UCC letter of credit rights - how to properly perfect security interest in LC proceeds?
Been wrestling with this for weeks and hitting walls everywhere. We've got a commercial borrower who's using standby letters of credit as collateral backing for their equipment financing facility. The borrower is the beneficiary on multiple standby LCs issued by different banks totaling around $2.8M. Our loan committee wants to perfect our security interest in both the letter of credit rights themselves AND any proceeds that might get drawn down. I've been going in circles trying to figure out the proper UCC filing approach here. Do we need to file a UCC-1 against the borrower as debtor with the collateral description covering "letter of credit rights" specifically? And what about the proceeds - do those get automatically covered or do we need separate language? I'm also confused about whether we need to give notice to the issuing banks or if that's even required for perfection. The borrower has LCs from three different institutions and I don't want to screw up the perfection by missing some critical step. Anyone dealt with this type of collateral before? The loan docs are supposed to close next month and I'm running out of time to get this right.
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Lia Quinn
LC rights can be tricky! You definitely need to file a UCC-1 with the borrower as debtor. For the collateral description, I'd suggest something like "all letter of credit rights of Debtor, including but not limited to all rights to payment and proceeds under standby letters of credit" - you want to be broad enough to catch everything but specific enough to give proper notice.
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Haley Stokes
•Good point about being specific. I'd also add the actual LC numbers if you have them, just to be extra clear about what you're claiming.
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Jackie Martinez
•That makes sense. Should I list out all the issuing banks in the collateral description too or is that overkill?
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Asher Levin
You're on the right track but there's more to consider. Under UCC Article 5, you need to think about whether these are "supporting obligations" or just the LC rights themselves. If the underlying debt is what you're really securing, the LCs might be supporting obligations which have different perfection rules.
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Jackie Martinez
•Hmm, these are standby LCs backing the borrower's performance obligations to their customers, so I think they're primary collateral not supporting obligations in our case.
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Asher Levin
•OK that changes things. For primary collateral you definitely want that UCC-1 filing. The proceeds should be automatically covered under 9-315 as long as your collateral description is broad enough.
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Serene Snow
•Wait, I thought you had to specifically mention proceeds in the description? I've always included "and all proceeds thereof" language just to be safe.
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Issac Nightingale
I ran into something similar last year and ended up using Certana.ai's document verification tool to double-check all my UCC filings before submitting. You can upload your UCC-1 draft along with the loan docs and it'll flag any inconsistencies in debtor names or collateral descriptions. Saved me from a major headache when it caught that I had the borrower's legal name slightly wrong.
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Jackie Martinez
•Interesting, I hadn't heard of that service. How does it work exactly?
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Issac Nightingale
•Super simple - just upload PDFs of your documents and it cross-references everything automatically. Really helpful for complex collateral like LC rights where you want to make sure your description covers what you think it covers.
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Romeo Barrett
Don't forget about the control vs filing issue! With LC rights you can perfect either by filing OR by obtaining control. Control might give you priority over other secured parties who only filed.
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Jackie Martinez
•How do you obtain control over LC rights? Is that where the notice to issuing banks comes in?
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Romeo Barrett
•Exactly - you need to get the issuing bank to agree to honor your instructions. Not always easy to negotiate but gives you much stronger position.
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Lia Quinn
•Control is great if you can get it but don't let perfect be the enemy of good. Filing gives you perfection and that's what matters most for basic protection.
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Marina Hendrix
UGH the whole LC perfection thing is such a nightmare. Why can't they just make this stuff simpler? I spent three days last month trying to figure out if I needed to file in the state where the issuing bank is located or where the borrower is located.
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Asher Levin
•File where the debtor is located - that's the general rule for most collateral types including LC rights.
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Marina Hendrix
•Yeah that's what I finally figured out but man it took way too long to get a straight answer from anyone.
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Justin Trejo
Just went through this exact scenario 2 months ago. Filed UCC-1 with collateral described as "all letter of credit rights and letter-of-credit rights of Debtor, including all rights to payment thereunder and all proceeds thereof." Worked fine, no issues with the filing.
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Jackie Martinez
•That's helpful - did you end up getting control agreements from the issuing banks too?
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Justin Trejo
•We tried but only one of the three banks would agree to it. The other two basically said take it or leave it. We went ahead with just the filing and it's been fine so far.
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Alana Willis
Make sure you're thinking about what happens when the LCs expire too. Some of these standby LCs have relatively short terms and you don't want to lose perfection when they get renewed or replaced.
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Jackie Martinez
•Good point - these LCs have annual renewal dates. Does that affect the UCC filing at all?
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Alana Willis
•Not the filing itself but you might want language in your security agreement about replacement LCs automatically being covered.
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Tyler Murphy
Another vote for using something like Certana.ai if you're worried about getting the details right. I used it on a similar LC deal and it caught that my collateral description was too narrow - would have missed proceeds from partial draws.
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Sara Unger
•How much does something like that cost? Sounds useful but we're trying to keep costs down on this deal.
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Tyler Murphy
•Worth it compared to having to refile or deal with priority issues later. The verification is pretty quick too.
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Butch Sledgehammer
Been doing LC financing for 15 years and my standard practice is always file the UCC-1 first, then worry about control if the client wants extra protection. 90% of the time the filing is sufficient for what lenders actually need.
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Jackie Martinez
•That's reassuring. I was starting to think I was missing something major but sounds like filing is the way to go.
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Butch Sledgehammer
•Exactly. Don't overcomplicate it - proper UCC-1 filing with good collateral description will get you where you need to be.
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Freya Ross
One more thing to check - make sure the borrower actually HAS the LC rights you think they have. I've seen deals where the borrower was just an account party but not the beneficiary, totally different perfection analysis.
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Jackie Martinez
•Yeah we verified that - borrower is definitely the beneficiary on all the LCs. Thanks for the reminder though, that would have been a disaster to miss.
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Issac Nightingale
•This is exactly the kind of thing document verification tools catch - they'll flag mismatches between what you think you're securing and what the actual LC documents show.
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Leslie Parker
Sounds like you've got good advice here. File that UCC-1 with broad LC rights language, include proceeds, and you should be golden. Don't stress too much about the control piece unless your client specifically wants it.
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Jackie Martinez
•Thanks everyone - feeling much more confident about this now. Going to get the UCC-1 drafted this week.
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Sergio Neal
•Good luck with the closing! LC deals can be complex but sounds like you've got it handled.
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Gabriel Graham
Just wanted to add one practical tip from recent experience - when drafting your collateral description, consider including language like "all existing and future letter of credit rights" to cover any LCs that might get issued or renewed during the term of your facility. Also, make sure your security agreement has a covenant requiring the borrower to notify you of any new LCs they obtain as beneficiary. This way you maintain continuous perfection even as their LC portfolio changes. The UCC-1 filing approach everyone's suggesting is definitely the right way to go - control is nice to have but not essential for most commercial lending scenarios.
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Yuki Watanabe
•That's excellent advice about the "existing and future" language! I was wondering about coverage gaps during renewals. The notification covenant is smart too - gives you visibility into their LC activity throughout the loan term. Really appreciate everyone's input on this thread, it's been incredibly helpful for getting my head around the perfection requirements.
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