Creditors looking to ensure payment on a debt obligation may have a lien placed on a person’s property or bank accounts through legal channels. Corporate stock shares represent ownership in an issuing company, which makes them collectively a viable source of collateral. In order to place a lien on corporate shares, creditors must go through certain filing procedures, which vary by state.
Tangible vs. Intangible Property
Shareholders' rights include certain ownership privileges, which are similar to those held by an actual property owner. Shareholders reap earnings from company profits and have voting rights that give them say in how a company is run. As corporate shares “represent” ownership, shares exist as a type of intangible asset in the eyes of the law. A creditor may opt to place a lien on a debtor’s shares in a company as a way to ensure payment in the event a debtor refuses to fulfill his obligation. In order to secure the shares as collateral, creditors must perfect the lien by following certain legal procedures.
The lien perfection process protects a creditor from losing out on a piece of collateral when other creditors attempt to lay claim. In order to perfect a lien on corporate shares, a creditor must file two forms: a security agreement and a financing statement. The security agreement describes the terms of the agreement between the debtor and the creditor. The financing statement lists the items of collateral and the address of the debtor. In some states, creditors may only be required to submit a security agreement, provided it includes all the information required on the financing statement.
The Uniform Commercial Code, or UCC represents a set of laws that regulate commercial activities across the United States, according to the U.S. Small Business Administration. Developed by the National Conference of Commissioners on Uniform State Laws and the American Law Institute, these laws provide states with guidelines for recording lien interests. Individual state requirements determine where a creditor would file paperwork for a corporate share lien. States that enact local filing requirements require that paperwork be submitted at the county records office in the county where the debtor resides. Some states may have central filing requirements, which require all paperwork submissions be sent to the secretary of state’s office. Other states may have a dual filing requirement, in which case both county and central offices must receive a creditor’s financing statement and security agreement. Financing statements remain active for only five years, so creditors must file a continuation statement in cases where the debt obligation still exists.
When placing a lien on a debtor’s corporate shares, creditors must ensure the accuracy of the information included in the paperwork. An inaccurate or misleading description of the security interest can result in a defective filing. A defective filing means other creditors may secure — or perfect — the shares as collateral in the place of the original filer. Defective filings may also occur in cases where paperwork information is submitted to the wrong location, such as a county office outside of the debtor's county of residence. Once a debt obligation has been fulfilled, the debtor should request a termination statement from the creditor, releasing the debtor from the terms of the security lien. It is the debtor’s responsibility to submit the termination statement to her state or county office of record.