THE UCC 1 LIEN

What Is a UCC Lien?

A UCC lien refers to a lien that is perfected by following the requirements of the UCC, or Uniform Commercial Code. The UCC is a collection of standardized laws on the contracting and trade of goods that has been adopted by the majority of states in the U.S. A UCC lien usually results when an entity lends money to a debtor, and the debtor pledges collateral to the lender in exchange for the loan.

Creation

A UCC lien is created when two parties execute a security agreement. A security agreement may be a prerequisite for a lender to loan money to a small business. A security agreement establishes the terms of the lien that one party will acquire on the property of the other party. For example, the security agreement may provide that the lender will acquire a lien on all of the equipment and inventory of the small business. In exchange, the small business will obtain a loan.

Perfection

A UCC lien must also be perfected if it is to be valid against other creditors and lienholders. Perfection refers to the statutory requirements in the UCC to complete the lien. Under the UCC, perfection of a lien is accomplished when the holder of the lien files a form UCC-1 Financing Statement with the Secretary of State (or its equivalent) in the state where the small business is located. The financing statement gives a description of the lien, the identity of the lienholder and the identity of the debtor. The financing statement is a public record, and it gives notice of the lien.

Purpose

The purpose of a UCC lien is to secure a lender's interest in repayment. Specifically, the lender will obtain a lien on collateral of the small business. If the small business defaults on repayment of the loan, the lender will be able to look to the collateral for repayment by foreclosure, or seizure and sale of the property. A UCC lien, in this sense, is very similar to a mortgage, in which the lender obtains a lien on a house while in repayment.

Renewal and Termination

The UCC provides that UCC-1 financing statements have an effective duration of five years. This means that if the financing statement is not renewed by the filing of a UCC renewal, the statement lapses and the lien becomes unperfected. This means that the lien may not be recognized if challenged in court by another lienholder or creditor of the small business. The lender must also file a UCC termination statement if the loan is paid in full. The termination statement gives notice that the lien is no longer effective.