when to file the UCC-1 August 28, 2018

KEN KIRSCHENBAUM, ESQ
ALARM - SECURITY INDUSTRY LEGAL EMAIL NEWSLETTER / THE ALARM EXCHANGE
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when to file the UCC-1
August 28, 2018
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when to file the UCC-1
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Ken
    How do you know when you should file the UCC-1? You mentioned we wouldn't be able to file it on every system and that it could violate things, etc. 
  Respectfully,
Megan Ingala, Administration
Watchmen Security
Raytown, MO
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Response
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    The Uniform Commercial Code, UCC, authorizes the creation of a statutory security interest in another's property. There are two components to the security interest. First, the Security Agreement, and second, the Financing Statement. 
    The Security Agreement creates the right to create the lien. The Standard Form Agreement, the All in One, provides for the creation of the security interest. But having the right to a security interest isn't enough, you have to "perfect" the security interest by filing a Financing Statement, the UCC-1 is the form that gets filed, usually with the Department of State [though some jurisdictions may require filing locally].
    The Residential All in One grants a security interest in the equipment installed. The Commercial All in One [security or fire] grants a security interest in not only the equipment installed, but other assets owned by the subscriber. 
    What does the security interest accomplish? Think in terms of a loan. You loan someone $10,000. If it's an unsecured loan there is no collateral posted. If it's a security loan then collateral is posted. The most common collateral people are used to are homes [the mortgage is the security instrument] and vehicles [lien is noted on the title certificate, not a UCC filing]. If you borrow against your accounts receivables you are going to grant a security interest in those accounts receivables as well as your cash on hand, inventory and other assets. If there is a default in payment the lender can look to the collateral, seize and sell the collateral to cover the loan, partially or in full. 
    Your Contract with the subscriber is similar to a loan in the sense that the subscriber is committed to making payments to you. Without the grant of a security interest, if there is a default in the payments, you can sue, but you will be in the position of an unsecured creditor. With a perfected security interest you are a secured creditor, entitled to recover the collateral pledged.
    So why not file the UCC-1 for every subscriber? Not every subscriber is going to default and the security interest is unnecessary. But it doesn't cost much to file, under $10 in most cases, and the lien is good for, I think, 7 years and can be renewed easily. However, filing the lien may have repercussions that your subscriber didn't consider when signing the alarm contract. Your subscriber may have other loans that prohibit additional liens, or a lease that prohibits liens. Or the subscriber may rely on credit scores that may be affected by your lien. 
    When to file? Inconvenience to a subscriber who has defaulted is of course not your concern. If your subscriber causes you to be concerned about its financial condition then perfect your lien. I would not encourage you to perfect the lien unless you were insecure about the subscriber’s willingness or ability to continue paying you under your contract. Filing routinely for all subscribers or without considering a criteria for filing, is likely to cause friction, and the removal of the lien [accomplished by filing a UCC-3 Termination Statement] for many. 
    When will the UCC-1 come in handy? If your subscriber files for bankruptcy a lien can make a big difference because you'll be a secured creditor and entitled to remove and sell whatever collateral you have a lien on, which is defined by the contract terms. Even without bankruptcy you could commence an action to recover your collateral and remove it. A subscriber will be required to pay you or surrender the collateral, which at the very least will be the equipment you installed. The removal of a fire alarm system would cause prohibitive expense; you're likely to get paid.
    What about a Mechanic Lien? A security interest created by a UCC filing is consensual; the subscriber "grants" you your security interest. A Mechanic Lien is a statutory lien that you may be entitled to, without the consent of the subscriber. But unlike a UCC security interest, a Mechanic Lien is costly to enforce, and if you do enforce it you will find that you are grouped together with all others who have filed a Mechanic Lien. With the UCC you are entitled to priority if first in line.         Another problem with the Mechanic Lien is that it is for those "improving real property", whereas the UCC is for a security interest in "personal" property. For reasons having nothing to do with the security interest issue, the Standard Form Agreements all provide [and most others forms have copied] a provision that states that all equipment installed by you remains personal property. That even includes a fire alarm system, including the wiring. By definition therefore, you are not improving real property and should not be permitted to file a Mechanic Lien. Filing a Mechanic Lien is costly and there are consequences, to you, if you file an improper lien. I typically discourage filing a Mechanic Lien for the alarm industry. The fire protection industry [fire suppression systems] do qualify for Mechanic Liens, though not necessarily for all equipment [i.e., fire extinguishers, which are portable]. 
     When you buy the All in One we send you the UCC-1 form.  
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Ken Kirschenbaum,Esq
Kirschenbaum & Kirschenbaum PC
Attorneys at Law
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ken@kirschenbaumesq.com
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