Unauthorized UCC3 Termination Statement did not Support Tortuous Interference Claim

By Paul Hodnefield, Esq.

Nothing gives a secured lender heartburn faster than learning that someone has allegedly terminated its financing statement without permission. The lender will often assume that the filing of a UCC3 termination statement will leave it with an unperfected security interest.  Fortunately, that is not necessarily the case. The mere filing of a termination statement does not always terminate the effectiveness of the financing statement to which it relates, as was demonstrated in the recent case of First Guaranty Bank v. Republic Bank, Inc., 2017 U.S. Dist. LEXIS 190928 (D. Utah Nov. 17, 2017).

In 2012, Med One Capital Funding, LLC (“Med One”) entered into a finance lease with Pioneer Health Service, LLC (the “Debtor”). Med One then assigned the right to receive lease payments to Republic Bank, Inc. (“Republic”).

A finance lease is, in effect, a type of security interest. On April 25, 2012, a financing statement was filed to perfect that security interest in the leased assets. The financing statement named both Republic and Med One as secured parties.

Republic later assigned its interest in the finance lease to First Guaranty Bank (“First Guaranty”).  On July 20, 2015, Republic filed a UCC3 assignment naming First Guaranty as a secured party on the 2012 financing statement.

In March of 2016, the Debtor stopped making payments on the finance lease and filed for bankruptcy. A few months later—and for reasons not set forth in the facts of the case—Republic filed a UCC3 termination statement for the 2012 financing statement.

First Guaranty brought suit against Republic for various causes of action related to the finance lease. Later, First Guaranty brought a motion to amend its complaint with an additional tortuous interference with economic relations claim against Republic based on the termination statement.  First Guaranty alleged that Republic’s filing of the termination statement terminated First Guaranty’s financing statement and impaired its right to collect under the finance lease.

Republic opposed First Guaranty’s motion to add the tortuous interference claim, arguing that the new claim would be subject to dismissal for failure to state a claim. Thus, the court had to determine whether First Guaranty had a valid claim for tortuous interference.

The court began by noting that to plead a viable tortuous interference claim, First Guaranty had to show that Republic (1) intentionally interfered with existing or potential economic relations, (2) by improper means, and (3) caused injury to First Guaranty. The court then determined that First Guaranty failed to plead facts sufficient to sustain a tortuous interference claim.

The court based its decision on two factors. The first was based on a reading of the UCC3 form itself, which included the following statement next to the termination check box: “TERMINATION Effectiveness of the Financing Statement identified above is terminated with respect to the security interest(s) of the secured party authorizing this Termination Statement.”  Field 9 of the form, which is labeled “NAME of SECURED PARTY of RECORD AUTHORIZING THIS AMENDMENT,” contained only Republic’s name. Therefore, according to the court, the termination statement did not terminate or affect in any way First Guaranty’s security interest.

The second factor that swayed the court was the Article 9 rule that an amendment authorized by one secured party of record does not affect the financing statement with respect to another secured party of record. Because First Guaranty did not authorize Republic to file the termination statement, the termination statement could not terminate the financing statement with respect to First Guaranty. Consequently, there was no injury. As a result, the court denied First Guaranty’s motion to amend the complaint to add the tortuous interference claim.

The takeaway from this case is that the filing of a termination statement does not always terminate the effectiveness of the record to which it relates. To terminate the effectives of a financing statement, the filing of the termination statement must be authorized by the secured party of record. Moreover, if there are multiple secured parties, a termination statement will only be effective with respect to the secured parties that authorized the filing.

A final word of caution about this case: although it appears that the court reached the right result under Article 9, its reliance on the form itself may have been misplaced. Authorization to file a record cannot be determined from the name set forth in Field 9 of the form or its electronic equivalent. Authorization to file is determined under law other than Article 9, which normally would be the state law of agency. After all, a filer can put any name they want in Field 9. The name or names listed in Field 9 cannot conclusively establish the requisite authority to file a UCC amendment. Therefore, interested parties rely on that information at their own risk.

Paul Hodnefield is associate general counsel for CSC® and is a frequent speaker and writer on UCC due diligence issues. Please feel free to contact him with questions or comments at paul.hodnefield@cscglobal.com or 800-927-9801, ext. 61730.

 

Unauthorized UCC3 Termination Statement did not Support Tortuous Interference Claim