Understand what a UCC does and means.
In a word, a UCC is like a mortgage on real estate. Consider it a ‘mortgage’ on other types of assets, actually everything else other then real estate.
It is filed publicly for all to check on and discover. It is the way the banks protect their collateral. By the fact that the UCC (uniform commercial code act, section 9) is filed in local registries and on line, thus making it easily discovered by anyone interested, it puts the world on notice that the collateral that supports a loan must be paid off before title can be passed to the buyer. This protects the lender.
The issue is, I am discovering borrowers who ignore the UCC, and sell the assets to unsuspecting and perhaps inadequately represented buyers who failed to discover or even look for the existence or absence of a UCC on the collateral.
When done, when an asset with a UCC filing on it, is sold ignoring the UCC, the buyer will not have a defensible title. The bank whose collateral has been inappropriately sold and its UCC filing ignored, can reclaim their assets and leave the buyer high and dry.
If impossible to be reclaimed, or if the value has been reduced, the bank has every right to pursue the original borrowers and put them into default.
When this happens, it is a mess. Everyone sues everyone and everyone is liable for all the losses they incur and those of the bank.
It is impossible to escape the wrath of the bank on this issue unless the banks note is paid off in full…which is highly unlikely. The bill of sales is worthless as clear title cannot be transferred with a UCC on file.
Yet I see more of this then one would believe.
A better result would be to take the offer to the bank and possibly negotiate a split of the sales revenue in exchange for a release of the assets to the buyer. This works. In a more typical situation the bank will demand all the payment and apply it to the loan reducing the obligation.
May not be helpful to the borrower/seller but it is the way it works. The bank has priority on the collateral if and when liquidated.
Be aware when you sell assets that may be encumbered by a UCC. Also be aware that typical security agreements which include a UCC also includes after acquired assets, thus it typically covers everything the business has and acquires.
One important issue to understand, if the business is acting in the normal course of business doing what it does on a daily basis, there is no violation of the UCC when assets are sold and permission is unnecessary for the sale of inventory. If capital assets are sold that are not part of the daily normal act of doing business then the bank must be included in the transaction and permission must be received and a release of the UCC must be acquired.
If the business is in liquidation, everything it has including accounts receivable, inventory, and assets of any nature are the collateral of the bank and revenues received from liquidation are property of the banks. When in liquidation, it is for the benefit of the bank.
I see too many mistakes made regarding this issue and it is very damaging to the relationship with the bank and the potential for a good workout. Be careful. Be smart. Do business correctly, it is the only way.
