I am often asked by creditors whether they can file a lien against their customer's property because the customer is seriously delinquent. The creditor is usually looking for a simple "yes" or "no" answer. But, it really isn't a simple question so I respond either with the standard "depends," or launch into a series of questions. Why? Because some liens can be filed without the debtor's consent and some require the debtor's consent.

Both voluntary and involuntary liens are governed by statute and case law. Examples of involuntary liens include things such as mechanics' liens (preconstruction and construction liens in Utah), repairman's lien and livestock feed liens, etc. The law allows a creditor to file a lien in these situations when the debtor isn't paying (or you have serious concerns about being paid) and the legislature has seen a compelling interest in helping the creditor attempt to get payment.

Secured transactions can be referred to as a type of lien which is an interest in somebody else's property, but one that requires the debtor's consent. Transactions with a debtor can be secured by either real property (land and/or buildings) or personal property (anything that isn't real property.) But typically when we use the term "secured transaction" we are referring to transactions governed by Uniform Commercial Code ("UCC") Article 9. The UCC governs only personal property. So, in this article we are covering only those voluntary liens regarding personal property.

Think of the loan on your car. You want the car but have to take out a loan. The bank/credit union is willing to loan you the money but wants to make sure it will get paid. They don't want to take possession of the car to protect their position and, of course, that would defeat your purpose for acquiring the car. So they take a security interest: you have possession and ownership but they can take the car from you if you don't pay timely.

So with that introduction, what is required?

1. Unless the creditor takes physical possession of the collateral (the property put up to secure the debt), there needs to be a written signed "security agreement" that clearly describes the collateral.

2. The secured party must give something of value to the debtor.

3. The debtor must have rights in the collateral.

Sounds pretty simple? I wish it really were just that simple and I don't want to scare you but there is a lot more. I will give you just enough to help you determine if you may want to seek the services of competent counsel.

So after my initial and simple explanation, the next question I get is "so do you have a sample security agreement?" The answer is no. I have seen security agreements from 1/2 page (usually home grown but they can be effective) to 103 pages. There can be lots of questions that need to be addressed beyond where can the collateral be located, who has to move it and with what permission, who is going to put oil in it and pay the taxes. It is best to have your attorney review your type of likely transactions and help you design a form that will allow you to fill in the blanks. (Just like the paperwork when you bought that car.) The security agreement will also spell out what your rights are upon default of the debtor.

There will be a statement within the security agreement that grants you the interest you want and gives you the right to file a notice of your interest with the state. Filing is called perfecting your interest which gives notice to the rest of the world that you have an interest in the designated property. You have heard of a "UCC 1." That is actually the number of the form that is used to file notice of your interest with the state. The technical term for the document is "financing statement." Unfortunately, it isn't always a UCC 1 and it isn't always filed with the state. Sometimes it is the title to a vehicle, airplane or boat, etc. upon which you have to list your interest. And, you will use another form if you are dealing with cattle or cut timber. So, there are the questions of where, and also about when which we haven't touched.

By now the article is already long and you are saying your business isn't that complicated.

Let us assume that you only sell equipment. Yes, that will simplify things for you. But, is it titled equipment or untitled; are there accessories that can be added -  who gets those? Next, if you are taking an interest in the debtor's other property because the debtor is already past due but doesn't want you to file suit, you could wind up with all kinds of things. Prior debt counts as something of value. You aren't limited to taking a security interest in just the items you sold to the debtor or just the items you financed. Cross collateralization can be a good complication for you.

What are the debtor's rights in the collateral? Generally, the debtor will be the owner. Remember your car? But there are lots of other legally recognized interests. For example, the right of the debtor to receive an interest in the proposed collateral in the future can be sufficient. (Of course, if that right of the debtor never matures, you lose.)

I think by now you can see this is a little more complicated than it first sounds. Now you understand why you get the standard "depends" answer or you get hit with a battery of questions. Keep asking questions because we will do our best to point you in the right direction. NACM teaches a primer within the business credit law course for those who want to dig a little deeper.