National
Putting an End to the Use
of the UCC-1 Financing
Statement as a Weapon
By: John Gerrity, Freedman Anselmo Lindberg LLC
The UCC-1 financing statement is a tool that
allows a creditor to perfect its security interest in
the personal property of a debtor.1 In most states,
the form is filed with the secretary of state’s office. The filing of such statement creates a lien
on the property being pledged. This sounds like
a simple, straightforward process for creditors
to enforce their rights. It is so simple, that one
might ask: What is to prevent someone from
filing a baseless UCC -1 statement that is done
with malice and intent to harm someone that
does not owe a debt? In Illinois and many states,
the answer is: nothing. However, legislation is
pending in Illinois and several other states that
will change that.
The Fraudulent Filers
A simple search of “UCC-1 statement”
through any search engine will turn up a
plethora of snake oil salesman. These sites encourage people to “become secured creditors”
(usually with a CD or booklet for the low price
of $49.99).2 The perpetrators of many of these
false claims are individuals who are part of the
“sovereign citizen” or “redemption” movements.
They believe they are not subject to laws, taxes,
nor are they citizens of the United States.
This ideology is sprung in part from the “Posse
Comitatus” movement that arose during the
1980s.3 These groups, while their ideas may
appear far-fetched, or perhaps even laughable,
are incredibly dangerous. The FBI considers
sovereign-citizen extremists as comprising a
domestic terrorist movement, which scattered across the United States has existed for
decades with well-known members, such as
Terry Nichols, who helped plan the Oklahoma
City bombing.4 Public officials, creditors, or
potentially any individual who gets in the way
of a sovereign citizen may become the target of
a fraudulent UCC-1 filing.
The federal government has legislation
imposing liability for filing a false lien or
encumbrance against a federal judge or law
enforcement official.5 The Eighth Circuit
Court of Appeals recently affirmed the District
Court of North Dakota regarding a fraudulently
filed UCC financing statement against a North
Dakota District Judge and an acting U.S. Attorney.6
Illinois’ Solution
The proposed legislation in Illinois combines
elements of legislation imposed in other jurisdictions with criminal penalties for violations
and civil liability to persons (not just public
employees or officials) injured by the fraudulent filing. This legislation was introduced in
the Illinois House of Representatives by Rep.
Michael J. Zalewski (D) as HB5190 and in the
Senate by Sen. Don Harmon (D) as SB3813.
On March 28, 2012, HB 5190 was passed
unanimously in the House. Two days later, the
counterpart SB3813 passed unanimously in the
Senate. As of late April, the Senate bill arrived
in the House and the House bill arrived in the
Senate for approval. Once the House bill is
passed out of the Senate, the General Assembly
has 30 days to get it to the governor. Governor
Pat Quinn will have 60 days to act upon it. The
proposed lllinois’ legislation was vetted by the
Uniform Laws Commission, and could serve
as a template for other states’ revisions to the
UCC.
What does this mean for those who file
fraudulent statements in Illinois? Those who
file fraudulent financing statements shall be
guilty of a Class A misdemeanor for a first
offense and a Class 4 felony for a second or
subsequent offense. In Illinois, Class A misdemeanors carry a prison sentence of less than
“Putting an End” continued on page 12
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4 Legal League Quarterly
“Don’t Get Fooled” continued from page 1
ments is when the changes take effect. This
is largely due to the fact that the Dodd-Frank
to the servicing of the loan; a request for loan origi- Act requires one to play hopscotch in order to
nation documents is not a QWR.” Jones v. PNC
interpret the rules. Here, Title XIV of DoddBank, N.A., No. C 10-1077 LHK, 2010 U.S. Dist. Frank, which contains the QWR changes,
LEXIS 92866, at *5 (N.D. Cal. Aug 20, 2010).
states that these specific provisions will become
Prior to Dodd-Frank, RESPA contained a
effective no later than one year after the regula20/60-day response requirement to a QWR.
tions enacted in Title XIV are set forth by the
Once a servicer receives a proper QWR, RESPA
Treasury Secretary in final form. However, these
mandates that “the servicer shall provide a written regulations must be enacted within 18 months
response acknowledging receipt of the correof the “designated transfer date.” Title XIV
spondence within 20 days (excluding legal public defines the designated transfer date as the date
holidays, Saturdays, and Sundays) unless the
established under section 1062 of the Doddaction requested is taken within such a period.”
Frank Act. Section 1062 says the designated
12 U.S.C. § 2605(e)(1)(A). The servicer then
transfer date must be established and published
has “60 days (excluding legal public holidays, Sat- in the Federal Register by the Treasury Secretary
urdays, and Sundays) after the receipt from any
within 60 days after the enactment of the Act.
borrower of any [QWR]” to make the requested
The Treasury Secretary set the designated
changes to the borrower’s account or notify the
transfer date as July 21, 2011. However, if the
borrower that their account is correct. 12 U.S.C. Treasury Secretary does not issue a regulation in
§ 2605(e)(2)(A)-(C).
final form within 18 months of the designated
However, Dodd-Frank, seeks to shorten the re- transfer date, Title XIV, and the changes to the
quirement to 5/30 days. Pub. L. 111–203, § 1463. QWR response times, become effective on
Failing to comply with the timing requirements can January 21, 2013.
result in the borrower being awarded actual damDespite the CFPB’s rules that keep in place
ages plus, in certain situations, statutory damages in the 20/60-day requirement for the time being,
the amount of $1,000 pre-Dodd-Frank and $2,000 litigants are not fully convinced that 12 U.S.C.
post-Dodd-Frank. 12 U.S.C. § 2605(f)(1); Pub. L. § 2605(e) requires implementing regulations.
111–203, § 1463. Additional damages are available The majority of cases hold that the amendin class action cases. 12 U.S.C. § 2605(f)(2).
ment does not take effect until implementing
regulations are proscribed by the CFPB (or
Effective Date of RESPA Changes
after 18 months). See Fenske-Buchanan v.
One of the most litigated and perplexing
Bank of Am., N.A., No. C11-1656 MJP, 2012
questions concerning the new QWR requireU.S. Dist. LEXIS 51058, at *9 (W.D. Wash.
April 11, 2012); Williams v. Wells Fargo Bank,
N.A., No. 11-21233, 2011 U.S. Dist. LEXIS
105513, at *15–19 (S.D. Cal. September 19,
2011); Patton v. Ocwen Loan Servicing, LLC,
No. 6:11-cv-445-Orl-19DAB, 2011 U.S. Dist.
LEXIS 82789, at *12–13 (M.D. Fla. July
28, 2011); Jones v. Vericrest Fin., Inc., No.
1:11-CV-2330-TWT-CCH, 2011 U.S. Dist.
LEXIS 151458, at *41 n.5 (N.D. Ga. December 7, 2011).
Despite the consistent holdings, many
lawyers are continuing to argue to the courts
that the 5/30-day requirement is in effect. See
Nix v. Tavernier (In re Nix), No. 11-80062-HB,
2012 Bankr. LEXIS 13, at *36 n.40 (Bankr. D.
S.C. January 5, 2012) (“At the hearing on this
matter, the parties argued over the applicability
of the [Dodd-Frank Act], which requires the
mortgage servicer to acknowledge receipt of
the QWR within five days.”).
It is important to recognize that these arguments may continue to arise in litigation and
to prepare for them accordingly. Although the
case law is convincingly in favor of the position that the amendment is not yet effective,
none of the cases is binding, and a court could
potentially rule that the 5/30-day deadline is
applicable. Unless the CFPB issues new regulations before January 21, 2013 (18 months
after the designated transfer date), it is wise for
servicers and their attorneys to take the proper
precautions until that date to ensure that they
are in full compliance with RESPA.
Legislative Action
Illinois is not the first state to propose
legislation for the fraudulent filings of UCC-1
one year, while Class 4 felonies carry a
statements. In 2004, Michigan passed legislasentence of between one and three years.7
tion imposing penalties for fraudulent filings.
Fraudulent filers are also liable in civil actions.
MCL 440.9501 Texas passed legislation in
They shall be held liable to each injured person
for: 1) the greater of the actual damages caused 2005 allowing the secretary of state (through
using the attorney general), to take action to
by the violation or up to $10,000 in lieu of
actual damages; 2) reasonable attorney’s fees; 3) combat fraudulently filed UCC-1 statements.
court costs and related expenses of bringing the Section 405.022 of the Texas Government
action; 4) in the court’s discretion, exemplary
Code allows the secretary of state to request
damages in an amount determined by the court
the assistance of the attorney general in deteror jury. 8
mining if the document is fraudulent before
This begs the question, how does an indifiling/recording the document. Additionally,
vidual properly bring a claim? This is addressed
the secretary of state can request additional
in the legislation as well. The individual, who
proof to determine if a lien is valid if it aphas been attacked with the fraudulent claim,
pears to be fraudulent. Any UCC-1 statemay file an affidavit with the Secretary of State
ment filed by an inmate in Texas is presumed
explaining the filing. From there, the secretary
invalid.
of state will take action by requesting additional
Some other states, which have imposed or
documentation from the filer supporting the
proposed legislation regarding fraudulent UCC
claim. The additional documentation, if submit- filings include:
ted, will be reviewed by the Department of
Minnesota: Minnesota Statute § 545.05 proBusiness Services of the Office of the Secretary vides a motion procedure for obtaining judicial
of State and the Office of the General Counreview of a falsely filed financing statement.
sel within 30 days after the request. After this
Additionally, Minnesota Statute § 609.7475
review, the Secretary of State may terminate the provides for criminal penalties for the fraudulent
record if it has a reasonable basis for concludfiling of a UCC-1 statement.
ing the filing was fraudulent. If the filing party
Georgia: House Bill 997 aims to make filing
believes that its filing was terminated wrongfully,
it may file an action requesting that the claim be a false lien against a public officer or employee
on account of the performance of their duty a
reinstated.9
felony.
One might think this would create chalIndiana: Senate Bill 382 was introduced in
lenges to the filing of claims by banks and other
January of 2012. The bill defines a fraudulent
financial institutions that regularly file claims.
filing and allows a court to enter an order declarHowever, this section of the proposed law does
ing the recording ineffective.
not apply to “regulated financial institutions” or
Kentucky: Senate Bill 97 provides remedies
their representatives.
for current and former public officials that are
This proposed change to the Illinois Unithe subject of fraudulent filings. The filing office
form Commercial Code is a great step forward
in protecting individuals from attacks individuals is also given discretion to refuse to accept a
UCC recording if it appears to be unauthorized.
like the so called “sovereign citizens” who file
bogus UCC-1 statements.
Future of Sovereign Citizens
and Fraudulent Filings
It is clear the FBI is aware of the danger
that so-called sovereign citizens pose. More
states will likely come forward with legislation
aimed at protecting citizens from harassing and
credit-score damaging false liens. Perhaps other
states will seek to work with the Uniform Laws
Commission to create stronger protection for
individuals damaged by these claims.
“Putting an End” continued from page 4
12 Legal League Quarterly
1 Ill Comp. Stat. 810 ILCS 5/Art. 9 Pt. 5 Sub 1 heading,
et al. (West 2012).2 “Legal UCC: Secured Party Creditor &
UCC1 Online Services,” http://www.legalucc.com/; “UCC
Redemption Servives,” http://www.redeemthetruth.com/.3
“What is a ‘Sovereign Citizen’?” Southern Poverty Law Center:
Intelligence Report, Winter 2008, Issue Number: 132, http://
www.splcenter.org/get-informed/intelligence-report/browseall-issues/2008/winter/house-of-ill-repute/what-is-a-soverei.4
“Sovereign Citizens: A Growing Domestic Threat to Law Enforcement: By the FBI’s Counterterrorism Analysis Section.”
FBI Law Enforcement Bulletin: September 2011, http://www.
fbi.gov/stats-services/publications/law-enforcement-bulletin/
september-2011/sovereign-citizens.5 18 U.S.C. § 1521
(West 2012).6 United States v. Reed, 668 F.3d 978, (8th Cir.
2012).7 Ill. Comp. Stat. 730 ILCS 5/5-4.5-55; 730 ILCS 5/54.5-50 (West 2012).8 H.B. 5190, 97thGen.Assem. (Ill. 2012).
http://www.ilga.gov/legislation/fulltext.asp?DocName=&
SessionId=84&GA=97&DocTypeId=HB&DocNum=5190&
GAID=11&LegID=65324&SpecSess=&Session=S.B. 3813,
97th Gen. Assem. (Ill. 2012). http://www.ilga.gov/legislation/
fulltext.asp?DocName=&SessionId=84&GA=97&DocTypeId
=SB&DocNum=3813&GAID=11&LegID=65917&SpecSess
=&Session=9 Id.