The filing of a UCC-1 financing statement is a separate action from the repayment of the funding advanced to the business. The UCC-1 will remain effective until a termination is filed or the financing statement expires. Under 9-515 of the UCC, the effectiveness of a filed UCC-1 is effective for five years from the date the original financing statement was filed. The secured party has the opportunity to extend the effectiveness of the financing statement by filing a continuation statement during the six months before the financing statement expires. Additionally, New York has a searchable list of names and file numbers for all current and lapsed financing statements for one year. As a result, a lapsed MCA filing can be found by a potential lender up to six years after the filing.
Blanket Lien on a Business
Having an existing UCC-1 financing statement is significant because the UCC filing is part of the due diligence that banks and other lenders conduct. A blanket lien on a business put into place by a previous funder may prevent the business from being able to obtain another loan or will require an explanation of the lien. The secured party may terminate the original financing statement by filing an amended financing statement UCC-3 in the same office where the original financing statement was filed. In the case of corporations, LLCs and limited partnerships, the office in which the secured party would file the UCC-3 is the central filing office in the state where the entity is organized because section 9-307 provides that a registered organization is “located” in the state where it is organized. Section 9-513(d) provides that the filing of a termination statement makes the original financing statement no longer effective.
Filing Fee
Terminating a UCC-3 filing in New York is inexpensive. The New York State Department of State charges a $20 filing fee for filing electronically and $40 for filing on paper. The form asks the filer to check the “Termination” box and input the original filing number on the UCC-1. The Department of State provides a UCC search for $25 per business name. Before making a request for termination, though, it is best to first make a search to ensure the correct file number, filing date and name of current secured party of record. The MCA funder may assign a “servicer” or new owner to the MCA filing. If an MCA funder sells the loan, the party who owes the duty to terminate may not be a funder that previously fronted the money. Get proof of payoff before demanding termination.
Best Proof of Payoff
A “paid in full” letter or satisfaction letter from the funder would be the best proof of payoff. Other evidence may include bank records showing the last remittance. Under section 9-210, a debtor may send a signed demand for accounting for the amount owed on the obligation to a secured party. The secured party has 14 days to respond. The first request per six month period is free. Thereafter, a secured party may charge $25 or less per request. Section 9-210, however, does not apply if the secured party is a “buyer of accounts.” If the MCA funder structured its agreement as a purchase of future receivables, it may rely on the exception to section 9-210 and ignore a request for an accounting.
Non-consumer Collateral
The statutory remedy for a demand to terminate the lien is section 9-513(c). It only applies to non-consumer collateral, which is presumably true for an MCA. The secured party, once demanded, has 20 days to file a termination or give the debtor a termination statement for the debtor to file. The duty exists if the secured party isn’t securing any obligation and isn’t committing to make any advances. It exists on the sale of the accounts once they’ve been paid, and it exists for any filing not authorized by the debtor.
The statute explicitly includes buyers of accounts, not just lenders. So if the MCA frames its transaction as a purchase, the funder isn’t protected from the duty to file a termination. A demand letter should identify the debtor as on the UCC-1. It should provide the file number and filing date, the payoff date and payoff amount, and assert that no obligation exists and no further advances are committed. The demand should be signed by the business. The statute is triggered by receipt of a signed demand. The demand should be sent in some way to allow the sender to verify its delivery date.
If the search revealed more than one secured party of record, the demand should be sent to each. A termination authorized by only one secured party is effective only as to that party and the filing remains effective against the others.
If 20 days have passed and no termination has been filed, section 9-509(d)(2) provides that the debtor may file the termination itself. It will have to indicate on the form that it is authorized by the debtor. If you’re using the standard form UCC-3, that means check the box in item 9 and enter the debtor’s name. Again, this self-help remedy is only available if the secured party actually failed to comply with section 9-513. And that’s only if the underlying obligation has been fully satisfied. A business still making payments under an unsatisfied and disputed MCA or that settled for less without a written release of the lien assumes some pretty significant risks by filing a termination without the secured party’s authority.
At Least Two Types of Damages
A funder that ignores a proper demand could be liable for at least two types of damages under section 9-625. Section 9-625(b) authorizes the debtor to recover actual damages caused by the failure to comply, including any loss incurred as a result of the debtor’s inability to obtain new credit or the cost of having to pay more for it. Section 9-625(e) also authorizes the debtor to recover $500 in each case in which the secured party fails to comply with section 9-513. Actual damages might be the larger amount. It wouldn’t be hard to imagine a lost loan opportunity or an increased interest rate due to a lingering MCA lien totaling more than $500.
Not all MCA filings were correct. Some may not even have been authorized. If so, section 9-518 permits a person to file a correction statement for a record that has been filed against its name. The correction statement identifies the record and explains why the record is inaccurate or wrongfully filed. A correction statement doesn’t invalidate the financing statement or change its legal effect. It just supplies the other side of the story to the public record. Taking down a wrongful filing would involve a legal action, and the statute provides that recourse outside the filing office.
Merchant cash advances have one other cleanup issue regarding the UCC-1. Funders will often send notices to a merchant’s customers pursuant to section 9-406 to tell them to pay the funder instead. Section 9-406(a) states that following receipt of the notice, a customer’s obligation can be discharged only by payment to the assignee (the funder), and not to the merchant. If the customer seeks to be reasonably assured that the assignment is valid, section 9-406(c) allows the customer to demand confirmation of the assignment, and to keep paying the merchant if confirmation does not arrive. Following pay-off, any such notices should be withdrawn by the funder, so customers don’t send payment to the wrong party.
The last step is confirmation. A new search of the UCC should yield the UCC-3 as an attachment to the original filing. In New York, a terminated filing can be pulled from the index for a year after the original filing’s term would have expired. The search should reveal the UCC-1 and the termination side-by-side, so it’s good to have on file a copy of the termination and the payoff letter.
