Contributed by Tim Hall, Managing Attorney, CT Corporation
Now that you know how to recognize unauthorized filings, let's talk about possible remedies.
If you read our previous post, you know that searchers are expected to conduct reasonable steps to contact prior secured parties to confirm the validity of any filed records. All too often, however, secured lenders may not be as friendly and forthcoming as the drafters of Article 9 may have hoped! When informal methods and inquiries to existing secured parties fail to uncover the information needed, the code provides some relief to subsequent lenders. There are several sections of the UCC Article 9 that address unauthorized filings, and prescribe possible methods for dealing with such filings.
The first thing to remember is that the filing office can’t help! The role of the filing office is to index UCC records, and make the records available to any party requesting the records. A filing office cannot tell you whether a filing is authorized or unauthorized, whether it was filed by mistake, or what the record means. The office is not authorized to remove records from the index based only upon an assertion that a record is mistaken, fraudulent or in error. However, there are provisions in Article 9 to address such filings:
- Demand for Accounting/Termination (9-210)
- Correction Statement (UCC-5) (9-518)
- Penalties (9-625)
The first method for determining the effectiveness of a filed record is through Section 9-210. This section provides that a debtor may request three types of information from a secured party. The three types of information available to the debtor are: 1) a request for an accounting; 2) a request regarding a list of collateral; and 3) a request regarding a statement of account. A secured party receiving such a request generally must comply with the request within 14 days of receipt. The secured party is only required to respond to such a request if it comes from the debtor. A secured party is not required to provide any information to other secured parties, interested persons or competitors. But, by working through the debtor, a secured party can obtain such information and act accordingly.
The second method Article 9 provides for dealing with unauthorized filings involves Section 9-518. This section, entitled “Claim Concerning Inaccurate or Wrongfully Filed Record”, provides a non-judicial means for a debtor to correct a UCC record that was inaccurate or wrongfully filed. The form for taking action under this section is the UCC-5 form, which has traditionally been known as a “Correction Statement” but will be known as an “Information Statement” when the pending UCC Article 9 amendments take effect in the next couple of years. Originally, the correction statement was intended to provide a debtor with a means to address a financing statement, filed against the debtor, that was wrongfully filed or contained inaccurate information. However, over the years, the form has been filed most frequently by secured parties as a means of providing notice when a mistake has been made. It is important to note that filing a UCC-5 has no legal effect; it is merely a method for providing additional information to searchers.
Lastly, Section 9-625, entitled “Remedies for Secured Party’s Failure to Comply with Article”, sets forth various penalties for non-compliance with Article 9. The sections that relate to the fraudulent or mistaken filing of UCC financing statements are 9-625(b) and 9-625(e).
Section 9-625(b) provides “…a person is liable for damages in the amount of any loss caused by failure to comply with this article. Loss caused by failure to comply may include loss resulting from the debtor’s inability to obtain, or increased costs of, alternative financing.”
Section 9-625(c)(1) defines the parties able to recover damages, and allows “a person that…was a debtor, was an obligor, or held a security interest in or other lien on the collateral may recover damages under subsection (b) for its loss”.
And finally, Section 9-625(e) provides in part that “in addition to any damages recoverable under subsection (b), the debtor…may recover $500 in each case from a person that…files a record that the person is not entitled to file under section 9-509(a).”
As you can see, a secured party of record must take its responsibilities very seriously! A party filing an unauthorized UCC record can be liable to both the debtor and to other secured parties for losses resulting from the unauthorized filing. In addition, there is possible recourse for a secured party whose interests are compromised by another party's unauthorized filing.
We have one more installment of our series left. Check in tomorrow to learn more about the recent—and controversial—New York District Court case Roswell Capital Partners LLC v. Alternative Construction Technologies.
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.