What this is: In this article we focus on filing UCC-3 amendments to terminate existing UCC-1 financing statements.
What this means: Whether you are a UCC secured party or potential lender there are many things to consider not only when determining the effectiveness of a UCC filing, but also when preparing and filing UCC financing statement amendments better known as UCC-3 forms.
What is a UCC Termination?
When a debtor has satisfied all debts owed and/or collateral has been returned to the lender, the lender typically files a UCC amendment to terminate the UCC financing statement that established the lender’s priority over the collateral.
The UCC-3 amendment form is used to make a variety of changes to UCC-1 financing statements. Section 9-512 of the Uniform Commercial Code (UCC) states that a financing statement amendment is used to make any changes to an existing financing statement, including continuations, terminations, assignments and amendments to party names and collateral.
Authorizing and Filing UCC Terminations
The effectiveness of a termination statement is determined by whether the filing was authorized by the proper party (Section 9-509(d)). Most often, a secured party of record for the financing statement authorizes the filing of a termination; however, there are instances when a debtor can authorize the filing.
Typically for a debtor to authorize a termination of a financing statement, the debtor must first have fully discharged its obligation to the secured party under the terms of the underlying security agreement (Section 9-513). Then the debtor must take the following steps:
- The debtor must contact the secured party to request that a UCC-3 amendment be filed to terminate the original financing statement. This must be an authenticated demand letter sent to the secured party of record under its name and address indicated on the UCC-1 financing statement.
Tip: Send authenticated demand letter along with a copy of the original UCC financing statement via certified mail to verify receipt.
- Once received, the secured party has 20 days to either terminate the filing or send a termination statement to the debtor that the debtor can then file.
- If termination does not occur within the 20-day time frame, the debtor may file a UCC-3 amendment to terminate the UCC-1 filing.
- Whether it is a secured party or a debtor authorizing the termination, the following process should be adhered to when filing:
- Prepare and complete a UCC-3 amendment form to include:
- The filing number of the initial financing statement to which amendment relates.
- Indication of amendment type as “Termination."
- The name of “Authorizing Party.”
Note: If the authorizing party is the debtor, this must be indicated in the appropriate box.
- Review and review again for any mistakes or incorrect information.
- Submit the filing to Secretary of State’s office in the appropriate state.
- Prepare and complete a UCC-3 amendment form to include:
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Common Pitfalls and Errors When Filing a UCC Termination
When preparing and filing UCC-3 amendments to terminate financing statements, here are a few pitfalls and errors to avoid:
1. Incomplete or Inaccurate Information
It is essential to provide accurate and complete information. Any errors or missing details could result in a filing office rejection. Information such as the debtor's name when required, the authorizing party and the UCC filing number must be correct.
Tip: There are several states that require the debtor’s name on a UCC termination filing. It is recommended that you put the debtor’s name in Box 10 (Optional Filer Reference Data), except in Georgia and Rhode Island, which prefer that the name be listed in Box 6. Note that Florida and Montana also require the secured party’s name on UCC-3 filings. Refer to our help piece on Non-Uniform UCC-3 Requirements Under Article 9 for these and other state-specific UCC-3 requirements.
2. Issues When a Financing Statement Indicates Multiple Secured Parties of Record
If multiple secured parties are indicated on the initial financing statement and they each authorize the termination, then all secured parties need to be indicated on the UCC-3 form or each must file their own termination. If only one secured party name is indicated when there are multiple secured parties of record, the termination will only apply to the secured party named in the termination and the financing statement will remain active as to the remaining secured parties.
Best Practices and Strategies for Minimizing Loss of Priority and Fines
- Ensure that policies and procedures are in place that will minimize the chances of accidental or incorrect termination filings.
Tip: Require at least one other bank officer or lawyer, other than the bank’s UCC preparer, to check terminations before filing. Lenders may want to make notations in the file or on your system when the borrower has more than one loan, to minimize the risk that other loans are not inadvertently affected by a payoff.
- Provide detailed written instructions if you are using an attorney or title company to process a closing where the lender is to be paid off.
- Secured parties should utilize the optional reference portion on the bottom of the UCC financing statement and UCC amendment forms. Noting the client and matter/reference number in this area will provide a way for all involved to verify specific transactions.
- Make sure all secured parties of record have authorized the filing of the termination statement if that is the intent.
- If the intention is to terminate one of the multiple debtors, use a party amendment to delete the debtor.
- Terminating with respect to some collateral? Use collateral amendment to delete collateral.
- Establish a plan to review satisfied loans and release of liens and act promptly when requested by the debtor to release a lien after payment in full is received. Pursuant to UCC 9-625, the secured party of record may be liable to debtor in the amount of $500 plus actual damages if failure to terminate a UCC financing statement results in the debtor’s inability to obtain alternative financing.
Using best practices and choosing a reputable and experienced service provider like Cogency Global will ensure UCC termination filings are handled correctly and efficiently. Doing so will preserve the accuracy of a loan portfolio by minimizing risk and will ensure sustainability of business in the future.
What if the legal description of the real property on UCC-3 fixture filings is not included?
Article 9 requires the legal description of the real property on any type of UCC-3 for fixture filings per Section 9-512(2). In addition, remember to check field 1b on UCC-3 amendments, which indicates that the UCC financing statement amendment is to be filed [for record] (or recorded) in the real estate records. To learn more, head on over to How to File UCC: 11 Mistakes to Avoid.
What are some best practices for minimizing loss of priority and fines due to neglecting details and procedures when conducting UCC searches and maintaining your lien portfolio?
- When uncovering a UCC termination, further inquiry of the parties involved is necessary to determine authority of the filer and other particulars.
- Call or email past lenders if you are relying on collateral for a new loan that once was the subject of their UCC. Seeking written verification that the loan has been paid off and the collateral is no longer encumbered is an extra step that is well worth it.
Check out our companion article, UCC Termination Statements Part 2: Public Record and Maintaining Priority, for more information on this topic.
This article is provided for informational purposes only and should not be considered, or relied upon, as legal advice.