Recently, the New York District Court case Roswell Capital Partners LLC v. Alternative Construction Technologies ruling effectively extinguishes one creditor’s security interest due to an arguably ineffective termination by an unauthorized party.
Although the ruling in this case is not the norm, instances of unauthorized UCC filings are prevalent on the public record and thus always present a certain level of risk to a secured transaction. During due diligence, it is the duty of a searcher to analyze and investigate the records, and identify effective versus ineffective filings.
Although the ruling in this case is not the norm, instances of unauthorized UCC filings are prevalent on the public record and thus always present a certain level of risk to a secured transaction. During due diligence, it is the duty of a searcher to analyze and investigate the records, and identify effective versus ineffective filings.
As an introduction to and illustration of the issue, let's start with a couple examples:
- Scenario #1: A UCC search is conducted, and the results indicate the following: a) A UCC-1 was filed by Bank ABC on June 1, 2005. b) On December 1, 2008, a termination statement was filed listing Bank ABC as authorizing party. c) On January 8, 2010, Bank ABC filed a timely continuation statement. Given this unusual sequence of events, the searcher would be faced with a key question to answer: is the continuation statement effective, or did the earlier filing of the termination statement effectively terminate Bank ABC’s interests?
- Scenario #2: Similar scenario, but note the key difference marked here in bold print. A UCC search is conducted, and the results indicate the following: a) A UCC-1 was filed by Bank ABC on June 1, 2005. b) On December 1, 2008, a termination statement was filed by Bank XYZ as authorizing party. c) On January 8, 2010, a timely continuation statement was filed by Bank ABC. Again, the searcher is faced with the question: is the continuation statement effective, or did the earlier filing of the termination statement effectively terminate Bank ABC’s interests?
In the first example, it appears that Bank ABC had the authority (as secured party of record) to file a termination, but may have done so by mistake, and later tried to file a continuation. If that was the case, the termination was effective, and Bank ABC no longer has a perfected security interest, despite the later filing of a continuation statement. In the second example, it appears that Bank XYZ was not the secured party of record, and most likely Bank XYX filed the termination by mistake. In this scenario, since Bank XYZ did not have the authority to file the termination, the termination was ineffective, and the continuation statement filed by Bank ABC is effective.
Although the facts are slightly different, the starting point for analyzing both examples is the same: Did the party filing the UCC record have the authority to file it? However, although we know the key question to ask, the answer cannot be determined solely by reviewing the UCC search results. A searcher must take additional steps to ascertain the validity of each filed record.
For instance, using the facts provided in the second example, it is possible that Bank XYZ may have had the authority to file on behalf of Bank ABC (Section 9-502, et al, allows a “representative of the secured party” to act on behalf of another secured party if authority exists). If Bank XYZ had such authority, then the termination filed by Bank XYZ was effective to terminate Bank ABC’s interest.
