Putting a Dollar Cap on Your UCC Filing

I haven't done a UCC filing since I've worked for this company, but in my past I used them often. I never placed with a specific amount on covering my collateral. If I knew I was taking a subordinate position I always made sure they were made aware of my filing. Since our product was unique (propane fuel tanks), we never had a problem

If they filed their UCC first, you are automatically subordinate unless the rules have changed. It used to be that you had to contact other UCC holders if you were filing one as well. If he doesn't have the loan yet I would file the UCC listing your collateral. You're under no obligation to the bank. It sounds like you're already on the hook because you're a vendor. If something goes south it will play out in court.

Just my thoughts...good luck!

Here's what the UCC states regarding the description that must be given for collateral:

Section 9-108 (a) Sufficiency of description. Except as otherwise provided in subsections (c), (d), and (e), a description of personal or real property is sufficient, whether or not it is specific if it reasonably identifies what is described.

(b) Examples of reasonable identification. Except as otherwise provided in Section 9-502 and subsection (d), a description of collateral reasonably identifies the collateral if it identifies the collateral by:

(1) specific listing;

(2) category;

(3) except as otherwise provided in subsection (e), a type of collateral defined in this chapter;

(4) quantity;

(5) computational or allocational formula or procedure; or

(6) except as otherwise provided in subsection (c), any other method, if the identity of the collateral is objectively determinable.

The UCC does not specifically include a dollar limitation within Section 9-108(b)(5), but at first glance, I don't see why that section would not be applicable to allow for describing a specific amount. There are some issues, like specificity sufficient to put other creditors on notice of the scope of the lien, but those could be handled so that you could draft an accurate statement of the indebtedness secured, an adequate collateral description in the Security Agreement, and a legally sufficient collateral description for the UCC-1 financing statement that gets filed. That said, I have never seen this done in a California case so it would be wise to look at the law of the state where the debtor is located to see if the issue has come up there.

Another possibility to consider would be to take a purchase money security interest that only covers inventory the seller has shipped. Or, you might obtain a personal guarantee for the total debt or for a specific dollar limitation on the total debt.

As you know, the difficulty here is that banks, and lenders in general, are voracious and will want a broad general security interest in all assets to collateralize their credit. If you are a creditor who has the earliest recording, and therefore the first lien, the lenders will be pounding you for the subordination of that debt so they can have the first position.

Some thoughts - 

1. you have the right to ask how much the bank is lending before making your decision.  We've seen clients that have been extending credit lines that are far more than the banks' loan, so they have greater leverage to decline to subordinate.  But, I'd say let's all turn our cards over and see who is in for how much.
2. You also have the right to modify your credit line if you do subordinate.  It's exactly what the bank would do, you have the same option.  Less collateral, less money.  "If we subordinate, our $50K credit line goes to $30k."  You tell us how to handle it.

Keep in mind by adding amounts you may be restricting your security if your credit line increases in the future.