Free White Paper: Leasing Medical Equipment and the UCC Filings: A History of the Uniform Commercial Code

The Uniform Commercial Code is a set of laws that oversee general business transactions and standardizes the sale or transfer of personal property within the United States. The first code was developed in 1951 by an editorial board consisting of representatives from the National Conference of Commissioners on Uniform State Laws and the American Law Institute. It has undergone several revisions to accommodate different types of business transactions and historical legal conflicts resulting from the sale of personal property. It took some time for every state to accept the code which was intended to encourage uniform transaction conduct throughout the country. Case law and the American Bar Association are the most trusted resources for disputes when defining a transaction or disputing the terms of the filing.

The term ‘transaction’ includes “sales, leases, negotiable instruments, bank deposits and collections, funds transfers, letters of credit, bulk sales, documents of title, investment securities and secured transactions” (US Legal, Inc., 2010–2014). Any transaction over $500 should have a corresponding UCC filing in the state the transaction was executed to legally enforce the contract, payment terms, and conditions. The type of UCC filing in a medical leasing agreement determines if the debtor has the “right to own” versus a “right to use”. This article will compare and contrast the right to own versus the right to use then explore how the difference impacts the type of UCC filing governing the contract. The conclusion will explain how a UCC filing is specifically utilized in an Equipment Finance Agreement.

Right to Own versus Right to Use

The language in a lease agreement can be unclear if the purpose of the contract is not properly defined. Medical equipment that is intended to be re-sold or rented to a patient will require a different type of legal contract and addendums. Accounting principles will also vary based on how the asset is defined in a contract. The doctrines governing the agreement and financial reflections would show up contrarily if the equipment is intended to stay at the facility. Property that is not available for repossession or is not intended to be re-leased at the end of its useful life is generally treated as a secured loan or an installment agreement which is defined by Article 9 in the Uniform Commercial Code. The right to own or a secured lease also means that a debtor continues to hold title and the responsibilities of ownership throughout the term of the contract. The lessee is expected to carry insurance, all warranties, and pay for any equipment failures during the life of the loan while the UCC is in place.

The right to use is more temporary, like leasing an apartment month to month, and it does not hold the debtor ultimately responsible of the personal property, unless there is significant damage. The lessor has a responsibility to the title of the property as well as its condition, insurance, and warranty. Ultimately, the debtor should expect to have to return, replace, or re-lease the property. This type of UCC filing is defined by Article 2A in the Code and is considered a true lease.

Article 9

There are eleven articles in the original code but many leases only focus on UCC Article 2A and 9. The difference between the two articles is based on the ‘right to use’ versus the ‘right to own’. The contract language between these two types is substantially different when it comes to the lease details. An equipment finance agreement is a secured loan that focuses on Article 9 of the Uniform Commercial Code and when filed, creates a ‘security interest’ in the equipment listed which differs from a true lease (The CLP Foundation, 2010). If a UCC is filed as a security interest than the debtor has a “right to own” and the lessee has title to the equipment then the lessor only has an interest in the equipment should the debtor run out of money.

According to the Uniform Commercial Code in Article 9 subsection 203(f) titled “Attachment and Enforceability of Security Interests; Proceeds; Supporting Obligations; Formal Requisites”: Proceed and supporting obligations, The attachment of a security interest in collateral gives the secured party the rights to proceeds provided by Section 9-315 and is also attachment of a security interest in a supporting obligation for the collateral. https://www.law.cornell.edu/ucc/9/article9. This interest can often conflict with other lessors that may have filed a blanket lien over a company’s entire stock of assets. The security interest filed under Article 9 is identifying a right to a portion of the debtor’s liquidated assets after a company has filed for bankruptcy. If the agreement is found in default, there are “supporting obligations” for the collateral like the right to report the performance through a letter of credit report.

Equipment Finance Agreement

There can be implications surrounding the effects of a UCC filing against medical equipment that you own. The type of filing can be explained by defining the difference between temporary ownership and a ‘lease to own’ arrangement. If a company is truly leasing equipment then the UCC governance treats the contract as temporary. In this situation, the lessor keeps title to the item and has a right to repossess the item if the lessee runs out of money or files for bankruptcy.

However, an equipment finance agreement is similar to an installment plan where the business holds title to the equipment and the lender files for a security interest with the UCC office under Article 9. If a company files for bankruptcy before the contract is paid off or if there is a payment default, then creditors other than the lessor that filed the security interest “may have rights to take the item to satisfy unpaid debts” (Steingold, 2013). A security interest is essentially a place in line to be reimbursed for any losses should a company fail financially. Typically, larger revolving loans that a company has will take precedence by filing a blanket UCC lien over a company’s assets. Any UCC filings held as a security interest might be second or third in line for any remedies in the case of a company bankruptcy. The lessor can escalate repayment by demanding that any personal guarantee or corporate guarantee make remedy, including any additional fees or costs accumulated by the debtor in the collection process.

The UCC filing under Article 9 of the code occurs when a contract is commenced against the company in the state where the debtor is registered with the Secretary of State. An entity must be legally recognized as a business with an active listing to proceed with the filing. A debtor is not required to remove a UCC lien for the equipment or property listed on the agreement after the contract has been paid off. It is recommended that a company research the filings made by lessors, which is usually made public on each state’s SOS website. A company can contact the lessor and ask that they remove the corresponding filing if the agreement has been executed fully. A judge cannot give a lessor the same right to remedies if a contract is fulfilled. It is a good idea to keep a record of each expired contract, payment terms, and payment details when asking a lessor to remove a UCC filing.

Conclusion

There are several aspects to the Uniform Commercial Code that are not intended for collateral secured under an Equipment Finance Agreement. The right to own in a secured transaction has the advantages and burdens of ownership like holding title, warranties, and insurance on the equipment but also allows the company to sell or rent the equipment with a simple addendum. The remedies permissible to the lessor differ greatly because an EFA is not a temporary or true lease; it is more likened to an installment loan. The risks associated with an EFA to a business owner are substantially less than a true lease and give the lessee ownership rights to the equipment during the term of the contract. However, not all lessors will automatically remove an Article 9 UCC filing. It is recommended that a company research all filings to ensure that the listings are accurate and up to date.

Free White Paper from Finance Capital

Finance Capital White Paper

Finance Capital, leading provider of equipment leasing and loan programs, published a new White Paper, “Small Businesses and Personally Guaranteed Loans.” The white paper discysses personally guaranteed loans for small business owners, the requirements and the risks associated with these loans, and then offer some recommendations for business owners facing personally guaranteed loans.

Continue reading “Free White Paper from Finance Capital”

Summer 2015 Newsletter from Finance Capital

newsletter

First off, we’d like to thank you for being our client and allowing us the opportunity to work with you towards your financial goals. Our primary reason for business is to provide you with the tools and information you need to meet those goals and successfully run your business, big or small.

 

Make sure to connect with us on Facebook and LinkedIn or follow us on Twitter (@FinanceCap) to stay up to date on all of the HME and DME industry news.

 

Thanks again,

The Finance Capital Team
www.financecapital.us

 

Read the e-mailed Newsletter

Electronic Documents for Small Businesses and Lenders

Screen Shot 2015-04-28 at 11.38.02 AM

 

Finance Capital, leading provider of equipment leasing and loan programs, has published a new White Paper, “Electronic Documents for Small Businesses and Lenders.” The ten-page White Paper is designed to examine the growing use of electronic documents and signatures and their components, the state and federal laws surrounding e-documents, the advantages and disadvantages of electronic transactions, and best practices for electronic documentation.

For years businesses and lenders have dealt with challenges associated with the shipping and exchange of paper documents that often end up delaying transactions. Today, electronic documents and contracts are redefining the equipment leasing and financial services industry because they offer a much different scenario to users. Electronic documents allow businesses and their customers to access and finalize contracts and leasing agreements from any location, at any time of day. This allows for users to quickly approve, sign, and complete transactions in just a few clicks.

Continue reading “Electronic Documents for Small Businesses and Lenders”

Spring 2015 Newsletter

First off, we’d like to thank you for being our client and allowing us the opportunity to work with you towards your financial goals. Our primary reason for business is to provide you with the tools and information you need to meet those goals and successfully run your business, big or small.

Make sure to connect with us on Facebook and LinkedInor follow us on Twitter (@FinanceCap) to stay up to date on all of the HME and DME industry news.

Since 2001, Finance Capital has financed more than $1 billion in loans for our customers in the medical field. With the highest approval ratings in the industry, we understand how to help you achieve your goals while adhering to your business plan. This newsletter is one more tool for you to use in making those goals a reality.

Thanks again,
The Finance Capital Team
www.financecapital.us

Read the e-mailed Newsletter

SBA 2015 Emerging Leaders Free ‘Mini MBA’

Finance Capital Attending SBA 2015 Emerging Leaders Free ‘Mini MBA’ for Growing Businesses

SALT LAKE CITY–The Small Business Administration’s Utah District Office will host the 2015 Emerging Leaders training initiative starting in April.  Emerging Leaders is a selective, seven-month training curriculum that specifically focuses on the professional development of entrepreneurs of ‘2nd stage’ businesses poised for growth in Utah.

The Emerging Leaders curriculum was is designed for the participant to emerge with a three-year strategic growth action plan with benchmarks and performance targets that creates jobs and builds communities.

Participants will graduate the program with a 3-year growth plan that has been vetted by peers and business experts and is based on their individual business’ situation and goals. In addition, the participants will have access to a network of peers and business leaders who can continue to provide support and accountability as the strategy is implemented.

Visit the SBA website to learn more about this opportunity.

Finance Capital attends 2015 Medtrade Spring event

Finance Capital attended the 2015 Medtrade Spring event last month in Las Vegas, Nevada  from March 30th through April 1st.

This Medtrade Spring event is the second largest tradeshow in the U.S. focused solely on the Home Medical Equipment industry. The show brings together thousands of HME providers, healthcare professionals, and manufacturers, all under the same roof.

This year, the event emphasized how to get more cash sales. The new product pavilion also featured some great new products, but lacked hands-on interaction with product samples. Overall, the show was a success and left dealers and vendors with a resolve to keep pressing forward!

NAELB 2015 Annual Conference

spring2015-naelb-logo
NAELB 2015 Annual Conference

Finance Capital is excited to announce that we will be attending the NAELB 2015 Annual Conference. The event will be held at the Arizona Grand Resort in Phoenix, AZ from April 30 through May 2, 2015.

To learn more about NAELB 2015 Annual Coference, or to register, please call 1.800.99.NAELB or visit www.naelb.org. We hope to see you there!