UCC Article 9 Search Basics

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Caitlin: Hello, everyone, and welcome to today's webinar, "UCC Article 9 Search Basics." My name is Caitlin Alaburda, and I will be your moderator.

Joining us today are Jason Welch and Eric Geringswald. Jason has been a CSC customer service representative since 2011 and works with CSC's top law firm market customers on a wide range of corporate and Uniform Commercial Code matters. Eric is deputy compliance officer and director of publishing for CSC, where he works at the enterprise level to keep CSC in compliance across the globe.

And with that, let's welcome Jason and Eric.

Jason: Hi, everyone. Thank you, Caitlin, for that introduction. This is Jason Welch at CSC. I look forward to the presentation and hope you all find this useful. Eric, why don't you go ahead and take it away from here?

Eric: Sure. Thank you, Jason. I'm Eric Geringswald, and this slide here just shows the depth and breadth of CSC locations around the globe. Today our focus really is in the United States and the Uniform Commercial Code filing, but we just wanted you to have a sense of the depth and breadth of locations where CSC is located.

Jason: Thank you, Eric. We are indeed located all over the world, and as you can see in the next slide, we indeed have our eyes and hands in many different services throughout the legal service sector, from entity management and compliance, digital brand services, as you already know UCC search and filing, registered agent service, corporate filings and documents. We've got your bases covered with all your legal services needs here at CSC.

So folks, again thank you for attending today's session. The agenda today, by the way this is Jason Welch, the agenda today is UCC searching best practices. We really want to get into a nuts and bolts conversation about the best practices of searching, and I hope that some of your questions may be answered throughout the process today. There will be some time at the end for some Q&A, and we also have some product information regarding when your search order is complete what you receive. I'd like to kind of run through the product so that you can become comfortable with CSC's search results.

And with that, Eric, why don't you move on to the next slide?

Eric: Thank you very much, Jason. And at this point in time, I'll start with the essential concepts that are important for everyone to really understand — perfection and priority.

So perfection protects third parties that are not subject to the security agreement by making sure that they have the interest in collateral secured. The most common method of doing that, of course, is by filing a UCC financing statement. And that is what we're going to talk about as we go further in terms of this searching aspects of UCCs.

And the key with perfection is that it makes the security enforceable against the claims of third parties. So by filing that document in the public record you have made the world aware that you have a claim to the collateral that is listed in that security agreement. The UCC may list what some of the collateral is, but the security agreement really is what secures the collateral.

For priority, priority is the order in which the claims are satisfied. So think about it as the order in which UCCs are filed may be the order in which the claims are satisfied, meaning that the first one filed, first in time, first in right. And the second person will get whatever is left over after the first person. And the third person will get whatever is left over after the first two people in the event that there would be a bankruptcy.

So that's the concept of priority. And the rule is that priority occurs whichever comes earlier, the time of filing or perfection, again that first in time, first in right. And the rules for that are under the UCC law at 9-322. There is an exception for purchase-money security interest filings, but that is kind of something that's more on the filing side, and we'll worry about that in the future.

So the important thing to remember about Uniform Commercial Code filings are that the UCC system really is a notice filing system. It indicates that a security interest may exist. But you really have to get down to the transactional documents behind the UCCs because the UCC records are not enforceable documents per se. It's really the transactional documents behind them that are the enforceable documents.

And the UCC records do provide minimal information. They do not provide all of the details of the transaction, and that is by design. The idea there is that certain aspects of a transaction are private and should remain private, but the UCC just lets you know that certain parties engaged in a transaction where certain items of collateral have been pledged.

And clearly this is the most important concept for everyone today, and that is the duty of further inquiry. You can't rely on the record itself. While that is a great indicator and is incredibly helpful, you really do need to drill down into those transactional documents so that you can truly understand the details. And the upcoming slides that we'll cover will help provide more meat around that.

The role of the filing office is ministerial, and Article 9 removed any discretion from the filing offices in their filing and search process. And it's important that we understand that because any filing that is submitted that meets the requirements or the sufficiency requirements of the UCC will be put in the record whether or not it meets the perfection requirements. So it's important to understand that.

It's also important to understand that search and filing is a machine process, and because it is a machine process, it is limited to the capacity of the programming and the machines. And as a result of that, there can be challenges at times.

The duties of the filing office are to index the records for retrieval by debtor name or file number. They can reject only for reasons set forth in 9-516(b) and report only records that exactly match the search criteria after applying the standard search logic, if any. So again, their search logic can be very varied depending on states. Some states the search logic is exact, including punctuation and spaces. In other states, the search logic is very forgiving. But the key is to understand that search logic when you're doing searches, which is why there's value in employing a service company to do that because we do that all day every day and understand the idiosyncrasies.

The filing office has no duty or power with respect to perfection. They don't determine that. That's determined outside of the system. Or priority, again that's determined outside of the system. Or the effectiveness of the liens. Again those concepts are outside of the notice system that the UCC system represents.

So now we'll talk about search basics and best practices, and I'll turn it over to Jason Welch, who'll take you through that.

Jason: Thank you, Eric. That was a good discussion on priority, effectiveness, and perfection. We appreciate that.

What I'm going to do today is really talk about some nuts and bolts in administrative information for you in terms of requesting searches with CSC, what your role is, and what CSC's role is. And I hope you find this useful.

So CSC's role as the searcher, CSC and its networks of local partners is responsible for searching the public record. We are searching the names that you provide to us. We do not build the public databases. We are not responsible for any errors on those databases. But again, we have the expertise in knowing how to run the searches and getting you the results in a timely manner. Many of our searchers have been employed with CSC for decades. They are a wealth of information and knowledge. And, of course, your service representatives, such as me, are there to guide you through the process.

Note that CSC does not provide legal guidance. And we get asked questions all the time that my job is to essentially say to you that's a legal question, and/or if it's not a legal question, to do my best to answer it and add on any insight I can.

And also CSC does not interpret your search results. Once we send you the results, it would be your role to review those results and do whatever you need to do, which may be write an opinion paper or summarize the results so that your customer has a good understanding of what was found.

Okay. So now that I've discussed CSC's role and CSC's responsibility, I just wanted to talk briefly about what the customer's responsibility is in this process.

You would be responsible for obtaining the legal entity names to be searched, ensuring that they are spelled correctly. Well, one way you do this is you obtain an entity's charter documents, the formation document with any amendments. That's something you would definitely want to do beforehand. And let me say oftentimes my customers receive lists of entity names, sometimes in the hundreds for searches for CSC to run.

And I just want to emphasize that you want to make sure those names are indeed the correct spelling, the correct names as oftentimes a name such as ABC Inc, a customer will relay that entity to you or your client, but in fact it may be ABC Corporation or ABC, Inc. So the best practice here is for you to refer to an entity's charter documents to confirm that the name is spelled correctly.

And then and also you would want to identify the state of incorporation and, where applicable, the principal office address. This is important, as Eric had discussed a bit previously, that your standard UCC search would be run in the state of incorporation or where the debtor is organized. So you're going to need that information.

Next step would be to determine what is needed to be searched and where. So just to expand on what I just said, you may need to run searches that are more expansive than UCC searches. You may need to explore searching in different locations, such as where the entity has its principal office location, where it owns property, etc. That would all be your responsibility to determine that information and provide CSC with that information.

And, of course, once you receive the results, you want to spend a thorough amount of time reviewing the results and making sure that you understand what you received and that there are no discrepancies in the results.

And finally, this is a topic that may be very important actually is know the cost of your order. Searches can get expensive when you're running a search against dozens of entities, and you want to know beforehand whether the search is meeting your client's expectations in terms of the cost. And CSC is able to provide you with an estimate of the baseline charges before searches are run upon your request, and that estimate would include service fees, jurisdictional charges, but it would not include any applicable copy cost charges should liens be found.

Okay. So now we're going to expand on the discussion I just had with you about the names to search. And I just wanted to discuss a bit further that when reviewing the charter documents, you want to make sure you're reviewing for any prior names. And it would be your determination to consider whether any prior names need to be searched. Please consult an attorney when doing so.

And I'd like to also reference that not all searches are run against entities. It's actually quite common to be running searches against individuals. And in doing so, you want to make sure that you have the individual's correct legal name. And how do you do that? Well, you need a copy of that person's driver's license and/or passport and make sure that you are providing CSC with the correct legal name.

Moving on to the next point, again talking about prior debtor names, we're really making a point of this just because it is important, when running searches, that you consider that entity names get changed frequently and you may need to search prior names to make sure that the results are correct. And again, people's names change, and so you want to make sure that you ask individuals for any prior names of use.

And moving on to the final point, we're talking about merged or acquired businesses. That would be Section 9-508 of the UCC law. Check the charter documents for any mergers on record and consult an attorney to determine whether any of the non-surviving entities in a party to a merger need to be searched.

Eric: So search locations, you want to search in the location of the debtor, and you have to determine the jurisdiction based on UCC law. We've given you the citation there. And you have to search the filing office designated, again we're giving you that there this citation.

And really what we're trying to say here is that you determine the jurisdiction based on the filing rules. So that would be where the entity was formed. Or if it's an individual, that would be where the entity resides, and you determine that by where they pay their state taxes. If you have questions because you have someone who's a snowbird, you may want to search both in the summer state and the winter state just to make sure that you have your bases covered.

For collateral that is fixtures, timber, or mineral collateral, there you would search in the location where those filings would be made in the states. Usually those are local filing offices. It could be generally the county. Some states it's the town or province or parish depending on the language that they use. But you would be searching at a local level for that.

Jason: Thank you, Eric, for that. Now I'm going to go back and talk about I've titled this section "UCC and More." And first of all, I just want to pose a question that you might be wondering. What is considered a standard due diligence search?

Well, it's a fair and valid question. However, it would be a question that you would determine on your end. But I can say, just from my years of experience, that customers generally order the following. A UCC search for personal property UCCs with the state of formation number one. Number two, what I would say is a "lien" search, and this would include UCCs, tax liens, and judgment liens. And then number three, what I like to say is the full gamut or the full suite search. This includes UCCs at the state and county level, county being a search for any real property UCCs. Tax liens, that would be your state and federal tax liens. Judgments, pending suits, and bankruptcy. And those are the three areas, those are the three categories I would say that are most commonly asked in terms of what CSC searches and provides our customers for.

Now I just want to expand on the full suite search a bit further because running full suite lien and litigation searches does require more information from you the customer. CSC would need, for example, but not limited to the principal office place of business for the company, possibly where the company has assets or owns property. Those bits of information you would need to conjure up and send to CSC in order for us to build our search and run the search in the proper filing offices.

And moving on to the third point, and this really gets into the weeds here, but it's interesting to know that from state to state there is variation in where liens are filed.

And let me just use New York State, my home state, as an example. State tax liens, these would be liens filed by a state agency, they are indexed with the Secretary of State of New York. But the copy of the lien is actually recorded and searched or retrieved from the county office where the debtor has its mailing address or principal office address.

Delaware, Delaware Secretary of State records federal tax liens. Well, you know what? So does the three counties in Delaware.

So it would be your determination, of course, to determine how broad you want to get with your search. And just by virtue of the word "state tax lien," that does not necessarily mean that the state tax lien is filed with the secretary of state. In Tennessee, because I guess I have a little Nashville on my mind, but in Tennessee, state tax liens are filed only at the county level.

So these are conversations that you can have with your service rep. And there is often a lot of back-and-forth between me and you and helping you search in the correct locations based on what you're trying to do.

Okay. So let's talk about some filing office information that would be of more use to you. I apologize. I will try not to make this so boring, but we'll hopefully get a few laughs along the way.

So first of all, note that search thru dates, know this, that when liens are filed, they do not necessarily become available on public record databases immediately upon filing. In fact, oftentimes there is a week to two week or even longer lag, and you see the lag extend itself generally in the fourth quarter as states the filing volume really increases in the fourth quarter and it becomes more difficult for the clerks at states to index debtor and secured party information on the record.

So items that are filed after a search thru date, and by the way the search thru date on CSC results are noted, you'll clearly see when the thru date is. So items filed after the thru date are unlikely to appear on the search results. So if you get your UCC search back and it does not have a copy of a UCC that was recently filed, you may want to ask yourself when was this filed and let me take a look at the search thru date. And if you have questions beyond that, of course you should ask me, your CSC representative, and I can assist along the way.

Now, as I discussed about indexing, the fact is there are and there will be indexing errors on these databases. Clerical errors can be made by filing offices. And an error, for example, relating to the debtor name will affect the search results. So if a name is spelled incorrectly when it's indexed, you're not going to find that UCC when you go to search for it.

And to this point, when you file a UCC, you have the option with CSC to order what's called a search to reflect. And what a stretch to reflect is, is once the filing has been completed, CSC has a line in our system to run a UCC search against that filing at the appropriate time, and again this might take one or two weeks. So we have it all teed up for you, and then we will run the search to confirm that the UCC we just filed for you a week or two ago is properly indexed and that it appears on the search result. And that's something very important that you might want to consider as you file UCCs, because frankly oftentimes I run into situations where years later a client has discovered that a UCC was indexed incorrectly by a state.

And this just happens. And as I kind of take a look at it right now, in the current context of the pandemic and people working from home, you would have to think that more clerical errors are made as people are working remotely. Not all states allow state employees to do so. But it's just something that I think I wonder moving forward in the years ahead if we're going to see an increase in clerical errors that are being made.

So let's move on and talk about lapsed filings. Just know that when a UCC is filed, the UCC stays active for a period of five years from the file date, and that it's the filer's responsibility, oftentimes that would be a secured party, to continue with the UCC as needed, if needed, and that if a UCC is not continued, then it lapses. And this could this could bring serious harm to a secured party. So this is something to really focus on and consider.

Now in terms of searching, CSC and search companies do not generally return lapsed UCC filings when searching, and that is because the lapsed filings are no longer effective. And in fact, there are many jurisdictions that may even purge its record after a year of a UCC being lapsed. States, it's their prerogative to do so.

Okay. So let's talk briefly about when an order is complete and you receive the results. Now just know that when you get your search results, you'll want to review all the pages, especially where records are found. And there are situations where UCC filings have collateral exhibits attached to them. You want to make sure that any exhibit has been filed and recorded properly in the state office. So when we talk about courts impute to the searcher knowledge of the full contents of each record, what we're saying is it's your responsibility to make sure that all pages that were filed by the filer appear on the public record.

Moving on to the next point, reconcile file numbers, file dates, and other information, this is important. When CSC provides you with your search results, you're getting a listing of records found. The listing is often prepared by CSC. In some cases, you get certified listings, such as Delaware. But you want to make sure that the data on the listing matches the data on the filed-stamped UCC, and that would include file numbers and file dates.

And a lot of our customers will use these search results in the years ahead to copy and paste file numbers to file, for example, UCC3 continuations. And you just want to make sure that the data is factually correct. So please review. And if there are any discrepancies, you can reach out to CSC, your service representative. We will dive into them, we will explain them to you, and we will work to resolve any issues that are found.

Now determining the effect of record, this is just something that Eric discussed briefly, and just to harp on this again, UCC filings are mere notices. They're mere public notices. They give the filer the benefit of any doubt. But understand that if there are any issues with determining the effectiveness of a filing, that would really be between the parties involved, the debtor and the secured party, and if necessary a court, a judge to render some sort of judgment. So in knowing that, you may need to dive into and research further issues that need clarity.

Okay. So we've called the next slide "UCC Search Traps." These are things that we want you to be aware of when you are reviewing your results.

Number one, you're going to find this happens quite frequently. A terminated UCC is not inactive. It may be, in fact, fully effective. So know that when one terminates a UCC, it remains active on the public record until the UCC lapses, until you reach that five-year point where it lapses.

Now there are situations, and I see this a lot on my end, where one will file a UCC termination and someone else will file a UCC continuation. So you have a bit of an enigma here, where someone has terminated it and then someone has continued it. And you'll see this when reviewing your search results. And know that any determination as to what actually occurred here would be something that you would need to bring to attorneys and have a discussion with the relevant parties involved. So I just wanted to highlight that this does happen and not to be confused. But if you have any questions about it, you should reach out to CSC to discuss further.

Number two, in the course of a UCC1 filing history, UCCs are often assigned. A UCC assignment is filed, and this is another trap where one might think that the assignor is no longer a secured party of record when an assignment is filed when in fact that's not the case. The assignor remains a secured party of record.

And in terms of the collateral statements of UCCs, you're going to see a lot of different variations potentially of language and how, for example, an item may be described throughout the course of a filing of the UCC1 filing history, whether it's for example equipment, such as computer equipment, which then may be identified as all assets, etc. So the same asset can be covered through any number of different collateral descriptions. And frankly, oftentimes you see UCCs that are filed as just general all-purpose, all assets filings.

And, of course, failure to conduct further inquiry, it's really your responsibility to dive into any issues and to find out what's going on. Searchers cannot rely alone on the public record. So the results that you get may not present to you the full picture. You may need to ask the parties, the debtor, secured party, etc. for underlying security agreements for communications that are not considered public record, they're considered private record. So you may find yourself communicating in depth with parties to try to retrieve internal documentation that really gives you the full scope of what is going on.

Okay. So folks that was a brief overview of some of the legal aspects of UCC searching and some of the administrative aspects of searching. I hope that was a good use of your time. I now wanted to move on to CSC resources, what you're getting in terms of our product, and we'll move on to the next slide.

We're really aimed at giving you search results that are easy to digest, that allow you to look at charts that are produced from our system. I find the charts to be a good way to hone in on where there are records found. And we'll show you shortly some examples.

And just know that when running a searches, particularly against large, common debtors, Fortune 500 companies, that you're going to find a lot out there, and that's going to mean that the PDF result pages are going to be quite extensive. It's not unusual for me to return results to customers in the thousands of pages. So in those situations, we are able to link you the results rather than email and splice up PDF files. So there's a lot of avenues we can pursue in getting you the results. And in the end, we're just trying to put together a package for you to be able to quickly review and make an informed determination based on what's been found on the public record.

So let's move on to our charts. This slide is an example of our PDF style search chart, and you'll see how it's laid out. You'll see that we have the debtor name, the jurisdiction, the type of lien, and what was found. And then we break it down further into the secured party. And likewise, with court searches, you're going to see the plaintiffs, etc. So you're getting sort of a good overview of what's been found rather than having to go through each single page of the PDF that you've been given. So that's the PDF version.

And then we also have, and I personally like this myself because it allows me to sort. I can sort the results by what's clear and what's record found. I can search by the debtor name, the service area, etc. It really allows me to kind of go in and everyone has particular needs. Every order might be different than the one previously, so it just gives you some more control over how you are able to hone in on the results and make quick determinations.