"the Twain Shall Meet": a Real Property Approach to Article 9 Perfection

• Jurisdiction: United States,Federal
• Publication year: 2015
• Citation: Vol. 64 No. 4

"The Twain Shall Meet": A Real Property Approach to Article 9 Perfection

Patrick H. Hill

"THE TWAIN SHALL MEET":^* A REAL PROPERTY APPROACH TO ARTICLE 9 PERFECTION^†

ABSTRACT

In an era of boundless access to information, a group of rogue citizens is waging an antigovernment war of attrition. Trading firearms for securities documents, the Sovereign Citizens are wreaking havoc on a system designed to foster justice for all. By manipulating the infirm process of securing credit, these domestic terrorists threaten to topple the American legal and economic systems.

The ability to secure debt is essential to the health and growth of a modern global economy. As the contours of lending transactions become increasingly complex, commercial law must adapt to address the mounting problem of fraudulent filings. Article 9 of the Uniform Commercial Code facilitates the creation of security interests in personal property. The American Law Institute and the National Conference of Commissioners of Uniform State Laws on occasion revisit and amend the Uniform Commercial Code to ensure its continued effectiveness.

The drafters must turn their attention to the infirmities of Article 9 of the Uniform Commercial Code. While Article 9 allows creditors to perfect their interests in personal property with ease, its prescribed methods have proven vulnerable to abuse. The instrument perfecting a creditor's rights in collateral requires no authentication, and Secretaries of State retain no discretion to invalidate even facially fraudulent filings. The Sovereign Citizens have seized upon this weakness in Article 9. Their campaign of paper terrorism has devastating consequences for the victims, necessitating an amendment to the Uniform Commercial Code.

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This Comment argues that the drafters should borrow from real property traditions to lend validity to the process of perfecting an interest in personal property. By requiring the creditor to file an authenticated, acknowledged security agreement in conjunction with a financing statement, Article 9 could protect victims from the subversive activities of Sovereign Citizens. Ultimately, this Comment will demonstrate that the benefits of such a revision far outweigh the costs. The victims and the taxpayers should no longer be forced to subsidize this troubling trend in commercial law.

Introduction............................................................................................1105

I. The Article 9 Approach to Perfection and its Infirmities ... 1109

A. Current Law ............................................................................ 1109
B. The Recent Rise in Fraudulent Filings .................................... 1113

1. The Sovereign Citizen Movement ...................................... 1114
2. Types of Fraudulent Financing Statements ....................... 1115

II. State Responses............................................................................1117

A. Post-Filing Expedited Judicial Relief...................................... 1118
B. Post-Filing Penalties ............................................................... 1120
C. Post-Filing Administrative Remedy......................................... 1120
D. Prefiling Administrative Discretion ......................................... 1122

III. The Pivotal Role of the Security Agreement........................1123

A. Real Property Security Agreements ......................................... 1125
B. Recording the Security Agreement with the Financing Statement ................................................................................. 1127

IV. Implications of the Proposed Article 9 Amendments...........1130

A. Implications for Secretaries of State and Other Filing Offices 1130
B. Implications for Lending Institutions and Other Creditors ..... 1132
C. Implications for the Court System ........................................... 1133
D. Implications for the Victims of Fraudulent Filings ................. 1133

Conclusion................................................................................................1134

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Introduction

"Edward, a Living Soul in the Body of the Lord, of the House of Israel," and "Elaine, a Living Soul in the Body of the Lord, of the House of Israel," as the Browns identified their names on court filings, cited themselves as "the court" and "the judge" in an order purportedly directing a clerk to dismiss a criminal case against them.¹ Judge Steven McAuliffe of the United States District court for the District of New Hampshire promptly rejected these filings, but that did not signal the end of this bizarre tale.²

The Browns, hailing from Plainfield, New Hampshire, contested criminal proceedings against them for alleged failure to pay income tax.³ A jury convicted both Browns of federal tax violations, leading to sentences of just over five years.⁴ The couple refused to surrender to the authorities, leading to a nine-month ordeal ending in a standoff reminiscent of a classic Spaghetti Western showdown.⁵ Holed up in their New Hampshire home with a considerable stockpile of weapons and explosives,⁶ the Browns continued to resist and issue militant threats against the U.S. Marshals tasked with their arrest.⁷ As undercover Marshals finally entered the Browns' home after months of careful planning, Edward met them at the door armed with a handgun and an assault rifle.⁸ In time, he calmed down and invited the Marshals inside to join him and Elaine (also armed with a handgun).⁹ Even after their ultimately safe

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apprehension, the Browns fought tooth and nail to overturn their convictions and sentences, which then included over thirty years of jail time.¹⁰

The uncanny tactics the Browns employed to evade prosecution and sentencing are, unfortunately, not uncommon.¹¹ They are the hallmark behaviors of a large, loose network of individuals termed "Sovereign Citizens."¹² Though their means and motivations may vary, these extremists share a common trait: distrust of government.¹³ Sovereigns like the Browns engage in a vast range of illegal activity, from falsifying drivers' licenses to impersonating law enforcement.¹⁴ Though the Browns turned to more militaristic means, many Sovereign Citizens attempt to disrupt government activities by engaging in fraudulent activities collectively known as "paper terrorism."¹⁵ By filing false or frivolous documents with courts and other government offices, they wreak havoc upon the legal system.¹⁶

One of the most worrisome types of paper terrorism is the filing of fraudulent financing statements, a phenomenon that has surged in recent years.¹⁷ The financing statement, a creature of the Uniform Commercial Code (UCC),¹⁸ is a document that allows creditors to establish their interest in personal property used as collateral in a secured loan.¹⁹ Though this scheme facilitates the extension of credit, and thus economic growth,²⁰ Sovereign Citizens have abused it in an effort to further their subversive goals, chief of

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which is to thwart the functioning of a federal government they refuse to recognize as legitimate.²¹

While filing a fraudulent financing statement does not necessarily create a bona fide security interest in personal property without an underlying security agreement, these false filings are not benign.²² First, the fraudulently filed statement clouds the title to the victim's property, making it difficult for her to obtain credit or sell property.²³ Second, when a victim subsequently learns of the encumbrance on her property, she must incur the substantial legal fees associated with removing the false statement.²⁴ In one particularly striking instance, Rusty Wofford spent over $100,000 in legal fees fighting Richard McLaren, a notable Sovereign Citizen, in Texas courts.²⁵ And the damage is not limited to the individual victims, as these voluminous filings can quickly congest a court system, wasting precious public resources.²⁶

Though states have taken measures to remedy this growing problem,²⁷ the UCC drafters have yet to establish a uniform, superior solution.²⁸ Instead of leaving the various state legislatures to continue their fragmented approaches, the drafters should amend Article 9. These amendments should adopt aspects of the real property approach and apply them to perfection of security interests in personal property. Specifically, Article 9 should require the party filing the financing statement to attach the underlying security agreement, thereby giving filing offices an expedient means of verifying a statement's authenticity. Imposing recordation of the security agreement should serve as a screening tool without imposing costs of extensive prefiling review as is required by current state prefiling provisions. Such an ex ante approach would remedy the problem rather than leaving victims alone to resuscitate their financial reputations in the courts of law. This real property approach to perfection

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would also alleviate the strain Sovereign Citizen activities place on the limited resources of the courts. Ultimately, this strategy would relieve the public fisc of a pecuniary burden it ought not bear: the cost of subsidizing subversive, antigovernment tactics.

This Comment, proceeding in four parts, will demonstrate the efficacy of such an approach to perfection of security interests in personal property under Article 9 of the UCC. Though it does not suggest that the drafters should adopt the real property approach to secured credit wholesale, it does identify a particular real property strategy that would apply well in the personal property context. To wit, Article 9 should require filing of the authenticated, acknowledged security agreement in conjunction with the financing statement.

Part I will lay out the landscape of the current approach under Article 9. Section A focuses on the problematic role the Secretaries of State play as the filing gatekeepers. Section B then...