Complications with Multiple Secured Parties: Part 1 – Terminations
Most people do not appreciate the potential complications involved when a search reveals multiple secured parties on a single financing statement.
Here is part of the cause of the confusion: the filing office has a serious concern about omitting pertinent data, and their system is designed to add information readily but to remove information only in very specific circumstances. In Minnesota, at least, applicable rules provide that:
- An assignment adds the assignee as a secured party but does not delete the assignor as a secured party. (See Minn. R. 8280.0220)
- An amendment to change a secured party’s name adds a “new” secured party name but does not delete the “old” secured party name. (See Minn. R. 8280.0210(A)(3).)
The problem, then, is that a UCC search report may show multiple secured parties while the underlying records could reveal that one or more of the apparent secured parties is not actually still involved. Official Comment 2 to § 9511 astutely states that “all effective records that comprise a financing statement must be examined to determine the person or persons that have the status of secured party of record.” True!
If a search reveals multiple secured parties with respect to a financing statement, and the goal is to resolve that financing statement, one can pursue one of two approaches. One can analyze all the records affecting the financing statement, attempt to compile evidence to exclude one or more antiquated secured parties, and obtain terminations from each secured party that has not been definitively excluded. Alternatively, one can seek to obtain a termination statement from every listed secured party.
“If one of several secured parties of record files a termination statement, [its effect] applies only with respect to the rights of the person who authorized the filing of the termination statement… The financing statement remains effective with respect to the rights of the others.” Official Comment 5 to § 9513.
The filing office is not the arbiter concerning who should be a secured party of record; they will list any secured party that has not unambiguously been relieved of that role. To be certain that the interests of all prior secured parties are resolved, one must obtain a termination from each and every secured party of record OR otherwise collect evidence to establish convincingly that the interest of each apparent secured party was otherwise ended. To resolve the interest of a secured party revealed in a search report but which is not subject to a UCC form termination from that secured party, one might choose to rely on an authenticated statement from the apparent secured party that the one of the following three things is true.
First, the secured party could state that its entire interest memorialized in the financing statement was transferred to another named secured party of record with respect to that financing statement. For example: “SP-1’s entire interest in collateral memorialized in financing statement [filing no.] was transferred to SP-2 on [date].” Then, so long as one has a termination statement from SP-2 dated after the date SP-1 transferred its interest, one could conclude that that financing statement is resolved. The effect of this first type of statement is to establish that SP-1 no longer claims any interest.
NOTE: The implication of a UCC-3 amendment indicating an assignment in Field 3 and completing Fields 7 and 9 but not Field 8 should be that the assignment is not a partial assignment. Logically, an assignment that is “not partial” must be “full,” but the assignor would still remain as a secured party of record absent a separate amendment indicating a party information change in Field 5 and identifying the secured party to be deleted.
Second, the secured party could agree to be bound by the “new” secured party’s termination, probably at the same time denying that the earlier secured party still has any interest. For example: “SP-1 cannot provide a termination to financing statement [filing no.] because it transferred its entire interest to SP-2. SP-1 agrees to be bound by any termination provided by SP-2.” Then, so long as one has a termination statement from SP-2, one could conclude that that financing statement is resolved. The effect of this second type of statement is to establish that SP-1 is bound by SP-2’s termination. Third, the secured party could authorize another (e.g., the debtor or the prospective new secured party) to file a termination of the secured party’s interest. For example: “SP-1 authorizes [named person] to terminate whatever interest SP-1 has, if any, under finance statement [filing no.].” Then, so long as the authorized person completes a termination, and SP-2 has separately provided its termination, one could conclude that that financing statement is resolved. The effect of this third type of statement is to delegate the authority to prepare and deliver a termination of SP-1’s interest.
NOTE: Only the third alternative will result in a “clean” UCC search result, because it authorizes the filing of a UCC-form termination. The two other alternatives involve evidence that the secured party no longer has an interest, but they do not necessarily provide a vehicle to cause a UCC-form termination to be filed on the secured party’s behalf, so the UCC search results may continue to reflect the potential interest.
So, a careful searcher should seek to resolve the interest of every secured party of record, not merely the “latest” secured party of record with respect to each financing statement, and there are multiple ways to accomplish this, though the decision regarding which method is acceptable for each searcher is left to that person’s determination.
More next time on amendments, etc.
NOT INTENDED TO PROVIDE LEGAL, ACCOUNTING OR OTHER PROFESSIONAL ADVICE AND SHOULD NOT BE RELIED UPON AS SUCH.