Most of our fifty States have adopted the Uniform Commercial Code (UCC), which prescribes the method for a creditor to perfect security interests in collateral.

Credit unions utilize the UCC filing provisions to perfect their security interest in items pledged as collateral on a loan, such as on a vehicle.

Once a creditor files the appropriate form with the proper state or county office(s), the security interest remains perfected for a period of five years from the date of filing. After five years from the date of filing, the security interest terminates unless the creditor files a continuation statement with the same office(s) within six months prior to expiration of the five year period.

In McCollum v. Reisinger et al., 146 B.R. 649, a case of first impression, creditor McCollum was owed $118,200 from Reisinger. McCollum properly filed a financing statement and perfected his security interest in debtor’s inventory, supplies, equipment, accounts receivable and the proceeds thereof.

McCollum’s financing statement expired five years after the initial UCC filing date and McCollum had not filed a Continuation Statement. When McCollum realized that his security interest may no longer be valid, he filed another financing statement.

Debtor Reisinger, however, obtained additional financing from Commerce Bank, which was to be secured by the same collateral. Commerce Bank filed its financing statement one minute before McCollum filed his second financing statement.

Debtor Reisinger filed for bankruptcy. The issue this court confronted was whether McCollum or Commerce Bank held the first secured interest in the pledged collateral.

The court held that the Commerce Bank’s security interest would take priority since McCollum’s original financing statement automatically terminated after five years from the first filing, and since McCollum had not filed a continuation statement, the original McCollum lien became inferior to the Commerce Bank lien.

EDITOR’S COMMENT

Although most states have adopted the UCC, which was designed to provide, in part, for continuity for creditors perfecting security interests among the various states, some states have modified the UCC for their own concern.

Since many credit unions intend their security interest to continue after five years from the original perfection date, it is of the utmost importance that the credit union file a continuation statement prior to expiration of the original five year term. Otherwise, the credit union’s security interest will automatically expire and the credit union will be left with a wholly unsecured loan.

Each credit union will want to familiarize itself with the applicable UCC filing requirements for continuation statements if the collateral is intended to secure a loan that exists longer than the specified UCC five year term. Your credit union attorney is the best source to provide this valuable information to you.

Still another problem being realized by lenders across the country is the situation that occurs when the debtor pledges certain items as collateral for a loan, such as a vehicle, but the credit union does not file its own lien and trusts the debtor to record the vehicle title with the state. If the debtor fails to record the title with the credit union’s name as the secured party, and the debtor files for bankruptcy, the credit union may then have an unsecured loan.

Author: Charles R. Harroun, Attorney at Law