David Lutz: Five UCC Article 9 Mistakes That Can Cost Lenders Their Priority Position
— Your security interest is only as good as your UCC compliance.
Common Pitfalls in Secured Lending and How to Avoid Them
Over my years representing financial institutions, I've seen the same UCC Article 9 mistakes come up repeatedly—often only discovered when a borrower defaults and multiple creditors are fighting over the same collateral. By then, it's too late.
These errors are preventable. Here are five common mistakes lenders make and how to protect your security interest.
1. Filing in the Wrong Jurisdiction
This seems basic, but I still see it. UCC-1 financing statements must be filed where the debtor is "located" under Article 9—not where the collateral is located, not where the loan closes, and not where your bank is headquartered.
For a registered organization (LLC, corporation), the debtor is located in the state of formation. For individuals, it's their principal residence. Get this wrong, and your financing statement is ineffective from day one.
Action item: Always verify the debtor's state of formation (for entities) or current residence (for individuals) before filing. If the debtor changes its jurisdiction—say, an LLC domesticates from Minnesota to Delaware—you have four months to refile or risk losing priority.
2. Incorrect Debtor Name on the Financing Statement
The debtor's name on your UCC-1 must exactly match the legal name. Not "close enough." Exact. For registered organizations, use the exact name on the Articles of Organization or Articles of Incorporation—including punctuation, capitalization, and entity designators like "LLC" or "Inc." For individuals, use the name on their driver's license.
A misspelling, missing comma, or using a DBA instead of the legal entity name can make your financing statement "seriously misleading" and potentially ineffective against competing creditors and bankruptcy trustees.
Action item: Pull a current business entity record from the Secretary of State before filing. For individuals, verify their legal name from a government-issued ID. Don't rely on what's written on loan documents.
3. Inadequate Collateral Description
"All assets" doesn't cut it in every situation. While a super-generic description like "all personal property" is technically sufficient for a financing statement, you need to be more specific in your security agreement.
More importantly, certain collateral types require special treatment:
- Deposit accounts require control agreements, not just a security interest.
- Consumer goods in a borrower's possession may be subject to PMSI super-priority rules.
- Chattel paper can be problematic if another creditor takes possession.
Action item: Be specific in security agreements. Understand what type of collateral you're actually taking—is that "equipment" actually subject to a lease? Are you taking a security interest in the lease payments (chattel paper) or the equipment itself?
4. Failing to Monitor and Maintain Filings
UCC-1 financing statements lapse after five years. I've seen lenders lose priority positions simply because no one calendared the continuation deadline.
You must file a continuation statement within six months before the five-year expiration. Miss that window, and your financing statement lapses. If the borrower has other creditors, you may have just moved to the back of the line.
Action item: Implement a system to track UCC expiration dates and file continuations timely. Most practice management systems can handle this, or use a commercial UCC service. Don't rely on memory or individual calendars.
5. Ignoring Purchase Money Security Interest (PMSI) Rules
If you're financing equipment or inventory, understand that a subsequent creditor with a PMSI can jump ahead of your earlier-filed security interest—if they perfect correctly and give proper notice.
For equipment PMSIs, the creditor must file within 20 days of the debtor receiving possession. For inventory PMSIs, they must file before delivery AND send notice to existing secured creditors.
As an existing creditor, if you're not monitoring new UCC filings against your borrowers, you may not discover that your inventory or equipment collateral is now subject to a super-priority PMSI.
Action item: Run periodic UCC searches on your borrowers to identify new filings. If you see a potential PMSI, verify whether proper notice was given and evaluate your collateral position.
The Bottom Line
Secured lending isn't just about loan-to-value ratios and credit analysis. Your security interest is only as good as your UCC compliance. A first-position security interest recorded incorrectly can become a worthless piece of paper when you need it most. These mistakes are all preventable with proper procedures, attention to detail, and periodic reviews of your collateral position.
About the Author
David Lutz is the owner of Lutz Law Firm in Minneapolis, representing financial institutions, businesses, and individuals in banking law, secured transactions, and commercial litigation. He can be reached at david@lutzlawfirm.com or 612-424-2110.
Latest
