Reviewing UCC search results reveals more than just active filings; it also uncovers terminated and lapsed filings that are often dismissed, overlooked, or erroneously terminated. Commercial finance attorneys, small business lenders, and corporate paralegals who dismiss ‘inactive’ filings can create gaps in risk assessment and the overall financial health of the debtor. Terminated or lapsed filings may indicate previous secured relationships or incorrect terminations that are still relevant to your transaction. These records merit closer inspection, and ignoring them could possibly expose parties to unnecessary legal and financial risks.
What is a UCC Search?
A UCC (Uniform Commercial Code) search is an inquiry into public records to determine whether a person or business has pledged personal property, such as inventory, equipment, or assets, but not real estate, as collateral for a loan. The search can also reveal existing, expired, or terminated liens held by other lenders.
The search period, or through date, encompasses all entries in the office’s filing index at the time of the request up to the search date, considering any specific date parameters you specify. The UCC search will typically include:
- UCC-1 financing statements are original filings that perfect a security interest in the collateral for a loan or financial transaction.
- UCC-3 amendments, including continuations, assignments, and terminations, reflect changes to the original filing over time.
- Fixture filings, if the collateral includes fixtures or certain real estate-related interests, are often found at the local filing office.
Best practice for a due diligence search is to request both current and historical filings. The results afford evaluation of prior liens, mistaken terminations, and continuation of current liens.
What UCC Termination Statements Actually Do
UCC financing statements are generally effective for five years, after which they lapse unless a timely continuation is filed to extend the secured party’s perfection. Wyoming is the exception with an initial effectiveness of 10 years and a continuation period of 10 years. A UCC termination filing indicates that the secured party no longer has or needs a security interest in the debtor’s collateral.
For example, when a bank loans money to a business, it takes a security interest in the business’s specific equipment or inventory, which serves as collateral. Another option is a blanket lien, which allows a creditor to seize some or all of a debtor’s assets if repayment isn’t made. The bank files a UCC-1 to indicate its interest in that property or to create a blanket lien. Once the loan is fully repaid, the bank files a UCC-3 termination to show it no longer has an interest in the collateral.
How and Why UCC Filings Become Inactive
UCC filings become inactive either because they have not been continued and have lapsed after five years or because a termination has been filed. Depending on the jurisdiction, lapsed filings may remain visible in the records as historical filings. The debtor can file a UCC termination on their own behalf, but only with legal authorization. It does happen without authorization and is generally not legally effective.
Therefore, when a UCC search returns results that include lapsed or terminated filings, it is common practice to retain and review those filings as part of the due diligence process for UCC searches.
Understanding the Hidden Risks of Terminated and Lapsed UCC Records
Inactive records can reveal prior liens, incorrect terminations, and overlooked risks. Lapsed or terminated filings often provide the only paper trail showing how collateral has been used over time. When reviewed by a lender or counsel, a lapsed or terminated filing can reveal another lender’s security interest in the same assets, indicating other financial relationships that should be reviewed before engaging in a new transaction with the debtor.
Reviewing inactive records can also reveal mistaken or unauthorized terminations. In some cases, it can uncover instances where collateral may not have been properly secured. A comprehensive picture of the debtor’s history might help protect against hidden priorities or unexpected claims.
The Importance of a Professional UCC and Lien Search
Using a professional UCC search and filing provider like Corp1 gives you the benefit of seasoned expertise in both requesting and delivering search results. Our team understands how each state’s rules, indexes, and search logic differ and will work with you to ensure your requests include name variations, filing types, and time frames. While online search portals are available, a knowledgeable service company helps ensure that your searches are comprehensive and tailored to your specific transaction. Reach out and speak to one of our Success Partners for assistance in your next due diligence matter.
This blog is for informational purposes only and in no way constitutes legal counsel. Please get in touch with an attorney or accountant for professional legal and financial advice.
Resources: CO Secretary of State, NY Department of State, Investopedia
