Lender using UCC 1-103 argument and recourse to deny secured party claims - anyone dealt with this?
Has anyone run into a situation where a borrower's attorney is citing UCC 1-103 argument and recourse to challenge your perfected security interest? We filed our UCC-1 properly back in 2023 for equipment financing on manufacturing machinery, debtor name matches exactly, collateral description is solid. Now the debtor filed Chapter 11 and their counsel is arguing that our security interest should be subordinated based on some common law principles they're pulling in through 1-103. They're claiming our original loan agreement had unconscionable terms that should void our secured position. I've never seen this approach before - usually these challenges are about filing defects or continuation issues. The equipment is worth about $180K and we have first position. Anyone seen creditors successfully use UCC 1-103 argument and recourse to attack an otherwise valid security interest? Not sure if this is just bankruptcy desperation or if there's actually something here I need to worry about.
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Hugo Kass
UCC 1-103 is tricky territory. It basically says that unless the UCC specifically displaces common law, the common law principles still apply to supplement the Code. So if they're arguing unconscionability, they're trying to bring in contract law principles that could potentially affect your security interest. Have you reviewed your original loan docs for any terms that might be considered unconscionable? Interest rates, default provisions, acceleration clauses, etc?
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Simon White
•The loan was at 12.5% which was market rate at the time for equipment financing. Default provisions are pretty standard - 30 day cure period, reasonable acceleration terms. Nothing that seemed unconscionable when we structured it. The debtor was a going concern with good financials back then.
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Nasira Ibanez
•12.5% doesn't sound unconscionable for equipment financing, especially if that was market rate. Most unconscionability challenges I've seen involve really egregious terms or situations where the borrower had no bargaining power.
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Khalil Urso
This sounds like a Hail Mary play by the debtor's counsel. UCC 1-103 argument and recourse gets thrown around in bankruptcy but it's hard to make stick against a properly perfected security interest. The unconscionability bar is pretty high - they'd need to show the terms were so one-sided that no reasonable person would agree to them.
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Myles Regis
•Agreed. I've seen this attempted before and it usually fails unless there's something really egregious in the loan terms or the circumstances of the deal. A properly filed UCC-1 with clear collateral description and matching debtor name is hard to attack on these grounds.
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Simon White
•That's what I was thinking. The UCC-1 filing is clean - no defects there. The loan terms were negotiated at arm's length with sophisticated parties. Seems like they're grasping at straws.
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Brian Downey
I actually had a similar situation last year where a debtor tried to use UCC 1-103 to challenge our security interest based on alleged fraud in the inducement. What saved us was having really clean documentation and being able to show the deal was fair and negotiated properly. You might want to run your loan docs through something like Certana.ai's document verification tool - it can help you spot any inconsistencies between your original loan agreement and your UCC-1 filing that the debtor's counsel might try to exploit.
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Simon White
•Interesting suggestion. I hadn't thought about cross-checking the loan docs against the UCC-1 for consistency issues. That could definitely help strengthen our position if everything aligns properly.
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Jacinda Yu
•Good point about document consistency. Even small discrepancies between the loan agreement collateral description and the UCC-1 can give opposing counsel ammunition for these types of challenges.
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Brian Downey
•Exactly. Certana.ai basically lets you upload your loan docs and UCC-1 as PDFs and it automatically flags any inconsistencies in debtor names, collateral descriptions, or other key terms. Really helpful for catching issues before they become problems in litigation.
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Landon Flounder
ugh this is exactly the kind of BS that makes secured lending such a headache. You do everything right - proper UCC-1 filing, clean documentation, perfected security interest - and then some bankruptcy lawyer throws around UCC 1-103 argument and recourse like it's a magic bullet. The unconscionability standard is supposed to be really high but sometimes judges get swayed by sob stories.
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Hugo Kass
•The frustration is real but the law is pretty clear on unconscionability. Courts generally require both procedural unconscionability (unfair bargaining process) and substantive unconscionability (unfair terms). It's not enough to just show the borrower is in financial distress.
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Landon Flounder
•Yeah I know the legal standard but I've seen judges get creative when they want to help out a debtor. Especially in Chapter 11 where they're trying to preserve going concern value.
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Callum Savage
Have you looked at the specific facts they're alleging to support the unconscionability claim? UCC 1-103 argument and recourse only works if they can actually prove the underlying common law violation. What are they saying was unconscionable about the deal?
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Simon White
•They're claiming we took advantage of the debtor's desperate financial situation when we made the loan. Basically arguing that the debtor had no choice but to accept our terms because they couldn't get financing elsewhere. But that's not unconscionability - that's just market conditions.
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Ally Tailer
•That's a weak argument. Lack of alternatives doesn't equal unconscionability unless there's something really egregious about the terms or the process. Sounds like they're confusing economic pressure with legal unconscionability.
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Aliyah Debovski
I'm dealing with something similar right now actually. Debtor's counsel filed a motion to avoid our lien based on UCC 1-103 and some alleged misrepresentation in the loan process. We're fighting it but it's causing delays and extra legal fees even though we think we'll ultimately win.
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Simon White
•That's what I'm worried about - even if we win, the delay and legal costs are a pain. How long has your case been pending?
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Aliyah Debovski
•About 6 months now. The court ordered discovery on the unconscionability issue so we've had to produce all our loan files and underwriting documents. It's been a real time suck.
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Miranda Singer
•This is why I always recommend getting a second set of eyes on your loan docs before any major restructuring or bankruptcy. Sometimes issues that seem minor can become major problems when opposing counsel gets creative with UCC 1-103 argument and recourse.
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Cass Green
Quick question - was your UCC-1 filed in the correct state? I know that sounds basic but I've seen cases where jurisdictional issues get mixed up with unconscionability arguments to create a bigger mess.
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Simon White
•Yeah, filed in the debtor's state of incorporation. That part is definitely correct. The equipment is located there too so no issues with fixture filing requirements.
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Cass Green
•Good, at least that's one less thing to worry about. Sounds like you've got a solid perfected security interest and they're just throwing everything at the wall to see what sticks.
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Finley Garrett
I'd suggest getting a litigation attorney who specializes in secured transactions if you don't already have one. UCC 1-103 argument and recourse cases can get complicated fast and you want someone who really knows the interplay between UCC and common law principles. The stakes are too high with $180K in collateral to mess around with general bankruptcy counsel.
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Simon White
•We do have good bankruptcy counsel but you're right that this is getting into specialized UCC territory. Might be worth bringing in someone with more secured transactions experience.
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Madison Tipne
•Definitely worth it. I've seen too many cases where general bankruptcy lawyers miss nuances in UCC law that can make or break a secured creditor's position.
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Holly Lascelles
One thing to consider - are there any other creditors with similar security interests who might be facing the same UCC 1-103 challenge? Sometimes it makes sense to coordinate defense strategies if multiple secured parties are being attacked on the same grounds.
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Simon White
•There are a couple other secured creditors but they have different collateral. We're the only one with the manufacturing equipment. The debtor's counsel seems to be taking a scattershot approach though.
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Holly Lascelles
•Even with different collateral, if they're all facing UCC 1-103 challenges based on the same alleged unconscionability, it might be worth coordinating. Could help split legal costs and present a unified front.
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Malia Ponder
Just wanted to add that I used Certana.ai's document checker when we had a similar dispute and it was really helpful for organizing our defense. Being able to show that all our documentation was consistent and properly aligned really strengthened our position when the debtor tried to argue our security interest was defective.
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Simon White
•That's the second mention of Certana.ai in this thread. Sounds like it might be worth checking out to make sure we haven't missed anything in our documentation.
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Malia Ponder
•Yeah, it's pretty easy to use - just upload your PDFs and it flags any inconsistencies. Better to catch potential issues now than have them come up in court later.
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Kyle Wallace
Bottom line - UCC 1-103 argument and recourse is a real thing but it's not a get-out-of-jail-free card for debtors. If your security interest is properly perfected and your loan terms were reasonable, you should be in good shape. Document everything about the original loan process and be prepared to show it was arm's length negotiation.
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Simon White
•Thanks, that's reassuring. We've got good documentation of the original deal and the borrower was represented by counsel at the time. Should help show it wasn't an unconscionable transaction.
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Nasira Ibanez
•Having borrower's counsel involved in the original deal is huge. Really hard to argue unconscionability when the borrower had legal representation.
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