UCC For Jewelers

Article 5

In My Legal Opinion….By Leonard M. Weiner, Esq., PhD.

(This is the fifth in a series of columns that deals with contemporary legal and commercial issues that are currently facing the diamond and jewelry industry and I invite reader email responses and dialogue regarding the issues raised. Please see the previous article.)

These articles for information and discussion purposes only and should not be construed as legal advice, which advice shall be provided only after entering into a written retainer agreement.)

The UCC was created specifically to protect you; you should take every advantage of that right. The filing of such security interest requires a full understanding of how the UCC functions, a procedure not generally understood by most attorneys and certainly by most laymen. Once properly filed, however, it will provide you with the ability to conduct consignment transactions as a priority secured creditor.

As mentioned in the previous article, prior to the revisions of Article 9 in 2001, if one wanted to secure his consignment goods he was required to file both in the jurisdiction where the customer was organized and in every jurisdiction where the consignment goods were located. Thus for example, if one wanted to file on Zales, one had to file in Delaware where it was organized, in Texas where it has its main office and in every state it had a store, a daunting and extremely expensive task.

I indicated above that the filing of such security interest requires a full understanding of the UCC. Let’s examine this requirement of filing in the proper jurisdiction. Where would one file on a corporation that has its main office located in New York City, and yet is a Delaware corporation? Where does one file on an individual? Where does one file on a foreign corporation that is doing business in United States?

Without getting into the complex, and intricate details of how to determine the proper place to file the UCC-1, which are beyond the scope of this series of informative articles, Revised Article 9 of the UCC has eliminated the former, burdensome and expensive requirement to file in every jurisdiction where the goods are located andbasically requires that one files where the customer is organized, if it is a legal entity; if the customer is an individual, where the individual principally resides; if it is a foreign entity with a presence in the US and the goods remain in the US, in Washington DC; if it is a foreign entity organized in a foreign country and the goods are located in the foreign country, one could not file in the US and would have determine whether such foreign country has a similar securitization procedure and file there.

OK, we determined what jurisdiction to file the UCC-1 in, are we ready to file?No! Probably the biggest mistake that filers make when filing UCC’s is they did not file under the right name of the customer. If you get the name wrong, including a simple misspelling or filed under a d/b/a instead of the customer’s legal name as filed in the customer’s Secretary of State’s office in the state where the customer is formed, and upon a database search of the correct name the invalid name does not appear, the entire filing is invalid and worthless.

It is actually worse than worthless because the filer thinks he filed properly and extends credit in reliance on the fact that he has a valid UCC-1, and only finds out it is in fact invalid during the bankruptcy proceeding when the attorney for the bankrupt denies his claim as a secured creditor.

It is imperative that before filing the UCC-1 that the exact name of the customer be checked with the records of the Secretary of State in the state where the customer is organized to verify its accuracy and also to confirm that the customer is a domestic entity of that state and not a foreign (organized in a different state) entity registered to do business in that state.

I can tell you from experience that many companies do not know their exact legal names and have countless times provided me with inaccurate names when asked. I can also tell you that in the process of filing UCC’s for my clients, I have come across many misfiled UCC’s which were invalid, of no legal value, totally unbeknownst to the filers who mistakenly relied on the filing services or their attorneys to do the filing properly.

Perhaps you now can understand why I indicated earlier that the filing of such security interests require a comprehensive understanding of the UCC. No filing service or general practitioner of law is qualified to provide this level of experience and knowledge.