The Secret Side of UCC Financing Statements

In my experience representing banks, asset based lenders and private lenders in San Jose and throughout the San Francisco Bay Area, an overriding concern is to make sure that the lender has the ability to go after the collateral if the borrower does not pay for any reason. Accordingly, a lender, secured creditor or factor taking collateral for a loan* instinctively knows that you need to file a UCC-1 financing statement as part of the transaction. From the earliest days of training, it is drilled into most secured lenders that the UCC-1 is one of those items you must have. It “perfects” the lender’s security interest in collateral, which means that it gives your lien priority and makes the lien rights enforceable against third parties, bankruptcy trustees (if it ever came to that) and others.

UCC Filings and Marketing Strategies

One unintended consequence of UCC filings is beginning to come to light. That is, every filing potentially provides the world – meaning competitors – with information about the lender’s activities. The ongoing development of sophisticated databases allows a person so inclined to figure out who a lender is financing – i.e. who it has as its customers. That, of course, has the potential of leading to targeted marketing efforts. The purpose of this article is to point out that this use of a lender’s UCC filings, which is often not much thought about, is becoming more prolific as database analytical tools become more prolific.

Representative Parties

The requirement of filing a UCC-1 financing statement is so fundamental to credit underwriting and the protections it provides are so substantial that it is out of the question for a secured lender, ABL lender or factor to consider going without one. With that strategy effectively off the table, we are seeing the rise of so-called representative parties or third party representatives who insert the representative’s name rather than the actual lender’s name on UCC-1 financing statements in the secured party box. If a representative party has multiple lenders using the service, it effectively disguises the identity of the actual lender. Of course, this disguise comes with a fee!

The legal underpinning for the use of representative parties is found in Section 9502(a)(2) of the California Commercial Code (and similarly numbered sections in other state’s commercial codes). Section 9502 provides that to be “sufficient” or complete, a financing statement must include the debtor’s name, a description of collateral, and the name of the secured party or a representative of the secured party.

You may hear more about use of representative parties, lender fictitious names and other disguising techniques going forward. The reason is straightforward: it is apparently becoming more necessary to foil the attempts of competitors in the marketplace to obtain a lender’s customer list through analysis of the data bases.

*(Note: The UCC filing is used in connection with liens on most business assets, but does not perfect a lender’s security interest in real estate and certain unique types of assets, which are not discussed in this article. )

The information appearing in this blog does not constitute legal advice or opinion. Such advice and opinion are provided by the firm only upon engagement with respect to specific factual situations. Specific questions relating to this article should be addressed directly to Strategy Law, LLP.

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