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Beware the “hidden” liens on your dealership!

“We’re happy to extend the money you’ve asked for,” said the banker. “But, unfortunately, our UCC search has discovered seven different companies have liens on your inventory or equipment or both.”

“I don’t understand,” replied the dealer. “Because I don’t owe anyone a dime!”

It’s a scenario that would ruin anyone’s day! Sadly, it’s a true story from a Midwest dealer who was extending a line of credit with his very willing local banker. Most important, it could be an important wake up call for all retailers.

The dealer recently brought his situation to the attention of marketing consultant and industry veteran Ben Sherwood. He publishes an excellent “Marine Business Blog” that I read regularly and I urge every dealer to do the same at: www.bensherwood.net.

Here’s the rest of the story. After getting past the shock and viewing the list of lienholders, the dealer said: “I don’t think some of the companies that have liens on our dealership are still in existence. I need to contact each and try to get releases. I would bet many other dealers are experiencing the same problem.

“It all began when we did some floor planning with different products,” the dealer continued. “Little did I know that the liens were not just against the particular product and, once established, remained even if the balance had been paid in full. Most of the liens covered all inventory, equipment, fixtures, deposit accounts, chattel paper, contract rights, general intangibles, etc. Truly, unbelievable.”

Among the companies filing the liens were Textron, ITT and others. Most of them have been folded into GE. “I’m getting the mess straightened out,” the dealer reports.  “But it has been a real hassle.”

As this example shows, UCC filings may not be liens limited to inventory as many believe. In fact, a UCC filing could be a blanket that covers virtually every aspect of the dealership. A few years ago in Ohio, a big floorplan lender proposed legislation allowing such blanket filings. Ohio’s marine trade associations blocked the attempt for this and other good reasons. 

Clearly there’s never been a better time for all dealers to search out any possible liens that may be against them via old UCC filings. As this dealer learned, just because you paid them off doesn’t mean they were ever properly released. Likely they were not!

In addition, local marine trade associations may want to take time to review state law governing the use and release of UCC’s. They may vary. For example, are there any limits on what a UCC can cover? Is there a time by which a paid off lien must be released?  Do member dealers even really understand the UCC impact? Is there need for a legislative initiative on behalf of the member dealers?

As this Midwest dealer so aptly put it: “I wonder how many dealers realize what liens have been filed on their businesses and what those liens cover.”

Comments

6 comments on “Beware the “hidden” liens on your dealership!

  1. Alan Silverman

    Norm’s comments are spot on. All distributors and dealers should periodically run a complete UCC search with copies requested. The search should be run under all names utilized by the business as well as the name of the business owners in the case of privately owned businesses. Additionally, examine all “Requests for Credit” carefully. The generally used form incorporates a personal guaranty attempting to hold the signer individually liable for all credit extended. We have negated this attempt on numerous occasions but still find creditors trying to enforce it, time and time again, when these forms were never intended as guaranties.

    Alan Silverman
    SILVERMAN, SMITH & RICE, Attorneys
    Kalamazoo, MI

  2. Noel Osborne

    This has been a continiung problem for many years. Secured parties are in a hurry to execute liens when they are providing you with credit but it takes them forever to remove those liens when they stop doing business with you. Look carefully at what is included on those UCC-1’s you are signing. Make sure that they only include the inventory or equipment that the company is providing you and not a blanket filing that covers everything in your possession.

  3. John Underwood

    i used to annotate the end of my floorplan contracts when I was a dealer with the following or a reasonably close facsimile:

    “Not withstanding any of the above, only the products directly financed by ______ will act as security for this debt.”

    Strangely, hardly anyone ever argued.

    I wouldn’t put it past some legal departments to try to UCC my wife and kids, in spite of this addendum, however.

  4. JACK DOLAN

    SEVERAL YEARS BEFORE I SOLD MY BUSINESS ,WE HIRED AN ATTORNEY TO REVIEW ALL OUR UCC FILINGS.WE HAD A LARGE NUMBER OF UNREALSED LEINS. IT SEEMS THAT WHEN THE BANKS, CREDIT COMPANIES ETC.MADE A LOAN THEY CHARGED US FOR THE FILING AND THE RELASE BUT THEY NEVER DID FILE THE RELEASE. CHASING DOWN AND CLEARING THOSE OLD LEINS WAS EXPENSIVE BUT IT WAS WELL WORTH IT. OUR SALE WENT THROUGH WITHOUT A HITCH. OUR LAWYER RECOMENDED A UCC REVIEW EVERY 5 YEARS.JACK DOLAN

  5. John Collard

    UCC liens expire after seven to ten years (may vary by state). To be valid, the lienholder must refile the lien, which may not occur if the base loan is paid off. Pay attention to detail and get the release when the loan is satisfied.

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