What this is: In our previous post we discussed best practices when preparing and filing UCC terminations and how to ensure effectiveness. In this post we focus specifically on how to interpret a termination found when conducting a UCC search and how to ensure your loan portfolio is intact.
What this means: When searching UCCs should terminations be considered? What determines if a UCC termination is effective? How do I know if an unauthorized termination has been filed on a UCC1 in my loan portfolio? Let’s dive in to learn more. You may be surprised by what you find!
Refresher: What is a UCC Termination?
As a quick refresher, the UCC3 amendment form is used in a variety of transactions and is a key part of the lifecycle of a loan. In Section 9-512 of the Uniform Commercial Code (UCC), it 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.
When a debtor has satisfied all debts owed and/or collateral has been returned to the lender, a UCC amendment is routinely filed to terminate the security interest perfected by the UCC financing statement and is used to extinguish the lien before its 5-year term has ended.
UCC and IP due diligence services can be difficult to get right. Get started with our resource page on UCC, IP & Related Due Diligence Services.
Is a Financing Statement No Longer Effective Once a Termination Has Been Filed?
When reviewing UCC search results as part of a lender’s due diligence, it may be your first inclination to ignore a UCC that has a termination listed, assuming that the UCC record is no longer a factor in determining priority. Before deciding to ignore any terminated UCCs that turn up on your search reports, the following 3 scenarios should be considered:
1. Multiple Secured Parties
As discussed in the pitfalls of UCC termination filings in Part 1 of our discussion, it is important to note that when a termination is filed against a UCC record that has multiple secured parties, that termination can mean 2 very different things.
The secured party that filed the termination could be acting as a representative for all secured parties. In this instance, the filed termination would mean that every secured party associated with that specific UCC record has terminated their priority claim to the collateral.
The secured party that filed the termination may be relinquishing only its own interest in the collateral, in which case the UCC record would represent a continuing, effective claim for all other secured parties of record.
2. Termination Filed Without Proper Authorization
Proceed with caution if you see a UCC record that has a termination filed and then a subsequently filed continuation. There may be several different scenarios at work. Possible explanations include:
- Poor record keeping by the secured party: Essentially a case of the right hand not knowing what the left hand is doing.
- The termination was filed by a party other than a secured party of record or an authorized debtor. Examples:
- UCC filer uses the wrong original filing number on their document and terminates the filing in error.
- Debtor filed an unauthorized termination to unencumber the collateral.
- A new lender may have assumed they were authorized to file a termination statement, because there was no outstanding balance with the prior lender.
3. Termination With Proper Authorization But of the Wrong Financing StatementIn this scenario, the secured party inadvertently selects the wrong financing statement from its portfolio, and prepares and files a UCC3 termination for a financing statement that established priority for a debt that is still owed. Unfortunately, since the secured party was authorized to terminate its own financing statement, despite that it was the wrong financing statement, the secured party will lose its priority over any pre-existing subsequent filers. That was the situation in the infamous GM bankruptcy case, where the secured party terminated the wrong financing statement with the same debtor and secured party as the financing statement that the secured party intended to terminate, but these were different loans, and the debtor had not satisfied the $1.5 billion dollar loan secured by the mistakenly terminated financing statement!
Effective UCC Search and Lien Portfolio Management Strategies
- Filers: When preparing a UCC3 termination for filing, check and double-check to ensure that you have captured the number of the financing statement correctly. And, to avoid the situation in the GM case, make sure that you are terminating the correct financing statement in your portfolio.
- Searchers: When your UCC search uncovers termination, examine it and the underlying financing statement carefully to determine if the termination extinguishes the rights of all secured parties of record, or only some. In some instances, further inquiry of the parties involved is necessary to determine authority of the filer and other particulars.
Using best practices will assist in carefully examining terminations uncovered in UCC search results and exercising extremely careful attention to detail when preparing UCC3 terminations for filing will preserve the accuracy of a loan portfolio by minimizing risk and will ensure sustainability of business in the future.
When is a typical UCC/statutory lien search not enough?
Intellectual property falls within the scope of "general intangibles" as defined in Section 9-102 of Article 9 of the Uniform Commercial Code. As such, searching for UCCs that may include IP as collateral is necessary but limiting your due diligence to a typical UCC and statutory lien search may not be enough. A UCC may only provide a general collateral description, which may or may not indicate if IP is included because these specific details are only required in the security agreement. Security agreements are rarely found in the public record. Therefore, a thorough public record due diligence investigation should also include a search of the USPTO and USCO. Only by conducting these additional searches can you determine who has the rights to the IP and whether other liens exist. For more information, check out our article, Federal Intellectual Property Due Diligence: Beyond UCC and Lien Searches.
What is a PMSI filing?
Section 9-103(b)(1) of the Uniform Commercial Code (UCC) states that “a security interest in goods is a purchase money security interest … to the extent that is the goods are purchase-money collateral with respect to that security interest.”
Simply put, a PMSI is created when a creditor loans money to a debtor to finance the purchase of certain goods. In return, the debtor grants the creditor a security interest in those goods. For more information on this topic, read our article, Unpacking Purchase Money Security Interests (PMSI): A Detailed Overview.
What is an example of a common error when filing a UCC termination?
Failure to disclose intentions when a termination is being filed. If there are multiple secured parties on the UCC financing statement and all parties authorize the UCC termination, all secured parties need to be indicated on the UCC termination. If only 1 secured party name is indicated and there are multiple secured parties, the termination will only apply to the secured party named and the additional secured party’s interest will continue. For more information, head on over to our companion article, UCC Termination Statements Part 1: Preparing and Filing.
This article is provided for informational purposes only and should not be considered, or relied upon, as legal advice.