UCC fraud and abuse happens when a third party purposely files a fake UCC statement or accidentally doesn’t file it properly. Some situations include:
- If a lender uses vague descriptions of collateral on the assets in a business loan when the borrower specified the assets (this gives the lender more leeway in seizing assets if the borrower defaults).
- Third parties that submit a fake UCC filing to try and extort money, hamper another company’s ability to borrow money or sell assets, or to disrupt and distract the other company.
- When a lender doesn’t terminate a UCC lien after the borrower pays off the debt or extends the lien when they shouldn’t.
Situations like this are less common than they used to be, but they still can happen, which is why it is important to be proactive when protecting yourself and your business from UCC fraud and abuse. At SmallBusinessLoans, we’re here to help by providing the information you need to stay ahead of potential scams and know what to do if you ever face one.
Becoming a victim can cause you to:
- Miss out on a business opportunity because the UCC error caused you to get turned down for a small business loan.
- Not be able to sell a business asset because you can’t transfer a clean title.
- Lose money on legal fees and time that you could be spending on your company or personal life.
UCC filings are public record and start when a third party files a UCC-1 form with your Secretary of State or county recorder’s office for real estate. This can be a lender filing their claim on collateral for a business or personal loan, a vendor that shipped your product before you pay, or even a customer that paid in advance.
Because the Secretary of State offices process a huge number of filings, it’s practically impossible to verify legitimacy upfront, so they rely on after-the-fact processes to fix any errors. That means fraudulent filings might show up unexpectedly when you try to sell an asset or use it as collateral for a loan.
There is no one-size-fits-all solution for remedying errors and false claims, as each state has its own process to fix errors, so check the states you operate in at least once a quarter. If you’re planning an expansion or thinking of buying out a competitor and need financing, you may get declined if there is a false claim on your assets, and this can delay or prevent the approval for funds that you need right now.
Unfortunately, there’s nothing you can do to outright stop UCC fraud and abuse in advance, but there are three starting points to proactively protect yourself and your business including:
- Conducting regular searches for yourself and your business.
- Proactively communicating with lenders and other third parties that have filed or will file UCC statements on your assets.
- Fixing UCC errors yourself when you detect them.
Regular Searches
UCC liens can be filed on both business and personal assets, so doing regular searches for yourself and your business name is something to put on your calendar every week or month. For real estate, you’ll need to search with the county where the property is, but for other assets, check your Secretary of State’s website for a free UCC search, like this one from Virginia.
Pro-tip: Run searches for your complete name and common errors like typos (For example: “Ashley’s Salon” as well as “Ashleigh’s Salon”).
When you’re planning to sell an asset or apply for a loan, contact your Secretary of State’s office and ask for a UCC-11 certified search to get an official result verifying that no liens exist on the property. This gives an asset buyer or lender proof that the asset isn’t claimed by someone else. It only costs about $20 and holds more weight than a screenshot.
If you see any erroneous filings, take action immediately.
Proactive Communication Is Best
Proactively communicating with the filer is the best way to fix things quickly. Searches can also help you find errors, whether they are honest mistakes or borderline UCC abuse. Examples of errors can be lenders incorrectly describing the asset on the filing or extending the lien due to an administrative issue even though you’ve paid off the debt.
Filers must describe the asset on the initial UCC-1 form, which gets recorded in public records, and you should verify that they use specific language to identify it:
- Use VINs for vehicles and serial numbers for equipment.
- Use model or part numbers if unique identifiers aren’t available.
- Provide complete descriptions like “100, 20-count boxes of cerulean cashmere V-neck sweaters, size Large, ordered from XYZ vendor on XX/XX/XXXX date.”
In some situations, the party filing might try to give themselves a better chance of getting paid back if you default by writing something like “vehicles belonging to ABC company” instead of using the VINs and vehicle description. This will potentially give them a claim to seize and sell all your vehicles if you don’t protect yourself and you default.
If this happens, contact the lender immediately and tell them to file a UCC-3 Financing Statement Amendment with a specific and accurate description to “restate covered collateral” in box 8 on the form. Make sure they include your email in the “Send Acknowledgement To” box so that you’ll get an email from your Secretary of State when it gets fixed.
If the lender doesn’t cooperate or if you’re dealing with an all-out scam where you can’t communicate, here’s the process to fix the filing yourself.
Fixing UCC Fraud or Abuse Yourself
Fixing UCC fraud and abuse yourself is easy by following these five steps:
- Immediately file a UCC-5 to contest the fraud in public record.
- Send an authenticated demand letter to the filer.
- File a UCC-3 financing amendment with your Secretary of State or the county for real estate.
- Get a stamped acknowledgement from the filing office.
- Run a certified UCC search for proof the public record is now clean.
File a UCC-5 Statement
The first step is filing a UCC-5 Information statement with your Secretary of State or county office for real estate. This creates a public record of the original filing being a fraud or an error.
Pro-tip: Check with your Secretary of State’s office to see if they have an expedited fraud process, like this one in Minnesota, that can save you time and hassle.
Send Authenticated Demand Letter
Next, send the filer a §9-513(c) termination letter demanding they immediately file a UCC-3 financing amendment to terminate their claim.
Pro-tip: Download and fill out the UCC3 from the IACA website and send it with your termination demand letter. Make sure to use the original UCC-1 number that you’ll find on the search result where you found the inaccurate UCC filing.
File a UCC-3 Amendment
The filer has 20 days after they receive your letter to file the UCC-3 amendment, so if you don’t see it, then file your own on day 21. Most states have e-filing portals like this one from California. Include your own version of the UCC-3 form and also proof they received the demand letter or that it was denied delivery by UPS/FedEx/USPS.
Get and Keep the Stamped Acknowledgement
You should get a stamped acknowledgement from the state or county clerk if you file in person. E-file systems should give you a downloadable PDF immediately. If you don’t see an option for the stamped acknowledgement, contact the office directly or go in person to get a hard copy. Save this file for future reference in case someone tries to scam you again.
Run Certified Search
The final step to protect yourself is to ask your Secretary of State to run a certified UCC-11 search. This gives you official notice from your Secretary of State that there are no erroneous UCC filings, and you can use it as proof when working with potential buyers or lenders.
Being proactive can protect you from UCC fraud or abuse, giving you a better chance of identifying errors or fake filings as soon as possible. When this happens, you can communicate with the filer to fix the issue or work to correct it yourself with the 5 steps in this article.
At SmallBusinessLoans, we only work with the most trusted lenders and financing providers. However, if you’ve borrowed from other lenders and are still paying down your financing, don’t overlook these tips.
SmallBusinessLoans does not provide tax, legal or accounting advice. This material has been prepared for informational purposes only. You should consult your own tax, legal and accounting advisors.
