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.
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.
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.