UCC Article 9- A “New” Collection Tool?

For this week’s Guest Post Friday, Musings is honored to have Doug Reiser. Doug is a construction attorney licensed in Louisiana and Washington, focusing the majority of his efforts on the contracting and management phases of the construction process. Recently being named a LEED AP, Doug hopes to grow with the blossoming green building industry.

He works with at the boutique construction firm Wolfe Law Group, LLC as a member and the director of the Seattle, WA office. Doug is a contributor to the blogs Construction Law Monitor, LA Green Law, and Chinese Drywall Blog, as well as an owner and general counsel for Express Lien, Inc. and contributor to its blog at constructionlienblog.com.

Good old UCC Article 9. Lawyers, do you remember that part of your legal studies?

Unless you represent manufacturers or other goods producers, you probably shut the book on secured transactions right after your bar exam and turned the page to state lien laws. As a brief refresher, the UCC provides a security interest (or lien if you prefer) for sellers of goods upon those goods which they sell or transfer. It can be obtained by security agreement or control/possession of the good. It is perfected (made enforceable and prioritized) by filing with the state, generally, but in some cases automatically (consumer goods).

State lien laws are more at home with most of us. We feel comforted that in our states these laws will protect our clients and ensure that they are secured. Because in the end, our goal as construction attorneys is to maximize our client’s wealth prospectus. And in most cases – that means getting them paid.

Some time ago, I began to remember that secured transactions exist; that these tools were intended to ensure that the sellers of goods were protected from loss in a transaction.

But why haven’t these tools become utilized in the construction? Are there benefits to attempting a mixed security arrangement?

The best example is the material or equipment supplier. As a supplier of goods to a project, the supplier could effectively have both rights: (a) a security agreement with the contractor for a security interest in the goods, and (b) a mechanic’s lien against the property for the value of the goods.

Not far off is the general contractor, who in many ways acts as both a laborer and a seller of goods, albeit downhill from the supplier it purchased the goods from. Couldn’t a general contractor have a UCC interest in the materials and appliances that it places on the project and still have a state mechanic’s lien?

Here is what you need to know to best take advantage of the intertwining of these laws:

(1) Fixture Problem & the UCC Solution – In the past, construction attorney have deferred to state mechanic’s lien laws because of the issues of fixture law. In fixture law, suppliers run the risk of their goods becoming permanently attached to buildings and therefore losing their “goods” nature, becoming a fixture to the property. In that case, it always made more sense to have a mechanic’s lien against the property, which now houses your goods.

But in actuality, your client could lose priority. Lets face it – a UCC lien on the goods themselves is better than being #21 in line to a piece of property which is likely to be usurped by a mortgage company at the top of the priority list.

Use a fixture filing. People act like they are going out of style, but when used properly, a supplier may be able to negotiate to walk on the job and pull out their materials without much of a fight from other creditors.

A fixture filing can be perfected by simply filing a financing statement (WA ones here) in the County where the project is located. As scary as it seems to track your UCC filings, in many states, they are no more difficult than a state mechanic’s lien.

(2) Fixture Wars – In Washington state we ran across an actual war over who wins – UCC fixture or WA mechanic’s lien. The victor: it depends (love that).

In WA a recent case demonstrated that the determination of the goods as personal property or real property is the factor. If the goods installed on a job site are personal property (not affixed) then the UCC lien wins out. If the goods become part of the real property – the mechanic’s lien wins out.

This analysis is important in the wake of millions of dead and bankrupt projects nationwide. On any certain project, you may have appliances and equipment that are real property and several similar items that are personal property. The court in Union Elevator reasoned that grain elevator equipment that had been at a plant for 9 years was still considered personal property, even though it had been used there everyday and was necessary for the business’ function. In doing so, the seller of the equipment prevailed on its UCC claim.

The implication for contractors is this – do you want to continue to worry about the classification of your equipment/supplies/goods? In my opinion, it is not worthwhile to risk this loss. Though mechanic’s lien laws protect you after you fail to get paid, UCC laws provide a mechanism during contracting, which can be self-assuring.

(3) Use Your Contract- Get a PMSI

In many situations (especially transactions of high costs) contractors, suppliers or equipment companies may want to do both. Obtain a security agreement in your contract, file the financing statement in the debtor’s state and the project county, and then follow up the project with a mechanic’s lien against the project.

In most states, a security agreement has no real formatting requirements. It can simply be a sentence in your contract that states “the seller/contractor retains a security interest under UCC Article 9 to any and all equipment/supplies/appliances sold under this contract and is authorized to file a financing statement regarding the same.” That simple.

PMSI (purchase money security interests) are the end-all-be-all of collection tools. Talk to an attorney about how to make certain that you have an enforceable PMSI in your materials, equipment and appliances.

A properly filed and perfected PMSI in fixtures can in many circumstances beat out the bank on their construction mortgage.

(3) File Online & With Care – Its the internet people – the wave of the future. Almost every state provides online filing of UCC interests. To my knowledge, no state in the USA permits the online filing of mechanic’s liens (British Columbia does though).

The ability to file UCC liens online makes it a very simple and attra
ctive vehicle to security for contractors. Most states even have easy to understand filing instructions which makes the chore a potential “in-house” endeavor.

Use care when filing and make certain to index claims under the proper names. Even the misplacement of one letter may be the difference between #1 rank and end of the line.

The lien game seems to have been too easy for too long. Mechanic’s liens are simply not cutting it the way the used to. The UCC is not as scary as those text books made it – contractors should try it on for size.

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