Whether the Filing Was Authorized
A UCC-1 financing statement pops up against your business, and you have no idea why. It appears to be a blanket lien on substantially all of your assets, and if you are already facing tight debt pressure, that is not a reassuring sight. The first question you need to ask is whether the filing was authorized. The Uniform Commercial Code requires that a creditor file a financing statement only if the debtor authorizes the filing. UCC (section 9-509) says the authorization may be explicit, in an authenticated record, but typically it is included in a signed security agreement.
What is a UCC-1? A secured party (a creditor with a security interest in a piece of property) perfects its lien on some of a debtor’s assets by filing a UCC-1 financing statement with the state. This is under the Uniform Commercial Code. The purpose of the filing system is to give other potential creditors notice that the assets may be encumbered. This is why a filing you don’t recognize is so important when you are trying to raise money: the next lender will see the filing.
Pull out every agreement you signed with the creditor named on the filing, and with any funder. When you signed a security agreement, you authorized your creditor to file. When you entered into a financing agreement, it may contain standard authorization language naming the funder your attorney-in-fact and authorizing it to sign and file a financing statement on your behalf. If you entered into a later supplementary agreement to add more collateral such as inventory, then you may have two agreements covering substantially all of your assets. If you signed something like that, then the filing is probably not fraud even if you forgot about it.
Ratified the Filing
What if your lender files a UCC-1 before you sign anything? In In re The Adoni Group (Bankr. S.D.N.Y. 2015), Capital Business Credit filed a UCC-1 with the Department of State of New York claiming a blanket lien a day before the business executed a factoring agreement. The business went into involuntary bankruptcy, and the unsecured creditors committee argued the filing was void because nothing was signed yet. The court disagreed and held the later security agreements ratified the filing, so the lien was validly perfected.
The factoring agreement included a security interest in the accounts receivable, contract rights, software, cash deposits and the like. A month later they signed an inventory security agreement covering current and future inventory. That second agreement was described as a part of and supplementary to the factoring agreement. The funder requested summary judgment. They argued that by signing the security agreements, the business had ratified the filing automatically. The court granted the funder’s request for summary judgment, and the creditors’ claims were dismissed.
The court ruled that “authorize” not only has a forward-looking meaning, namely “to empower or give permission for an act to occur,” but also a backward-looking use, the validation of prior acts, and some sources define “authorize” and “ratify” as synonyms. The official comments to the Uniform Commercial Code state that an unauthorized financing statement becomes effective when the debtor, after it has been filed, authorizes or ratifies it. The rules regarding the filing of financing statements are intended to give notice to other creditors as early as possible that the debtor has encumbered its property, and the early filing was not prejudicial to the debtor or any other person.
So why would a lender file the financing statement before your paperwork is complete? Sometimes, they will, if the deal is very likely to close, just to save the cost of a lien search after the fact. That means a pre-filing is not proof of forgery by itself. And, remember, Adoni is the opinion of a single bankruptcy court. Whether other courts will follow that logic remains to be seen.
The moral of this story to the owner in trouble is that the timing gap alone, as bad as it seems, was not enough to knock out the lien in that case, even with a committee of creditors pushing the argument in bankruptcy court. So before you call a filing fraudulent, be honest about what you signed. The word ‘fraudulent’ should be saved for filings you truly never agreed to.
If You Never Signed Anything
If it really is unauthorized - you never signed a security agreement or anything else authorizing it, and the financing the filer was talking about never closed - then the filer could be on the hook for damages under UCC Section 9-625, especially if the filing kept you from getting other financing. And if the deal does not close, the filer is supposed to immediately file an amendment terminating its financing statement. So keep records of any funding you were turned down for.
We are Delancey Street, a business debt settlement company. We are not a law firm, so we can’t challenge a filing or pursue damages from the filer. When litigation makes sense, we refer the owner to a vetted independent attorney. The attorney-client relationship will be between you and that attorney. But the filing may turn out to be real, from a merchant cash advance funder whose agreement you signed. Then the issue is the debt, and our senior advisors negotiate with funders and lenders for less than the full balance owed. We don’t give you another loan.
So, in practice:
- Get a copy of the filing and note the filer and date.
- Then check every agreement you signed and see if they match.
- If a filing was made before your signature, it may still be valid if you signed a security agreement later.
- If you never signed anything and the deal never closed, ask the filer to file a termination amendment, and consult a lawyer for damages.
Our first consultation is free and confidential.
