Securing Debt Payment Through Use of Article 9 of the UCC and Construction Liens

Article 9 of the Uniform Commercial Code provides a means for a supplier of goods on credit to secure payment. Materialmen's lines provide a means for a contractor, sub-contractor, supplier, laborer, or professional such as an architect or engineer on a construction project to secure payment of his unpaid account. Each one has different means of foreclosure and each are independent of the other, although a supplier of material on a construction project could use Article 9 of the UCC, in addition to the materialmen's lien. A problem could arise, however, in the use of Article 9 when the materials are incorporated into the construction project and cannot be readily identified or removed without damage to the project.

Article 9

All of the 50 states have enacted some version of the Uniform Commercial Code. Article 9 of the UCC covers the creation of security interests in goods. The security interest created is something like the old chattel mortgage or conditional sales contract.

To create a valid security interest under Article 9. the creditor, supplier of the goods (usually inventory, equipment or accounts receivable), must (1) extend credit, (2) receive a security agreement signed by the debtor, buyer of the goods, and (3) perfect the security agreement by filing a Financing Statement, wherever specified by the UCC, usually with a state agency such as the Department of Licensing in the State of Washington, where the debtor is located. The Financing Statement must be signed by both debtor and creditor, and filed, in order to obtain a priority over other creditors. This is important, particularly in cases of bankruptcy, and where there are other secured parties.

While there is no objection to taking a security interest after the credit has been extended, it is easier for a creditor to obtain priority by taking and filing the interest before the credit is granted. Often the debtor will decline to sign the necessary documents after the credit is fully extended, and bankruptcy preference issues could arise that would nullify the security.

Priority is important when it comes to foreclosure or realization on the security because in the case of multiple filings, the courts usually follow the "first in time, first in right" rule. Priority is unimportant if another supplier of goods has received a purchase money security interest in the specific goods sold, and given appropriate notices, and filed within a specified time of the debtor's actual receipt of the goods. The holder of a validly perfected PMSI has priority, no matter when he files.

Since creditors can search the records in the office of the agency designated to receive and file the Financing Statement in order to see who else may have perfected their security interests, it is important to file under the proper legal name of the debtor, and in the proper jurisdiction where the debtor maintains his principal place of business. Failure to file or filing in the wrong jurisdiction and under the correct name of the debtor can result in the loss of the security.

As might be expected, there are always exceptions to what kind of property can be the subject of an Article 9 filing. The best example is where the property is titled motor vehicles. These can be perfected only by means of the title certificate, which probably involves filing with a different state agency than the one for filing Financing Statements.

Foreclosure or realization upon the security taken is another subject, not covered here. A Financing Statement expires 5 years after filing unless renewed. Resort to your lawyer is probably necessary and certainly advisable in the use of Article 9.

Materialmen's and Professionals' Liens

If you are a supplier of goods that will be attached to or incorporated in real estate or a professional whose design and consultation has been used in the site preparation or construction of the project, you can perfect a security interest therein by filing a Financing Statement in the jurisdiction where the real property is located. The difficulty is in the foreclosure process: how to reclaim the goods that have been incorporated into the project. For this reason, most suppliers of goods that are to become attached to the real estate and professionals have better collection results through use of the materialmen's or professionals' lien.

Again, the procedures are governed by the laws of the state in which the private work is to be done. Such laws vary throughout the United States but almost all the states have the same generic approach. Public state and federal projects require different procedures.

Prior to filing a lien there may be a requirement for some parties to give a preliminary notice to the owner in order to obtain a priority, and failure to do so may affect the quality of the lien.

The lien itself must be filed, in the state of Washington, within 90 days of the lien claimant's last work was performed or materials supplied. It must be filed with the officer of the jurisdiction where the work has been done, who records liens, like mortgages, against real estate. Some states require a notice that the lien has been filed to be given to the owner within a certain time after filing. An action to foreclose must be instituted, by service and filing with the Clerk of the Court, within a specified time after the filing of the lien: 8 months in the state of Washington.

Priority of liens is important because frequently there is not enough property to pay all claims. Often there is a mortgage or deed of trust that has priority and its foreclosure may eliminate your interest. There is hardly any way you can avoid recourse to your attorney if foreclosure is required. Failure of a contractor or sub-contractor to register with the appropriate agency where contractor registration, bonding and insurance is required can also result in the loss of a lien.

Public state projects require a preliminary notice to the general contractor. The potential claim would be made against the bond of the general contractor, not a lien on the property of the owner. Federal projects are protected by the Miller Act as amended by Congress in 1999. The procedures to follow are similar to those of public state projects. 

Forms

(1) Article 9 Forms. In the state of Washington, these forms can be obtained on the Internet at http://access.wa.gov/, or at book stores with legal forms, or at local law libraries (where you will have to copy the form).

Since security agreements are not filed, the Internet service may not provide a complete set of necessary documents, which include (a) the Financing Statement, (b) the security agreement, (c) the notice of taking of a PMSI, and (d) a request for search (a valuable tool when extending credit, or attempting realization on your security.

(2) Mechanic's and Professionals' Lien forms can be obtained from your attorney's office, book stores with legal forms, form books in local law libraries, like the King County Law Library, trade associations and on the Internet at your local SCORE Business Information Center. Necessary forms include (a) notice to the general contractor, (b) notice to owner, (c) claim of lien, (d) notice to owner of filing of claim of lien, and (e) notice to lender.

Disclaimer: This discussion does not constitute legal advice. It is strongly recommended that you review all applicable state statutes and in addition retain legal counsel to assist you.