In this week's Freedom Friday blog and email newsletter, I'm going to talk about an issue that has come up with a recent prospective client, and with some clients in the past, and that is the need to file a UCC-1 in order to secure a collateralized loan. That's a mouthful. Most of the time, when I ask a prospective client if they filed a UCC-1, they have no idea what that is, and they haven't filed one, which is very unfortunate for them. In today's Freedom Friday blog and email newsletter, I am going to answer the question I am always asked, “What is a UCC-1?”
Imagine that you are offering someone a loan, and you want to secure that loan with personal property, or commercial property. Many times, for example, loans given to restaurants are secured by the fixtures in the restaurant itself. The loan is secured by the oven, the refrigerator, the stove, the table and chairs where the diners sit to eat, and all the other “equipment” in the restaurant. In this example, the restaurant equipment serves as the collateral for the loan and makes it a “secured” loan. If you loan someone or another business money (or sometimes provide a commercial lease), if you do not secure the loan with collateral, it is an unsecured loan, and your only legal remedy is a money judgment. However, if you secure the loan with collateral, not only can you sue to recover a money judgment, i.e. the unpaid balance, but you can also sue in “replevin” for the collateral and attempt to get that back. But, if you want to do that, there are additional steps you have to take.
Going back to our example of a secure or collateralized loan made to a restaurant, merely listing out the collateral in the loan agreement is not enough to secure the loan. When you loan someone or a business money and you want to secure the loan with collateral, you have what's called a “security interest” in the collateral. Another example is many car or auto loans are secured by the vehicle itself. The lender has a “security interest” in the vehicle, even though the purchaser owns it. The same is true with a mortgage on your house --- the bank has a “security interest” in your home. If you loan money to a restaurant, and the loan is secured by a long list of tables, chairs, stove, oven, refrigerator, and all the other equipment, then there is a “security interest” in all that collateral. However, you have to “perfect” the security interest, and you do that by filing a UCC-1. You cannot sue to recover the collateral unless you file a UCC-1.
So, what is a UCC-1? UCC stands for the Uniform Commercial Code, which has been adopted in Oklahoma. A UCC-1 is a filing statement which is a legal notice filed by a lender as a way to publicly declare its right to potentially obtain the property that is the collateral of the loan. A UCC-1 serves as a lien on secured collateral, where the components and filing procedures are similar to the lien requirements for residential mortgages. A lender must incorporate completed UCC-1 statements in a loan contract for it to be deemed effective. The statements must include detailed information about the borrower and itemize descriptions of all the collateral for the loan. The lender must perfect their lien by filing the UCC-1, and in Oklahoma, the Oklahoma County Clerk is the depository for all UCC-1 filings so that's where it has to be filed.
So, that's what a UCC-1 is. If you loan money to someone or a business, and you wish to secure the loan with any type of collateral, then you must file a UCC-1 in order to have any chance of getting the collateral back if the borrower defaults on the loan.
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