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!
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.
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:
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.
Or
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.
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:
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.