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UCC Financing Statements Are Not Impenetrable Shields

Derek D. Samz

Collecting on judgments or other accounts receivable can often be a daunting and murky endeavor, especially without the assistance of an attorney. Oftentimes debtors will go to great lengths to avoid payment of your debt. A common tactic that debtors will employ is to assert that they owe money to a lender who’s loan is secured by a UCC Financing Statement. UCC Financing Statements are security instruments typically used to secure loans where the collateral for the loan are not real property, but consist of vehicles, tools, cash, accounts receivable and other forms of personal property. However, this form of security instrument is not as ironclad as the debtor, and its secured lender, would hope you believe.

I recently represented a subcontractor that had obtained a judgment against the general contractor (“Debtor”) for breach of contract. After issuing a citation to discover assets to the Debtor, I discovered that the Debtor was due to receive a payment of $80,000 on a different project. However, upon the filing of the request that these funds be turned over to my client, the Debtor’s primary lender stepped in and asserted that it possessed a higher priority security interest in the Debtor’s collateral, and that my client would not use the Debtor’s assets to satisfy its judgment. However, the Debtor was still operating its business as a going concern. Indeed, documents produced by the Debtor pursuant to the citation to discover assets revealed that its lender had made similar statements to other creditors, but at the same time had allowed the Debtor to continue operating instead of liquidating the Debtor’s assets to satisfy the loan. In fact, documents produced revealed that the lender had made additional loan advances to the Debtor after the date the Lender had supposedly declared the Debtor to be in default under the loan.

After submitting briefs to the Court detailing these facts, the Judge held that the Lender could not assert a higher priority under the UCC Financing Statement until it had declared the Debtor to be in default. The Judge determined that based upon the facts before him, most notably that the Lender had allowed the Debtor to continue operating and access to additional funding, that the Lender had not declared a default, or was actively assisting the Debtor in shielding its assets from creditors. The Judge went on to rule in my client’s favor, and ordered that the $80,000 receivable be turned over to my client to satisfy its judgment.

The moral of the story is that the simple existence of a UCC Financing Statement, or other security instrument, is not the end of the inquiry in collection proceedings. A diligent and savvy creditor may be able to obtain superior rights over a lender that has not declared a default and taken action to enforce its secured lien. If you have any questions regarding your collection issues, please give DiMonte & Lizak, LLC a call.

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