Ask a Banker | The Hows and Whys of Lien Searches
Banker explains what cattlemen need to know
By Katrina Huffstutler
Cattle, like all livestock, don’t come with a title, but it’s easy to find out if you own them outright or not. Texas and Southwestern Cattle Raisers Association (TSCRA) Director W. Clay Jones, president of Commercial National Bank of Brady, explains the process for this month’s installment of “Ask a Banker.”
He says that when they loan money to a customer to purchase cattle they perfect the lien by taking a security agreement and filing a Uniform Commercial Code, often referred to as a UCC, with the Secretary of State’s office.
The Uniform Commercial Code allows a creditor, typically a financial institution or lender, to notify other creditors about a debtor’s assets used as collateral for a secured transaction by filing a public notice (financing statement) with a filing office. That document becomes public notice, Jones says, and is available for anyone to look up on the Secretary of State’s website. In Texas, the search part of the site can be found by searching SOSDirect.
“If a customer comes to our bank and wants to finance some livestock, the first thing we do is run a UCC lien search,” Jones says. “That’s before we ever make the loan. Because we have to make sure there is not another lien out there prior to ours.”
He offers an example. John Doe comes into Commercial National Bank of Brady. Jones runs a lien search and discovers there’s a lien on “all livestock now owned or hereafter,” language commonly associated with such transactions.
“We’d say, ‘Now, wait a minute, John. There’s already a UCC out there,” Jones says. “And he would probably say, ‘Yeah, I financed some cattle with them years ago, but I paid that off.’”
Since that Uniform Commercial Code is still on file, Jones says his bank would have 2 options — get the other bank to release it, or to have them sign it over to Commercial National Bank of Brady.
On the other hand, Jones says, if there is no such Uniform Commercial Code out there, the bank has the all clear to proceed.
He says the search is fast and easy — and a lot different than it was when he started his banking career.
“Years ago, we would fill out a form and mail it to the Secretary of State’s office along with the appropriate fee,” Jones says. “Now, thanks to technological advances, whether we’re filing a UCC or performing a search, that is all done online and in less than a minute.”
The purpose of the search is to ensure that a person, either knowingly or unknowingly, doesn’t mortgage the same animals, equipment or property twice. But as was discussed in last month’s column, if there are multiple liens, the first to file record has the perfect lien. That’s why it’s important to be sure no old liens are still filed.
“At our bank, we do this just simply to clean the record, but not every bank does,” Jones says. “I encourage cattlemen, once they have paid off any financed livestock, to ask their bank to release that Uniform Commercial Code so they don’t have an old lien showing up in a search.” Jones also urges producers to know what’s in their Uniform Commercial Code.
“Often, a cattleman will assume, ‘I bought these 20 head of cattle with that loan, so those are the only animals the bank has,’” he says. “And while that may be the case in some circumstances, many times it is not. If you read through that Uniform Commercial Code, most of the time it will say, ‘All livestock owned by the debtor, together with all increase thereof, wherever located, all feed, feed additives, feed supplements, including any and all product proceeds arising therefrom.’
“It’s a very broad filing and may include a lot more than he thinks it does. I think it very is important that cattlemen who finance understand that while they may think they have just 10 cows financed, if they own 20, those are included in that UCC filing.”
It is worth mentioning, Jones says, that Uniform Commercial Codes do eventually expire on their own. When the bank files with the Secretary of State’s office, it is for a period of five years. At the end of that period, if the loan is paid off and the bank has no active lien, it will expire on the anniversary date.
“Just because the bank files a Uniform Commercial Code,” Jones says, “it is not out there forever.”
He adds that if the bank is still financing cattle for the producer and still has a lien when the anniversary arrives, they will file a continuation for another 5 years. ❚
What’s the difference?
Jones says he often has customers who get mixed up when it comes to Uniform Commercial Code and a notice of security interest.
“They are totally separate and different things,” he says.
A Uniform Commercial Code is a document that perfects the bank’s lien and is filed with the Secretary of State. A notice of security interest comes into play when the customer sells his cattle.
“Let’s say I have a customer we have a loan on, and we know he sells cattle to Producers Livestock Auction Co. in San Angelo and Jordan Cattle Auction in San Saba. We would send a notice of security interest to both of those auction markets.”
When the customer sells his calves, the auction market will know that the bank has a lien on them and will pay accordingly, addressing the check to both the seller and the lending institution. That means when the cattleman goes to deposit the check, they’ll not only have to endorse it themselves but also get the bank’s endorsement.
“Lien Searches” is excerpted from the July 2017 issue of The Cattleman magazine.