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Unauthorized UCC-1s: Lessons Learned from recent court cases

Be vigilant to defend against unauthorized UCC-1 filings. 

A UCC-1 can be filed without the debtor’s knowledge or authorization. Therefore, law firms, attorneys, and paralegals must be vigilant when conducting due diligence to ensure that unauthorized financing statements have not been filed against their clients. Unauthorized financing statements can cause significant issues with a Merger and Acquisition process of a business. Two recent cases demonstrate the barriers faced by potential clients with unauthorized UCC-1s filed against them. 

In Lightstorm Entertainment, Inc. v. Cummings, decided on April 27, 2021, an unauthorized UCC-1s of titanic proportions was at issue. A month before Lightstorm, on March 30, 2021, a different court settled a $100,000,000 disputed debt in Deutsche Bank National Trust Co. v. Fegely that arose from the authorized filing of a UCC-1 against the bank. Both cases illustrate how a UCC-1 is filed and the actions their lawyers took to mitigate these circumstances.

In Lightstorm, the studios contend that Cummings filed two false UCC-1s with the California Secretary of State to harass them without any legal basis whatsoever.

Cummings submitted an” ‘Affidavit’ and Statement of Truth’” regarding the first UCC-1 on July 3, affirming that the studios owed him $400 million and “a 1% continuing royalty to be paid to him and his heirs in perpetuity and annually from the proceeds of continued sales of the film.” Thus, when Cummings filed the July 3 UCC-1, he knew that the Studios did not authorize its filing. Further, he knew that his claims to the studios’ property identified as “collateral” had been dismissed with prejudice by a federal district court in Florida. 

On July 29, 2020, Cummings filed a second false UCC-1, identifying the studios as “Debtor.” The studios also did not authorize Cummings to file this second false UCC-1. The July 29 UCC-1 is nearly identical to the July 3 UCC-1 and based on alleged collateral. Cummings filed the July 29 UCC-1 with the California Secretary of State without the studios’ authorization. He knew when he filed it that he had no valid claims against the studios. 

In Deutsche Bank, the bank sought declaratory relief for its claims that Fegely’s UCC Financing Statement was false, invalid, and should be rendered null and unenforceable as a matter of law. Declaratory judgments exist so that parties can avoid the “multiplicity of litigation” and “liability for ongoing damages” due to uncertain rights. The court ruled that Fegely’s UCC Financing Statement was null and unenforceable because Fegely failed to prove that she obtained authorization to file the UCC Financing Statement against Deutsche Bank. Also, Fegely admitted that she had no evidence to prove she received authorization before filing the UCC Financing Statement. The court stated, “…a person may only file an initial financing statement only if “the debtor authorizes the filing in authenticated record…To authorize such filing, the debtor must do so: (1) ‘in an authenticated record;’ (2) ‘[b]y authenticating or becoming bound as a debtor by a security agreement;’ or, (3) ‘[b]y acquiring collateral.’”

These cases make it clear that UCC-1s must be authorized to be effective. 

Secured transactions are governed under Article 9 of the Uniform Commercial Code. It provides a mechanism whereby a secured creditor can perfect its security interest in the debtor’s assets by filing a UCC-1 financing statement. Theoretically, anyone can file a UCC-1 against anyone else. However, Article 9 has strict requirements for a filed UCC-1 to be effective; mainly, the debtor must authorize the financing statement. Therefore, companies must be vigilant in keeping track of any UCC-1s potentially filed against them. 

Bottom line:

  • a UCC-1 can be filed without the “debtor’s” knowledge or authorization,
  • a company’s due diligence should include further investigation of any liens their UCC search uncovers to ensure they were authorized, and
  • businesses should be vigilant in monitoring UCC filings to confirm that no unauthorized financing statements have been filed against them.

The Jacobs Law, LLC can assist your business by conducting accurate UCC filing services. Please schedule a consultation with one of our attorneys today. 


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