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What Is a UCC-3 Filing and Why Should You File One?

Have you filed a UCC-1 to secure your interest in certain collateral? Well, if you have and you need to continue, amend, assign, or terminate your UCC filing, you will file a UCC-3. You may have already guessed, but today’s post is all about the UCC-3, including its magical powers. OK, it may not be magical per se, but it is certainly powerful and shouldn’t be ignored.

UCC-1, UCC-3, UCC-5, UCC-11

It may seem like an odd numbering system, but each form is important in its own right. A UCC-1 is the initial Financing Statement and is filed to provide notice to other creditors of your security interest. Typically, when we talk about perfecting your security interest or filing a UCC, we are usually referring to a UCC-1 or your initial filing.

Let’s skip the UCC-3 for now and jump ahead to the UCC-5 and the UCC-11. A UCC-5 is an information statement you file when you believe an existing record is inaccurate or was wrongfully filed. In compliance with Article §9-518 , this statement should include reference to the original filing (the filing with the alleged errors). It should indicate it is an information statement and it should identify what you believe to be inaccurate in the original filing. It’s important to note, this filing does not amend any information – you will need to file the UCC-3 if you need to amend info.

The UCC-11 is an information request to determine whether there are other secured parties, whether specific collateral is already secured by a UCC, and to determine a creditor’s priority.

Bouncing back to the UCC-3.

A UCC-3 Wears Many Hats

It’s true, a UCC-3 is used to continue your existing filing, amend your existing filing, terminate your existing filing, or assign your interest to another secured party.

Continuation

A UCC is effective for 5 years. If you need to extend the filing, you will file a UCC-3 Continuation within 6 months before the expiration date of the existing filing. Once the continuation has been filed, your UCC is effective for another 5 years. If you don’t file your continuation timely, your UCC will become ineffective.

How often should you continue a filing? It depends on what you are providing as the creditor. If you are a lender, and your customer’s loan period is longer than 5 years, you would need to file continuations every 5 years until the loan is paid off/closed, to maintain your security. If you are a distributor of goods, and your customer operates on a revolving line of credit with you, you should file a continuation every 5 years as your relationship continues.

I’m going to repeat what I just said moments ago: if you do not file a continuation timely, your existing UCC will become ineffective. And, as we’ve discussed on our blog before, you can’t revive your security interest; you will lose your place in line.

Ah, UCC Amendments, let me count the ways! Why would you need to amend your UCC? The most common reasons to amend a filing include a change in your customer’s name or address, a change in your company’s name or address, or a change in the collateral.

The most common, and arguably most critical, reason to amend your filing is if your customer’s name or address changes. We talk about this a lot, because not only is it vital to your security interest, it’s also one that consistently stymies creditors . Article §9-507(c) clearly states you have a 4-month window to amend your filing for a debtor name change to maintain your priority. If you fail to timely amend your filing, your filing will be considered seriously misleading, and your security interest will be unperfected. Remember, names matter in UCCs, after all, a search by name is how parties identify whether a security interest already exists on certain collateral.

I mentioned you may want to amend a filing if your company’s name or address changes, and while this is not dictated by Article 9, it is a best practice. I recommend amending the filing to alleviate delays or missed notifications about a debtor’s bankruptcy. For example, let’s say your customer files for bankruptcy. The bankruptcy trustee will go through public records (i.e., UCC filings) to ensure notifications of the bankruptcy – including the mega important bar date info – are mailed to all parties. If your address is wrong and the mail is either delayed or returned, you could miss the bar date. Yes, you could likely argue you missed the bar date because you didn’t receive timely notification, but the court may say “Hey, not my problem, you should have maintained the public record.” Is it worth the hassle?

If there is a change in the collateral, you will need to amend your filing. Other creditors are relying on the information you provide to determine whether an interest already exists on certain collateral. If your Financing Statement doesn’t correctly identify the collateral, other creditors can assume there is collateral available for them to use as security – keep it current, don’t let that happen.

If you need to assign or transfer all or some of your rights to the collateral to another secured party, you will file an Assignment.

9-514 Assignment of Powers of Secured Party of Record

(b) [Assignment of filed financing statement.]

Except as otherwise provided in subsection (c), a secured party of record may assign of record all or part of its power to authorize an amendment to a financing statement by filing in the filing office an amendment of the financing statement which:

(1) identifies, by its file number, the initial financing statement to which it relates;

(2) provides the name of the assignor; and

(3) provides the name and mailing address of the assignee.

Assignments occur frequently with banks, as one bank transfers its security to another bank.

Termination

Seems fitting to end today’s post with Terminations. The filing of a termination ceases the effectiveness of the original UCC. Typically, terminations are filed at the end of the relationship when monies have been paid and/or collateral returned. As an example, your bank filed a UCC when you signed for your car loan; once your car loan is paid off, the bank terminates their UCC, which frees up the collateral (i.e., your car).

Use caution when terminating filings because you can’t un-terminate them. If you need a billion dollar warning, check out How JP Morgan Chase Bank’s Billion Dollar Mistake Can Make You a Better Credit Manager .

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UCC3 Amendments: The Essentials

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It can be difficult to understand the nuance of both filing and searching Uniform Commercial Code (UCC) financing statements (also known as UCC3s). Sometimes, filers could find the effect of their filed UCC3 to be different than intended. Other times, there are multiple amendment actions that can be taken to achieve the same effect on the UCC3 record.

The result is that this process can become cumbersome for both filers and those who interpret the record. CSC Associate General Counsel Paul Hodnefield will seek to clear up the uncertainty surrounding the different types of amendments, their effect on the record, and the risks involved in the process.

Webinar transcript

Disclaimer: Please be advised that this recorded webinar has been edited from its original format, which may have included a product demo. To set up a live demo or to request more information, please complete the form to the right. Or if you are currently not on CSC Global, there is a link to the website in the description of this video. Thank you.

Tarik: Hello, everyone, and welcome to today's webinar, "UCC3 Amendments: The Essentials." My name is Tarik Hopkins, and I will be your moderator.

Paul: Thank you, Tarik. Well, before I get into the presentation, I just want to introduce myself a little bit. As Tarik said, my name is Paul Hodnefield. I'm Associate General Counsel for CSC, and in that capacity, it's my responsibility to be the go-to person for all things related to the UCC search and filing process.

And to carry that out, I'm heavily involved in the industry. I participate with the filing officers and their organization, IACA. I co-chair a task force for filing office operations and search logic for the ABA. I am frequently in contact with filing offices around the country, troubleshooting various issues, and a lot of other . . . oh, I also monitor case law and legislation on a daily basis.

So needless to say, I get a lot of information from a lot of different sources, and one of the favorite parts of my job is when I can share that with our customers. So I'm really glad to be here today.

And the topic we have today happens to be UCC3 Amendments. Understanding UCC3 Amendments can be a challenge for both filers and searchers. These records don't always have the effect that their title implies, and in some cases, there are multiple options for accomplishing the same effect on the record.

Yeah, it is critical for those involved in the process to know how UCC3 records work. I mean, filing a UCC3 Amendment incorrectly or misinterpreting an amendment when it appears on a search can have costly consequences for the parties involved.

What I plan to do today is provide a high-level overview of the essentials regarding the different types of UCC3 Amendments. In the process, I will point out some of the best practices and identify common traps for the unwary searcher and filer.

More specifically, I'm going to begin with some basic concepts about the UCC system and UCC3 records, including the rules for sufficiency and design of the UCC3 form. Then I'll move on to the specific types of amendments.

The program will finish with some specific case issues, and then I'll take questions for the remaining time.

A couple of caveats about this program. As noted, this is a high-level overview. There are a lot of details and nuances for some types of amendments that require much more time to cover than we have available today.

And likewise, post-filing changes that require amendments are outside the scope of the program today. These topics all require their own sessions and much more time to cover thoroughly, but we do offer other programs as well from time to time.

So with no further ado, we'll go ahead and get into the basics of the UCC3 process.

A couple of general concepts that are important to understand. Actually, a few of them. For one, it's really important to understand that the UCC is a notice filing system. And what that means is that what gets filed in the UCC records are not liens or security interests. They're merely notices that indicate a security interest may exist.

These records are not enforceable in their own right. You can't sue to enforce a Financing Statement. That's not what they're for. You can sue to enforce the underlying documents, but all a UCC Financing Statement does is provide notice so the security interest may exist.

That same notice filing principle applies to amendments as well as to Financing Statements. So all amendments are really nothing more than notices either.

Another important concept to understand is that a UCC3 amendment has no separate existence apart from the Financing Statement technically in the definitions of Article 9. A Financing Statement as defined in Article 9 means a record composed of an initial Financing Statement and any filed records related to the initial Financing Statement. In other words, UCC3 Amendments are subsumed into the Financing Statement to which they relate.

Another very important thing to understand about UCC3 records, especially in a notice filing context, is that the effect of a UCC3 Amendment cannot be determined by the record itself. Again, these are just notices. They don't provide all the details somebody would need to know the effectiveness, and that means that further inquiry is necessary to understand the full state of affairs with regard to the amendment.

Another important concept to understand when it comes to UCC3s is the role of the filing office. The filing office plays less of a role than many people realize in the filing of amendments.

The filing office role is purely ministerial. The Article 9 drafting policy is to make the filing office's role ministerial. That means they don't exercise judgment or discretion when it comes to filing or search.

The filing office does not interpret UCC records. They do not determine the effect or meaning. In fact, the filing office has no power to make a record effective or ineffective. All it can do is make it retrievable or hidden. And what this does is it places the responsibility on interested parties, those who search the records, to determine what they mean and what the effect is.

The filing office has, as a matter of policy under Article 9, an open-door policy. And what that means is when a search is conducted, the filing office simply turns over everything that's been filed that's related to a Financing Statement disclosed by the search. They have to maintain all the records related to a search until a year after the lapse date, so they can't get rid of anything until that period of time.

So the search results include any disclosed initial Financing Statement and all related records. And what this really means for the searcher is that all UCC Amendments are cumulative, meaning nothing is ever removed from the record. They always add to it. Even an amendment to delete a party doesn't actually delete the party. It just adds a record that the searcher can take a look at to interpret who is a party, but the parties will continue to appear in the index.

Now, not all amendments that get filed are effective. They have to satisfy certain requirements under Article 9, so I want to talk about the effectiveness of UCC Amendments.

First of all, an amendment of any type is only effective to the extent it was filed by a person that may file it under Section 9-509. In other words, it's got to be authorized. It has to be filed with the authority of a person who is authorized to do so under 9-509.

Now, under 9-509, the people entitled to authorize a record will depend on the nature of the record. Any record that expands the scope of the Financing Statement, such as adding collateral or adding a debtor, that must be authorized by the debtor. Now, that authority isn't required to be indicated on the UCC3, but it does have to be authorized.

Now, authorization always takes place outside the public record. I can't be proven from the record itself.

Any other amendments, such as to change party information, change a party address, continue, terminate, assign, all of these things must be authorized by the secured party of record.

Now, one thing to bear in mind, too, is that there may be limited effect to a UCC3 Amendment because under 9-510 (b), an amendment authorized by one secured party of record does not affect the Financing Statement with respect to another secured party of record, unless that other secured party of record has also authorized the filing.

Now, as I mentioned, authority to file cannot be determined from the record itself. It isn't required to be indicated in the record. And in fact, it can't be proven by the record. That can only be determined through conducting further inquiry outside the public record to reach that point.

In addition to being filed by somebody who has authority to file it under 9-509, in order to be effective, an amendment has to also be sufficient. In other words, it has to comply with the statutory requirements of Article 9.

These are fairly straightforward. For one, it has to identify by file number, the initial Financing Statement to which it relates, at least if it's filed in the State Central Index. So it has to have a correct initial Financing Statement file number.

If it is a fixture filing or other record that's filed in the real estate records, then the filer must provide additional information required by section 9-502 (b), which typically is what's required to get it filed in the land records, like it has to indicate it's to be filed and the land records, has to contain a description of the real property, and so forth.

So these are all things that are required to index the record in the appropriate index. In addition to that, the record has to indicate what type of amendment it is because the filing office has to know how to index it appropriately. So this is done by using the appropriate checkbox on the form.

Finally, the record must provide any additional information that's required based on the type of amendment. For example, an amendment to add a debtor must have a debtor name and address. That information is provided in Sections 6 through 8 of the UCC3 form or its electronic equivalent.

Now, there are multiple types of amendments that can be done using the UCC3 record. There are either 12 or 13, depending on how you count them. I tend to think there are 12, because I don't draw a distinction between full or partial assignment. That's not really a filing office issue. That's just to provide additional information for those who search the records.

You can add, delete, or change parties and collateral. There are assignments, continuations, and terminations. A total of 12, maybe 13 if you count full and partial assignments separately.

Now, these are all done using the UCC3 form, or its electronic equivalent. A couple of things about the UCC3 form.

Before I do that, though, I want to point out one of the reasons that understanding the UCC3 form is important is because that while paper is becoming less and less common . . . In fact, in many states now, they no longer accept paper forms. But the layout of this form serves as a template for the design of the electronic filing systems used by the states. So it is important to understand what this record really means and how it's designed.

First of all, it's intended to be a multi-purpose form. It's used for all different types of amendments. And because of that, certain fields are used for different purposes. For example, Field 7 might be used to provide new information for a new debtor, but it might also be used for providing assignee information, things like that.

The collateral field might be used to add collateral, but it also might be used to indicate a partial assignment.

The form was not designed with the intent of carrying out multiple actions. And in fact, there are certain combinations of actions that do conflict with each other because they would use the same fields for different purposes.

So the design really assumes one amendment per form, and even in states that do accept multiple actions on the same form, there oftentimes isn't an advantage to that because there isn't necessarily a cost savings because they'll charge multiple fees, and there's a greater risk of indexing errors. So it's generally recommended to do only one action per form. Most state electronic filing systems only allow one action per UCC3 record.

Now, the form and the electronic equivalent were designed intentionally to limit the types of actions that can be done only to those actions that are either required or permitted under Article 9. That's why the standard forms do not have a miscellaneous amendment action or provide for subordinations or other types of things that people might want to file in the UCC records.

The idea was that the filing offices did not want to turn the UCC index into a bulletin board for anything that could be filed. They wanted to keep it narrowed down to just the required documents or the required actions that need to be filed under Article 9.

So enough about the form and other general concepts. Now, I want to move on and talk about some of the specific types of amendments. And I want to begin with one that probably has caused the most confusion out there for both filers and searchers trying to figure out exactly what it means and when it's used, and that is the UCC3 Assignment.

Now, the purpose of the UCC3 Assignment is to assign some or all of the secured parties' right to amend the Financing Statement. It does not assign the security interest. That is something entirely separate.

In fact, a UCC3 Assignment doesn't even really assign the secured party's right to amend the Financing Statement. What it does is it grants another secured party the right to amend the Financing Statement, because it doesn't remove the assignor as a secured party.

In fact, the effect of a UCC3 Assignment is that the assignee becomes a secured party of record, and the assignor remains a secured party of record. They still have authority to amend the Financing Statement.

There's some dispute on this. Some commentators have said, "No, once an assignment is filed, the assignor has no more interest in the record." But I think that's a risky view to take of it, because the black letter of the statute does draw a distinction between a UCC3 Assignment and the effect it has on the parties that are secured parties of record.

So the safest course of action is to assume that the assignor remains a secured party of record until an amendment is filed to delete the party.

So really, a UCC3 Assignment has the same effect on the record as an amendment to add a secured party. This is one of those cases where you can accomplish the same thing through different amendments. An assignment adds a secured party. An amendment to add a secured party adds a secured party. They pretty much do the same thing when it comes to the filing office index.

As far as a partial assignment goes, the purpose of this is to limit, actually, the assignee's right to amend the Financing Statement to affect only certain described collateral.

The status of the parties following a partial assignment is the same as for a full assignment. The assignee becomes a secured party of record. The assignor remains a secured party of record.

In fact, there's a case out there, which I might talk about if there's enough time, involving an assignment where the Court pointed out that because the secured party did not assign the security interests, the assignor remained perfected by the Financing Statement it originally filed.

So to indicate a partial assignment, very simple, you just check Box 3 for an assignment. And then in the Collateral field of the Amendment Form, Box 8, there is a checkbox for collateral assigned. That is not a collateral amendment. It is actually part of the assignment, even though it's in the collateral box.

Remember, the form is designed from multiple different types of actions, some of which are not compatible with each other. So a partial assignment is not compatible with a change to the collateral.

So the effect of a partial assignment is simply that it limits the effect of any amendments filed by the assignee to the particular collateral that's described in the assignment.

So if you have an assignee, and the partial assignment says Accounts Receivable, and later that assignee files a termination, that termination would only be effective with regard to the Accounts Receivable. That's the way it's designed to work.

I should point out as an aside, as I go through the different amendment actions, that some of these issues have not come up before the courts yet. And as a result, we don't know how the courts will interpret them. We can only speculate based upon the black letter of the law in the official comments to Article 9, but that's the way it should work.

So UCC3 Assignments, some practical considerations. From a searching perspective, remember that the effect of an assignment requires further inquiry beyond the public record. There's nothing in Article 9 that requires a filer to indicate that an assignment is full or partial. There are a couple of states that have required that, but Article 9 does not.

And Article 9 doesn't require a partial assignment to specify collateral. That's something that a searcher could learn through further inquiry of the parties involved.

Also important from a searching perspective to remember is that the assignor remains a secured party of record, or at least when it comes to the . . . As I said, this is something that's still being debated. The courts haven't really addressed it yet, but there is some case law out there that suggests this is how the courts will assume it.

But to be safe from a searching perspective, it's best to assume that the assignor remains a secured party of record, unless an amendment has been filed to delete that party or they have filed a termination statement.

And amongst other things, the assignor has authority to amend that Financing Statement, even if it appears to be a full assignment. So take that into consideration.

And there's a good reason for that, too, because, theoretically, a Financing Statement filed only by the assignee could remain effective for the assignor secured party. Even if the assignor doesn't have an interest in it at the time, they could issue a new loan and use that Financing Statement to obtain original priority. There's a strong argument that that could be done.

The case hasn't arisen before the court yet, but it could at some point, and nobody wants to be a test case on it. So it's always better to assume that the assignor remains a secured party of record.

So some best practices. From a filing perspective, if, after filing an assignment, the parties do not want the assignor to remain a secured party of record, they should be filing a separate UCC3 Amendment to delete the original secured party so that they don't remain a secured party of record.

From a searching perspective, the assignor should be treated as a secured party of record unless an amendment has been filed to delete that party. That means they should receive all notices to which a secured party is entitled to under Article 9 and be treated as a secured party in any action to enforce a foreclosure or anything like that, until they disclaim an interest anyway.

If a Financing Statement that includes a UCC3 Assignment has been terminated, it's going to be necessary to verify that the assignor actually authorized the termination, in addition to the assignee, in order to ensure that UCC3 is actually fully terminated and cannot come back to haunt a later secured party.

Remember that the authority to file and who provided that authority and the extent of that authority is not something that you can determine from the UCC3 record itself.

On to the Termination Statement. The Termination Statement is used to indicate that the Financing Statement to which it relates is no longer effective. This is just like any other UCC record.

Assuming that it was filed by a party that was authorized to file it under 9-509, then upon the filing of that Termination Statement, the Financing Statement to which it relates ceases to be effective.

Now, the filing office, however, will keep it active in the index. Termination doesn't trigger any filing office duties. All they have to do is index it as an Amendment so it shows up on a search.

Part of the issue is the filing officers do not know whether a Termination Statement was authorized and, therefore, effective. So they just file it, and they continue to maintain that Financing Statement until it lapses by time. And that means that they will continue to file Amendments after that termination has been filed. It's up to the searcher to determine what the effect of any Termination Statement is.

So, assuming it was filed with full authority, the practical effect is that the Termination Statement terminates the effectiveness of a Financing Statement, and it does so as a whole. The entire Financing Statement ceases to be effective, and that's the case for all debtors and all collateral, except for a rare case where a partial assignee might be filing a Termination Statement.

So really, there's no such thing as a partial termination. It's kind of all or nothing. It goes to all of the secured party's interest in that Financing Statement. And that creates some traps for the unwary here because a UCC3 Termination Statement may not terminate the record. If it wasn't authorized by the secured party of record, it's not effective. Simple as that.

The filing office will file it because they play no role in determining effectiveness. Their job is to file the records so that it's there and that when somebody conducts a search, it's there for them to examine.

Also, even if a secured party authorized the filing of a Termination Statement, the Financing Statement may still remain effective if there are multiple secured parties, and that's because the Termination Statement filed by one secured party of record has no effect with respect to the interests of the other secured parties of record.

So you may have Secured Party A and Secured Party B on a Financing Statement. Secured Party A authorizes the filing of a Termination Statement. Secured Party B does not. The Termination Statement will terminate Secured Party A's interest, but not Secured Party B's. So the Financing Statement will remain effective after that.

And this creates a potential trap for the searcher that sees Financing Statement, Termination, and assumes that that Financing Statement is no longer effective. You can't do that just from the records that have been filed. Further research is required.

So, if an unauthorized Termination Statement is filed, or one that has not been authorized by all secured parties of record, guess what? The Financing Statement remains fully effective against all the debtors and all the collateral, and that is a trap for the unwary searcher who relies solely on the public record.

And there is case law out there on that where the courts have found that a searcher who relied on an unauthorized Termination Statement, they lose. The secured party that filed the Financing Statement prevailed.

When it comes to authority to file a Termination Statement, you can't determine that from the record itself. Further investigation is always required.

I do want to point out, too, that there is one situation in which a debtor may authorize the filing of a Termination Statement. That is where the secured party, there's no obligation remaining, and the debtor has sent a demand to the secured party to terminate the Financing Statement.

If the secured party does not do so when there is no obligation remaining secured by the collateral, then if the secured party doesn't do so within 20 days, the debtor becomes authorized to file an effective Termination Statement. That is rare and requires compliance with the strict statutory requirements.

So some best practices when it comes to Termination Statements from a filing perspective. If it is intended to terminate with respect to multiple secured parties of record, make sure all secured parties of record authorize the filing of the Termination Statement if that's what is intended.

If there are multiple debtors, and the secured party only wants to terminate with respect to one, do not file a Termination Statement. Use an Amendment to delete the debtor. That will cut that debtor out of the scope of the Financing Statement.

Same thing with terminating with respect to some of the collateral. The proper thing to use at that point is an Amendment to Delete Collateral, not a termination. I mean, you can write debtor names onto a Termination Statement to try and limit it, but that doesn't do it. It doesn't limit it to particular debtors. It will affect the Financing Statement as a whole.

From a searching perspective, remember that the Termination Statement is only a notice, just like a Financing Statement, and that it's necessary to conduct further inquiry to determine the authority of the party or parties that filed the Termination Statement. You just can't determine it from the face of the public record itself.

Reliance on the Termination Statements without any further inquiry is going to be a risky proposition. And searchers who relied on that and later took their own security interests have found themselves in some cases subordinated to that prior secured party who did not authorize the filing of a Termination Statement.

And Termination Statements can be filed for all sorts of reasons without authority. Sometimes it's by mistake. Somebody transposes numbers on a Financing Statement file number. Sometimes, a new lender may assume they're authorized to file a Termination Statement, because there's no outstanding balance with the prior lender, or something like that. There are all sorts of reasons why they can be filed by mistake. And if it's not authorized, it's simply not going to be effective.

Next, I want to talk about the Continuation Statement. The purpose of the Continuation Statement is twofold. It does two different things. First of all, it extends the effectiveness of the Financing Statement to which it relates for an additional five-year period. And then the second part of it is it will keep the record active in the filing office records, so it will show up on searches for an additional five-year period.

Now, I want to be clear on something. Filing a Continuation Statement doesn't automatically perform both of these purposes. It is possible to file a Continuation Statement, for example, that will not extend the effectiveness, because it wasn't authorized or there was some other problem with the record. It gets filed and the filing office extends the lapse date by another five years. But if the record isn't effective, it's not going to extend the effectiveness of the record for an additional five years.

Likewise, there are times where a Continuation Statement might not get filed, such as a wrongful rejection case, and the lapse date won't be extended, but the effectiveness remains or it becomes a hidden lien due to the filing office actions.

So the purposes are independent. And it has to be authorized and sufficient. It has to meet all the requirements for filing a Continuation Statement in order to accomplish both purposes.

I also want to mention that the extension of a lapse date, calculating the extension of effectiveness and the new lapse date, runs five years from the date the record would have ceased to be effective, absent the filing of the Continuation Statement.

This isn't much of an issue at the state level, but at the county level, it is very common for counties who don't deal with UCC all the time to make a mistake when they get a Continuation Statement and extend the effectiveness for five years from the date the Continuation was filed.

When that happens, they can usually be talked into resetting the lapse date correctly, but it can cause problems five years down the road if another Continuation is required, because you've wound up with a shortened window in which to file, or at least the filing office believes that to be the case. So be aware of that potentially at the county level especially.

So, when a fully effective Continuation Statement is filed in compliance with the statute, the Financing Statement to which it relates will remain searchable for another five-year period, and it will remain effective for that additional five-year period.

Some things to be aware of when it comes to a Continuation Statement. One of the most important is that the Continuation Statement can only be filed within six months before the lapse date. The intent here is to make Article 9 of the filing system a self-purging system. If a Continuation Statement isn't filed before the lapse date, then the record can be purged a year later.

And this is a way of making secured parties go back and double-check and make sure they really want to file a Continuation Statement, or that one is needed at that point. So it has to be filed within that six-month period before the lapse date.

Now, if the record is filed late any time after the lapse date, even if the filing office accepts, indexes the record, and extends the lapse date, still, it's too bad because by operation of law, the Financing Statement will cease to be effective. It will continue to show up in the searchable index, but it has lapsed by time as a matter of law.

So, if the Continuation is filed late, the Financing Statement lapses, and the secured party had better file a new Financing Statement if they want to remain perfected. They're going to lose their priority, of course.

But remember, the filing office has no power to make a record effective or ineffective if they accept it and reset the lapse date. After it's been filed late, it's an ineffective record.

And this has happened. There have been states that have done this. And the secured parties might think that they're perfected, that they have an effective Continuation Statement out there, but they don't.

Fortunately, it hasn't been something that's come up before the courts yet. But when it does, I think there's going to be a rude awakening if the filing office made that type of error, which they have in the past.

If the UCC Continuation Statement is filed earlier than the six-month window, it's not effective. And again, that's the case even if the filing office accepts the Continuation and resets the lapse date.

So it's the filer's compliance with Article 9 that determines whether the record is effective or ineffective, not anything the filing office does.

So best practices with Continuation Statements. You've got to get them filed within that six-month window. Don't file them any earlier than six months before the lapse date, and certainly don't file them after the lapse date.

Now, I want to move on and talk about Party Amendments. First, we'll talk about an Amendment to Add a Party, either the debtor or the secured party.

The purpose of this amendment is to add another party to the Financing Statement. In the case of an added debtor, it will perfect a security interest in the assets of the debtor that's being added. And the priority date for that will run only from the date when the amendment is filed. It is not retroactive to the original UCC-1 filing date.

And that's because until the amendment was filed with respect to the new debtor, it didn't provide any notice to third parties that this debtor's assets were encumbered. So, as a result, the priority will only run from the date of the filing of the amendment.

This can result in situations where Financing Statements have multiple priority dates with respect to different debtors and different collateral, because the same thing applies on an Amendment to Add Collateral.

When it comes to an Amendment to Add a Secured Party, the added secured party becomes a secured party of record. And it has no effect on the priority because it doesn't change the scope of the security interest. It only changes who's entitled to enforce the security interest and amend the Financing Statement. So there is no priority effect on an Amendment to Add a Secured Party of record.

Another type of Party Amendment is the Change Amendment. The purpose of this amendment is to change the name or address of either a debtor or a secured party of record on the Financing Statement.

This type of amendment typically applies to a party that is already of record. So it'll apply to a debtor or to a secured party that's already on the Financing Statement. It's not something typically that's used to add a different debtor or secured party.

But from a filing office perspective, they treat these much the same way as they would an Add Party Amendment. If the name that is provided is not already of record, then they will take the new name and add it as an additional debtor or as an additional secured party.

Remember, amendments always add to the record. They never delete. And as a result, the old name will continue to show up, even though an amendment has been filed to change that name.

So the new information that's provided becomes part of the Financing Statement. And any new name for a debtor, for example, becomes added to the searchable index. So a search under the new name will find that Financing Statement that was originally filed under the old name. A search under the old name will also continue to find the Financing Statement. And again, the original information that was on there remains part of that Financing Statement.

Next up is an Amendment to Delete a Party. This is used to remove a debtor or a secured party from the scope of the Financing Statement. An amendment such as this has to be authorized by the secured party of record.

And the effect of this is that the party named is deleted from the record. So if a secured party is deleted, it means that the secured party's interest is no longer perfected by the Financing Statement. If a debtor is deleted, that means that the debtor is no longer within the scope of the Financing Statement.

So the party named is deleted from the scope of the Financing Statement, but remember, an Amendment to Delete a Debtor is not going to remove the debtor name from the searchable index.

This can cause heartburn for debtors and lenders and legal counsel, because it'll keep showing up to a year past the lapse date after it lapses by time. So it's important to understand that just because it shows up, doesn't mean it's still effective.

So the filing office has to maintain these records as a matter of statute. They have to be in the searchable index until the record lapses, and then they have to maintain it so it can continue to be searched until at least a year after the record lapses by time.

So just because a debtor shows up doesn't mean the Financing Statement is effective with respect to that debtor. That's part of the cumulative nature of amendments.

There are some limits to deleting a party. An amendment that purports to delete all debtors or all secured parties of record isn't effective. The filing office will probably accept it, but it has no effect. It won't delete a party if there's nobody to replace them.

Also, I want to point out, too, that deleting a party has a retroactive effect as well. When you delete a debtor, it's as if that debtor was never part of the Financing Statement. Just like a Termination terminates Financing Statement, deleting a debtor terminates the debtor from that.

And same thing with a secured party. If the secured party is deleted, it's as if the secured party was never perfected by that Financing Statement.

A couple of tips here. To terminate a Financing Statement with respect to only one of multiple debtors, use the Amendment to Delete the Party. Don't terminate, because the termination affects the Financing Statement as a whole, whether intended or not.

And again, remember that it will not delete the name from the searchable index. Debtors may not be happy about that, that it'll continue to show up, but it has to be explained to them why. The filing offices simply can't purge the records in that type of situation.

Now, I'll move on and talk about Collateral. The next is the UCC3 Add Collateral Amendment. Here, the idea is to bring new assets within the scope of the Financing Statement. Again, this type of amendment must be authorized by the debtor because it's expanding the scope of the Financing Statement to additional assets.

However, the debtor's authority doesn't have to be indicated on the UCC3 record. Just like a debtor has to authorize the filing of an initial Financing Statement, there's no place on there where the debtor indicates that they have authorized the filing of that.

So once a UCC3 Amendment to Add Collateral has been filed, it perfects that security interest in the added collateral. It will do so, though, without retroactive effect. In other words, it's only effective for the added collateral from the date the amendment was filed. And that's because, until that date, the Financing Statement did not provide any notice to third parties that that added collateral was encumbered.

Delete Collateral Amendment, this amendment is designed to remove collateral from the scope of the Financing Statement. It used to be called a Partial Release. In this type of case, the secured party of record must authorize the filing to delete collateral. Once it's filed, the collateral that's described in the amendment is no longer subject to perfection under the security interest.

One word of caution here. Make sure that an Amendment to Delete Collateral does not inadvertently delete all collateral. An Amendment to Delete All Collateral would be effective, and it would delete all collateral, and the filing offices will accept it. This is a potential error that has happened and could continue to happen, so just be aware of this and be prepared to just double-check and make sure that it's not inadvertently deleting all the collateral.

Next up is an Amendment to Restate Collateral. This is a very helpful type of amendment, but people don't always understand what it means. The idea here is to allow for multiple additions and deletions with one amendment, rather than filing a bunch of separate UCC3 Amendments.

And it does this by replacing all prior collateral descriptions. That's what a Restate Collateral does. It's like starting over with your collateral description.

When an amendment is filed to restate collateral, if it expands the scope of the collateral, it will have priority only with respect to the expanded collateral from the date the amendment was filed, but it will maintain its original priority with respect to any collateral that was covered by the prior descriptions.

So it can have both a retroactive and an immediate effect. It depends on just whether collateral is being added as part of that restatement.

Here's an example of what a Collateral Restate looks like. Here, they've described all equipment, and then they provided a Schedule A, which is not included here, and on that Schedule A is all of the equipment. So that's one way to do it.

And this will become the collateral description upon filing. It will replace all the prior collateral descriptions. But using this type of amendment does create a trap because it replaces all prior collateral descriptions. Any error or omission when restating the collateral may leave the secured party without the degree of perfection or priority that they expected.

One example is a case of Northern Beef Packers. What happened here was the secured parties had a blanket security interest on all the debtor's assets. Later, the debtor pledged two additional assets, and the secured party filed an Amendment to Restate the Collateral and described just the new assets, which were actually a very small part of the collateral.

Well, the debtor filed for bankruptcy, and the bankruptcy trustee was able to limit the secured party's security interest to the collateral described on the restated collateral description. In other words, they lost the perfection and the vast majority of the collateral because they didn't include it as part of the restated description.

So it's very important to do it correctly. Always provide the full collateral description on a Restated Collateral Amendment, just as if this was the initial Financing Statement, because if there are any errors or omissions, that may leave the secured party unperfected or subordinate in priority.

To wrap up, I want to cover a couple of special cases that I get a lot of questions about.

One is what happens if assignments are filed out of order? There's a lot of concern that, "Oh, this is going to create a problem with the chain of assignments, and it's going to be a real problem." Well, actually, probably not. The courts haven't addressed it yet, but remember that the effect of the assignment is that it adds a secured party of record.

Article 9 is a notice filing system. There's not a chain like there would be in real estate records, where you have a chain of conveyances. There isn't a chain in Article 9. It's more of a bunch of photos rather than a filmstrip.

And as a result, the effect of them being filed out of order is the same. Both of the signees become secured parties of record regardless of the order in which the assignments are filed, and there is no priority effect. They both become secured parties of record based on the priority of the Financing Statement, not the priority of when the assignments were filed. So really, there is no harm.

Of course, like I said, the courts haven't addressed this specific issue yet, but it shouldn't cause a lot of loss of sleep if this was to occur.

What happens if a Continuation or other Amendment is filed after a Termination Statement? This happens frequently. Well, the bottom line on it is that a Continuation Statement or Amendment filed after the termination will only continue or amend the Financing Statement to the extent the Financing Statement remained effective after the termination.

In other words, if the termination was fully effective and the Financing Statement ceased to be effective, then the Continuation or other Amendment really has no effect on the effectiveness of the record. You simply cannot revive a Financing Statement that's been effectively terminated by filing another Amendment.

Typically, when this happens, it can mean that a Termination Statement was filed without the secured party's knowledge. And they just assume that it's still fully effective, and it probably is, if that's the case.

Frequently, though, it's just also a mistake of the secured party. They might have a release department that handles Terminations and Amendments that release collateral or debtors, and they may have a different department that's responsible for Continuations and other Amendments, and sometimes the information doesn't communicate fully between them.

So the only way to know for sure what the effect of the Amendments after a Termination Statement will have is to conduct further inquiry to determine.

Tarik: All right, everyone. Well, that's all the time that we have for today. If we didn't get to your question, as mentioned before, we will contact you with a response after the webinar.

In just a moment, you'll also see a brief survey appear, and we invite you to provide your feedback on today's session. We thank you for everyone who joined us today, and we hope we see you next time.

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Ucc & corporate due diligence resource guide for legal and financial professionals, common questions on the ucc3 change statement form.

Which file number do I list in Box 1a? In this section, the UCC filer inputs the filing number for the original UCC record they wish to change. Keep in mind that even if a previous Change Statement is on record for the original UCC1 Financing Statement , the appropriate filing number to put on an amendment is the file number that the filing office assigned to the original UCC1 filing.

Under Current Record Information, do I list the debtor or the secured party? Box 6, Current Record Information is used for party amendments. In this box, you will indicate which party from UCC record is affected by the change. When adding, deleting or changing information on a debtor you will input the name and address of the debtor. For changes that relate to a secured party, enter the appropriate secured party name.

Do I need to include the collateral statement from the UCC1 Financing Statement? Box 8 is to be completed only for collateral amendments to detail what specific collateral items are being changed. UCC filers can add, delete or restate collateral from the original record. No collateral description is to be included on any other amendment type.

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§ 9-514. ASSIGNMENT OF POWERS OF SECURED PARTY OF RECORD.

(a) [Assignment reflected on initial financing statement.]

Except as otherwise provided in subsection (c), an initial financing statement may reflect an assignment of all of the secured party 's power to authorize an amendment to the financing statement by providing the name and mailing address of the assignee as the name and address of the secured party.

(b) [Assignment of filed financing statement.]

Except as otherwise provided in subsection (c), a secured party of record may assign of record all or part of its power to authorize an amendment to a financing statement by filing in the filing office an amendment of the financing statement which:

(1) identifies, by its file number , the initial financing statement to which it relates;

(2) provides the name of the assignor; and

(3) provides the name and mailing address of the assignee.

(c) [Assignment of record of mortgage.]

An assignment of record of a security interest in a fixture covered by a record of a mortgage which is effective as a financing statement filed as a fixture filing under Section 9-502(c) may be made only by an assignment of record of the mortgage in the manner provided by law of this State other than [the Uniform Commercial Code].

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Best Practices for UCC-3 Terminations and Continuations

• July 11, 2023
• / Business Bankruptcy
• / Thomas Egan
• Tags: Article 9 , UCC Article 9 ,

Careless UCC-3 Termination Filings Have Costly Consequences

Lenders and borrowers are focused on potential workouts and refinancing of loans due to the COVID-19 pandemic . As such, UCC-3 terminations and continuations will be thrust into the spotlight. Under Article 9 of the Uniform Commercial Code (“UCC”), a  UCC-3  is defined as a filing used to make or track any changes to a UCC-1 filing, including continuations, terminations, transfers, and amendments to party names and collateral. This article focuses on the legal aspects and effects of UCC-3 terminations and continuations and suggests best practices to protect our clients and third parties from having to litigate priorities.

Overview of UCC-3 Terminations

A UCC-3 termination statement (a “Termination”) is a required filing that terminates a security interest that has been perfected by a UCC-1 filing. 1  A Termination for personal property is accomplished by completing and filing form UCC-3 with the Secretary of State’s office in the appropriate state.

Generally, for non-consumer goods, the UCC requires that a new secured party cause an existing secured party to file the Termination within 20 days after a secured party receives an authenticated demand from a debtor and there has been payoff in full of the obligations to the existing secured party and cessation of any commitment to advance any funds. 2  To alleviate the burdens of this section on new secured parties and debtors, it is recommended that a payoff letter be obtained from the existing secured party that states: (i) the prior secured party will terminate the security interest, and/or (ii) the new secured party and/or the debtor are authorized to unilaterally terminate the security interest upon payoff. As shown on the IL UCC-3 form and instructions , a Termination must always identify, by its file number, the UCC-1 being terminated.

A new secured party must be cautious since the filing of a Termination may not always be effective to terminate the subject UCC-1. 4 For example, a Termination is not effective without proper authorization from the secured party of record or compliance by the debtor with § 9-509(d). Proper authorization cannot be gleaned from the face of a UCC-3 nor, as we shall see, even the intention of the secured party to terminate. Determination of proper authorization to file may be a matter of the applicable state’s law of agency or other laws. 5 Legal authority appears to support the notion that the action or inaction of a secured party of record may be enough for tacit or implied authorization.

Anyone relying solely on the listing of a secured party’s name on the UCC-3 to establish proper authorization to terminate runs a risk. Even where a debtor’s books and records indicate there are no outstanding obligations of a debtor to a secured party, sometimes lenders will still require each secured party of record that has a terminated UCC within the 5-year UCC lapse period to provide a letter stating that such secured party authorized the Termination of its UCC. 6 In many circumstances, though, considerations of costs, timing, and a lack of cooperation from prior secured parties will cause a new secured party to forgo pursuing such letters. 7

Per the instructions to Form UCC-5, “[a] person may file an Information Statement with respect to a record indexed under that person’s name if the person believes the record was inaccurate or wrongfully filed, or a person may file an Information Statement with respect to a record if the person is a Secured Party of Record with respect to the financing statement to which the record relates and believes that the person that filed the record was not entitled to do so.” If a secured party discovers its UCC-1 financing statement has been terminated without proper authority, such secured party can consider filing UCC-5 Information Statement to provide information to third parties that the Termination was filed without proper authority.

Overview of UCC-3 Continuations

If a search reveals that a Termination was filed against a UCC-1, but also shows a subsequently filed Continuation, a secured party must be cautious and undertake further research to determine the status of the UCC-1. 15   Such inconsistent results are usually due to poor record keeping by the secured party of record after it authorized the filing of a Termination. In such case, the Continuation will not revive the terminated UCC-1.

On the other hand, a Continuation filed after a Termination can indicate that the Termination was improperly filed. If the Termination was filed without the authorization of the secured party of record and then the secured party of record files a Continuation, the Continuation will extend the term of effectiveness for the applicable UCC-1, because the Termination was invalid. Regardless, a searcher facing this inconsistency should contact the secured party of record to determine if the Termination was filed with proper authority.

Important Decisions Relating to Authorization of UCC-3 Terminations

The Appeals Court in Official Committee of Unsecured Creditors of Motors Liquidation v. JPMorgan Chase Bank (In Re Motors Liquidation) , No. 13-2187, (2d Cir. Jan. 21, 2015) considered the effectiveness of a mistakenly filed Termination. In In Re Motors Liquidation , General Motors (“GM”) entered into two distinct secured transactions in which JPMorgan Chase Bank (“JPMorgan”) acted as agent for two different groups of lenders. The first loan (structured as a secured synthetic lease) in the amount of $300 million was made in 2001 to certain lease lenders and the second loan in the amount of $1.5 billion was made in 2006 (structured as a term loan) to a syndicate of over 400 lenders (such syndicate, “Lenders”). Separate collateral for each loan was recorded in different UCC-1 financing statements.

In 2008, the 2001 synthetic lease was maturing, and the closing for the payoff required the synthetic lease lenders to release their security interests in the collateral securing the lease. GM instructed its lawyer, Mayer Brown, to prepare the documents necessary to memorialize the pay off of the 2001 synthetic lease. In preparing such payoff documents, Mayer Brown mistakenly prepared a Termination for the collateral securing the term loan. Upon completion, Mayer Brown provided JPMorgan’s counsel, Simpson Thacher, drafts of proposed payoff documents for review, including the mistaken Termination. JPMorgan authorized the filing of the mistaken Termination which caused the release of the collateral securing the $1.5 billion term loan without JPMorgan or its counsel noticing the mistake.

The mistaken Termination was discovered only after GM filed for bankruptcy protection in Delaware in 2009. Adversary proceedings followed in the bankruptcy case. The bankruptcy court found that the unpaid loan security interest had not been terminated and ordered GM to repay the term loan with interest, and GM complied in July 2009. GM’s creditors alleged that the unpaid loan security interest had been terminated so that the Lenders for the term loan ( i.e. , plaintiffs in In Re Motors Liquidation ) were not secured lenders and should have to disgorge the 2009 repayment by GM.

More Best Practices

The discussion above makes it clear that actions, not intentions, govern Terminations and Continuations. Attempting to pass the buck for a mistaken filing will likely not be successful. Though it is harsh that the Lenders for the 2006 term loan lost such a huge amount of collateral, among the parties under the particular circumstances they were most culpable and must bear the burden of the mistaken Termination filing. Parties involved in any secured transaction should be prepared to take extra steps in order to ensure their transactions comply with Article 9 of the UCC and the relevant interpretations of the same. Specifically:

• For new secured parties: The practical effect of the forgoing cases is to reduce unnecessary “costs to new lenders (or other secured parties) for relying upon UCC-3 termination statements as they file UCC-1s to perfect their new interests in the same collateral” according to Christopher M. Cahill, Head of Bankruptcy and Restructuring Group, L&G Law Group LLP. Nevertheless, new secured parties cannot rely on the ‘mistakes’ of other parties. In other circumstances, courts could find that the new secured parties were not sufficiently diligent about confirming whether UCCs were properly terminated. In the instances where a new secured party’s counsel is “delegated” the responsibility to file Terminations, “the searcher needs to balance the time and cost required to verify the filer’s authority with the risk involved in the transaction…the consequences for a searcher’s failure to verify that a termination statement was authorized can be substantial.” 22
• For the existing secured parties: Most financial institutions have internal procedures and controls in place to handle preparation and filing of Terminations. These procedures are used to ensure that all Terminations are filed intentionally and correctly so as to avoid negative situations like those highlighted above. As such, many financial institutions do not permit their counsel to file Terminations. Counsel should get written confirmation that the client will handle filing of the Termination. In the event that the financial institution requires the counsel to file a Termination, then, as Mayer Brown did in the In re Motors Liquidation Co . case, such counsel should prepare and present the UCC termination at closing or similar event and get all parties authorization to file the termination.

Practically, the effects of the forgoing discussions show that secured parties should implement procedures that include stronger attention to detail and provide oversight strategies to avoid mistakes. 23 Some simple strategies such as a thorough review process with multiple levels for filing procedures can assist in avoiding mistakes. Additionally, “utiliz[ing] the optional reference portion on the bottom of UCC-1 financing statements…in order to have standard reference points that everyone in the firm can use to double check the specific transaction” can provide an effective means of ensuring all filings are associated with the correct transaction. 24

In conclusion, losing priority on a security interest due to problems with careless mistakes on UCC-3 Terminations or Continuations can be significantly detrimental to a secured party. Early establishment of thorough and effective internal procedures and multiple levels of review can greatly reduce the chances of a costly mistake.

We think you’ll also like:

• 90 Second Lesson: What is a “UCC Article 9” Sale?

Dealing with Corporate Distress 12: Meet Our Little Friend, The UCC

• Incorporation by Reference in UCC-1 Filings

To learn more about this and related topics, you may want to attend the following on-demand webinars (which you can watch at your leisure, and each includes a comprehensive customer PowerPoint about the topic):

• Restructuring, Insolvency & Troubled Companies
• Negotiating and Drafting Cash Collateral/DIP Financing Orders

©2023. DailyDAC TM , LLC d/b/a/ Financial Poise TM . This article is subject to the disclaimers found here .

• See U.C.C. §§ 9-509 & 9-513(2013); See also IL ST CH 810 § 5/9-513(Illinois enactment of Uniform Commercial Code).
• U.C.C. § 9-513(c)(1)(2013).
• See U.C.C. §§ 9-509(d)(1) & 9-509(d)(2)(2013).
• See Oakland Police & Fire Retirement System v. Mayer Brown, LLP , 861 F.3d 644 (7th Cir. 2017); see also Paul Hodnefield, UCC Terminations and the Diligent Searcher , CSC White Paper.
• See Hodnefield, UCC Terminations and the Diligent Searcher, CSC White Paper ; Rudolph J. Di Massa Jr. & Catherine B. Heitzenrater, ‘Authority’ to Terminate Financing Statements Under UCC, The Legal Intelligencer (Aug. 7, 2015).
• See Paul Hodnefield, Avoiding The UCC Search Termination Trap , CSC Blog (Sept. 3, 2013).
•   See UCC Terminations and the Diligent Searcher, supra.
• U.C.C. § 9-515(2013).
• U.C.C. § 9-515(d)(2013).
• U.C.C. § 9-102(a)(27)(2013).
• See UCC Terminations and the Diligent Searcher, supra.
• Official Comm. of Unsecured Creditors v. JP Morgan Chase Bank, N.A. (In re Motors Liquidation Co.) , 777 F.3d 100, 105–06 (2d Cir. 2015).
• Rudolph J. Di Massa Jr. & Catherine B. Heitzenrater, ‘Authority’ to Terminate Financing Statements Under UCC , The Legal Intelligencer (Aug. 7, 2015).
• In re Motors Liquidation Co . at 105.
• Oakland Police & Fire Retirement System v. Mayer Brown, LLP , No. 15 C 6742, 2016 WL 3459714, at *6 (N.D. Ill. June 22, 2016).
• Oakland Police , 861 F. 3d 644, 648 (7th Cir. 2017).
• Paul Hodnefield, Authority to file UCC Amendments, CSC Blog.
• Whang-Ki Josh Jang et. al., The Perils of UCC-3 Terminations , ABA Commercial Law Newsletter (2015).

About Thomas Egan

Thomas Egan is Of Counsel at L&G Law Group LLP. Mr. Egan’s practice at LLF is concentrated in corporate and transactional matters. He has been engaged in a wide variety of transaction during his thirty years of practicing law, including asset securitization transactions, mergers, stock and asset acquisitions, public and private offerings of securities (including…

Read Full Bio »   •   View all articles by Thomas »

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