A creditor wishing to record a lien on a debtor’s personal property may generally file a Uniform Commercial Code (UCC) financing statement to gain priority on those secured assets. However, the security itself is created separately, usually by a separate agreement between the debtor and the creditor, which is not filed with the California Secretary of State. California recently passed AB 501 to combat an accelerating trend of meritless UCC financing statement filings, particularly against public officials. Currently, someone can be unaware that they are named as a debtor in a UCC financing statement filed with the Secretary of State of California. Beginning on January 1, 2027, the Secretary of State must notify the debtor, who will generally have an opportunity to object through a simple form. The creditor could overcome that objection only through a lawsuit.
“The Secretary of State shall notify the debtor named in the financing statement within 21 days after the financing statement is filed.”[1] A debtor named in a financing statement filed by a person other than a financial institution or a public entity (or on their behalf) can contest the financing statement by filing an affidavit.[2] There is not a time limit for filing the affidavit. Upon receiving such an affidavit, “the filing office shall hold the affidavit in abeyance for 30 days.”[3] The filing office shall immediately “send notice of the pending termination of the financing statement to each secured party of record identified in the financing statement at the mailing address provided in the financing statement.”[4] Such secured party may petition the Superior Court “for preliminary injunctive relief to enjoin the filing office from filing the termination statement and for an order, which may be granted ex parte, directing the affiant to appear at a hearing before the court at which the court shall determine whether the financing statement is valid and should be reinstated.”[5] “[I]f no court order enjoining the filing has been received” by the end of the 30 days beginning with the receipt of the affidavit contesting the financing statement, “the filing office shall file a termination statement with respect to the financing statement identified in the affidavit” with immediate effect.[6] The petition seeking to validate the financing statement must be made within 90 days after “the termination statement is filed.”[7] This gives the creditor 120 days in total to litigate after the debtor files an affidavit. If the creditor is successful, the reinstated financing statement would be “effective from the initial filing date and is considered to have never been ineffective against all persons and for all purposes except against a purchaser of the collateral described in the financing statement who gave value in reliance on the termination statement.”[8] The standard will not be whether the financing statement was proper, per se, but rather whether there is “no reasonable basis or legal cause” for the financing statement.[9] Moreover, the debtor empowered to make this filing need not be the precise name on the financing statement but rather may be “a person who reasonably appears to be the person intended to be identified as a debtor in a financing statement, including where the financing statement identifies the debtor by a trade name, fictitious business name, former name, misspelling or truncation.”[10] Thus, an identifiable, yet misnamed, debtor can file the affidavit.
The court may award the costs and reasonable attorney’s fees to the victor upon determining the validity of the financing statement.[11] This is discretionary, not mandatory. If the challenge to the financing statement’s validity “was made in bad faith,” the court may “award the petitioner actual damages and may impose a civil penalty not to exceed five thousand dollars ($5,000) against the affiant” without limitation to any criminal offenses.[12] A person filing, or “direct[ing] another to file or record, a lawsuit, lien, or other encumbrance, including a notice of lis pendens, against another person or entity knowing it is false, with the intent to harass the person or entity or to influence or hinder the person in discharging their official duties if the person is a public officer or employee” is liable for a civil penalty of up to $15,000.[13] However, the statutory language for general damages is unchanged. Filers of UCC financing statements in violation of law are liable for $500 per violation in addition to loss suffered by the identified debtor because of the violation.[14]
The notification requirements appear to be prospective. The new law does not require the Secretary of State to notify debtors of UCC financing statements filed before January 1, 2027. However, the Secretary of State has a website that offers free searches of UCC filings on file with their office. Before, a debtor would need to litigate to invalidate the financing statement. Now, the burden of suing will essentially fall on the creditor, as imposed by this new debtor’s affidavit. While the debtor’s remedy is powerful, it still has limits. It does not work against financing statements filed by financial institutions or public entities. Nevertheless, the creditors this defense will work against will face an arduous deadline. Although technically possible to secure a preliminary injunction from a court within 30 days, courts are not known for being swift. The actual time will be considerably less than 30 days, accounting for the time it takes for the Secretary of State to mail the registered agent, and for the registered agent to notify the principal. If the 30 days elapses, the collateral could be sold to a good-faith purchaser without recovery from that purchaser.
[1] Com. Code § 9529.
[2] Com. Code §§ 9513.1(a) & (i).
[3] Com. Code § 9513.1(b).
[4] Com. Code § 9513.1(c).
[5] Com. Code § 9513.1(d).
[6] Com. Code § 9513.1(b).
[7] Com. Code § 9513.1(d).
[8] Com. Code § 9513.1(g).
[9] CCP § 765.010(b)(2).
[10] Com. Code § 9513.1(a).
[11] Com. Code § 9513.1(e).
[12] Com. Code § 9513.1(e)(3).
[13] CCP §§ 765.010(b)(1) & 765.040.
[14] Com. Code § 9625.