Know the Limits of UCC Search Results
An important part of a lender’s due diligence is to properly conduct a UCC financing statement search prior to closing a loan transaction. However, many lenders may not realize what information they are getting when they request a search from a particular filing office. UCC filing offices are required to maintain “active records.” An “active” record means a UCC record that is part of the searchable index. This includes all documents filed with the filing office, including lapsed, terminated, incorrect and ineffective financing statements. Many searchers incorrectly believe that an “active” record refers to a UCC filing that has not been terminated or lapsed. Many searchers also incorrectly believe that an “active” record indicates that the particular record is also an “effective” record.
The Uniform Commercial Code provides that “a filed record is effective only to the extent that it was filed by a person that may file it.” It goes on to say that “a filed financing statement is effective only to the extent it was filed by a person entitled to file it.” In addition, if a filed financing statement is not authorized, it is ineffective. In general, authorized filings will be effective and unauthorized filings will be ineffective. Unfortunately, many UCC indexes contain unauthorized filings, including, sometimes, unauthorized termination statements and other legally ineffective UCC filings.
The only way for a searcher to determine if a particular financing statement is effective is to determine whether or not the filer had the authority to file it. A searcher must sometimes look beyond the financing statement itself in order to determine whether or not the proper authority was obtained. A secured creditor must understand what the records and the UCC filing office will show, and what additional inquiry a searcher must make in order to determine whether or not the “active records” maintained by the UCC filing office are effective records.