In Rhode Island, a “bogus” lien on your business’s assets is always just a few clicks away. Indeed, without consent, warning, or any factual basis, any individual with internet access can allege a secured interest in any named collateral – including your business’s real and personal property – simply by filing a Uniform Commercial Code (“UCC”) financing statement with the Rhode Island Secretary of State’s Office that represents such an interest. During this automated process, the Secretary of State’s Office has neither the opportunity nor the discretion to reject UCC filings under the suspicion of illegitimacy or fraud.
The intent behind fraudulent filings varies. Perhaps the goal was to damage the named debtor’s reputation through a publicly available filing. Perhaps the objective was simply to harass or inconvenience the named debtor. Regardless of the underlying motivation, a fraudulent filing can inflict real harm, including but not limited to complicating – or even preventing – your business from obtaining secured financing.
To reduce the harmful impact of a bogus UCC financing statement, consider taking the following steps:
- Consistently Monitor the UCC Database.
Although you can’t prevent the filing of a bogus financing statement, you can minimize its harmful effect through quick detection. The Rhode Island Secretary of State’s Office conveniently hosts the UCC database on its website, enabling businesses to inspect any filed UCC financing statement that names them as a debtor to a purported secured party. Alternatively, your business may consider retaining a corporate monitoring service dedicated to alerting you of any unauthorized filings in the UCC database.
- File a UCC-5 Information Statement.
Should an inspection of the UCC database reveal a bogus financing statement, the first step in mitigating reputational and commercial damage is to file a UCC-5 information statement with the Secretary of State’s Office. Article 9 of Rhode Island’s adopted UCC provides that “[a] person may file in the [Secretary of State’s] filing office an information statement with respect to a record filed,” provided that (i) they are a secured party of record with respect to the fraudulent statement; and (ii) they believe they did not authorize the filing of that statement. See R.I. Gen. Laws §§ 6A-9-509(d), 518(d). Although the information statement does not render the bogus financing statement unenforceable, its filing serves to immediately alert the public that the alleged security interest is not legitimate.
Under Article 9, any information statement must include (i) an indication that the document is, in fact, a UCC-5 information statement; (ii) the file number assigned to the bogus financing statement; and (iii) the basis for the belief that the financing statement was wrongfully filed. See § 518(d).
In addition, if the fraudulent statement identifies real property as a type of collateral, the information statement must also include (i) an indication that the fraudulent statement names real property as a type of collateral; (ii) a description of named real property; and (iii) if applicable, an indication that the fraudulent statement was filed in the real property records, the name of the record owner (if it is not the named debtor), and the date and time (or book and page references) of the filing. See §§ 502(b), 518(d).
- File a UCC-3 Termination Statement.
Filing a UCC-3 termination statement with the Secretary of State’s Office will render the bogus filing ineffective. See § 513(d). Significantly, a business that is fraudulently named a secured debtor in a UCC financing statement cannot immediately file a termination statement. Instead, that business must first send the offending filer an authenticated demand notifying them of their obligation to issue a termination statement. See § 513(c). Article 9 enables the filer to either (1) send a termination statement to the business for filing; or (2) file it themselves with the Secretary of State’s Office. See id. In the (likely) event that the filer does neither within 20 days of receiving the authenticated demand, the business may then file a termination statement with the Secretary of State’s Office. See id.
- Seek Relief from the Courts.
Rhode Island lawmakers acknowledge that the provisions in Article 9 “cannot provide a satisfactory or complete solution to the problems caused by the misuse of the public records,” including but not limited to bogus filings. See § 518 cmt. 3. These limitations are readily apparent: under Article 9, a fraudulent filing statement will remain in the UCC database for at least one year following the filing of a pertinent termination statement. See § 9-519(g). Businesses that are interested in removing a bogus financing statement sooner should consider discussing with legal counsel the possibility of obtaining injunctive relief from the courts.
When weighing their options as potential litigants, businesses should also consider the potential recovery of monetary damages. To be sure, “a person is liable for damages in the amount of any loss caused by a failure to comply” with Article 9. See § 625(b). Moreover, Article 9 imposes statutory damages, including but not limited to a five hundred ($500) dollar penalty for each case in which an individual names a “debtor” in a UCC filing without that purported debtor’s permission. See § 625(e)(3). The refusal to issue or file a termination statement upon receipt of an authenticated demand also warrants a five hundred ($500) dollar penalty. See § 625(e)(4).
By diligently monitoring the UCC database and using the set of tools provided in Article 9, Rhode Island businesses can take control over the unpredictable and protect themselves against the unpreventable.
 R.I. Gen. Laws § 6A-9-101, et seq.
 In contrast, at least 31 states have enacted legislation intended to reduce the possibility that their respective secretary of state offices even accept a bogus financing statement. See Paul Hodenfield, Fraudulent UCC Filing Remedies by State: 2019 Edition (available at: https://blog.cscglobal.com/wp-content/uploads/2020/01/Fraudulent_UCC_Filing_Remedies_by_State_12312019.pdf). For example, in Arizona, “[t]he secretary of state may . . . refuse a filing based on a reasonable belief that the service is being requested for an unlawful, illegitimate, false or fraudulent purpose or is being requested or submitted in bad faith or for the purpose of defrauding a person or entity.” Id. at 5 (citing Ariz. Rev. Stat. § 14-121(B)).