Flagging Unauthorized Termination Statements with Information Statements

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Say you are a secured party with a filed financing statement.  For whatever reason, you obtain a search report for filings naming your debtor.  The report shows your unlapsed financing statement, but, unexpectedly, it also shows a termination of your financing statement! What can you do to try to create evidence and provide notice that a termination statement was unauthorized?

Who filed the termination statement? There are important differences among terminations filed by the debtor, filed inadvertently or improvidently by the secured party, or filed by someone other than the debtor or the secured party.

A debtor is entitled to file a termination statement under certain circumstances, including where the debtor properly demanded a termination from the secured party but the secured party failed to respond or where the debtor did not authorize the initial financing statement.bSee §§ 9-509(d) & 9-513 (a)&(c). Outside of these circumstances, and absent authorization by the secured party, a termination statement filed by the debtor is unauthorized.

A termination statement filed by a secured party is probably not “unauthorized” even if it is inadvertent or improvident; in other words, a termination statement “filed by mistake” is nonetheless a filed termination statement, and “unwise” or “regrettable” does not mean “unauthorized.”  An inadvertent termination statement could arise, for example, where a secured party seeking to file a continuation or some other amendment accidentally selects the termination option. An improvident termination statement could arise, for example, where a secured party files a termination statement after Loan 1 is paid in full without realizing that the security interest for Loan 2 is also perfected by the same financing statement.  A hybrid of inadvertent and improvident could occur where the secured party mistakenly files a termination statement for the financing statement connected to Loan 2 when the secured party meant to terminate the different financing statement connected to Loan 1. In any case, a termination statement filed by the secured party is seldom unauthorized.

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A termination statement filed by someone other than the debtor or the secured party, or an agent of either of them, is more likely to be unauthorized.  One situation that arises from time to time involves a new lender/secured party filing a termination statement purporting to affect the financing statement of the “old” lender/secured party.  Another situation involves some other filer creating a typo in the identification of the initial financing statement in an otherwise proper termination statement and accidentally connecting their termination statement to your initial financing statement. These are examples of unauthorized termination statements.

What if it is truly an unauthorized termination statement? “A person may file in the filing office an information statement with respect to a record filed there if the person is a secured party of record with respect to the financing statement to which the record relates and believes that the person that filed the record was not entitled to do so under Section 9-509(d).” § 9-518(c).  The form is a UCC-5 Information Statement. The information statement must indicate that it is an information statement – which the form inherently does – and requires just two data elements: the file number for the initial financing statement to which it relates, and the basis for the filer’s belief that the person that filed the termination statement was not entitled to do so under § 9-509.

A sample statement of the basis for a claim of an unauthorized termination statement might be something like:

The person filing the purported termination statement was not the secured party, was not authorized by the secured party, and was neither the debtor nor an agent of the debtor acting under circumstance where a debtor could be entitled to file a termination statement after a failure of the secured party to do so in a timely manner.

What is the effect of filing an Information Statement? Well… The UCC specifically states that “[t]he filing of an information statement does not affect the effectiveness of an initial financing statement or other filed record.”  § 9-518(e). The logic is that an unauthorized termination is not effective in the first place, and the information statement is merely a flag rather than a correction. There is utility in filing an Information Statement to draw attention to unauthorized termination.  It flags the unauthorized filing which should prevent subsequent reliance on the effectiveness of the unauthorized record; imagine your office decided not to file a continuation because someone erroneously believed the financing statement had been terminated. It contributes to the integrity of the filing office’s database; flagging errors makes the system more accurate and reliable for everyone.  And it creates some evidence of the secured party’s diligence in monitoring its financing statements; whether it is a competing secured party, a bankruptcy trustee, a regulator or auditor, your boss, or anyone else asking, wouldn’t you prefer to be able to show that you recognized the issue and flagged it?