The Uniform Commercial Code (the "UCC") is a group
of rules dealing with business transactions that have been adopted
by every state. The UCC has created a mechanism to identify which
creditor's claim is superior to the other's. Generally speaking,
the creditor that properly files the lien first has the superior
In order to record a security interest in the property of the
debtor, the creditor has to file a document with a particular
State official in the State in which the asset pledged as collateral
is located. That document filed is called a financing statement.
A financing statement is intended to put other creditors - that
may be offered the same asset(s) as collateral in the future
- on notice that another creditor has already perfected a security
interest in that asset. Any creditor can have the public records
examined to determine if prior liens exist.
There are several pitfalls to using financing statements:
The process of perfecting a security interest can be a
little different in each State.
Creditors cannot perfect a security interest in inventory
after it has already shipped. Therefore, creditors must
hold orders until this process is complete if they want
a perfected security interest in an asset of a debtor company.
Debtors are sometimes reluctant to agree to allow trade
creditors to become secured creditors.
Often, the debtor's bank - itself a secured creditor -
will not allow the debtor to pledge assets to trade creditors.
Another problem is the fact that a search of the public records
may reveal a pre-existing and perfected security interest in
the asset pledged as collateral - so it is critical to search
the public records carefully before relying strictly on the pledge.
Creditors should also be aware that the requirements for accuracy
in filing a financing statement are fairly rigorous. For example,
filing a statement listing the Debtor Company as ACD Bread Company
would probably not stand up against a challenge from a creditor
who recorded a financing statement later, but correctly listed
the debtor company name as the AC/DC Bread Company. The second
creditor to file would be correct in relying on the fact that
no one had perfected a security interest in the assets of AC/DC.
Therefore, under the UCC the rights of that second creditor to
the assets of the debtor would be superior to those of the first
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