for the same debtor. The order in which UCC funding statements are submitted determines the order in which lenders can collect. The first lender to apply is able to repossess the listed collateral up to the value of the loan. Only after or when that lender is satisfied can the second lender recover. For this reason, lenders tend to deposit quickly so that they can be the first online. It also means that a second lender may be reluctant to grant a loan to a borrower. Therefore, it is of the utmost importance that lenders correctly submit the UCC financing statement in a timely manner. The Court of Appeal of the Official Committee of Unsecured Creditors of Motors Liquidation v.
JPMorgan Chase Bank (In Re Motors Liquidation), No. 13-2187, (2d Cir. 21 January 2015) reviewed the validity of a dismissal submitted in error. In Re Motors Liquidation, General Motors ("GM") conducted two different secured transactions in which JPMorgan Chase Bank ("JPMorgan") acted as an agent for two different groups of lenders. The first loan (structured as a guaranteed synthetic lease) of $300 million was granted to some lenders in 2001, and the second loan of $1.5 billion was granted in 2006 (structured as a term loan) to a consortium of more than 400 lenders (this syndicate, the "lender"). For each loan, separate guarantees were recorded in different UCC-1 financial statements. Despite the review by GM and JPMorgan`s lawyer, the error went unnoticed until GM filed for bankruptcy in 2009. GM`s unsecured creditors requested a statement that, due to the erroneous notice of termination, the term credit facility was not secured and JPMorgan should be treated as an unsecured creditor during the bankruptcy proceedings. JPMorgan argued that the notice of termination was ineffective because JPMorgan did not intend to terminate the security right in the term loan facility and therefore remained a secured lender under the term loan facility. A UCC financing statement – also known as a UCC-1 financing statement or UCC-1 deposit – is a legal form that allows a lender to advertise a lien on an asset to secure a loan.
By depositing the UCC financing statement, the lender indicates that it has an interest in the property listed in the deposit. This means that if the debtor defaults on the loan, the creditor may be able to obtain the debtor`s personal property that has been deposited as security. Secured lenders (and their lawyer) should carefully review all UZC termination notices before filing them and ensure that what is included in the filing is correct. Since article 9 (513) has been adopted in essentially the same form in most States, a court may rule that the filing terminates all security rights listed on the form, even if the parties intend to have a different result. There are two types of privileges that can arise as part of a UCC funding declaration: privileges on certain guarantees and lump sum privileges. The court unequivocally concluded that UCC-3`s notice of termination had the effect of terminating all security rights listed on the form, including those relating to the term loan, regardless of the intention of the parties. The court focused on the clear wording of article 9-513: "With the filing of a notice of termination with the filing office, the financing statement to which the notice of termination relates loses its effectiveness." Since the court found no language regarding the intention of the parties, it concluded that the only condition for termination is that the secured lender approves the submission of the statement. Stating that "a secured party is the master of its own notice of termination," the court concluded that "it is fair for demanding parties to bear the burden of ensuring that a notice of termination is correct when filing." The UCC-1 declaration serves as a lien on collateral, with components and filing procedures comparable to lien requirements in residential mortgage agreements. The UCC-1 declaration is a uniform commercial code guideline that governs business and activities in the United States.
According to the ninth UCC article, entitled "Secured Transactions," a lender must include the full UCC-1 statements in the contract for a commercial loan for it to be considered effective. Statements should contain detailed information about the borrower and they should list descriptions of all assets mentioned as collateral for the loan. And while virtually any type of asset can serve as collateral, the most commonly used items include real estate, motor vehicles, manufacturing equipment, inventories, and investment securities such as stocks and bonds. Under the Uniform Commercial Code (UCC), a security right in a debtor`s personal property is further developed by filing a UCC-1 financing statement (now called a UCC initial financing statement) with the appropriate depository. This creates a security right in favour of the creditor and, in the event of default by the debtor under the credit agreement, the secured creditor may seize the debtor`s assets in order to recover amounts owed to it by the debtor. When the debtor has paid all amounts due to the lender, a UCC-3 notice of termination (now called the UCC termination notice) is regularly filed to terminate the security right honored by the UCC-1 financing statement. A complete understanding of the filing rules for UCC financing statements and the impact of incorrect filing of returns is a key part of securing and recovering commercial loans. Kira`s technology includes smart fields optimized for use on UCC funding statements, allowing users to discover relevant information from their UCC funding searches.
Unfortunately, GM`s lawyer inadvertently included the security of the term loan facility in one of the UCC-3 termination notices filed under the synthetic lease. Neither GM nor JPMorgan intended to terminate the collateral interest on the credit facility. UCC financing statements shall include a sufficiently identifiable description of the collateral or an indication that the financing statements cover all personal assets or property. A general description – such as "all of the debtor`s personal property" – is generally not sufficient to reasonably identify the security. In a decision of great importance to secured lenders around the world, the Delaware Supreme Court concluded in Motors Liquidations v. JPMorgan Chase Bank that filing a false UCC-3 termination notice can be a costly mistake. Note that a termination does not remove a financial statement from the registration index and remains active in the records office records.8 "Asset" does not mean "effective" because a deposit completed by a power of attorney is no longer effective in perfecting a security right, although research continues to disclose it.9 An allegedly terminated funding statement may be changed, assigned or even continued.10 If the matter continues, it remains active for another five years.11 A UCC-3 notice of termination (a "termination") is a mandatory deposit that terminates a security right enhanced by a UCC-1 filing.1 A notice of termination for personal property is obtained by completing and submitting Form UCC-3 to the Office of the Secretary of State in the state concerned. .
