Many owners only find out about a UCC-1 financing statement when a lien search turns one up against the business. If a merchant cash advance funder filed it, you probably won’t get a separate notice because the authorization is usually found in the security agreement that you signed. And at least one court has said the filing can come before your signature.
Under the Uniform Commercial Code, or UCC, a secured creditor perfects its security interest in a debtor’s property by filing a financing statement known as an UCC-1 form. In other words, a secured party with a loan out to you can lien a portion, or substantially all, of your assets by filing a UCC-1 form. Under the UCC, specifically Article 9, Section 9-509, a person can file a financing statement only with the debtor’s authorization. The authorization can be express, written in an authenticated record, but is usually established when a debtor executes a security agreement that grants the secured creditor a security interest in the collateral. This “execution” or “signature” also serves to authorize the secured party to file the financing statement. The UCC does not, however, specify when the authorization must take place.
Adoni Reasoning
In In re The Adoni Group, 530 B.R. 592 (Bankr. S.D.N.Y. 2015), the lender had filed a blanket UCC-1 lien on substantially all of a business’ assets before any security agreement was signed and without any written authorization. The very next day, the parties executed a factoring agreement which authorized the lender to file. The factoring agreement had a standard provision that named the lender as debtor’s “attorney-in-fact” and empowered it to execute and file a financing statement on behalf of debtor. Thirty days after that, the parties executed an inventory security agreement. The following year, the business’s fortunes took a turn for the worse, and its unpaid creditors filed an involuntary bankruptcy petition. The unsecured creditors’ committee then sued to invalidate the lien, arguing that it had been voided because the lender had filed before it had received authorization.
The lender asked for summary judgment, arguing that signing the security agreements automatically ratified the filing, as a matter of law. The committee conceded the lender’s filing could be ratified under common law principles, but asserted that nothing in the UCC makes ratification automatic and therefore a trial would be required to determine the facts.
The court noted that no other court had addressed the timing issue. Some authorities use “authorize” and “ratify” interchangeably. The term “authorize” can be forward looking - giving the lender permission in advance - or backward looking - ratifying something that has already been done. Official Comment 4 to UCC 9-322 states that an unauthorized filing becomes effective after the filing has been made, upon the debtor’s post-filing authorization or ratification. Therefore, the later execution of the security agreement ratified the early filing and the lien was valid and perfected. The court dismissed the committee’s action. The purpose of the filing rules is to make other creditors as early as possible aware that the assets may be encumbered. The early filing here did no harm to the debtor or anyone else.
Put that in merchant cash advance terms. Say a funder is interested in funding a deal that’s pretty much a done deal. If the funder wants to avoid a post-closing lien search cost, it can file a UCC-1 first and then get the security agreement executed by the business. Under the Adoni reasoning, that signature ratifies the early filing. (Just to be clear, it’s one bankruptcy court’s opinion and others may or may not see it the same way.) Even so, for the lender, it would be prudent not to pre-file without prior written authorization, or to expressly ratify the UCC-1s that had been filed by getting a post-filing written authorization.
The Deal Never Closes
And what if the debtor never executes and the deal never closes? This is the scenario that matters most for owners who shopped around. The party filing could face liability for damages pursuant to UCC 9-625, especially if the debtor is unable to secure financing elsewhere due to an unauthorized filing. The party that filed should immediately file an amendment terminating the filing. At Delancey Street, we are a business debt settlement company located in New York City, not a law firm. If litigation or bankruptcy is warranted, we refer owners to an independent attorney.
The first step to fixing a UCC-1 lien is understanding how it was filed. Pull out the funding agreement you signed and look for a provision that authorizes the filer to file a financing statement. If you signed it, the lien is likely valid and perfected. If the deal never closed, the filer should have filed an amendment to terminate the lien; don’t assume it has.
Merchant Cash Advance Debt
If the lien holds up and the real problem is the advance itself, that is a different conversation. We negotiate merchant cash advance debt (including stacked advances), SBA loans, equipment finance, and lines of credit with funders and lenders for less than the total owed. We do not sell another loan. The first consultation is free and confidential.
