ComplianceAugust 23, 2021

CT expert insights: How to respond to a false UCC-1 filing

Most business owners are likely familiar with Uniform Commercial Code (UCC) filings, especially considering UCC-1s are essential for those seeking a business loan. Only someone authorized by the debtor is allowed to file—but unauthorized parties can just as easily file a UCC-1 claim against your business without your knowledge. This can be troublesome for your business as the UCC-1 filing is on public record. Join this edition of Expert Insights with CT’s Publication Attorney, Sandra Feldman, to learn more about unauthorized UCC-1 filings.

Sandra explains how and why unauthorized UCC-1s occur, the headaches that arise from them as a result, and what you can do to protect your business both proactively and retroactively. Hear real-life examples of how companies have handled situations in which an unauthorized UCC-1 has been filed against them. If a UCC-1 has been filed against your business without your knowledge, Sandra provides a clear path forward to mitigate the situation.

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Greg Corombos: Hi, I'm Greg Corombos. Our guest in this edition of Expert Insights is Sandra Feldman, publications attorney at CT Corporation. Today we're going to focus on the headaches caused by unauthorized UCC-1 filings, what they are, how they happen, the problems they cause, and what to do about them if they do. And Sandra, thanks so much for being with us again.

Sandra Feldman: Well, thank you, Greg. I think most business owners who borrow money to finance their company are familiar with UCC-1 financing statements. The lender, in exchange for loaning the company money, will require it to put up some or all of its assets as collateral. And the company will authorize the lender to file a UCC-1 form.

GC: That's a very succinct explanation, but let's just make sure we're all on the same page. What are UCC-1 filings?

SF: A UCC-1 is a document filed in general with the Secretary of State in the state where the debtor is located, that allows a creditor to record its security interest in a debtor’s property, and give notice to the public of its security interest.

And by the way, UCC stands for Uniform Commercial Code. And Article 9 of the UCC governs the filing of UCC-1 financing statements. And even though Article 9 says that a UCC-1 can only be filed by someone who has been authorized by the debtor to file it, the reality is, it's fairly easy for someone to file a UCC-1 claiming to have a security interest in a company's assets without the company's authorization or knowledge.

GC: Well, that sounds like a nightmare. What kind of harm can that cause a company that's been named a debtor without its authorization?

SF: Nightmares is a good way of putting it. Now, while an unauthorized UCC-1 won't perfect the file of security interest, it can still cause the company named as debtor a lot of headaches, because that UCC-1 will be in the public record.

So, let's say the company is trying to get a loan, or maybe sell the business. A prospective lender or buyer will do a UCC search, and it'll see that UCC-1, and if they don't investigate further, they'll think the company has debts and liens on its assets that it really doesn't have.

GC: So how does this happen? How can unauthorized UCC-1s be filed by secretaries of state and become part of the public record?

SF: It can happen because the Uniform Commercial Code gives the Secretary of State's offices just limited authority, and their role is ministerial. Basically, as long as the UCC-1 contains the information required by law, they're supposed to accept it for filing and make it available to the public. It's not their job to check if the UCC-1 is authorized or accurate.

GC: Alright, let's talk about how to solve this potential nightmare. What can a company named as a debtor on an unauthorized UCC-1 actually do about it?

SF: The UCC provides a couple of options. The company named this debtor can file what's called a UCC-5 Information Statement, where it can state that the UCC-1 was unauthorized and is invalid. Now, that doesn't remove the UCC-1, but hopefully a searcher will see it and will put it on notice that there's a problem.

Oh, and also, the debtor can demand that the so-called secured party file a UCC-3 termination statement. And if it refuses, then the debtor can file it. Although again, that doesn't immediately remove the UCC-1 from the public records.

GC: Sandra, I'm sure somebody out there is listening and thinking, “Oh, you got to take him to court over this. Who would do something so fraudulently?” So, what kind of legal options do you have?

SF: Yeah, going to court is an option. And as a matter of fact, there were a couple of recent court cases involving unauthorized UCC-1s that I think would be interesting to point out.

Now, one of them is Lightstorm Entertainment v Cummings. And Cummings have filed a copyright infringement suit against, among others, the movie studios, Paramount Pictures and 20th Century Fox, claiming that the movie Titanic was based on his life story, and seeking $400 million in damages. And he also filed UCC-1s with the California Secretary of State, naming the studios as debtors and claiming to have a security interest in all of their assets, because of that $400 million debt owed them.

Now the studios never authorize the filing, and there was never any debt because Cummings lawsuit was thrown out. So the studio sued, seeking a declaration that the UCC-1s were false and void, an order instructing Cummings to withdraw them, and an order instructing the Secretary of State to remove them and to expunge the documents from its official records. And the court granted them all of the requested relief.

Now, we should also know that in some cases, money damages may be available. And a recent example of that is the case of Forthill Construction v Blue Acquisition. Forthill originally agreed to a loan from Blue Acquisition, but it changed its mind. Nevertheless, Blue Acquisition filed a UCC-1 with the New York Secretary of State, asserting a security interest in Forthill’s equipment and contracts. So Forthill sued, and not only received the declaration that the UCC-1 was void, but it received $1.4 million in damages after establishing that it defaulted on a $1.2 million bank loan, because it was unable to obtain any other financing, because of Blue Acquisition’s actions.

GC: We're talking with Sandra Feldman. She's Publications Attorney at CT Corporation. And Sandra, in some cases, as you mentioned, the fact that a UCC-1 has been filed against you is pretty obvious, because it shows up while you're applying for a loan or somebody takes legal action against you, like you just mentioned, especially with that Titanic story. That's insane. But what advice do you have for listeners who just want to know whether this is happening to them, and might be worried about their companies having an unauthorized UCC-1 filed against them?

SF: Well, one thing that can be done by a business owner is to periodically run a UCC search on their company to make sure no unauthorized UCC-1s have been filed. And I would also suggest that anyone listening who plans on doing a UCC search on another company, should investigate the UCC-1s that this search turns up to make sure that they were authorized. And I think I would also remind the lenders who might be listening who plan on filing UCC-1s, make sure that they get the borrower’s authorization to file in order to perfect their security interest.

GC: That would be very good. Sandra, unexpected problems are the last thing business owners need but knowing how to deal with them when they arise, and even to be able to do preventative maintenance, like you just mentioned, a valuable, valuable resource. So, thank you so much for your time today as always, and for sharing your expertise.

SF: Thank you, Greg.

GC: Sandra Feldman is publications attorney at CT Corporation. I'm Greg Corombos and for more information on this subject, please call CT at 844-878-1800.


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Sandra Feldman
Publications Attorney
Sandra (Sandy) Feldman has been with CT Corporation since 1985 and has been the Publications Attorney since 1988. Sandy stays on top of the most pressing and pertinent business entity law issues that impact CT customers of all sizes and segments.
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