To welcome new readers to the FCS blog, we have been running a “Best of” series since mid-April. This week’s article is the last in our series. Be sure to look back over our previous few posts to read articles on some of our most popular topics!
Two Important Reasons to Include Terminated Filings in Your UCC Search Efforts
One of the more common special requests we get from customers is to omit terminated filings from their UCC search results. When customers request that we leave terminated filings off our search reports, it usually stems from a misconception that once a termination statement is filed the financing statement no longer matters in terms of determining priority of claims. Not so fast!
There are two very important reasons to include terminated filings in your UCC search efforts.
Multiple Secured Parties
Keep in mind that a UCC Financing Statement may include more than one Secured Party. In these cases, if a single Secured Party files a Termination it can mean two very different things. First, because a single Secured Party can file a Termination Statement on behalf of all secured parties, it could effectively terminate the entire claim against the collateral. Or secondly, and this is where it gets interesting, it could indicate that the filing party terminated only their own interest in the collateral, in which case the Financing Statement would remain fully effective for all other Secured Parties of record.
There is no distinction between these two scenarios within the public record, so searchers must be diligent and contact the Secured Party to ascertain the scope of their Termination filing.
A Termination Statement is only effective if a party with the authority to do so files it. In most cases, the Uniform Commercial Code grants termination authority to the Secured Party (note debtor authorized terminations are effective in certain situations). Sometimes a party other than the Secured Party of record will file a Termination Statement. This could happen for a variety for reasons: perhaps a UCC filer put the wrong UCC1 file number on their document and terminated the filing in error or maybe the debtor filed an unauthorized termination in an effort to unencumber the collateral. According to the prevailing interpretation of Revised Article 9, whatever the reason for its filing, an unauthorized Termination does not affect the effectiveness of a UCC Financing Statement.
There is no way to tell from looking at a UCC Termination Statement or a UCC search result whether the Termination was filed with proper authority. Again, the searcher will need to follow up with the Secured Party for confirmation.
For these reasons, it is risky for a UCC searcher to disregard a UCC record simply because a termination reflects on the index. For any UCC Financing Statements that reflect a termination but are not yet expired, be sure to perform adequate follow up to determine the true status of the claim.