Contributed by Tim Hall, Managing Attorney, CT Corporation
In Part 2, we discussed the limited, ministerial role of the UCC filing office. Remember, the sole purpose of the filing office is to index UCC records in a systematic fashion. It is up to the party reviewing the UCC records to determine what the records mean. This leads to the next area of discussion, the concepts of authorization and legal effectiveness.
First, it is useful to look at a definition that is often misunderstood and used incorrectly in relation to UCC records. The Model Administrative Rules provide the following:
100.1 Active Record: “Active Record” means a UCC record that has been stored in the UCC information management system and indexed in, but not yet removed from, the Searchable Indexes.
Unfortunately, many searchers incorrectly believe that an “active” record refers to a UCC filing that has not yet been terminated or lapsed, and that upon being terminated or lapsing, a record becomes “inactive”. This is NOT the case!
An “active” record means a UCC record that is part of the searchable index. When read in conjunction with section 9-519(g), which requires that a filing office keep a financing statement on record until one year after its lapse date, it becomes clear that all records found in the UCC index (including those which have lapsed or have termination statements filed against them) are considered to be “active filings”.
Therefore, when a UCC search is conducted, a searcher will generally receive search results containing all active records. The searcher must then examine the records, and determine which records are effective. The analysis to determine which records are effective begins with Section 9-510, conveniently titled “9-510. Effectiveness of Filed Record”.
Section 9-510(a) provides simply “A filed record is effective only to the extent that it was filed by a person that may file it under Section 9-509”. Section 9-510 (Official Comment 2) further emphasizes that “a filed financing statement is effective only to the extent it was filed by a person entitled to file it.” Conversely, if a filed financing statement is NOT authorized, it is ineffective. It’s as simple as that! The general rule is that authorized filings are effective, and unauthorized filings are ineffective. The unfortunate reality is that UCC indexes around the country contain a large number of unauthorized, and legally ineffective, UCC filings.
Again, the key to an effective UCC filing is whether the filing party has the authority to file. This concept is defined in Section 9-509, conveniently titled “9-509: Persons Entitled to File a Record”.
Section 9-509(a) provides that a person may file an initial financing statement, or an amendment that adds collateral or a debtor, only if the debtor authorizes the filing in an authenticated record. Fortunately, subsection (b) provides that by authenticating or becoming bound by a security agreement, the debtor authorizes the filing of the initial financing statement and/or amendment covering the secured collateral. Simply put, when the debtor signs the security agreement, it authorizes the secured party to file a financing statement.
Section 9-509(d) addresses the filing of UCC-3 amendments other than those adding collateral or debtor names, such as continuations, assignments, etc. This section provides that “a person may file an amendment…only if the secured party of record authorizes the filing”. In limited circumstances, a debtor-authorized termination is also allowed. The Official Comments to this section state “A person who files an unauthorized record…is liable under 9-625 for actual and statutory damages. Of course, a filed financing statement is ineffective to perfect a security interest if the filing is not authorized”.
Finally, it is worth mentioning that intent is not a factor in determining the effectiveness of a filing. If a party has the authority to file, the fact that the party made an error or didn’t intend a result is not relevant. For example, if an authorized secured party intends to file a continuation statement, but checks the wrong box on the UCC-3 form and files a termination statement by mistake, the termination is still effective. If the party had the authority to file a termination, the record is terminated despite the fact that the filing was made in error. The filing of a subsequent UCC-5 Correction Statement or Continuation Statement will not “revive” the filing.
Questions, comments on anything you’ve read thus far? Use the comments field below, or email them to us.
Tomorrow’s Part 4 of this series will address dealing with multiple secured parties.
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.
It'd be great if you could make these articles/blogs printer friendly.
Posted by: TF | January 31, 2011 at 03:29 PM