7 Steps to Terminate UCC Liens After Settling Your MCAs

If you have entered into a settlement agreement to resolve a debt, UCC liens still remain outstanding on your financial record. Merchant cash advances (MCA) are designed to operate outside of the regulations of lending law; the paperwork filed at the beginning of your agreement remains in effect even after you have settled. In most cases, a UCC filing includes a blanket UCC-1 that covers all of your accounts, equipment, inventory, and proceeds in all locations.

Once you have fully settled a merchant cash advance, the UCC-1 financing statement your funder originally filed remains with the Secretary of State. It will stay in place until it is removed by either party, and since the funder is unlikely to handle this for you, you should look into your options. Merchants may only learn about this situation eight months or so after the fact.

The Termination Process

Terminating a UCC filing is primarily an administrative process, controlled by a statute that gives you leverage when it is followed correctly. The steps:

1. Understand what was originally filed.
2. Put the termination obligation in the settlement agreement.
3. Send the authenticated demand.
4. Use the self-help remedy if the deadline passes.
5. Verify the record rather than trusting the confirmation.
6. Clean up the collateral notices and the credit file.
7. Consider the potential disappearance of the funder.

Although each situation is unique, these guidelines generally assist with this complicated matter.

Step One: Understanding What Was Originally Filed

A majority of MCA funders file a blanket UCC-1 covering all accounts, general intangibles, inventory, equipment, chattel paper, and proceeds. The filing is completed in the state where the business is organized rather than the state in which it operates. If you operate in New York but your business is registered in New Jersey, your financing statements would be located in New Jersey.

The first step is to pull a debtor search, using the exact legal name of your company. Search in the state where your business is organized and in any other state where you have previously conducted business or where your business converted or reorganized. Some funders file paperwork with misspellings, trade names, or old business names, which makes these filings impossible to locate with a clean search using the correct legal name.

Two additional types of records tend to be overlooked during a debtor search. One is fixture filings, which are kept at the county clerk's office. The other: some funders may have obtained a confession of judgment entered prior to your settlement. In these cases, there is a docketed judgment lien in the county of entry, which requires that a satisfaction of judgment be filed with the same county. The UCC-1 is not changed when the judgment is satisfied.

Step Two: Put the Termination Obligation in the Settlement Agreement

The settlement agreement must outline what is required of the funder in very specific terms: how many days after the final payment clears it will file a UCC-3 termination statement for each identified filing number, how it will withdraw any notice of assignment sent to your processor or customers, and how it will vacate any entered judgment.

The agreement will need to include a list of the file numbers, jurisdiction, and filing date for each filing. Using the term "all filings" could lead to misinterpretations and to leaving filings outstanding.

It is ideal to hold onto the last installment until the termination of the filings is confirmed. Most funders will resist this tactic. However, a small payment still owed tends to increase the likelihood that funders comply with the termination more promptly.

Step Three: Send the Authenticated Demand

Article 9 provides a solution if the funder ignores your agreement. According to UCC 9-513(c), when collateral is not a consumer good, the secured party who is no longer obligated to advance value and holds no unsatisfied secured obligation must file a termination statement within 20 days after receiving an authenticated demand from the debtor.

Your authenticated demand should identify the debtor by legal name and include a listing of each filing number and jurisdiction. It should confirm that there is no remaining obligation or commitment to advance value. Finally, the letter should demand the filing of a termination statement within 20 days as required by the statute.

Send it by a method that will confirm receipt and proof of delivery. Send copies to the funder and the funder's counsel. Keep a record of the proof of delivery and the date it was delivered.

Step Four: Use the Self-Help Remedy if the Deadline Passes

Once 20 days have passed and the funder did not file the termination, Section 9-509(d)(2) gives the debtor authorization to file a termination statement themselves. You complete the UCC-3, mark the termination box, reference the original file number, and submit it to the filing office.

Take note that a self-help termination filed while a balance remains due creates exposure, not relief. Some filing offices have adopted their own practices for termination statements filed by the debtor, so confirm the office's specific practice before submitting your own filing. Should the need to file your own termination statement arise, speak with an experienced UCC lawyer first.

Step Five: Verify the Record

Just because the funder's attorney provides you with a stamped copy of the UCC-3 does not guarantee compliance. A rejection for name mismatches and incorrect file references can look the same as a correctly filed statement to an untrained eye. Run a fresh search and obtain the history of the UCC-1, including all terminations filed on the public record.

Where the filing has been assigned, the terminating party must be the secured party of record: the statement must be signed by the assignee rather than the original funder. Assignments are common in the MCA market, and terminations filed by an entity that no longer holds the record are ineffective.

Step Six: Clean Up the Collateral Notices and the Credit File

Contact each recipient of any collateral notice and confirm with your processor that a split or lockbox instruction is not outstanding.

A business's credit files tend to update at their own pace, and each bureau operates differently. Experian Business and Dun & Bradstreet both input UCC data at a different pace, so a filing that is terminated in March may still appear on a report produced in June.

Step Seven: Funders Who Have Disappeared

Sometimes, funders vanish. They may get acquired or decide not to continue funding. The reason does not matter. The next step is to file a debtor's UCC-3 for each identified filing number. It will be hard to prove that you notified the funder, so your own recordkeeping is essential.