Arkansas UCC Lien Filing

What’s in a Name?

The Arkansas UCC Lien Filing System Has a Thorny Issue

by Chad Cumming

How many liens are filed on a specific person? Who are those lien holders? What proper-

ty has liens? Those are standard questions that are asked repeatedly in the banking industry, whether it’s from the perspective of a debtor or a lender. There is a government office that exists, in part, to hold those records and answer those questions. However, a wrinkle in how that government office operates means the questions may not be answered as clearly as we have thought.

Most people are familiar with the process for placing a lien on property. To create a lien, a debtor must agree in writing to allow a lender to place a lien (liens are also known as “security interests”) on that debtor’s property. Records of liens are filed by lenders with the Arkansas Secretary of State’s office. That filing is known as a “UCC Financing Statement” and more commonly known as a “UCC.”

The purpose of the UCC financing statement is to serve as a public notice of the lien. This public notice helps lenders determine what property a borrower has that can be used as collateral. What makes this notice vital is the fact that more than one lender can file a lien on the same collateral. Therefore, the other purpose of the UCC financing statement is to create a record of which lien is first in line. This is called “priority.”

The mechanism for filing a financing statement and conducting a lien search in Arkansas is administered by the Arkansas Secretary of State. A financing statement is filed in the state where a debtor is located, meaning a financing statement filed on property of an Arkansas corporation is filed with the Arkansas Secretary of State. The search can be conducted most efficiently using their online search engine.

Searches are conducted using the debtor’s name. However, an issue with the state’s lien search engine means that some liens may not come up in a lien search. Needless to say, missed liens could present enormous problems for the banking industry.

To search the liens on a specific debtor, you search that debtor’s name in the Secretary of State’s search engine. Like many other search engines, the Arkansas Secretary of State’s UCC search engine weeds out certain words. Specifically, the search engine logic ignores certain “noise words.” Those words include, but are not limited to, “corporation,” “company,” “LLC,” or even “limited liability.” Additionally, words such as “an” and symbols such as the ampersand (“&”) are ignored as well.

The problem, however, is that no broad search takes place. The Arkansas Secretary of State’s search engine requires the exact name of the debtor to be searched. Also, the Arkansas Secretary of State’s search engine does not consistently ignore “noise words.” Lien search accuracy can also be affected by whether the company name has “Inc.” instead of “Incorporated” in its name. This may mean an incomplete search. Here is an example:

To help create an example, I filed a UCC financing statement on my company, “Chad L. Cumming, PLLC.” A search for “Chad” or “Chad Cumming” will show NO result. A search for “Chad L. Cumming” or “Chad L. Cumming, PLLC” will also show the lien. However, Search for “Chad L. Cumming, PLLC, an Arkansas limited liability company” will show NO result.

And this works both ways. If the UCC Financing statement names the debtor “Chad L. Cumming, PLLC, an Arkansas limited liability company”, a lien search for “Chad L. Cumming, PLLC” will not show the UCC financing statement. That is because, although the search engine logic is supposed to ignore “limited liability company” as “noise words,” for some reason it is treating those words here as part of the name to be searched.

Conversations with two lenders’ underwriting offices and with a local company that conducts lien searches for the banking and legal industries have confirmed that searches in Arkansas can be problematic. The Arkansas Bankers’ Association President Lorrie Trogden presented these concerns to staff at the Arkansas Secretary of State. While the staff acknowledged the issue, they said that a change in the search software is not likely to happen soon. The

“The search can be conducted most efficiently using their [Arkansas Secretary of State’s] online search engine. Searches are conducted using the debtor’s name. However, an issue with the state’s lien search engine means that some liens may not come up in a lien search. Needless to say, missed liens could present enormous problems for the banking industry.”

cost would be so extensive that it would require seeking additional funds during a future legislative session.

If two lenders determine they have liens on the same collateral, Arkansas law determines which has priority over the other. The general rule is that the first UCC financing statement filed has priority. However, the concern here is if the Secretary of State’s search engine misses what appears to be the proper name of a debtor. A financing statement does not guarantee priority if the search logic fails to bring up the debtor’s correct name. A lender might be able to argue to a court that the search engine is problematic and that its UCC financing statement properly names a debtor, but it’s far better to avoid a fight than to win one. What, then, should be done?

When conducting a lien search, a lender or attorney would be wise to run multiple searches for the debtor. Searches should use variations of a debtor’s name to ensure a lien may not be missed. The cost per search is minimal when compared to potential liability. One local lien search company has confirmed that they already take this approach.

When filing a UCC financing statement, a lender or attorney should use only the exact debtor’s name. If the debtor is an Arkansas entity, the lender should consider literally copying and pasting the debtor’s name off the articles of incorporation or articles of organization. Lenders should also ensure that no additional words are added. For example, it’s not unheard of for a loan document to use the phrase “an Arkansas limited liability company” after the debtor’s name. That extra identifier might add clarity in a loan agreement, but its inclusion in a UCC financing statement will confuse the Secretary of State’s search engine.

Although this is a complication that lenders have to consider when underwriting a loan or when closing one, this is not a difficult problem to overcome. As always, additional care and due diligence can avoid any problems. With proper training to the underwriting and loan closing staff, lenders should be able to avoid any missed liens until the Secretary of State can modify its search engine logic.

ABOUT THE AUTHOR Chad Cumming is a shareholder and director with Gill Ragon Owen, P.A. His practice has focused on structuring and documenting corporate and municipal finance transactions, asset acquisitions and dispositions, corporate law, securities offerings, and real estate development.