Contributed by Tim Hall, Managing Attorney, CT Corporation
To conclude our series on unauthorized UCC filings, we’d like to once again examine the recent Roswell Capital Partners case from the New York District Court. Several portions of the court’s decision conflict with the Article 9 statute, and create some additional risks for lenders. To review the case summary, refer back to our original blog post on the case.
To help identify these risks, this post will briefly summarize portions of the court’s decision and the relevant Article 9 treatment, followed by some thoughts on how it affects lenders.
Roswell Decision States: The provisions of Article 9 that reference a secured party’s obligation to conduct further inquiry apply only to “financing statements”, not to terminations.
Article 9: Defines a “financing statement” as “a record or records composed of an initial financing statement and any filed record relating to the filed financing statement.”
Effect: The court incorrectly interpreted Article 9. As it relates to filing and searching UCC records, a lender should always interpret the definition of a “financing statement” broadly. The drafters generally used the term “initial financing statement” when the intent was to limit the application to the initial UCC-1 filing. A party reviewing UCC records should always review the entire record and conduct further inquiry as necessary.
Roswell Decision States: “Even if the termination statement was not authorized by [the secured party of record], it nonetheless extinguished any perfected security interest [the secured party] had in the collateral.”
Article 9: Section 9-509(d) addresses the filing of UCC-3 amendments other than those adding collateral or debtor names, such as terminations. This section provides that “a person may file an amendment…only if the secured party of record authorizes the filing”.
Effect: Again, the court misinterpreted Article 9. Obviously, the drafters of Article 9 did not intend for arbitrary and unauthorized filings, such as those commonly filed by prisoners or “straw man” filers, to destroy a perfected security interest. This is particularly true when the unauthorized filing is a termination, as terminating a perfected interest has significant consequences. A searcher should always follow up on any filed records to determine the legal effectiveness of the record, and a lender should never assume that authority exists merely because a record was filed in the UCC Index.
Roswell Decision States: “The UCC therefore places the burden of monitoring for potentially erroneous UCC-3 filings on existing creditors, who are aware of the true state of affairs as to their security interests, rather than potential creditors who will not be in a position know whether a termination statement was authorized or not.”
Article 9: While Article 9 does contain some provisions that require a secured party to “monitor” the debtor, such as knowing when the debtor changes its name or location, there is nothing in Article 9 that places a burden on an existing secured party to monitor its filed financing statements.
Effect: It is hard to understand the court’s logic in requiring a secured party to monitor the UCC records in order to uncover an unauthorized filing, as the court previously stated that an unauthorized filing is effective anyway, and there isn’t anything a secured party can do if it identifies such a record.
However, there are some steps a secured party can take if an unauthorized filing (e.g., termination) is made:
- Discontinue funding, and freeze any further extensions of credit, until the situation is resolved.
- File a Correction Statement (Information Statement) UCC-5 explaining the situation.
- File a new UCC-1 as a precautionary measure and continue to file against the existing UCC record.
- To the extent 9-625 and other non-UCC law allows, take action against the unauthorized filer.
This concludes our series on unauthorized UCC filings! We hope you found this series to be informative and helpful. Please feel free to reach out to us with any questions you may have. Use the comments field below, or send us an email.
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.
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