Unauthorized filings: Dealing with multiple secured parties

Often, a secured transaction involves more than one secured party. On occasion, we have seen a single UCC financing statement listing 20 or more secured party names. It is important to remember that the responsibilities of each secured party are based upon the underlying transaction, and there is nothing filed in the public record that provides any insight into the relationships among the secured parties. In some situations, a single secured party will act as a representative for all secured parties. In other situations, each secured party is authorized to act on its own behalf, and is prohibited from acting on behalf of the other secured parties.

All too frequently, secured parties do not fully understand their relationships with one another, and therefore do not fully understand their obligations regarding new and existing UCC filings. Often, the responsibility for maintaining filed financing statements, and filing UCC-3 amendments to change names, addresses, continue the filings, release collateral, etc., is not clear. As the number of bank mergers, acquisitions, takeovers, etc. continue to increase — which often may involve loan portfolios with thousands of associated UCC filings — it can be very challenging for lenders to keep track.

On many occasions, various secured parties file what appear to be inconsistent filings against the same UCC record. For example, it is common to see UCC search results indicating a continuation statement was filed after a termination statement had been filed. Fortunately, Article 9 contains specific provisions to deal with situations involving multiple secured parties, and these provisions consistently invoke the concepts of authorization and effectiveness.

The first relevant section of the UCC Article 9 is Section 9-502, which defines the information a financing statement must contain. A financing statement must provide the name of the debtor, an indication of the collateral, and the name of the secured party or a representative of the secured party. When there are multiple secured parties involved in a transaction, it is essential that each party clearly understands its respective duties and obligations.

There are often transactions in which a single secured party will act as a representative of the others, and take responsibility for filing subsequent UCC filings such as continuations, amendments, etc. In other transactions, each secured party may have an obligation to protect its own interests, and each secured party will be responsible for filing its own amendments, continuations, or other filings. As previously stated, this cannot be determined by reviewing a UCC index or the financing statements; the responsibilities of each secured party are NOT part of the public record!

Section 9-510(b) provides “a record authorized by one secured party of record does not affect the financing statement with respect to another secured party of record.” Official Comment 3 to that section states “this section prevents a filing authorized by one secured party of record from affecting the rights and powers of another secured party of record without the latter’s consent." Section 9-509(e) further states “if there is more than one secured party of record for a financing statement, each secured party of record may authorize the filing of an amendment under subsection (d)."

So, what is a secured party to do when analyzing search results?

For example, it is fairly common for a secured party to make a mistake when entering the original file number on a UCC-3 filing. Of course, this makes it appear as though the secured party is taking a specific action (e.g., termination, amendment, collateral restatement, continuation, etc.) against a financing statement in which it has no interest. Likewise, since the amendment was never made against the correct original financing statement, the secured party’s intended action has not occurred. However, there is nothing on the UCC index or the face of the UCC-3 filing that indicates the filing was made by a secured party that did not have the authority to file it.

As a result, the party conducting a search can never rely upon the results of a search without following up on each filed record. Too often, searchers mistakenly take their search results at face value. Many searchers assume that if the filing office accepts and indexes a UCC filing, and it shows up on a search report, the filing must be a valid and effective record. However, searchers are expected to take reasonable steps to contact prior secured parties to confirm the validity of any filed records (particularly termination statements). Clearly, many secured parties prefer not to expend the time and effort required to contact prior secured parties, and thus undertake a certain degree of risk regarding the effectiveness of the UCC records. It is a cost/benefit analysis that each lender must make prior to engaging in a secured transaction.

It comes down again to Section 9-502, which reminds us that the Article 9 filing system is merely a “notice” system:

9-502 Official Comment 2: What is required to be filed is not…the security agreement itself, but only a simple record providing a limited amount of information. The notice itself indicates merely that a person may have a security interest in the collateral indicated. Further inquiry from the parties concerned will be necessary to disclose the complete state of affairs. Section 9-210 provides a statutory procedure under which the secured party, at the debtor’s request, may be required to make disclosure. However, in many cases, information may be forthcoming without the need to resort to the formalities of that section.