The effectiveness of any filed UCC record depends on whether it was filed by a party that was authorized to do so under UCC § 9-509. In the case of an initial financing statement, the debtor must authorize the secured party to file the record. However, what happens if the debtor does not provide its authorization until after the secured party has already filed the initial financing statement? That was the issue in a recent case, In re: The Adoni Group, Inc, 2015 WL 2080521 (Bankr. S.D.N.Y. May 4, 2015).

The Adoni Group, Inc. (the “Debtor”) and Capital Business Credit, LLC (“Capital”) were engaged in negotiations for the factoring of the Debtor’s accounts receivable. On May 15, 2013, Capital filed a UCC-1 financing statement against substantially all assets of the Debtor. However, as of that date the Debtor had not authorized the filing of a financing statement. In fact, the Debtor had not yet signed a security agreement or provided any other authorization for Capital to file a UCC record.

The next day, May 16, 2013, the Debtor and Capital entered into both a Factoring Agreement and a related Inventory Security Agreement. Both agreements included the grant of a security interest that covered substantially all of the Debtor’s assets.

Over the next year the Debtor fell behind on its obligations. On June 19, 2014, unpaid creditors filed an involuntary bankruptcy petition against the Debtor. The Committee of Unsecured Creditors (the “Committee”) then brought an adversary action to avoid Capital’s security interest.

The Committee alleged that Capital’s financing statement was void and of no effect because the Debtor had not signed the security agreements or otherwise authorized Capital to file the record. Therefore, according to the Committee, Capital’s security interest was not perfected.

Capital asserted that the Debtor’s execution of the security agreements automatically authorized not only the filing of future UCC records, but also the previously filed financing statement. By executing the security agreements, the Debtor ratified the filing of the financing statement. Consequently, Capital brought a summary judgment motion to dismiss the Committee’s suit.

When the matter came before the court, the Committee conceded that Capital’s financing statement would have become effective if the Debtor later ratified it. However, the Committee argued that ratification was not automatic under the UCC and that it must take place in accord with common law principles. That determination would require further proceedings, which would make summary judgment inappropriate.

After a lengthy analysis of the applicable UCC sections, the court agreed with Capital’s position. The court determined that the Official Comments to UCC § 9-509 indicated a clear intent by the commentators for the signing of a security agreement to ratify the pre-filing of a financing statement. Moreover, that conclusion was consistent with the policy that the UCC be liberally construed and applied to promote its underlying purposes and policies.

According to the court’s analysis, the underlying purpose of the UCC filing requirements is to put potential creditors on notice that there may be a security interest on the debtor’s property. The fact that financing statements may be filed before the security agreements are reached further shows that the legislature intended to encourage parties to provide notice to others as soon as possible. That goal was met in this case. Consequently, the court dismissed the financing statement-related claims the Committee brought against Capital.

The takeaway from this case is that a debtor may ratify the secured party’s pre-filing of an initial financing statement.  Nevertheless, secured parties should be very careful about adopting a practice of filing financing statements without prior authorization. While in most cases the debtor will eventually ratify the action by executing the loan documents, not all contemplated transactions make it to closing. If the debtor does not later ratify the filing, the secured party could find itself liable for actual and statutory damages under UCC § 9-625. The best practice, therefore, is to always obtain the debtor’s authorization in an authenticated record prior to pre-filing a financing statement.

Paul Hodnefield is Associate General Counsel for CSC and a frequent speaker/writer on UCC due diligence issues. Please feel free to contact him with questions or comments at or 800-927-9801, ext. 61730.

UCC Expert’s Corner: Court Finds Debtor Ratified Unauthorized UCC Financing Statement