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Law360 (March 24, 2021, 2:15 PM EDT) --
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| Ming Russell |
The lender is now unresponsive and unavailable due to pandemic-related delays. Can a debtor file a UCC-3 termination statement with respect to a satisfied obligation in the event the secured party fails to file as required by the Uniform Commercial Code?
Corporate and finance lawyers and in-house counsel struggling through excessive delays in receiving termination releases during the pandemic will be heartened to find that Sections 9-509(d) and 9-513 of the Uniform Commercial Code permit debtor termination filings in this predicament.
Due to unprecedented economic strains related to the COVID-19 pandemic, many businesses have been obtaining new lending and refinancing, and scrambling to pay off prior loans and evidence their corresponding lien releases.
Since the onset of the COVID-19 pandemic, the Small Business Administration approved over $3.6 million in loans through the Economic Injury Disaster Loan Program in the U.S.,[1] some of which tided over small businesses until their next secured lending transaction.
The 2020 year-end surge in lending to make up for lost time in the virus-infected year left even private lenders and established national banks struggling to meet the overwhelming demand to push through credits and salvage the otherwise depressed 2020 activity levels.[2]
Between the overloaded SBA, intermittent government and bank office closures, and lenders forced to work from home with limited resources, at times UCC-1 financing statements related to terminated facilities remained unreleased, and attorneys who never before grappled with this issue turned with increased frequency to statutory remedies to make demand to terminate old debt liens.
Designed to create an accurate system of filing records, the Uniform Commercial Code provides for the removal of stale UCC-1 financing statements as a matter of policy. In consumer financing, UCC Section 9-513(b) requires a secured party to file a termination statement within one month of a loan payoff.
Given that lenders, and the SBA in particular, are overwhelmed, the filing of termination statements may not always happen in a timely fashion. Though perhaps elusive due to lack of use, the code clearly sets forth procedures for making demand on a secured party in the event no obligations remain to be satisfied.
In the event the secured party fails to file a termination related to a satisfied obligation, the debtor may have the right under UCC Section 9-513(b)(2), in the case of consumer financing, and Section 9-513(c), in all other financings, to send an authenticated demand letter to the secured party requesting release of the UCC-1 financing statement related to the terminated financing.
If the secured party neglects to file within 20 days of receipt of the authenticated demand letter from the debtor, then UCC Section 9-509(d)(2) authorizes the debtor to file the relevant termination.
Borrowers and lenders counsel alike should caution the debtor to appropriately draft and send an authenticated demand letter with tracking, and help to submit and receive copies of such missives as evidence that the demand and therefore filing are proper.
In AEG Liquidation Trust v. Toobro NY LLC, the New York Supreme Court in 2011 held the debtor's termination to be ineffective where the condition of an authenticated demand letter mandated by UCC Section 9-513(c) was not satisfied.[3]
The underlying obligation must be satisfied; an authenticated demand letter must be sent; and the lender must fail to make or provide a responsive filing within 20 days of their receipt of an authenticated demand letter for a termination filed by the debtor to be authorized.
Should any condition of UCC Section 9-513(c) be unsatisfied, the consequent termination filed by the debtor under the auspices of UCC Section 9-509(d)(2) could be rendered ineffective.
Though the modern world has shifted toward electronic execution, a printed letter with a handwritten signature remains an indisputable and therefore recommended form for an authenticated demand letter.
While it might be tempting to send and rely on an email, where a debtor termination filing is contemplated, counsel would do well to rely on a printed demand letter that is signed by hand and sent by certified mail or overnight courier with tracking to the address of notice listed on the financing statement to avoid any arguments against its validity.
Technically, the UCC might allow an electronic demand letter to be sent, since it defines authenticated as "to sign" or "to adopt or accept,"[4] and "sent" as defined by the UCC means to "deposit in the mail," but also to "transmit by any other usual means of communication," including electronically.[5]
However, state law may dictate that a document must be manually signed to be valid.[6] Alternatively, state law may dictate electronic signature requirements of which a typical email could easily run afoul; for example in Illinois a written signature is defined as either a handwritten signature or a formal electronic signature created using a secured procedure pursuant to the Illinois Electronic Commerce Security Act.[7]
Moreover, UCC 9-516 is unequivocal in identifying the mailing address of record for the secured party as satisfying the notice requirement, making a written letter delivered to a physical address, as opposed to electronic delivery to an email address, the best method of complying with the requirements of the UCC.
To avoid any debate as to whether the debtor's termination is invalid due to ineffective demand, debtors should send a manually signed demand letter by certified mail or overnight courier with tracking to the secured party at the notice address listed on the UCC-1 financing statement, however tempting it might be to simply send an email request.
In any event, in this scenario, an email request for termination, if an available form of resolution, has likely already proven to be ineffective.
Impatient debtors should also be advised to wait the appropriate measure of time prescribed: a full 20 days. In many cases, it suffices for a debtor to deliver an authenticated demand letter, and consequently the secured party itself provides the rightful termination without any further required action on the part of the debtor. In sum, the 20-day waiting period should be abided.
On the other side of the demand, lenders counsel and in-house counsel to any financial institution should carefully review any demand for authentication.
Courts are likely to invalidate incorrectly filed terminations by parties without authority, such as in the U.S. Bankruptcy Court for the Western District of Tennessee's 2020 case In re: Smith. There, the court held in a dispute between two lenders, each claiming priority over the other in bankruptcy, that an unauthorized termination statement was ineffective to terminate a valid security interest.[8] But conversely, judges lack sympathy for inadvertent terminations that could have been avoided.
Mistaken terminations by those with authority are likely to be upheld, such as in the U.S. Bankruptcy Court for the Western District of North Carolina's 2012 decision In re: Hickory Printing Group Inc., where a mistaken filing by a bank's financial officer for termination was held to be valid, because the mistake "in no way impl[ied] lack of authorization."[9]
In 2014, the Supreme Court of Delaware echoed this in Official Committee of Unsecured Creditors of Motors Liquidation Co. v. JPMorgan Chase Bank NA, where the judge quashed the lender's argument that an authorizing party must understand a filing and intend their effect for a filing to be effective, stating unequivocally that "it is enough that the secured party authorizes the filing" for such filing to be effective.[10]
A lender should avoid unintentionally authorizing a filing that should remain effective, since the court will not take intent into account.
To expand upon a common example in the market, overly broad UCC lien searches sometimes call up unrelated filings on a company with a similar name.
If a borrower's counsel were to incorrectly assume that a filing on a similar but different name relates to its borrower due to overly broad search terms, and make demand to a secured party for the release of a correct and unrelated UCC-1 filing, that secured party would err to ignore such a demand and unintentionally authorize its correct and proper filing to be released by omitting to respond in a timely fashion.
Such a mistake would require such secured party to file a new UCC-1 filing and result in the loss of its original filing date, as well as potential litigation in the event a priority dispute later ensues.
We know from such recent examples as the U.S. Bankruptcy Court for the District of Minnesota's 2020 holding In re: Rancher's Legacy Meat Co. that filing of continuation statements is insufficient to reperfect on a lapsed security interest, and a refiling risks being primed by interim filings. It is certainly better to avoid a termination than to be beholden to file an ineffective record continuation and hope for the best with respect to a later-dated refiling of a UCC-1 financing statement that relates back to an earlier dated financing.[11]
If the pain of having a valid filing potentially terminated fails to create a motivating force, lenders should additionally be forewarned that they may be held liable for actual and statutory damages for failure to respond to requests and failure to timely file termination statements under UCC Section 9-625.
Specific remedies at law include, but are not limited to, (1) judicial orders concerning noncompliance, (2) damages, and (3) statutory damages for noncompliance of $500 per instance.
Given that the impetus of most borrower and lender parties is to simply move forward in good faith with current lending activities, and that failures to file terminations almost never stem from an intentional delay, communication through an authenticated demand letter is likely the key to a successful resolution and not a discussion of likely unnecessary litigation and penalties that could be applied.
Nevertheless, counsel should be aware that such penalties exist as not to perpetuate a situation that might implicate them.
Though the hustle and bustle of COVID-19 life has created an unexpected uptick in the need for debtors to authorize self-filing of terminations, or at least make authenticated demand under UCC Section 9-513, corporate and finance lawyers and in-house counsel can rest easier knowing that remedies exist to aid them in their handy-dandy copy of the Uniform Commercial Code.
Ming Russell is an associate at Goldberg Kohn.
The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.
[1] U.S. Small Business Administration, SBA Extends COVID-19 Economic Injury Disaster Loan Application Deadline through Dec. 31, 2021, RELEASE NUMBER 20-93, December 30, 2020, https://www.sba.gov/article/2020/dec/30/sba-extends-covid-19-economic-injury-disaster-loan-application-deadline-through-dec-31-2021.
[2] Abby Latour, Busy Q4 in Middle Market Lending Adds to Optimism for 2021, December 17, 2020, https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/busy-q4-in-middle-market-lending-adds-to-optimism-for-2021-61777899.
[3] 32 Misc. 3d 1202(A), 932 N.Y.S.2d 759, 759 (Sup. Ct. 2011).
[4] UCC § 9-102(a)(7); Richard F. Duncan, William H. Lyons, and Catherine Lee Wilson, The Law and Practice of Secured Transactions: Working with Article 9, Law Journal Press §2.02 [6] (2015) (Explaining the UCC § 9-102 was specifically modified as not to require a manual signature, but that the document authentication must nevertheless be in a "perceivable" form).
[5] UCC § 9-102(a)(75).
[6] Matthew Bender, New York Commercial Law Goldbook, UCC § 1-201 Annotation 39 (2015), citing NY CLS Gen Const § 46.
[7] Electronic Commerce Security Act. 5 ILCS 70/1.15; 5 ILCS 175/1-101 et seq.
[8] 622 B.R. 26 (Bankr. W.D. Tenn. 2020), citing Lange v. Mut. of Omaha Bank (In re Negus–Sons, Inc.), 460 B.R. 754, 757, n. 10 (B.A.P. 8th Cir.2011) (identifying that accepting an unauthorized termination as effective "appears to be contrary to the plain language of the Uniform Commercial Code") and In re RAG East, No. ADV 12-2454 - CMB, 2013 WL 796616 (Bankr. W.D. Pa. Mar. 4, 2013) (deciding that a termination initiated by an party without authority was ineffective); see also In re A.F. Evans Co., Inc., 932 N.Y.S.2d 759, 759 (Sup. Ct.) (where the court held a termination by an escrow agent in error to be invalid based on lack of authorization to file for termination).
[9] 479 B.R. 388 (W.D.N.C. 2012).
[10] 103 A.3d 1010 (Del. 2014).
[11] 616 B.R. 532, 540 (Bankr. D. Minn. 2020).
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