Is an MCA Claim Secured in Bankruptcy? 5 Questions Beyond the UCC Filing

If an MCA funder filed a UCC-1 against your business, is this financing statement just enough to guarantee the funder is a secured creditor? The answer is “No.” A UCC-1 financing statement gives notice of a creditor’s security interest in the borrower’s property, but it does not, by itself, create the security interest. The document itself doesn’t change the status of the lender; it merely serves to publicly indicate that the funder has made a claim against assets.

In practice, the UCC-1 “survives” the bankruptcy case, but it may end up being secured, partially secured, or unsecured depending on the assets at issue, the value of the assets, the nature of the agreement, the timing, and the filing itself.

Really a Loan or Was It a Sale

The starting question is this: was the advance really a loan or was it a sale? The answer can affect the claim, defenses to the claim, and how it is treated. Most agreements in merchant cash advance situations purport to be “sales of future accounts receivable”, and courts look to determine whether an Advance Agreement purporting to be a sale of accounts receivable is actually a loan.

Article 9 of the Uniform Commercial Code (the “UCC”) governs both the creation of a security interest in personal property and outright sales of accounts and payment intangibles. Therefore, in many cases, it is impossible to determine from the UCC-1 alone whether the transaction was a loan secured by property, or a sale of the property outright.

Courts ask whether payments really move with revenue, whether reconciliation is real and not an afterthought, whether there is a fixed term at all, whether the funder takes the risk the business fails, and whether bankruptcy is a default. They also look at how funds actually moved between the parties and at the terms of the underlying agreement.

But not all courts in all situations hold the same way. Two cases held opposite positions, and the results could not have been more different. In In re Global Energy Services, the court found the arrangement was a true sale of receivables; the reconciliation was real and enforceable. In JPR Mechanical, by contrast, the court found it was a disguised loan, and the lender had to repay more than $3 million paid in the period right before the bankruptcy filing.

Whether the Lien Is Valid at All

The second problem is whether the lien is valid at all, and properly perfected. Have you actually granted the security interest at all? Was the collateral described well enough? In what state was it filed and was that state correct? Was the filing authorized? Does an earlier creditor come first and have priority?

Even if the UCC-1 is valid, it may not be properly perfected. Generally, these financing statements have an initial period of five years, and must be continued before the expiration of this period. The document is simple, but there are hard deadlines. Even a few days late may mean the filing lapses and the funder is no longer perfected. A funder claiming a lien is not allowed to say “just trust me” and must prove its lien is perfected. To do this, the funder must attach to its proof of claim a copy of its UCC-1.

The third concern is the value of the collateral. Put simply, before a creditor can be a “secured” creditor, there has to be value in what they are “secured by.” Even if the UCC-1 was filed correctly, the funder is only secured in the value of the collateral. Whatever the funder is owed above that value is treated as an unsecured claim, paid like other unsecured creditors.

Revenues the business earns after filing are generally not caught by the old lien, but there are some special exceptions; the primary one is for “proceeds” of the property that existed before filing.

The fourth big question is timing: What were the dates of the filings and when the bankruptcy was filed, and what you paid the funder in the months before filing. Most debtors don’t think about when the funder filed, but courts do. There are rules on “preferences” in bankruptcy. These are payments made before the bankruptcy, but in the 90 days preceding it. These payments can be “avoided”, or forced to be repaid, if certain conditions are met. If the funder perfected its security interest more than 30 days after it took effect, the law will normally treat the transfer as if it had been made on the date of perfection, which may pull the transfer within the 90-day period.

Automatic Stay

The final issue is that once you file for bankruptcy, whether the funder is secured or not, they cannot just keep collecting money as if the bankruptcy had never happened. From the minute the case is filed the “automatic stay” springs into effect, and stops most efforts to collect. Even if the funder was secured, it cannot collect on a lien on property that belongs to the estate without special relief. There are some exceptions, but this can be complicated.

”Secured creditors” are allowed to ask the bankruptcy court for relief from the automatic stay. There is a concept of “adequate protection” of the secured claim, and this will be decided on a case-by-case basis. The stay against the funder will end 30 days after its request to lift the stay unless the court decides, after a hearing and after giving notice to all affected parties, to keep the automatic stay in effect. Cash the funder has an interest in is “cash collateral”. It can be used only with consent of every creditor who has an interest in it, or a court order.

Your company’s bankruptcy may not settle your personal liability. Generally, a corporate bankruptcy does not discharge the people who run the company. The “stay”, or legal protection that normally applies to the company, may not cover you.

Go back to all relevant paperwork you may have. Find your original UCC-1 filing. Find your agreement with the funder. Before you file, take a close look at the agreement itself, the whole document, front to back, from the cover sheet to the terms on the last page, any exhibits and attachments. You need to understand what all of the UCC-1s are, from what funders, when they were filed, and whether they are valid.

Once you have decided to think about bankruptcy, there are things you can do that can cause major problems. It is better to wait until you have a professional telling you what to do. Don’t rush to move assets, hide revenue, throw away records, or make payments to insiders.

Funders may insist they are “secured” creditors. But this may not always be true. It can be dangerous to agree that anyone is secured in bankruptcy until this analysis is finished.