Decades ago, many businesses engaged in transactions with other entities in the same geographic area. Then came the Internet and other electronic devices that allow business to be easily conducted with a just a few clicks. Today’s companies are likely engaged in transactions with entities in other states.
You need to comply with the UCC if you are conducting business across state lines. It may affect you if you are involved in one of these businesses. It is important to have a basic understanding of the Uniform Commercial Code (UCC).
- Sale of goods including warranties and delivery;
- Borrowing money;
- Leasing equipment;
- Business-to-business wire transfers and automated clearinghouse payments;
- And much more.
The UCC is not a federal law. It is a set of laws adopted by all 50 states and U.S. territories. Once adopted, states can modify or reject provisions so businesses still need to pay attention to state laws.
Many businesses come into contact with the UCC when they borrow money and the lenders have to file a UCC-1 form or Financial Statement. These important filing requirements fall under UCC article 9 covering secured transactions.
When a lender secures an interest in a borrower’s personal property used as collateral, the lender files a UCC-1 form with the state’s Secretary of State Office (or equivalent office). Personal property can include business equipment or inventory. By filing a UCC-1, the lender establishes a priority claim in the event the borrower files for bankruptcy or becomes insolvent.
The UCC-1 form also serves as a public notice of a lender’s interest in specific assets of a business. The information on these forms is public information. Before a lender makes a secured loan, it does a search in the state’s UCC filings database to ensure that no other UCC-1 form has been filed against the borrower’s collateral. If more than one lender files a UCC-1 form against the same collateral, the lender that filed first has a priority claim if the borrower defaults or goes bankrupt.
Lenders may file UCC-1 forms in more than one state if a borrower has business locations in multiple states, or moves from one location to another. “Personal property” means non-real property used in operating a business, such as equipment, furniture, and inventory. After a loan is paid off, a borrower should ask the lender to terminate the UCC-1 filing. Otherwise, the lender may not proactively take information out of searchable databases.
Note: If a business is selling you property, you should check to see if there is a filed UCC form showing a secured interest in the property before you sign a contract. Also, in the contract, you may want the seller to represent that there is no secured interest in the property.
What the UCC Covers
The UCC is a large set of laws governing commercial transactions between all 50 U.S. states and territories. It is divided into parts, called “articles:”
- Negotiable instruments or commercial paper
- Bank deposits and collections
- Funds transfers
- Letters of credit
- Bulk sales or bulk transfers
- Documents of title such as bills of lading
- Investment securities
- Secured transactions
The UCC does not apply to transactions involving the following:
- Real estate