If you file Uniform Commercial Code (“UCC”) financing statements as a part of your business, or have financing statements filed against your business by others, you need to be aware of the newest amendment to the Illinois UCC.
For those unfamiliar, UCC financing statements are documents filed with the SOS by lenders, consignors, and other contracting parties to secure an interest in property of a debtor. In simple terms, these documents provide the lender, also known as a “secured party”, with a ticket to receive repayment of amounts owed in the event that the debtor goes bankrupt. While certain rules and exceptions apply, those parties that file a financing statement first have a superior claim to the possessions of the debtor than those parties that file a financing statement later.
The amendment to the Illinois UCC, which went into effect on July 20, 2012, gives the Illinois Secretary of State office (“SOS”) authority to investigate, punish, and terminate false filings, in addition to establishing criminal and civil penalties for those causing a false financing statement or lien to be filed. The amendment prohibits filings that are: (1) not authorized by the UCC; (2) not related to a valid existing or potential commercial or financial transaction, an existing agricultural or other lien, or a judgment of a court of competent jurisdiction; and (3) filed with the intent to harass or defraud the person identified as the debtor in the record or any other person.
One important aspect allows debtors that believe a fraudulent or mistaken financing statement has been filed to initiate a procedure by which the SOS may verify a financing statement, and if found in invalid, terminate it. In the past, debtors’ only recourse was to file a lawsuit to declare the financing statement invalid. A debtor that believes a fraudulent or mistaken financing statement has been filed must submit an affidavit to the SOS, which may then send written notice of the affidavit to the secured party and provide them with 30 days to supply evidence to refute the claims. If the SOS determines that the record was filed in violation of the statute, it can then terminate it. The SOS’s actions can be appealed to a court or tribunal.
Be aware that the SOS is not required to take action. In instances where there is no clear fraud or mistake in the filing, or which are or may become complex, the SOS may likely pass the responsibility to the court system rather than make the decision whether to terminate a filing.
In addition to the new procedure available through the SOS, the statute also makes violators guilty of a Class A misdemeanor for the first offense and a Class 4 felony for subsequent offenses. The offending party would also be liable in a civil action for actual damages or up to $10,000 statutory damages, in addition to attorney’s fees and other costs.
If you need help filing a UCC financing statement on behalf of your business, or believe that fraudulent filings have been made against your business, please contact Waltz, Palmer & Dawson, LLC at (847)253-8800.