Financing Statement

Financing statement

A UCC financing statement (also referred to as a UCC-1) is a short, simple record filed for the purpose of giving constructive notice of a secured party's interest in property of the debtor. UCC 9-521 provides a safe harbor form of financing statement and financing statement addendum that a filing office may not refuse to accept except for reasons specified in UCC 9-516(b). In contrast, the real property secured creditor will record the security instrument itself (mortgage or deed of trust) to give constructive notice of a consensual lien on real property. While a financing statement is a short and simple record, Article 9 devotes twenty-seven sections (all of Part 5) to the filing system.

To perfect a security interest in personal property or fixtures through the filing of a financing statement, such a filing must be a permissible method of perfection. Filing is a permissible method of perfection with respect to most types of collateral but is not permissible with respect to some types of collateral. See Commentary.Perfection of security interest in personal property. Accordingly, a security interest will not be perfected if one files a financing statement (and does nothing else) where filing is not a permissible method of perfection (e.g. with respect to collateral for which perfection is governed by state certificate of title legislation). Conversely, a security interest will not be perfected if one fails to file a financing statement where filing is the only available method of perfection (e.g. with respect to most accounts).

To perfect a security interest by the filing of a financing statement where a financing statement is a permissible method of perfection, the financing statement must be sufficient, it must be effective, it must be filed, and it must be filed in the correct location. We explore each of these requirements in turn.

Sufficiency

A financing statement is a record that contains certain information. The record may either be written or in electronic form (U.C.C. 9-102(a)(39), (69)) although, as discussed below, a filing office may choose not to accept a record communicated by a particular method or medium. To be a sufficient record, the finanancing statement must provide the name of the debtor and the name of the secured party (or representative of the secured party) and must indicate the collateral covered by the financing statement (U.C.C. 9-502(a)). U.C.C. 9-502(b) states additional requirements for fixture filings or where the financing statement covers timber to be cut or as-extracted collateral. We elaborate on these requirements in Commentary.Sufficiency of finanancing statement.

Effectiveness

A financing statement is effective only if filed by a person entitled to file it (U.C.C. 9-510(a)). Typically, the secured party files the financing statement. The secured party is entitled to file the financing statement if the debtor authorizes the filing. The debtor provides such authorization by becoming bound under the terms of a security agreement (U.C.C. 9-509(b)), but the debtor may, alternatively, separately authorize the filing in an authenticated record (U.C.C. 9-509(a)(1), such as in a case where the secured party wishes to file a financing statement prior to the debtor's execution of the security agreement ("pre-filing"). Note that a financing statement need not be signed by the debtor to be effective (Comment 3 to U.C.C. 9-509).

Filing

A financing statement is deemed filed when the filing office to which it is sent accepts it for filing. U.C.C. 9-516(a). Acceptance of a financing statement by a filing office will routinely take place when the financing statement is communicated to the filing office accompanied by the requisite filing fee. Filing fees are specified in a state's version of U.C.C. 9-525.

A financing statement will also be deemed filed in some cases if the financing statement is communicated to the filing office with tender of the filing fee but the filing office refuses to accept the record. The filing office must refuse to accept a financing statement for the reasons specified in U.C.C. 9-516(b) and may not refuse to accept a financing statement for any other reason. U.C.C. 9-520(a). If a filing office properly refuses to accept a financing statement for filing, the financing statement is not effective. U.C.C. 9-516(a). However, a filing office may make a mistake. It may improperly refuse to accept a record. If it does so, the financing statement is nonetheless deemed filed except as against a purchaser of collateral who gives value in reasonable reliance upon the absence of the record from the files. U.C.C. 9-516(d). Or, the filing office may accept a financing statement that it should not have rejected. In that case, the financing statement is nonetheless deemed filed. U.C.C. 9-520(c).

A filing office may choose to accept communication of either a written or an electronic record, or both (U.C.C. 9-516(b)(1)). Presumably most if not all states soon will accept communication of an electronic record and some states may ultimately choose not to accept communication of a written record. If a filing office does not authorize the communication of a particular type of record (e.g. written), the communication of such a record, if rejected by the filing office, does not constitute a filing (U.C.C. 9-516(a), (b)) and therefore cannot perfect the security interest. Article 9 provides a "safe harbor" form of written financing statement in U.C.C. 9-521 but does not require its use. A filing office that accepts written financing statements may not refuse to accept this safe harbor form except for the reasons specified in U.C.C. 9-516 (U.C.C. 9-521(a)). Because of this safe harbor, it is likely that most secured parties that wish to communicate a written financing statement to a filing office that accepts written records will use the safe harbor form.

The filing office is obligated to index financing statements accepted for filing, generally by the name of the debtor (U.C.C. 9-519), but a mistake in indexing by the filing office does not affect the effectiveness of the financing statement (U.C.C. 9-517).

Correct location

To perfect a security interest where a security interest may be perfected by filing, the financing statement must be filed in the correct location. If filed only in an incorrect location, even if sufficient and even if effective, the financing statement will not perfect the security interest. To determine the correct location, one must first apply a choice of law rule to identify the state whose law will describe the location (U.C.C. 9-301). Upon identifying the correct state by applying the choice of law rule, U.C.C. 9-501 describes the location of filing within that state. We explore these concepts more fully in Commentary.Location of filing and Problem.Location of filing and lapse.

After filing

Generally, the financing statement is effective for five years from the date of filing (U.C.C. 9515(a)). At the end of the five year period, absent renewal, the effectiveness of the financing statement lapses (U.C.C. 9-515(c)). It may be renewed for a five year period (and for successive five year periods) through the filing of a continuation statement during the last six months of the five year period (U.C.C. 9515(d), (e)). A continuation statement not filed within the six month period is ineffective U.C.C. 9-510(c).

Article 9 also includes provisions concerning the amendment of financing statments (U.C.C. 9-512), including amendments assigning the powers of a secured party of record to an assignee (U.C.C. 9-514(b)), the filing of a correction statement (U.C.C. 9-518), and the filing of a termination statement (U.C.C. 9-513). We do not explore the details of those provisions in these materials.

Events subsequent to the filing of a financing statement (or subsequent to renewal or amendment of a financing statement) may make the information in a financing statement inaccurate and misleading. We consider the issues raised by such events in Commentary.Events subsequent to filing and Problem.Events subsequent to filing.

Searching

If the filing of a financing statement is a permissible method of perfecting a security interest, someone wishing to know whether someone else claims a security interest in personal property or fixtures of the debtor must search for a financing statement in the appropriate location. Any person may initiate a search and obtain the relevant information by a request to the appropriate filing officer (U.C.C. 9-523(c)). See, for example, the request form used by the California Secretary of State.

Absence of a financing statement from the location(s) in which it should be filed connotes to any searcher that there is no perfected security interest in property of the debtor as of the time of the search, unless a security interest has been perfected in an alternative way (e.g. possession of the collateral by the secured party). Discovery of a financing statement by a searcher alerts the searcher to the possibility of a perfected security interest in property of the debtor and provides the name of the secured party from whom the searcher can request further information. What further information would the searcher want? Recall Commentary.Relationship Between Debt and Value of Collateral. What information is in the financing statement?

Practical information

The offices of the California Secretary of State, the Indiana Secretary of State, and the New York Department of State provide useful practical information on line about filing and searching (e.g. lists of forms, fees, instructions, direct computer access services for filing and search requests, information about search logic, frequently asked questions).

The secured party may file, renew, amend, or terminate a financing statement on its own, but frequently does so through a commercial service performing those functions. Interested parties can undertake an informal on-line search through Lexis-Nexis or Westlaw (note U.C.C. 9-523(f)) or may retain a commercial service to undertake a formal search.