When Perfecting A Security Interest In Goods or Chattel, Don’t Be Fooled If The Debtor ReLocates Its Business To A Different State

PERFECTING SECURITY INTEREST IN GOODS OR CHATTEL

Under the Uniform Commercial Code (“UCC”), is a secured creditor required to file a new UCC-1 financing statement to perfect its security interest in equipment if a debtor moves its “location” to another jurisdiction?  The answer may depend on whether the debtor is considered an “organization” or a “registered organization.”Bailout-Printing-press-cartoon

UCC 9-301 dictates where a creditor must file a financing statement in order to perfect its security interest. This section confirms that the “jurisdiction” of the debtor’s location governs the perfection and priority of a security interest in collateral. UCC-9-301(1).  The same section also provides that the law of the jurisdiction where the collateral is located governs the perfection and priority of a security interest in collateral.

UCC 9-102(50) defines the term “jurisdiction of organization” to mean “with respect to a registered organization, . . . the jurisdiction under whose law the organization is organized.”  The term “registered organization” is defined as “an organization organized solely under the law of a single State or the United States and as to which the State or the United States must maintain a public record showing the organization to have been organized.” UCC 9-102(70).

UCC 9-307(b) offers the following general rules to determine a debtor’s location:

(1)     A debtor who is an individual is located at the individual’s principal residence.

(2)     A debtor that is an organization[1] and has only one place of business is located at its place of business.

(3)     A debtor that is an organization and has more than one place of business is located at its chief executive office.

However, subsection (e) of UCC 9-307 provides a specific rule to determine the location of a “registered organization,” by stating that a “registered organization” that is organized under the law of a State is located in that State.”  (Emphasis added).

In the event that an individual debtor “relocates” to another jurisdiction, an entity debtor re-organizes in another jurisdiction, or a new debtor in a new jurisdiction becomes encumbered through a transfer of collateral, the burden falls on the secured party to ensure that they perfected under the law of the new jurisdiction. See UCC 9-316. The existing security interest remains perfected only until the earliest of a lapse of the financing statement, or 4 months to one year depending on whether or not a new debtor has become encumbered.  Under these circumstances, to maintain a perfected security interest in collateral the creditor is required to file a new financing statement in the jurisdiction of the debtor’s new location. If a financing statement is not filed by the earlier of these events (lapsing of original UCC-1 filing, or 4 months to a year), then the security interest becomes unperfected and subject to losing priority to another secured creditor. UCC 9-316.

A reasonable reading of the UCC suggests that the re-perfection rules enumerated under UCC 9-316 do not apply to “registered organizations.”  Accordingly, a debtor’s “relocation” of its business and collateralized equipment from one state to another does not constitute “a change of the debtor’s location” if the debtor is a “registered organization.” In other words, although a debtor that is a registered corporation physically moves to a different jurisdiction, it’s “location” is governed by UCC 9-307(e), and thus, is deemed to have never changed its location because it remains “located” in the state of its incorporation.  Therefore, the secured creditor would only be required to file a UCC-1 financing statement in the debtor’s state of incorporation – not the new jurisdiction – to perfect its security interest.

In any event, it is best practice for a secured creditor to monitor to the location of its debtor and to file a new financing statement in each jurisdiction the debtor moves to so as to avoid issues with competing security interests in the same collateral.

[1] Whereas the UCC defines the term “Registered Organization,” the UCC does not provide any definition for the term “organization.”  UCC 9-102.

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Author:
Eric’s varied litigation and transactional experience includes complex commercial/ chancery/federal matters, preliminary injunctions, partnership/corporate shareholder actions, will & probate litigation, guardianships, bankruptcy, bankruptcy court litigation and corporate dissolutions, business transactions & corporate law, asset recovery/repo, debt collection & judgment enforcement, receiverships, foreclosure, fraudulent transfer litigation, attorney & professional ethics, entertainment and intellectual property, internet and website development law, real estate disputes and restrictive covenants, trial & appellate practice in state and federal courts. Eric has also been appointed by the court to serve as counsel to an alleged incapacitated person in a guardianship matter and is a candidate for judicial appointments in complex commercial litigation matters as a special fiscal agent, receiver and provisional director.

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