What is a UCC Search and Why is it Important?
You may not have heard of the UCC unless you frequently lend money, but if you are purchasing business assets you may need to understand the basics. Whether you’re purchasing used equipment or buying the books and accounts of a business, make sure you protect yourself with a thorough search.
What is a UCC Search?
Part of an area of law called “secured transactions”, a Uniform Commercial Code (“UCC”) search is a query of the records of UCC financing statements filed with the Secretary of State’s office in a given state. Lenders and other creditors routinely file financing statements as part of their process.
A properly performed UCC search determines if another person or entity has a security interest in personal property (broadly defined as any property not real estate), for example: specific items or categories of items like equipment, supplies, inventory, or intangible goods such as accounts receivable, etc.
Effect of a Security Interest
In addition to certain formalities, a security interest in personal property is created where one person or entity, called a debtor, grants rights in property they own to another person or entity, called a secured party, in exchange for value, usually in the form of a loan. The debtor’s property becomes collateral to secure the debtor’s promise to repay the secured party. If the debtor defaults on its payments, the secured party can exercise its rights over the property, including seizure of the property.
Conduct a UCC Search for Business Asset Purchases
The vast majority of UCC searches are performed by financial institutions to verify items they are considering taking as collateral for a loan are not already encumbered by a prior creditor. In a business context, a UCC search is an important due diligence step in finalizing a business purchase or acquisition. In most situations, the rights given to a secured party over collateral will remain effective even if the collateral is sold by the debtor to another party.
The UCC records may be specific by type of collateral, and by state. For example, the financing statement for a vehicle might be filed at the DMV, and if that vehicle is used by the seller to cover a field territory of two states finding which state its registered in is critical.
Without properly performing a UCC search, a business purchaser risks buying assets subject to another’s security interest.