Everything You Need to Know About UCC's

June 16, 2017
3min read

This article will examine UCC-1 financing statements, a tool some funders have considered using as an additional layer to help protect their investments.

Whether or not this is a method more funders should be using is up for significant debate, primarily since UCC-1 filings are typically used in creditor/debtor relationships.

It bears reiterating that since legal funding is a non-recourse investment, there is no debt involved, and the standard terms and phrases used throughout this post to describe UCC-1 financing statements -- creditor and debtor -- are misnomers, at best.

The purpose of this post, simply, is to arm you with information on what a UCC-1 is, why they aren't ubiquitous in legal funding today, and lastly, how funders are considering using them.  

What is the UCC?

The Uniform Commercial Code, or UCC, is one of many ever-evolving uniform acts that have been put into law in order to harmonize the law of sales and other commercial transactions across the U.S. It was drafted to simplify, clarify and modernize the laws governing commercial transactions.

Article 9 of the UCC is a well-known section governing secured transactions, which enables lenders to take a security interest in collateral (assets of debtors) and provides lenders with an assurance of legal relief in case of default by the borrower.

The UCC has been adopted by all 50 states (and D.C.) to varying degrees. Some jurisdictions, for example, deviate from the official UCC form and procedures (albeit only slightly) by tailoring the language to meet their unique needs and preferences.  

What is a UCC-1?

A UCC-1 financing statement is a legal form that a creditor files in order to secure his or her interest in the personal property/assets of a debtor, i.e. "perfecting the security interest."

By perfecting its interest, the creditor has essentially given public notice that it has a right to take possession of certain assets as repayment of underlying debt.

Important: the creditor will have by this time have established its relative priority with other creditors of the debtor in the event of a default or bankruptcy. The creditor is now a "secured creditor" and his or her interest is in the public record.

The financing statement is generally filed with the office of the secretary of state in the state where the debtor is located. For an individual, the statement is also recorded in the state where the debtor resides, and, for most kinds of businesses, the state of incorporation or organization.

The UCC-1 form itself is a short, usually just a 1-page  document that is nearly identical throughout the country. While many states do use the same form, make sure to use the proper version accepted by your state.     

Why don't funders use them, and why do funders consider them

There are a few reasons why legal funders may not feel filing a UCC-1 is relevant to protect their legal funding lien:

1) They won't meaningfully protect their interest more than the procedures they currently use.

Legal funding liens are a unique breed. Since they are considered a sale of future proceeds, and not a loan, there is technically no debtor or creditor. Further, attorneys have traditionally been the gatekeepers for lienholders and administer priority based on law and dates of agreements. There aren't many war stories from the industry, either, of funders who have been hurt by not having filed a UCC.      

2) It's expensive.

There is a lot of overhead costs to file and extinguish UCCs and there are out of pocket fees to pay as well. 

3) The filings are public record.

That may be helpful in alerting the world that you have an interest, but it alerts the world to the lien's existence as well, which isn't always positive for funders or plaintiffs.

Funders who file UCCs quickly expose who they fund for the world to see. It's not hard for competitors to glean valuable competitive data that way.

Furthermore, plaintiffs may be at a disadvantage if the fact they received funding becomes public. Insurance companies, who could conceivably search for such information, may use it against them in some way.  

So why might you file one?

The most obvious reason is your financing source requires you to use it.

It's not uncommon for institutional investors, who are likely familiar with UCC filings from other transactions outside of litigation finance, may think it's another layer of enforceability. It also may add a psychological edge-through a UCC-1, people may assume you're sophisticated and may be less likely to try to mess around with your contract.

Other situations where you may find a UCC effective is if an attorney pays a client the proceeds you were supposed to get and now have to go after the client directly for repayment of the money.

As mentioned above, by perfecting your security interest you become a secured creditor. In a Chapter 7 bankruptcy, for example, secured creditors are paid first (in the order the UCCs were filed), while unsecured creditors split what is left over on a prorated basis.

How to file?

In New York, a UCC filing costs $40 for a paper-based filing and $20 for an electronic filing. You can definitely do this on your own. Simply search the internet for your state government's UCC filing procedure- this is Delawares, for example -and follow the instructions. Alternatively, there are many companies out there who specialize in this type of corporate filing, such as CSC

Next, send copies to the plaintiff, his or her counsel and the defense counsel. It's a matter of public record once filed, but you should still give those attorneys a copy for their records (it's much harder to deny knowing the UCC-1 exists if you email it personally, or, for extra security, send it via certified mail).

If plaintiff drops their counsel and represents themselves, some funders notify the defense immediately that there is an existing lien on the client's case; send them a copy of the UCC-1, too. If the plaintiff gets a new attorney who won't honor your lien, even in the face of a UCC-1, it's probably time to file a lawsuit.

Note that a financing statement is effective for a prescribed period of time. In New York and many other states, an initial filing is effective for five years after the original filing date, at which point it will lapse unless a continuation is not filed. Continuations may be filed up to six months prior to the lapse date of the initial financing statement and will extend the filing period five additional years from the original filing date. As we always preach, this is one of the many reasons you must keep great records!


There are some circumstances where UCCs may be relevant for legal funders.  Not the least of which is when an originators capital source requires it. But, on whole, UCCs aren't a neat fit for legal funding.

Legal funding is a unique asset class where the registry that matters most is the one with the plaintiff's attorney. If they have your lien on file and recognize its priority, it's hard to see how a UCC gives you more protection than that.                

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