Imagine this scenario: You take in a used tractor on trade. The customer applies the trade-in value, about $40,000 or so, toward the purchase of a new $100,000 tractor. You know this customer. You know his father and brothers and uncles. They have been farming in your area for years. He assures you the tractor is paid in full. You shake hands, he takes his new tractor home. You turn around and sell the traded in tractor for $50,000. You do this type of transaction all the time. End of story, right? Maybe not.
Let’s say the farmer’s harvest didn’t quite pan out how it was planned. In fact, it didn’t pan out anywhere near how anyone had planned and the farmer had to default on his operating loan for the year. As is standard in these situations, his lender had put a blanket lien on the harvest and all his equipment — including that tractor he traded in to your dealership. Unless you received a release for that specific piece of equipment, the bank can now come after you for the value of that tractor and you may be required to pay up. The tractor was encumbered by a blanket lien, even though the piece of equipment itself was paid off.
The dealer could have avoided this unfortunate scenario by conducting a lien search and acquiring a release from the lender. (Lenders are generally willing to do this because their customer is getting replacement collateral with equity available to the bank that is equal to the value of the trade-in.)
While certainly lien searches and UCC filings are standard operating procedure for many dealers around the country, not all dealerships make it a point to go through this process.
Protecting Your Assets
When a piece of equipment is financed or rented out, the lender or dealer can protect their security interest by filing paperwork with the state. This law — called the uniform commercial code — was enacted in all 50 states to regulate commercial transactions. One section of the law allows for a public notice, called a UCC-1, which is filed in a designated state filing office by dealers or lenders to perfect their security interests in equipment that is bought, rented or financed. Filing is usually with the office of the Secretary of State in the state of residence, incorporation or business formation.
Each secretary of state office seems to be reinventing the wheel.
Each has come up with their own system …”
The UCC-1 is typically filed in the state where the person who is buying or renting the equipment resides. So, for dealerships that have branches throughout multiple states or smaller dealerships that might be located on a state line and have customers in two states, this can become a tedious and time consuming task. If you are a large dealer that does business in 20 states, you would have 20 different processes to follow.
Refining the Process
Mark Klinnert, finance coordinator with Butler Machinery Co., a Caterpillar/AGCO dealer based in Fargo, N.D., says the process for his dealership to complete a lien search can be quite involved.
“One needs to know the exact name and spelling of the person as it appears on their driver’s license. The driver’s license also indicates in which state the person lives thus pointing to the state where a lien search would need to be done. For a company, one needs to know exactly how they are registered with the Secretary of State and in which state they are registered. Often companies are registered in states that differ from where they operate. At times we search both the person and company when we don’t know how they have done business in the past.”
“Each secretary of state office seems to be reinventing the wheel,” he says. “Each has come up with their own system. They all do it differently and they all charge differently. Some have online lien search service while others require a fax.”
One solution to this issue would be to establish a federal system to oversee UCC filings — rather than having it administered at the state level.
Common UCC Terms
Article 9, Uniform Commercial Code: Revised Article 9 of the UCC law governs the creation and perfection of security interests and provides for centralized filing, generally with the office of the Secretary of State.
Secured Party: The dealer or retail party financing a customer’s purchase and has been granted a security interest by the debtor.
Debtor: The customer.
UCC-1 Financing Statement: A document created to provide public notice that a secured party may have a security interest in a debtor’s listed property.
UCC-3: A document used to add, delete or change information on a filed UCC-1. It can also be used to terminate, assign or continue a secured party’s interest.
Security Interest: An interest in equipment granted to the secured party to secure payment of the amount financed on a piece of equipment.
Perfected Security Interest: A security interest that becomes enforceable against competing interests by third parties. Filing a UCC-1 in the public record is normally a required part of the perfection process.
Priority: Once perfected, the secured party has priority to the collateral over other secured parties that perfected at a later date. Unless a security interest is perfected under the UCC, the secured party may lose its priority on the equipment to subsequent lenders.
Security Agreement: An agreement that describes the equipment being financed and grants the secured party a security interest in the equipment.
Purchase Money Security Interest (PMSI): A security interest in equipment obtained by the supplier of the equipment that directly finances the purchase price; or a security interest taken by a third party lender providing funds to be used to purchase the equipment.
But according to Lance Formwalt an attorney whose firm, Siegfried and Bingham in Kansas City, Mo., is general counsel to the North American Equipment Dealers Assn. (NAEDA), the chances of that happening are very slim.
“The UCC has been around for over 50 years. While states generally adopt virtually all of the components of the UCC, the approach of allowing the states control over this decision permits states to make some variations to reflect local customs. I don’t see a groundswell of support to vary from that system and, for the most part, the UCC code tends to work pretty well.”
The challenge, of course, is to know where to go for information. Mike Williams, vice president of government relations for NAEDA, says they have tried to provide resources for its members to ease this task.
“It’s certainly an ongoing battle for everyone to keep track of where to file,” he says.
NAEDA decided to create a website that has links for each state or county where dealers can look to see where UCCs should be filed for a specific state.
But some private companies have also tackled this issue and provide a variety of different services to help streamline both UCC filings and lien searches.
One of those companies is gFAXX. It is a relatively new company which provides a product that not only helps streamline UCC filing, but also has the ambitious charter of creating a global database of equipment ownership by equipment serial number, rather than by a person or business entity as the state repositories have it listed.
Right now, when filing a UCC-1 or doing a lien search, that is done through the person’s name or business name that owns the equipment.
While the company is aiming to have a robust database of information from UCC filings that dealers can search, they are just in the beginning stages of capturing that information. Dealers utilizing the service, use it to streamline the filing process.
“We rent across several states,” says Butler Machinery’s Klinnert, so using gFAXX does streamline things because you are always filing the same way — using the electronic form — no matter what state. “For our rental department, where we might have a couple hundred transactions each month, it is quite helpful.”
RDO Equipment is a John Deere dealer also with headquarters in Fargo, N.D. According to Brian Madson, director of credit operations for the dealership, they file UCC-1s on equipment if they haven’t been paid on a wholegoods sale within 18 days of the purchase.
“For example, let’s say a customer has purchased a $200,000 tractor and it’s been 20 days and we have not received payment. One of two things is probably happening: they are in the process of securing financing through an outside lender or they are going to pay cash and just haven’t gotten around to it yet. But regardless, at the 18-20 day timeframe, we may file a UCC-1 using gFAXX to protect our security interest.”
One of the features of gFAXX that saves time is that you can save customer and equipment information in the system that can be used to populate subsequent filings. It also reduces the opportunity for errors.
“This feature is a big benefit for us,” says Klinnert. “You can’t misspell a customer’s name on a UCC filing because you will never be able to find them again when you go to do a lien search as that may jeopardize the UCC-1 in a court of law.”
While this process can be cumbersome and time consuming, it is in everyone’s best interest to make the effort to file UCC-1s when financing equipment and to do lien searches when taking in trades or purchasing used equipment.
Parts of this article were summarized from “The Uniform Commercial Code — What It Means to Your Business.”