Secured lenders are aware of the UCC1 financing statement and its use to perfect an interest in personal property. They check on the debtor’s name and the collateral’s description and the location they filed it. Remember, though, that perfection isn’t guaranteed for the life of the loan. Do not assume the perfection survived the filing, check.
When people get into financial trouble, they sometimes try to find an easy out. A debtor will think about it differently than a lender, so you’ll need to read up to stay ahead. The debtor could file a fake termination statement or transfer collateral without your permission. Here’s how a lender can fight back.
Bogus Termination Statement
A fraudulent termination statement is a filing by the debtor, or a third party, that tries to make the collateral look like it’s unencumbered. Often it’s done to get a chance to sell the equipment, or use it as collateral for a new, “first in line” loan.
A bogus termination statement creates harm to the lender. It hinders enforcement of a security interest. And it opens the door to other competing claims of secured parties who may be relying on the termination and lending against the collateral. It’s also an invitation for other parties, including bankruptcy trustees, to argue the financing statement’s invalid. It causes delay, as well as legal fees, and costs.
Lenders who fall victim to the con often don’t realize it until after the debtor defaults, or it files bankruptcy.
An authorized termination statement ends a UCC1 financing statement. But, if that termination statement was unauthorized, it doesn’t work. One scenario involves the debtor filing a fictitious termination statement. To do this, they take the name of the lender from the UCC1 financing statement. They put that on a UCC3 form and file it in the office. The office accepts it and indexes it. This is not a valid termination statement. Typing the original lender’s name on the UCC3 doesn’t pass for approval by the secured party of record. The office accepting and indexing the copy doesn’t have anything to do with it.
The rule is UCC 9-509, which requires all records to be filed with authorization. A UCC3 termination statement must be approved by the Secured Party of Record to be effective. Without the secured party of record’s approval, it’s void. Even if they’ve posted an unauthorized UCC3 that shows on record searches.
So the security interest continues to be perfected, despite the fakeout statement on record. It will, however, make it more expensive to enforce the security interest.
If you suspect they falsified a termination statement, you have a few options. As the lender, you can stand on your rights and do nothing. The termination is ineffective. Need to do anything? Nope, but other parties aren’t going to know that. Usually, it’s better to put third parties on notice of the dispute. It cuts down on fighting with the debtor later, or after default.
One of the easiest ways is a UCC5 information statement. Use it to comment that the Termination Statement is not authorized. That puts everyone on notice. Any search that will show the financing statement should show the information statement. Anyone who relies on the UCC3 statement as if it was genuine acts at their own risk. As long as the UCC5 shows up on a search that pulls your financing statement, you can be sure that anyone who claims they didn’t know about the dispute, should have. The UCC5 isn’t a safety blanket. But it should reduce your risk of having to fight the debtor, or outside parties, later.
Finding the Bogus Termination Statement Early
Often, the lender will not notice the bogus termination until foreclosure starts, or the debtor files bankruptcy. By then, it’s too late. The UCC5 is useless. It all depends on finding the bogus termination statement early.
The solution is subscribing to a tracking service. That’s usually done through service companies or data aggregators. They’ll give you prompt alerts on any termination or amendment. That gives a lender ample time to react. And, with the UCC5, you can get ahead of an unauthorized termination statement. This can keep a lender protected long before a debtor starts cooking the books.
For a while, private vendors were the only way to know if a debtor filed a termination statement. Now, thanks to Utah Senate Bill 43, it’s easier. When the debtor files the statement, the state is supposed to notify the secured party on record. At least, that’s the way things are supposed to work.
The bill leaves out one important detail, though. It doesn’t explain how the filing office would know who filed the termination statement. You can see where this gets weird if the filer is sneaky. A clever debtor won’t announce that it’s the filer. So the filing office notifies on all terminations, regardless of who the filer is.
These notices began May 1, 2024. Termination statements for fixtures can also wind up on county land records. How those county offices will handle fixture recording is unknown.
Until now, Utah’s the only one that sends secured parties a notice for a termination statement. It’s nice to have public notice, but it will take real effort and money to put something like this together. Other states will be slow to follow Utah’s example. Without Utah’s termination statement notice, lenders will need to set up private tracking on financing statements.
A termination statement by the debtor isn’t inherently a fraud. The Uniform Commercial Code 9-513 allows a debtor to use one after first asking for a termination statement from the lender. Under that law, the lender will first get a demand from the debtor for a termination statement. In other words, the filer named on the UCC3 must be the debtor, the real one. This means, UCC3’s may be filed in the open by the debtor. It’s not a trick. This is rarely used in fraud.
Hide the Transfer of the Equipment
The second scam is with debtors that try to hide the transfer of the equipment. They might sell the collateral to a third party and not tell the lender until the last minute, thinking that’s the end of that. Except it isn’t. Under UCC 9-315 (a)(1), a security interest keeps on after any sale or transfer, unless the lender authorizes it. Often, the lender can go after the transferee or buyer as well. The security interest stays with the collateral. Then it becomes the buyer’s problem.
The remedy against the buyer may be an action for conversion of the collateral and an order of replevin.
Finding the collateral can be the tricky part of the claim. Sometimes it’s hard to even track down who has the collateral. Transfers can be pretty sneaky, and the lender usually has no idea until there’s a default. Then it’s a hunt for the collateral, which can end up halfway across the country. Once a buyer in a new state has the collateral, it’s tough to track down who has it now.
No tracking service is going to catch this: they rely on public records, and sneaky transfers usually leave none. It’s easy to forget about checking up on the company you’re doing business with, but that’s how you stay on top of things. If you want to know where the collateral is at all times, you have to stay in touch with the debtor. Best defense: Communicate early and often with debtors and stay vigilant.
These are two of the typical scams debtors can use to dupe a secured lender. There are many other actions that debtors may take that threaten the perfection, many with no ill intent. It’s best to get a tracking service for at least the big filings and keep a close relationship with the debtor. Even that can’t eliminate all risk of debtor action.
About Delancey Street
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