MYTHBUSTERS: Don’t Get Fooled by These Common UCC Searching Myths!

A UCC search provides critical information about an individual or business entity’s existing liens and other financial obligations that could affect their ability to repay debts. For lenders, a UCC search will help uncover any existing claims to the collateral that the applicant has agreed to pledge to secure the transaction. Which means high quality, dependable UCC search results are imperative in a due diligence investigation, any blind spots expose the lender to risk and can cause big problems down the road.

Despite its importance, CLAS has found that there are a host of common misconceptions or “myths” surrounding UCC searching. In this article we debunk Five Common UCC Searching Myths.

Myth: To cover all of my bases, I really need to perform a nationwide (50-state) UCC search.
Truth: UCC search methodology actually stems from the Uniform Commercial Code filing rules which state that UCC Financing Statements are to be filed in the following specific locations, based on the type of debtor:

• Registered Business: the state where their organizing paperwork is filed
• Unregistered Business: the state where they have their chief executive office
• Individuals: the state where they hold their primary residence

A Secured Party must file its UCC Financing Statement in the appropriate filing office in order to perfect its security interest. If the Financing Statement is filed in the incorrect filing office, the Secured Party will not enjoy a priority position to collect. Since the above listed are the locations where Secured Parties are required to file, it follows that these would be the locations where searches need to be performed to uncover UCCs that would represent existing claims to the collateral.

Performing a nationwide UCC search is costly and almost always unnecessary. Of course, you should always check with your legal counsel or risk management department about what searches to perform to best mitigate your risk for loss.

>> WATCH: Six Simple Ways to Save on UCC, Lien and Litigation Searches

Myth: I can ignore terminated filings that show up on my UCC search.
Truth: Proceed with caution! A UCC with a Termination on record may still be an active claim, particularly if the UCC has more than one Secured Party listed. When a Termination is filed against a UCC record that has multiple Secured Parties, that Termination can mean two very different things:

1. The Secured Party that filed the Termination could be acting as a representative for all Secured Parties. In these instances, the filed Termination would mean that every Secured Party associated with the UCC record has relinquished their priority claim to the collateral.
   
   
2. Or, the Secured Party that filed the Termination may be relinquishing only its own interest in the collateral, in which case the UCC record would represent an enduring, effective claim for all other Secured Parties of record.

Another consideration: a Termination is only effective when filed by a party with the authority to do so. Typically this means the Secured Party of record, though in some cases a the debtor is authorized to file a Termination. There is no way to tell by looking at a filed Termination statement or a UCC search result whether a Termination was filed by an authorized party. It is always a good idea to follow up with the Secured Party to confirm status of the claim.

>> Further Reading: Examining the Effect of a UCC Continuation Filed After a Termination

Myth: I only need to worry about “exact name” findings on my UCC search.
Truth: Many state filing offices maintain tax liens on the same searchable index as their UCC records. While Secured Parties must adhere to the Uniform Commercial Code’s strict rules on how to properly identify a debtor on a UCC Financing Statement, government agencies, including the IRS, are not held to the same naming rules standard when filing a tax lien.

In many cases, tax liens maintain priority even if the lien lists a variation of the taxpayer's legal name. Consequently, it is important to be sure your search effort will return any tax liens filed under variations of your target name(s). This can be accomplished in a couple of different ways: 1. Request an official UCC search under every known name variation or 2. Perform a non-official UCC search using an online search system that utilizes broad-based name searching to uncover filings under similar names.

 >> Reduce Risk! Be Sure to Include the Right Party Names on UCC Searches

Myth: Ordering a “Listing Only” is a good way to save money on my UCC searches.
Truth: While it is true that ordering a listing only will save you money on your search request (most states/vendors charge between $2.00 and $3.00 per page for copies of UCCs,) it can be a risky choice.

A UCC listing (aka search report) can deliver several pieces of critical information including filing numbers and filing dates, party names and addresses, occasionally even collateral type - but it is usually necessary to view a copy of the actual filed UCC1 to see the specific collateral that is covered by the Financing Statement. So, ordering a “listing only” search is really only giving you part of the story. Not to mention, this can drive up your overall due diligence costs and slow your turnaround time because you will need to go back a second time to purchase copies of the filings after obtaining the listing.

Myth: I only need to perform a UCC search once, as part of my pre-funding due diligence routine.
Truth: In addition to a pre-funding search for UCC’s, it’s a good idea request a second UCC search after filing a UCC Financing Statement - commonly referred to as a search to reflect. A search to reflect is a UCC debtor search of the office where you filed a UCC document, performed after your filing posts to the state’s records to confirm proper indexing of the Financing Statement and verify the secured party’s position relative to other creditors. If you are not currently performing a search to reflect after filing a UCC, you may want to consider adding this step to your standard filing process.