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Kiwi Firms Transacting with US Firms Should Understand UCC Liens

For those businesses unfamiliar with US commercial law it is important to understand how integral the Uniform Commercial Code (the “UCC”) and UCC Liens are to this particular field of law. The UCC is a collection of model codes which was originally drafted by the American Law Institute and was adopted by each state legislature separately in either it original proposed form, or as modified to meet each state’s particular local customs. The purpose of the UCC was to standardize commercial law throughout the United States. The UCC regulates the buying, selling, and leasing of goods, banking, storage and transport of goods (including bills of lading), securities, and secured transactions. With harmonized law regulating each step of a transaction in the sale of goods, businesses in the US now have a much easier time of standardizing their commercial contracting practices. Accordingly, it is important that NZ businesses selling their goods into the United States have at least a basic understanding of the UCC.

For the purposes of this article, we will focus the secured transaction rules of the UCC, which are located in Article 9. A “secured transaction” is one in which a security interest is retained in a party’s property in connection with the transaction. For instance, a seller can retain a security interest in the goods being sold to a buyer until the buyer makes payment for those goods. It specifically comes into play when a New Zealand business sells goods into the United States on terms of credit. Typically, NZ businesses will send their goods to their US distributors or retailers and allow full or partial payment for those goods after the goods are received and accepted. While some NZ businesses do this without any sort of protection from non-payment, many will also require a “letter of credit” from the buyer.

A “letter of credit” is an arrangement with the buyer’s bank wherein payment for the goods is guaranteed by the bank on behalf of the buyer if the “terms” of the letter are met. The terms of the letter often state that payment will not be made on purchased goods unless the goods are delivered exactly on time, with all the necessary documentation, in acceptable condition, and in the exact quantity ordered. While a letter of credit should form a part of any regular international transaction, such as an NZ business selling its goods into the US, the letter of credit mechanism leaves the NZ seller vulnerable and exposed to risk on several accounts. First and foremost of these risks may be the buyer or distributor’s unwillingness to take on the costs of securing a letter of credit. For new or small businesses this can be a particular hardship if they are unable to meet the bank’s credit rating requirements. Also, the NZ seller can often run into problems with collection on the letter of credit because they fail to meet one of the letter of credit’s strict triggering requirements. For example, if any part of the shipment is damaged during transit, or there is a third-party delay which prevents the shipment from being received on time, the bank can refuse to honor the letter of credit. This sort of event is not generally the fault of the NZ seller, yet the NZ seller is left holding bag without security for payment where the partially conforming goods have been delivered.

In order to secure recourse for these sort of situations (ie, where the letter of credit is either unobtainable by the buyer or the terms of the letter cannot be met by the seller), the seller has the option of asserting a security interest lien on the goods under Article 9 of the UCC. Specifically, Article 9 authorizes a lien on the buyer’s personal property (usually the goods themselves, but sometimes extending to other personal property of the buyer pledged as collateral). To obtain UCC liens, the Sales Contract or Terms of Sale must include a specific provision which invokes the Article 9 security interest and specifically defines the collateral. Once the buyer accepts this term and accepts the goods, the lien is said to have “attached” to the pledged collateral. In order to finalize the lien, the buyer must then “perfect” the lien by (in most cases) filing a UCC-1 Form Financing Statement.

A Financing Statement is a form document filed in the US public records which gives public notice that there is a security interest in certain personal property. It requires the disclosure of the names of the debtor and generally describes the collateral to whom the UCC liens apply. The method for filing a Financing Statement differs slightly from state to state, but is generally done through the state’s Secretary of State Office. Once the Financing Statement is filed with the appropriate state office, it gives the NZ business the right to repossess the goods sold (or other collateral). The goods can then be auctioned under the UCC’s rules and the money obtained through the auction is used to reduce the debt owed by the buyer. All of this can be accomplished without having to file anything with the local court if the repossession can take place without disturbing the peace.

The ability to seize and sell collateral greatly increases the likelihood of at least a partial payment on the conforming goods received by the buyer in the transaction. Further, the process for filing UCC liens by way of the UCC-1 Form Financing Statement is simple and inexpensive. Finally, when combined with a letter of credit, the UCC lien provides a New Zealand business selling its goods into the US on credit with a robust payment security mechanism. NZ businesses should review there Terms of Sale and Sales Contracts to ensure that they include this valuable and powerful collection tool.