The Art of Drafting a Perfect Security Agreement
Today we take a field trip to the Museum of Art and examine “Starry Night” by Vincent van Gogh. At first glance, “Starry Night” may look like a child swirled a paint brush around, hastily drew a few houses with a black magic marker, and added a church steeple, with some lazy-cartoon-like mountains in the background. But, as we know, a child did not create this piece of art; an artist created this piece – someone who honed his craft to absolute perfection. Every swirl in this painting is deliberate, precise in size and tone – all of its contents make it a single masterpiece.
OK, but what does “Starry Night” have to do with a Security Agreement and the UCC filing process? Often times, Security Agreements and artistic masterpieces are incomplete. And while an incomplete piece of art may be on display, with no one judging it as “incomplete,” a security agreement does not have the same privilege.
Perfection, precision, masterpiece…
Drafting a solid Security Agreement (perhaps not as aesthetically pleasing as “Starry Night”) is also an art form. Designed to mitigate risk and to grant creditors security in the event of debtor default, meticulous details combine to create a perfected security interest, i.e. the UCC-1 Financing Statement.
The most common errors in Security Agreements are often as simple as omitted details. Perhaps it’s a misspelled debtor name, the absence of a granting clause or a vague collateral description. So, what makes a solid Security Agreement?
- Correctly Identify the Debtor. There are oodles of cases demonstrating the devastating consequences of incorrectly spelling the debtor’s name in a Security Agreement or UCC Financing Statement. Take a look at “What a Difference a Name Makes: Omission of “Inc.” Left Security Interested Unperfected” as one great example of the high stakes in errors.
- Include the Debtor’s Address. Not only should the debtor’s address be included, but it’s also imperative the address be correct.
- Date the Agreement. Confirm the document is dated – this is a great rule of thumb when your debtor signs any document for you.
- Ensure the Signors are Authorized. It is unfortunate to discover the individual who signed the document does not have the authority to sign, or all partners/members do not sign.
- Include the Granting Clause. A Security Agreement is nothing when the granting clause is missing, after all, it actually grants the security interest.
- Clearly Identify Collateral. This is a touchy subject. Often, collateral descriptions are too vague or too specific. Creating the right balance to ensure you have effectively covered the collateral is tricky.
- Reference Governing Law. Don’t forget to include reference to the governing law.
Properly perfecting a security interest through Article 9 of the Uniform Commercial Code is an art form. Make sure all of the required information is included and accurate. If in doubt, seek assistance from a professional.