Anyone with internet access can file a UCC financing statement in Rhode Island claiming a security interest in your business’s property without your consent, warning, or factual basis. The Secretary of State’s Office has no authority to reject a filing they think is fraudulent, so it gets processed. Filers may act for several reasons: to harass the business, or to damage its reputation by leaving a public record anyone can find. A fake UCC filing can make it harder for you to secure financing, or even impossible to get financed. If you run a small business, sometimes you get “encumbered” with liens like this on your business assets. It happens. If it happens to you, it pays to know what to do.
Whatever the motivation, here’s a long-awaited answer to the question: What do I do when someone files a fake lien against my business?
The honest answer is that you can’t stop a fake UCC filing. What you can do is catch it fast, because quick detection limits the harm. It’s not always obvious that a filing is fake. So first, keep a close eye on your state’s UCC filings database. In Rhode Island, you can search the Secretary of State’s UCC database online for any filing that names your business as a debtor. Or you can set up a corporate monitoring service to alert you to unauthorized filings. If the bogus filing goes unchallenged, it can hurt your business’s reputation and its ability to obtain financing.
Information Statement
Found one? File a UCC-5 information statement with the Secretary of State’s Office right away. It does not make the bogus financing statement unenforceable. It only alerts other parties - particularly a lender - that there is a problem with the financing statement.
Article 9 says the UCC-5 has to state that it is an information statement, give the file number of the original financing statement, and state the reason why the original was incorrectly filed. If the fake financing statement lists real property as collateral, the UCC-5 has to also say so, describe the real property, and note, if applicable, that the filing was made in the real property records, along with the name of the record owner (if the owner is not the named debtor) and the date and time, or book and page references, of the filing.
You Need a UCC-3 Termination Statement
Keep in mind, though, that the UCC-5 doesn’t actually fix the financing statement problem. It merely alerts other parties to the existence of the filing and the error. To make it ineffective, you need a UCC-3 termination statement.
The catch is that you have to make a demand for the filing to be terminated. A business wrongly named as a debtor can’t file a termination statement right away. First you have to make an authenticated demand that the filer issue or file a termination statement. Article 9 lets the filer either send you one to file or file it with the Secretary of State’s Office. How is that going to happen? It doesn’t, most likely. If they don’t do it within 20 days of your demand, then you can file the termination statement yourself.
Even then, the fake record will still show up when someone researches your business’s property. Under Article 9, it stays in the database for at least one year after the termination statement is filed. The lien is effectively dead, but the record will still be there. Think the law is working? Rhode Island lawmakers admit that Article 9 can’t give a satisfactory or complete solution to misuse of the public records. (By contrast, at least 31 states have passed laws meant to make their secretary of state offices less likely to accept a bogus financing statement at all.) The next time you try to get secured financing, the bogus financing statement may still show up. If you want it removed sooner, speak to a lawyer about getting a court order.
Can I Sue the Filer
Which brings up the obvious question: “Can I sue the filer?” That’s a different conversation, but one you’ll probably want to have. At Delancey Street we are not a law firm, so when litigation is the right call, we refer owners to a vetted independent attorney, and the attorney-client relationship is between you and that lawyer.
When you weigh your options, keep the money in mind. Under Article 9, a person is responsible for any loss caused by failing to comply with Article 9, and there are statutory damages on top of that. In Rhode Island, if the person refuses to issue or file a termination statement after your demand, you can ask the court to add $500 to your recovery. And if a person named a business in a financing statement without its permission, there’s another statutory damages provision: $500 for each such case. That could come in handy. But is that lawsuit what it’s worth, taking into account the amount of damages you can recover? Talk to a lawyer.
You can’t prevent your business from getting a fake UCC filing. You can, however, recognize it quickly and take steps to mitigate the harm. In practice that means you keep an eye on your state’s UCC database to spot a fake UCC filing quickly. If you find one, file a UCC-5 to alert others that there’s a problem, and then demand that the filer file a termination statement. If they don’t, you can file a UCC-3 yourself once 20 days have passed.
Of course, not every lien is a fake. If the filing against your business comes from a merchant cash advance funder or lender you really do owe, that’s a different, uglier problem. It’s the one we work on. Our senior advisors negotiate with funders and lenders for less than the full balance owed, and we don’t sell you another loan. A first consultation is free and confidential. But if you are being bothered by a fake lien you didn’t ask for, you can mitigate the harm. Just do it quickly.
