When money is involved, protecting everyone within a transaction is paramount. As a result, the UCC was created. Short for “Uniform Commercial Code” the UCC is a set of standardized laws and regulations that govern commercial transactions in the US. After reading this article you will know what one is and how it protects everyone involved.

The History of the UCC

The Uniform Commercial Code was first published in 1952 and is a Uniform Act developed by the Uniform Law Commission (ULC). The ULC is a non-profit organization, not a government agency, created in 1892 with the sole purpose of developing uniform legislation to create consistency in critical areas of statutory law. 

The UCC was one of the most influential and impactful of the more than 300 Uniform Acts developed. It standardized state laws and processes associated with commercial transactions extending beyond state lines. Starting with Pennsylvania in 1953, all states eventually adopted the laws. The only exception is Louisiana which did not adopt it in its entirety, choosing to exclude Articles 2 and 2A. California has also chosen to implement its own version that excludes provisions about real estate.

It includes nine articles regarding the sale or leasing of goods, letters of credit, negotiable instruments, fund transfers, bulk sales, bank deposits, warehouse receipts, bills of lading, investments, securities, and secured transactions. 

What is a UCC Filing?

When a lender provides financing to a borrower and takes a security interest in the borrower’s assets as collateral, the UCC provides rules and procedures to govern the transaction.

Under the UCC, a financing statement, also known as a UCC-1 filing, is typically filed by the lender to establish their security interest in the borrower’s collateral. This filing serves as public notice to other potential creditors that the lender has a claim to the specified assets. It creates a priority system, determining who has rights to the collateral in case of default or bankruptcy.

For the lending community, the UCC laws provided for the protection of a creditor’s collateral interest.  More specifically, the UCC-1 Financial Statement protects the security interest of creditors.

How a UCC Filing Protects All Involved

Giving a public notice of interest in the property of the debtor serves as a lien on commercial property in a business loan. Essentially, a UCC filing allows a lender to claim collateral that a debtor pledges, in order to secure their financing. It also gives notice that there is a right for the lender to take possession or sell assets to repay a debt.

Facts About UCC-1 Filings

  • The UCC must be filed with the Secretary of State office (SOS).
  • The creditor must seek permission from the debtor to file a UCC. Lack of permission does not invalidate a properly filled UCC-1.
  • It can be filed as a blanket lien or filed for specific assets.
  • It is valid for five years
  • Can be extended by a Continuation Statement, but this must be filed six months prior to the termination date. There is no limit on the number of extensions.
  • Multiple UCC-1 statements can be filed. In the case of bankruptcy, debt to the creditor in the first position must be satisfied before the second position lien holder can receive any collateral.
  • Changes can be made by filing a UCC-3. Examples of changes are moving ownership of the lien to another party or completely terminating the UCC-1.
  • When a UCC-1 is terminated, the second position holder moves into the first position unless the UCC-1 first position is assigned to another.

As a lender, filing a UCC lien is a way of protecting your investment in the unfortunate event of a debtor filing for bankruptcy. With a UCC filing, if your debtor declares bankruptcy, you’ll be given the opportunity to claim the assets that are covered under that lien.

When you work with CapitalPlus, we will always explain any financial and legal questions, including what is a UCC… in as much detail as you need.

>> RELATED ARTICLE: Construction Lien Rights – What Contractors Must Know

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