If you borrowed money and secured the loan with a lien on your equipment or inventory, chances are that when you did so the lender recorded a UCC-1 financing statement, a legal document filed in the public record that tells anyone who bothers to look that the lender has a claim on that collateral. If you subsequently paid off the loan and closed the account, you may be surprised to learn that the lien is still on file. Whoops. If you need to get new financing, the lien can be in the way. Can you do anything about it? Yes, you can request a UCC-3 termination statement. Who’s supposed to file the UCC-3? How is it done? What do you do if it doesn’t come?
What’s a UCC-3? Short answer: it’s the form you use to amend an already filed UCC-1 financing statement. Under the Uniform Commercial Code, anything you do to a financing statement takes place as an amendment: keep it alive (continuation), cut it off (termination), assign it to someone else (assignment), change a party’s name, or update the collateral. The one that matters to you is termination, which is the form that says a lender’s claim is cleared.
Authorized by the Proper Person
When you pay off the loan or return the collateral that was securing it, then typically the lender files the UCC-3 termination. A termination’s only effective if it was authorized by the proper person. Most of the time it’s the secured party of record, the lender who appeared on the UCC filing. But sometimes it can be authorized by the debtor (that’s you or your business).
In general, your business can authorize a termination if (1) the debt secured by the UCC-1 has been paid in full, and (2) the lender isn’t under any obligation to make additional loans or otherwise extend value. You’ve satisfied those conditions? Now here’s what to do. Start with an authenticated demand letter to the secured party of record at the name and address listed on the UCC-1. And if you want to make it clear that the letter was received, enclose a copy of the original UCC-1 and ship the whole package by certified mail.
That first condition is where many owners we talk to get stuck: they can’t pay their debt in full right now (especially if they already have an MCA and a loan or two stacked on top of it). That’s where we come in. Delancey Street advisors negotiate with funders and lenders to settle for less than you owe. We do not offer another loan.
File the UCC-3 Termination Independently
After receiving the demand, the lender typically has 20 days to either file the termination or send one to you for filing. If nothing has happened by the end of the 20-day period, your business is able to file the UCC-3 termination independently. The filing should include:
- the file number of the UCC-1 the amendment is associated with;
- the amendment type should be checked as a Termination;
- the name of the party authorizing the termination and, if the authorizing party is the debtor, the box should be marked accordingly.
Proofread it and proofread it again for errors. After that, you’re ready to file it with the Secretary of State’s office or the county where the UCC-1 was originally filed.
If you handle your own filings, don’t be casual about a few slips of paper. Under Uniform Commercial Code Section 9-509(d), the legal effectiveness of a termination depends on who authorizes it. The right to demand one comes from Section 9-513, but it applies only after the loan is fully paid and the lender has made no commitment to advance more funds in the future. You need to save the certified-mail return receipt - it shows the lender received the demand, which starts the 20-day countdown.
An inaccuracy, an omission, a piece of information you left out - all those things are grounds for the filing office to throw your form out in the first place. Particularly where it has to do with the debtor’s name (if required), the person authorizing the filing, and the applicable UCC file number. If there’s more than one secured party on the UCC-1, everyone gets listed on the UCC-3, or each files an individual filing. If you name only one of them, you terminate only that one and leave the remaining filings on file.
Keep in mind that a “release” isn’t always a full termination. If you drop one debtor out of a group, that’s a “party amendment.” If you release only some of the collateral, that’s a “collateral amendment.” And for the ones tied to real estate (what we usually call “fixture filings”), the UCC-3 needs to state the legal description of the property, and “box 1b” must be checked so it gets recorded in the real estate records.
In a closing where an attorney or title company pays off a lender’s lien, the lender is wise to give the office handling the transaction detailed written instructions. If you have more than one loan with the same lender, it helps to know that some lenders like to flag any file where a borrower has more than one loan to make sure the payoff on one does not, inadvertently, cloud or tie up the others. There’s also an optional reference space on the bottom of UCC forms. By giving lender and client or matter/reference number information in this section, everyone involved with the security agreement has an extra way of verifying and cross-referencing the transaction. These are things to ask your lender about before a loan gets paid off.
Actual Damages
If a lender simply never terminates, the law has something to say. Per UCC 9-625, where that results in the customer being denied alternative financing, the lender may be held accountable for $500 and actual damages. At any rate, the lender is expected to act promptly once you pay off the loan and ask for the release. If a lender delays and you miss your chance to borrow from somebody else, you may have a lawsuit. Pressing a claim like that is legal work, though. We are not a law firm; when litigation is the right call, we refer owners to an independent attorney.
Finally, think ahead. If you’re getting a new business loan and plan to use the same collateral that an old lender had a UCC on, call or email that old lender. Ask them to confirm in writing that you paid off the loan and their claim on the collateral is released. It might seem like an extra touch, but it could save you an argument down the line. Anytime you see a UCC termination listing in a search, it’s smart to contact the people who filed it and confirm they really had the authority to do so.
And if the old liens are the easy part and the debts you’re carrying now are the hard one, a first consultation with Delancey Street is free and confidential.
