The Uniform Commercial Code Filing: Finding Investigative Pearls

As Bob Woodward and Carl Bernstein sought to unravel the defining political corruption scandal of the past century, the tireless investigative journalists were exhorted by their secret source at one point to “follow the money.” Since the account of Nixon’s corruption was published by The Washington Post reporters as All The President’s Men and later made famous in the eponymously titled film starring Robert Redford and Dustin Hoffman, the phrase has become axiomatic for those seeking to establish - or insinuate, as the case may be - cause and effect between actors and actions. The money, of course, represents a thread between people or events that isn’t immediately apparent at first blush.

Follow the Money

As investigators probing the backgrounds and interests of individuals and companies in the context of due diligence, litigation consulting or asset searches, one of our principal remits is to understand and identify connections between subjects of the investigations and third parties, be they other individuals, businesses or even public agencies. This effort almost always includes, to some degree, identifying and cataloging assets. These assets can include real or intellectual property; ownership of, or limited partnership interests in, private businesses or funds; shareholdings in public equities; expensive artwork; patents; a rare car collection; or monies secured by a court-ordered judgment from a solvent debtor.  

Fidelity to the axiom follow the money is one way to find those assets. While there are few public records that provide as much information about a subject’s buying, spending, debt, income and property ownership as a bankruptcy filing, there are other sources for some of this information available to investigators. Because, of course, most folks don’t file for bankruptcy. So, you might see an inventory of personal assets in a divorce pleading documenting the division of assets; civil litigation likewise might include information on financial relationships and assets; property records obviously detail meaningful transactions.

The Pedestrian Record Returns Some Gems

One record that is imminently useful in following the money is the Uniform Commercial Code, or UCC, filing. It also strikes me as a record category that feels like it gets perfunctory treatment, more often than not. As a general rule, its contents don’t elicit exclamations from co-workers or stop the research workflow like finding a criminal felony record of a senior executive or discovering a flagrant lie or misrepresentation in a senior hire’s credentials. But, the transaction between borrower and lender (referred to in UCC filings respectively as debtor and secured party) that is codified by the record can be a great window into relationships and assets. 

These UCC records can provide investigators with visibility into real estate interests that they might not otherwise find. These interests could be properties or property portfolios owned in trust or by opaque limited liability companies which might be difficult, from a public records perspective, to connect to the borrower. Identifying such assets can amount to a near make-or-break finding for a creditor seeking to enforce a judgment or deciding whether to pursue a potential claim against a debtor.

Background and More Collateral

They are the outgrowth of an effort to create a predictable and uniform approach to transactions across the United States and its jurisdictions. These filings are generally recorded with the secretary of state, county recorder or county clerk. The financing for cooperatively organized real estate in New York City, for example, is recorded not through a mortgage, in which the underlying real property secures the extension of credit, but through a UCC because the buyer is acquiring an interest in the co-op organization with attendant leasehold rights.

UCC filings can also report as collateral public or private equity shareholdings or limited partnership interests in hedge funds, private equity funds and other investment vehicles leveraged for loans. This information is obviously salient in the context of a due diligence, asset search, proxy fight or other corporate contest. UCC records can likewise report fractional or greater ownership in an aircraft the flight plans for which can then be correlated with other business activities or events, say, in a pre-M&A or corporate contest context.

In one instance, during a background investigation on a subject whose professional motives our client was trying to scrutinize, we located a UCC collateralized by the value of a severance agreement that placed the debtor at a job and in a role that was previously unknown and critical to our understanding of her relationship to the principal subject. 

Unusual Insight Into Habits and Tastes

These records can also reveal important information about the habits and tastes of the borrower. The founder and former CEO of fracking pioneer Chesapeake Energy, Aubrey McClendon, in May 2010 pledged to Wells Fargo an inventory of more than 15 pleasure and luxury boats worth more than $10.5 million. The disclosure reported their location in a Minnesota town, the lengths of the vessels and the hull numbers for all of the watercraft, the oldest of which was manufactured in 1897.

In 2008, McClendon had already pledged to investment bank Goldman Sachs his extensive wine collection which was carefully enumerated and itemized in over 75 pages of detail reporting the winery, the name of the wine, the vintage, the volume, and the quantity. In all, the collection must have exceeded thousands of bottles. Chesapeake Energy was a publicly traded company that allowed, for a time, McClendon to invest alongside the company in the wells it was drilling. At one point, investors compelled him to return to the company funds he used to invest in a collection of antique maps, supposedly for the business.

Perennial Question: Why and What Next

McClendon was an obviously wealthy businessman. He owned an interest in the NBA franchise for the Oklahoma City Thunder (which a review of UCC filings reflects that he also pledged for loans). Chesapeake Energy was a successful company that joined the S&P Index in 2007, and McClendon was handsomely compensated as its CEO. 

Given the evidence of his pledge of an extensive array of personal collateral, an investigator would have to ask: what are his objectives and, in light of his compensation as an executive of a publicly traded company, why does he need to collateralize loans with personal assets?

We search these records in all manner of investigations. Database records often do not provide as much detail about collateral as the original source documents, so it’s important to, when and where possible, get the records from the county clerk or secretary of state. It’s also instructive to see if your subject is the secured party. In other words, is he or she lending to anyone and potentially entitled to the security in the event of a default?

This article was first published in the September/October 2024 issue of PI Magazine.