The owner did the right thing, settling and paying off a merchant cash advance. But the funder’s UCC financing statement might still be sitting on the public record. A UCC filing claims a secured interest in the collateral listed in the filing, which can include the business’s real and personal property. The process of filing with the Secretary of State is automated.
If you had a UCC filing tied to a merchant cash advance that settled, don’t brush it off. The financing statement is still out there, and it will turn up in a public search if a lender wants to see if it can secure the financing. That can make it harder to get financed - or impossible to do so on a secured basis. That means the responsibility to clean it up falls on the business owner, no matter why someone left the filing in place. Even if the person who failed to remove it was just sloppy or just forgot, it’s still a problem for you.
You can’t prevent someone from filing a UCC against your business. But the quicker you find out, the less harm is done. The database of UCC filings is maintained by the Secretary of State’s office and available online. Any business can review any financing statement that names it as debtor. You can also enlist the help of a corporate monitoring service to notify you when unauthorized filings are made. But no matter what happens, you’ll want to check the database yourself after settling.
The steps below come from Rhode Island’s version of the Uniform Commercial Code, where the filing office cannot turn away a suspect filing. In contrast, at least 31 states have passed laws meant to make it less likely their secretary of state offices accept a bogus financing statement in the first place. Arizona, for example, lets the secretary of state refuse a filing based on a reasonable belief it is for an unlawful or fraudulent purpose. So the details depend on your state.
UCC-3 Termination Statement
Once a UCC-3 termination statement is filed with the Secretary of State’s office, the original filing becomes ineffective. But the debtor business does not have the right to file that termination statement right away. First it has to send an authenticated demand to the person who filed the original UCC-1, notifying the filer that the filer has an obligation to issue a termination statement. The filer can either provide the termination statement to the debtor to file with the Secretary of State or the filer can file it itself. If the filer does neither within 20 days of receiving the demand, then the debtor is free to file the termination statement.
In practice, the 20-day clock doesn’t start until the filer gets the demand. And the filer most likely will do nothing in response. After 20 days, the business then files a UCC-3 termination statement with the Secretary of State’s office, and the financing statement is no longer effective.
UCC-5 Information Statement
While you wait for the termination, there’s something you can do to minimize the damage. File a UCC-5 information statement with the Secretary of State’s office. The information statement doesn’t make the financing statement unenforceable, but it does give notice to the public that the claimed security interest is not legitimate. To be effective the statement must clearly identify it as a UCC-5 information statement; state the file number assigned to the financing statement; and state the reason for the belief that the financing statement was wrongfully filed.
If the funder’s filing lists real property as collateral, there is more to include. A UCC-5 filing must include a statement that the financing statement names real property as collateral and describe the real property. It also must, if applicable, state that the financing statement was filed in the real property records; give the name of the real property record owner if it is not the named debtor; and give the date and time, or book and page references, of the filing.
Injunctive Relief and Money Damages
Legislators themselves say Article 9 cannot offer a satisfactory or complete answer to abuse of the public records. A financing statement will remain in the UCC database for at least one year after a termination statement is filed. If you want the filing removed sooner, you should consider discussing with a lawyer the possibility of getting injunctive relief from a court.
Under Article 9, a person is liable for damages in the amount of any loss caused by a failure to comply with the Article. It also awards statutory damages, like the $500 penalty for refusing to issue or file a termination statement after receiving an authenticated demand. Consider the amount of money damages you might recover when deciding whether to bring a lawsuit.
When a UCC stays up longer than it should, an owner might think filing suit is the only way to fix it. Taking the other side to court and seeking injunctive relief and money damages is a legal question. It’s not what Delancey Street is built for. We’re a business debt settlement company, not a law firm. If litigation is the right move for an owner, we’ll refer them to an independent, vetted attorney. The relationship will be between the owner and that attorney.
None of this is automatic. But a business owner can take back control after settling with an MCA funder by watching the UCC database closely and making use of the tools Article 9 gives - the authenticated demand, the UCC-3 termination statement, the UCC-5 information statement and, if necessary, the courts. Delancey Street negotiates with MCA funders and other creditors on behalf of business owners. Our first consultation is free and confidential.
