Criminals know that it’s easy to get access to someone’s property in Rhode Island. With ten minutes of anyone’s time, a person can have their digital signature on a fraudulent UCC financing statement filed with the Rhode Island Secretary of State claiming security interest in the property of someone else who isn’t a party to any transactions with the fraudulent filer. There is no prior notice of a filing about to be recorded against one’s business. No consent, no notice, no sanity needed. Since the state’s UCC filing system is fully automated, there is no human discretion involved. The Secretary of State has no authority to question or reject a bad filing.
Some people file a fake UCC just to harm a business’s reputation. Others do it to harass and annoy. It hardly matters why, and in any case the harm to the targeted party is real enough, perhaps most directly by making it hard or impossible to secure financing needed to grow.
Steps to Take to Minimize the Damage
You can’t stop someone from filing a fake financing statement against your business, but you can reduce the harm. Here are some steps to take to minimize the damage done by a fraudulent filing.
The best way to defend against collateral damage from a fake filing is to check the state’s UCC filing records. Checking periodically with the Secretary of State’s online UCC filing system for records on file against your business is easy enough to do and will help you identify fraudulent filings made against you so you can respond promptly. You can also hire a service to monitor the Secretary of State’s UCC filings and notify you when your business shows up in a new filing.
A UCC-5 information statement should be filed first in response to a fraudulent filing. Under Rhode Island’s §§ 6A-9-509(d) and 518(d), the UCC does allow for information statements to be recorded in the file with the Secretary of State. Filling out and filing the information statement is simply a way to register that the fake filing is not legit. While the information statement by itself won’t make the bogus filing unenforceable, it will at least alert other parties searching the official records that your business isn’t a party to the filed statement.
Under § 518(d), the information statement itself also has to do three things. It must say plainly that it’s an information statement, it must give the file number of the false filing being challenged, and it must explain why you believe the bogus filing was not authorized.
If real estate is listed as collateral (§§ 502(b), 518(d)), the UCC-5 form needs to do more. For openers, it has to say that real estate is involved. The statement should describe the property included as collateral. And if the false filing got recorded in the real property records, you need to say so in the information statement and give the date and time the document was recorded (or give book and page). And if the property’s record owner is not the same as the debtor, the information statement has to name the record owner.
To make the fraudulent filing ineffective, the correct party needs to file a UCC-3 termination statement (§ 513(d)). Unfortunately, there’s a catch for the wronged debtor. Section 513(c) first requires the debtor to send the filer an authenticated demand for a termination statement. The filer can file the termination statement directly with the Secretary of State’s office, or else send it to you. You could also file it yourself if the filer doesn’t react within 20 days after getting the authenticated demand. But don’t hold out much hope. It seems likely that the party responsible for the fraudulent filing in the first place will ignore the demand.
The tools provided by the UCC alone might not prove enough in the end. Even the UCC’s official commentary - comment three to section 518 - admits Article 9 doesn’t fully solve the problems from abuse of the filing system. The shortcomings aren’t hard to spot. Under section 9-519(g), a fraudulent filing will stay listed in the Secretary of State’s database for at least a year after the termination statement gets filed. If earlier removal of the problematic entry is crucial, be sure to ask your lawyer whether a court injunction could get the filing off the books sooner.
What You Might Be Able to Recover
Before you decide whether to sue, it’s worth taking time to estimate what you might be able to recover from the responsible party. Under R.I. Gen. Laws § 6A-9-625(b), a person is liable for losses caused by not following the Article’s requirements. If you’ve been named as debtor on a fraudulent filing, you can also recover for that directly under § 625(e)(3) - $500 per instance. You can also recover $500 from the filer for failing to terminate the false filing after an authenticated demand for that, under § 625(e)(4).
Rhode Island’s version of the Uniform Commercial Code is at R.I. Gen. Laws § 6A-9-101 et seq.
State-by-state Survey
At least 31 other states have passed laws trying to keep their Secretary of State’s offices from accepting bogus financing statements. Paul Hodenfield’s 2019 state-by-state survey of those laws goes through all of them. Take Arizona. Its statute, Ariz. Rev. Stat. § 14-121(B), lets the Secretary of State refuse filings that the office has reason to think might be unlawful, fraudulent or made in bad faith.
About Delancey Street
Delancey Street is a premier, and award winning, business debt settlement company that helps business owners nationwide. Our goal is simple: help you escape debt in a safe and legal manner. Based out of New York, we can help in 49 of 50 states. We tell you how it is; because your business and future is on the line.
