Q. I sold my telemessaging service and hold a promissory note from the buyer. Should I also file a UCC-1 form?
A. UCC-1 stands for Uniform Commercial Code financing statement. In general, it is a public notification that the sale of your accounts (and equipment, if included) have not been completely paid for. It is filed with the secretary of state and appears as a lien against the business.
Whenever a business is sold and the seller accepts “paper,” such as a promissory note, then the terms of the sale should include the filing of the UCC-1 statement. The UCC-1 form (available online) is completed by the seller and lists the name and address of the debtor (buyer) and the secured party (seller); a complete description of the collateral (assets such as customer accounts and equipment); the terms of payment for the note showing the amount due, payment schedule, and term; and where the collateral will be kept or used. There are also provisions for the secured party’s remedy if the debtor defaults on the promissory note so the secured party can reclaim the collateral. Thus, the UCC-1 form provides a lien, which is a legal right of interest in the asset that lasts until the obligation is paid.
Some sellers believe that a promissory note sufficient if a default in payment occurs, but the promissory note does not protect the seller’s claim to the assets. In many cases, the buyer can turn around and sell the assets (accounts and equipment) to someone else and still never pay the original seller in full. However, if the seller files a UCC-1 form with the secretary of state in the state where the business was sold, then the existing lien on those assets provides protection against a fraudulent sale. Unfortunately, we have heard of this happening.
For our clients, we generate both the promissory note and UCC-1 financing statement in those cases where the seller agrees to carry a note from the buyer. However, the UCC-1 statement is useless unless the seller files it with the secretary of state.