UCC Termination Statements, a Trap for the Unwary: Part EightUCC
We are pleased to welcome back guest author, attorney, Bennett L. Cohen to the FCS blog! Read on for the eighth installment in his blog series addressing the intricacies of UCC Termination Statements.
UCC Termination Statements, a Trap for the Unwary: Part Eight
If a UCC search reflects that a debtor has terminated its own filing, such fact raises an immediate red flag that the secured party shown on the terminated filing must be contacted to confirm that no further debt is outstanding (and that there is no commitment to extend debt or other credit to the debtor). It is also recommended that such secured party confirm in writing to the new secured party that it no longer has any debt outstanding and that its security interest has been terminated. Since it would be difficult for a new secured party to confirm the debtor’s strict compliance with Code Section 9-513 above, it is also desirable that the prior secured party authorize the new secured party in writing to terminate its UCC filing(s). A second termination would be desirable in this instance as the termination filed by the debtor may turn out to be ineffective. Whether or not the new secured party has the ability to obtain such authorization from the prior secured party is another issue.
Under former Article 9, terminated UCC statements were removed from the search records. However, under Code Section 9-519, the filing officer in each jurisdiction is required to maintain in the search records each UCC filing which has been terminated for at least one (1) year after the date such UCC filing would have lapsed had it not been terminated. This is a significant benefit for secured parties as it gives them the opportunity to review UCC filings and their terminations and conduct due diligence to determine whether the UCC terminations were authorized.
The Official Comment to Code Section 9-519(g) explains that this one-year rule “… increases the amount of information available to those who search the public records. The rule also contemplates that searchers – not the filing office – will determine the significance and effectiveness of filed records.”
There is a human limitation on this one-year safeguard built into the Code. Even though Code Section 9-519(g) requires that the filing office not remove a financing statement for one year after it would have lapsed (even if it was terminated), it has been disclosed that some search services (and perhaps filing offices) have provided less than comprehensive searches, by failing to reflect in the search terminated filings required to be kept in the record for the required period (i.e., one year after its scheduled lapse date). The inadequacies of such searches eliminate the protection built into the Code by Section 9-519(g) and constrain the searcher’s ability to conduct due diligence.