Unauthorized UCC filings! – Part 1: Identifying the key issues

Contributed by Tim Hall, Managing Attorney, CT Corporation

Recently, we posted a discussion of the New York District Court case Roswell Capital Partners LLC v. Alternative Construction Technologies, which generated a great deal of discussion among our readers. As a result, we’re presenting a more in-depth discussion of some of the issues raised in the Roswell case. This six-part series on “unauthorized” UCC filings (whether fraudulent or by mistake) begins today and will continue every weekday through Tuesday, January 25th.

As an introduction to and illustration of the issue, let's start with a couple examples:

• Scenario #1: A UCC search is conducted, and the results indicate the following: a) A UCC-1 was filed by Bank ABC on June 1, 2005. b) On December 1, 2008, a termination statement was filed listing Bank ABC as authorizing party. c) On January 8, 2010, Bank ABC filed a timely continuation statement. Given this unusual sequence of events, the searcher would be faced with a key question to answer: is the continuation statement effective, or did the earlier filing of the termination statement effectively terminate Bank ABC’s interests?
• Scenario #2: Similar scenario, but note the key difference marked here in bold print. A UCC search is conducted, and the results indicate the following: a) A UCC-1 was filed by Bank ABC on June 1, 2005. b) On December 1, 2008, a termination statement was filed by Bank XYZ as authorizing party. c) On January 8, 2010, a timely continuation statement was filed by Bank ABC. Again, the searcher is faced with the question: is the continuation statement effective, or did the earlier filing of the termination statement effectively terminate Bank ABC’s interests?

In the first example, it appears that Bank ABC had the authority (as secured party of record) to file a termination, but may have done so by mistake, and later tried to file a continuation. If that was the case, the termination was effective, and Bank ABC no longer has a perfected security interest, despite the later filing of a continuation statement. In the second example, it appears that Bank XYZ was not the secured party of record, and most likely Bank XYX filed the termination by mistake. In this scenario, since Bank XYZ did not have the authority to file the termination, the termination was ineffective, and the continuation statement filed by Bank ABC is effective.

Although the facts are slightly different, the starting point for analyzing both examples is the same: Did the party filing the UCC record have the authority to file it? However, although we know the key question to ask, the answer cannot be determined solely by reviewing the UCC search results. A searcher must take additional steps to ascertain the validity of each filed record.

For instance, using the facts provided in the second example, it is possible that Bank XYZ may have had the authority to file on behalf of Bank ABC (Section 9-502, et al, allows a “representative of the secured party” to act on behalf of another secured party if authority exists). If Bank XYZ had such authority, then the termination filed by Bank XYZ was effective to terminate Bank ABC’s interest.

Over the next few days, we will be discussing the following issues:

• How Article 9 of the UCC defines a secured party’s “authority to file”, and how this authority relates to the filing of initial financing statements and related amendments.
• How search results may contain unauthorized UCC records, and what the records mean to a secured party conducting a UCC search.
• Identifying the risks a secured party faces when an unauthorized filing is discovered, the steps a secured party may take in dealing with such filings, and the remedies available to involved parties.
• How recent case law interpreted these provisions (specifically, the Roswell Capital Partners case discussed previously on this blog).

Check back tomorrow for the second installment of this series, where we will walk you through some foundational knowledge underlying the issues at hand.

Tim Hall has been with CT Corporation for more than 14 years. He spent his first three years as a Team Leader for a UCC Service team, and has been with the Government Relations Team for the past 11 years. He is a graduate of The Ohio State University and the Northern Illinois University College of Law, and is a frequent speaker on Article 9 of the UCC.

Comments

[CT Lien Solutions]

This is an issue that frequently arises under the Article 9 system of “notice filing”. The Official Comment to Section 9-502 provides “Further inquiry from the parties concerned will be necessary to disclose the complete state of affairs”. Of course, the authorization to terminate a financing statement is an important part of such a “state of affairs”. So, how does one go about conducting “further inquiry”?

The drafters provided a statutory procedure for doing so in Section 9-210 (which we discuss in Part 5 of this series). This section allows a secured party to work through the debtor to obtain the information from prior secured lenders. The drawback to this section is that it allows 14 days for a prior secured party to respond, therefore resulting in substantial delays.

Of course, informal communications and cooperation amongst secured parties was envisioned by the drafters of Article 9. The Official Comment to Section 9-502 further provides “However, in many cases, information may be forthcoming without the need to resort to the formalities of that section”.

As a result, the best way to find out if the bank filing the termination had authorization is to contact the secured party (or authorizing party) and ask them. If there is no response, Section 9-210 provides a method for obtaining an answer.

[Alton Brown]

in the second scenario how can you find out if the bank filing the termination did or did not obtain authorization to terminate from the secured party?

[CJ]

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