7 Rights and Remedies of Secured Party (Exclusive of default, the secured or its agent may do the following: give written notice to the debtor requiring debtor to notify account debtors to remit payment(s) directly to the secured party, and also to take the proceeds of these accounts that may be in the debtor's possession; take whatever steps may be necessary collect these accounts, reclaim collateral, and apply it to debtor's indebtedness to secured party under terms of the security agreement; make periodic calls and/or inspections of records at debtor's place of business as they relate to transactions or collateral between secured party and debtor; take the debtor's place as regards rights, interests, and remedies as they relate to account debtors who have goods covered by security agreement; insert a short paragraph covering the rights of secured party under the UCC in the event of the debtor's default and as those rights relate to the date of the security agreement.)
8 Rights and Remedies of a Debtor (A debtor is empowered to exercise rights are necessary to function as the secured party's agent for all accounts until the secured party notifies the debtor that it will collect any and/or all accounts as set forth in the security agreement.)
9 Debtor’s Additional Agreements and Affirmations (The debtor affirms that his or her only places of business are those listed in this agreement and that the secured party will be promptly notified if there is a change of location or the addition of a new location; the debtor is the lawful owner at the time the secured party's security interest attaches, has the legal to transfer any interest in the subject goods, and will defend against the lawful claims and demands of all persons the collateral and its proceeds.)
10 Mutual Agreements (As used in this agreement, the terms "secured party" and "debtor" include the following: heirs, administrators, execu¬tors, successors, representatives, receivers, trustees, and assigns of those parties; it is agreed that the laws of (name of state) govern both parties to this agreement; the security agreement is all-inclusive and includes all writing that are pertinent and excludes from this agreement anything that is not in writing; any provisions of the security agreement that are not valid under the laws of the applicable jurisdiction shall be construed to exist and as such will not be enforceable against either party.) The agreement is then dated and signed by both the debtor and the secured party.
The above outline for a Security Agreement for Accounts Receivable is a version of one that I first saw more than 15 years ago in the pages of an annual edition of Credit Manual of Commercial Laws. I subsequently had my company’s attorney adapt that agreement to our specific requirements and found it to be a very comprehensive and effective document .Let me caution you, however, not to use the foregoing or any other such legal document unless you first run it by your company’s attorney; also let him or her decide whether it is applicable in the situation for which you intend to use it. It may be a perfect fit or that call to your company's attorney might save you from making a costly mistake.
There are similar security agreements to cover equipment and other chattels. The format should be similar to the foregoing example for accounts receivable with the obvious difference of an itemized listing of collateral (year,type, and description of each piece of equipment ).Other headings and subheadings are similar with perhaps more specifics in certain of the subheadings as they relate to the assembling, availability ,disposal, liability, inspection, and general care of the collateral. There are waivers and other such variations from the Security Agreement for Accounts Receivable, as stated before, the format is essentially the same.
Why Your Company Should Do IT
I believe it is obvious from what has been presented to this point in the chapters and subsections of Part 3 that no well-managed company whether small or large, should fail to add the protection potential of the Uniform Commercial Code to its other good business practices. How could a credit manager or the person who has credit management authority justify his or her failure to use aggressively the major tool in manager's arsenal of receivables defenses? How could that individual risk a major loss because the company's inventory, receivables balance,or other collateral had been left unprotected-left, in fact, with the status of an unsecured receivable? .
There are rarely enough assets in a business failure (bankruptcy and liquidation) for all of the priority and/or the secured creditors to receive cents on each dollar of their claim. The filing of a security agreement and a financing statement does not guarantee that there may not be some percentage of loss. The priority of those UCC filings has great bearing on which creditors receive the highest percentages of recovery.
After the matter of priority of the UCC filings, a major factor in any recovery is the liquidation value, not the book value, of the assets. Many liquidations are a disaster for the creditors in that the sale of assets may generate as little as 10 or 20 percent of book or purchase value. Whether a creditor has a perfected security interest that is high on the priority filing list will influence the percentage of recovery that his or her company receives. It is worth mentioning again that a properly constructed inventory agreement Should preserve the integrity of that asset and keep it from being commingled with goods--yours and others that were sold to the debtor for resale.
It is unacceptable for a person who has been given the responsibility to protect the company's assets to fail to put Uniform Commercial Code filings at the top of the list of protections available to the company. Not every account is protected; filings are made selectively and generally on the criteria of risk exposure: dollars, quality of the company, impact on the creditor if the debtor's business failed, and whether a filing could be made that would put the creditor's company at the top, or high on the list, of pro¬tected security interests.
There is the additional dividend of the more favorable impression that a company creates among bankers, individual investors, and venture capital¬ists when they become aware that the applicant for financial support is an active believer in UCC filings. People who are asked to put personal, depositor or investor funds at risk via credit lines, property mortgages, equipment financing, etc., invariably use the UCC to protect their security interest in goods, receivables, or chattels. It would be unthinkable for a banker or a venture capitalist to commit a sum of money to an existing company or a new venture without the maximum levels of protection; those levels of protection do not exist if there is no filing of the security interest and the financing statement. Credit grantors who maximize the safety of their company's dollars realize that there is more to ensuring the safety of those dollars than dealing with companies who have a good product, personable people, a good location, and goals that seem realistic and attainable.
The key questions beyond the positives that have just been stated can be narrowed to two: does the customer company have satisfactory standards for granting credit, and does the customer company protect itself and its suppliers via the use of UCC filings to shelter major exposure in key accounts? It is obvious that the accounts receivable or other goods or col¬lateral of the creditor company is at a much higher level of risk if the debtor company is not diligently protecting its own receivables assets and the inter¬ests of its creditors with appropriate UCC filings.
There can be no question regarding the wisdom of creating a security interest--a formal security agreement--that may then be combined with a financing statement to complete the filing package. A creditor will seldom hear more reassuring words than, "Debtor hereby creates a security interest in favor of the secured party" in property that is subsequently described in sufficient detail to satisfy the requirements of a filing under the Code. The overwhelming majority of knowledgeable credit administrators endorse enthusiastically the principal of "when in doubt create a security interest,” then take that security interest to its logical conclusion--a perfected filing Under the Uniform Commercial Code of the appropriate jurisdiction.
Recognizing the Security Interest
It might be unfair to suggest that every security interest is easy to recognize and, because recognition should not be a problem, to suggest that protecting the security interests of your company or business in every transaction is something that cannot be done routinely. It might be unfair to make that suggestion, but actually it is not. Why shouldn't you or the person who handles credit matters for your company be sufficiently aware of what constitutes a "security interest" to recognize immediately when one has been created?
A manufacturer or distributor has a security interest in goods that he or she sells on credit terms to a customer; that customer is generally in the business of selling the goods to third parties who may or may not be the ultimate user or consumer. All goods in this context have monetary value and if the creditor (supplier) is selling to the debtor (Customer) on credit terms, the creditor has a valid security interest in the goods until the debtor has paid for them. And is the debtor's responsibility to the creditor altered .if, through no fault of the creditor, the debtor is unable to meet the terms of his or her arrangement with the creditor? Not at all .The debtor’s responsibility to the creditor is unchanged by circumstances that have no bearing on the creditor's fulfillment of his or her obligation to the debtor.
It is imperative that a commercial creditor recognize when and how a security interest is created and takes the appropriate steps to protect that interest within the time frame allotted by the UCC jurisdiction in which the filing should be made. Remember that recognition of the existence security interest is not an end in itself. If the creditor does not follow through to take the steps required by the Code to protect the security interest of his or her company's goods, the creditor may get high marks for "recognition,’ but could eventually be in deep trouble if the debtor fails opts to seek the protection of the Bankruptcy Court.
You may recognize that your company has a valid security interest in certain accounts, but you do not choose to combine a formal security agreement with a financing statement to protect the receivables balance under the UCC. Is there any reasonable rationale for not making a filing? If "rea¬sonable rationale" means evaluating receivables accounts for size, liquidity, and potential impact on your company if the business should fail, and from that analysis you select a small percentage of accounts that are not pro¬tected by UCC filings and promptly cover them with a filing, then the criteria of "reasonable rationale" has been served. •
There are accounts that do not warrant the time and expense of a UCC filing, although the expenditure of time and money might be small. The balances are relatively small, the companies or businesses are well estab¬lished, payments to the trade are strong, and there is nothing in the financial or marketing picture of these customers that is not well managed. This is the category of account whose modest to moderate balances pose no threat to the bad-debt reserve of your company. There is no justification for perfecting your security interest via a UCC filing when balances are non threatening and the debtor companies in this category of accounts display characteristics none of problem accounts.
Never dismiss the possibility that your company might not benefit enormously-either short- or long-term-from a priority filing. As your increases professional growth and as the scope of your responsibilities matches your professional growth, you will not only "recognize the security interest,” but you will also develop the ability to perceive from a compact group of facts which accounts should or should not be protected. Don't allow yourself to be caught in a situation that in retrospect should clearly have been translated into a protected position-where recognition of the security interest should have been translated into a perfected UCC filing. Recognition of the security interest should never become a lost opportunity for a creditor to protect his or her company’s interests against the default of a debtor
Do not join the ranks of those who have, from time to time, found them¬ in the company of creditors who "failed to do so,” which is a synonym for “welcome to the ranks of the unsecured creditors." There has been earlier of the sorry percentages of recovery that accrue to creditor than that! Who are in the category of the unsecured. Your company deserves better than that! Do not let it wander unprotected into a situation that represents for your company a meaningful number of dollars. Take "recognition” through the additional steps of the UCC to protect your company's against the insolvency of a debtor
Nonpossessory Security Interest
The key criteria in almost everything that is covered in Division 9 of the code is whether there is a Security Interest. Does the person who wants to make a filing have a security interest in the collateral? No security interest? Then there cannot be a security agreement, financing statement, and UCC filing.
What is the situation when the debtor has possession of the collateral? Does that automatically shunt the person or company whose claim to having a security interest in the collateral is fortified by the fact that the person or company with the security interest(?) has received no money--or some money? Has the right to be known officially as a "secured creditor" been lost for the seller? Not at all.
Any Secured Party with a Security Interest can protect that interest against the claims of third parties either by taking possession of the collateral or by filing an appropriate notice with the filing officer. The notice will state that he, she, or the company has a security interest in the collateral covered by the Security Agreement. The secured party nails down his or her interest in the collateral by filing a Financing Statement. If ,however, financing statement is not filed, the security agreement will remain valid, but the failure to file gives another secured creditor who files earlier the opportunity to gain a priority.
The term "nonpossessory" is applicable to almost every commercial transaction where there is the sale of goods by a manufacturer or distributor and the transfer of those goods to the warehouse,storeroom,or sales facility of the customer. It is the ongoing hope of every manufacturer or distributor that collecting for goods transferred to the customer for resale will not be a problem, and if the seller has made a protective filing the UCC, there should be no question regarding the presence of “security interest" when the goods were shipped and the filing recorded.
A nonpossessory filing does not give the secured party the same level of security that he or she would have if the goods were still in possession, but that isn't commerce and it isn't the way business is conducted. Commerce is a meaningless word unless goods are shipped, received, and sold, and money is transmitted to the secured party to clear his or her interest in those goods. There never was a credit transaction that was totally risk--that applies to individuals, companies, or businesses Whose UCC filing are as strong as Gibraltar.
This provision is one of the most beneficial for creditors in that it enables them to enter into a commercial or other relationship with a debtor before any collateral or goods has changed hands. Example: A banker might grant a revolving credit line of $500,000 to augment cash flow,taking as security the company's accounts receivable--current and future accounts. It is necessary for the banker to name individual accounts in the bank's security agreement, nor is it necessary for the bank to periodically update the UCC filing with a list of current receivables accounts. One filing, one time should be adequate to perfect current and future receivables accounts.
Division 9 of the Code provides that all current and future obligations which are covered by a security agreement shall be secured by after-acquired collateral. This provision locks in the secured position of the person or business which has a security interest and ensures that collateral acquired after the security agreement has been filed shall become a part of the collateral.
