White supremacist groups probably took some sordid pride when they discovered that California prison inmates with Bloods' and/or Crips' gang affiliations had adopted their "Sovereign Citizen" movement tactics involving the "UCC-1 (Uniform Commercial Code, hereinafter UCC) bogus lien filing scam." These tactics were developed in the 1960s as part of an anti-government secessionist agenda to undermine government prosecutions and tax enforcement as well as the harassment, intimidation, and retaliation against public officials.

It took about 50 years for the UCC-1 bogus lien filing scam that started in isolated jails in Alaska to move across the nation from California and reach the East coast and then about five years to become fully operational in New York state. And like any bad idea that communicates through word of mouth and criminal conspiracies, the scam morphed as it spanned the nation. With the help of the digital era and individual Internet access, it now has resurrected in the post-2009 quagmire of the foreclosure crisis that New York courts confront today. This article will address the latest metamorphoses of the bogus UCC-1 notice of lien filing scam, its impact on the courts and remedies in New York.

Prison Practices

Prison inmates who fancied themselves "sovereign citizens" immune from government scrutiny made full use of the bogus UCC-1 lien scheme, to target, harass, annoy and retaliate against those they blamed for the consequences of their actions, including the police officers, corrections officers, prosecutors, judges, and even defense attorneys. The scheme utilizes the Internet-friendly UCC registry and relaxed electronic signature requirements to file bogus UCC-1's notices of lien, which are then electronically posted on a state's UCC-1 registry website for all to see.

The scheme can be problematic for the targeted debtor because a duly filed UCC-1 notice of lien, whether bogus or not, is available for public inspection, including potential lenders and creditors, at the UCC website, which most states maintain in various formats. In New York the website is operated by the Department of State. See http://www.dos.state.ny.us/index.html; see, e.g., State v. Pultz, 238 Wis. 2d 93 (2000).

Foreclosures

There are no simple answers as to why the foreclosure crisis has occurred. Some blame the idea that rose in the 1990s that all Americans can and should be able afford their own home. Others contend that lax regulations and greedy banks, mortgage companies and brokers sold mortgages to home buyers that could not actually afford the costs. Still others blame home buyers who were unrealistic as to what financial pressure their own wallets could overcome. The bottom line is that the UCC-1 scam was picked up by some unscrupulous homeowners whose homes were foreclosed to retaliate against the banks, attorneys, referees and courts who were involved in the foreclosure process. Some homeowners saw it as a way of clouding the title to their only significant asset, that had just been ripped from them, making it harder to sell the property to another. See, e.g., United States v. Tanner, 2007 U.S. Dist. LEXIS 31884 (WD Wash.2007). In United States v Tanner, the Court opined that the false UCC-1's clouded title, potentially damaged the credit ratings and in general harassed the federal employees in their personal lives for merely doing their jobs. Accordingly, a whole new wave of false filings against public officials has been observed recently involving the foreclosure epidemic.

Remedies

To be sure, the UCC was never user friendly when dealing with the bogus filing stratagem. Indeed, the problem of bogus UCC-1's has always been a challenge. The commentators to the UCC acknowledged the shortfall in the statute in their Comment to the Uniform Laws to the Revised Article 9, McKinney's UCC §9-518, which provides: "[T]his Article cannot provide a satisfactory or complete solution to problems caused by misuse of the public records. The problem of 'bogus' filings is not limited to the UCC filing system but extends to the real-property records, as well. A summary judicial procedure for correcting the public record and criminal penalties for those who misuse the filing and recording systems are likely to be more effective and put less strain on the filing system than provisions authorizing or requiring action by filing and recording offices."

UCC §9-518 was amended by L 2013. ch.490, §4, and specifically provides for a special proceeding pursuant to Article 4 of the CPLR to redress the problem of bogus liens filed against public officials. The law was amended in 2013 to facilitate the commencement of a special proceeding, but in reality the law did little more than codify a procedure that had already been used in practice with much success. If the law only codified the litigation practice that had been instituted to correct the bogus liens several years before, that would have sufficed. However, the amendment included at least one thorny requisite: that the UCC-1 lien be on the property of the public official. The legislature did not foresee, though, the UCC-1 scheme morphing and its use in the foreclosure epidemic with the foreclosed property being the subject of the collateral listed in the UCC-1. See UCC §9-518(d).

Notwithstanding the amendment, established case law allows for the pre-2013 litigation vehicle of the special proceeding to continue to be used as a viable remedy. See, e.g., Brown v. Thompson, 23 Misc.3d 1109A (Queens Co. 2009); Brown v. Peoples, — Misc. 3d — (Queens Co. Sup. Ct., Index No. 4212/2010 (April 14, 2010) (disclosure: the author was attorney for the petitioners).

The pre-2013 remedy, approved in Justice James P. Dollard's opinion in Brown v. Thompson, 23 Misc.3d 1109A (Queens Co. 2009), allowed for a special proceeding commenced by the petitioners District Attorney and the alleged debtors (all public servants) pursuant to CPLR Article 4. The court's order included declaratory relief and statutory money damages of $500 per each false UCC-1 filed pursuant to UCC §§9-528, 9-625, and 9-518.

This remedy—that is, a CPLR Article 4 special proceeding petition on notice to show cause— was particularly helpful when in the past a criminal prosecution was not viable. The special proceeding can be used as the vehicle to terminate the bogus lien. Moreover, in this civil proceeding, the respondents may not assert, without consequences to their case, their Constitutional Fifth Amendment right to remain silent, statutory discovery is limited, and a trial, if granted, is on an expedited basis. See, e.g., Access Capital v. DeCicco, 302 A.D.2d 48 (1st Dep't 2002).

In New York, prior to the 2013 amendment of UCC §9-518 (d), the relief ordered by the court could not include the "expungement" of the UCC-1 statement even though a UCC-3 statement would appear inadequate. Expungement of the UCC-1 is not a remedy permitted under the New York state UCC, because the UCC-1 meets the minimum requirements set forth in UCC §9-516(b) and, therefore, the filing office is required by law to accept and file it. As a practical matter, a duly filed UCC-3 termination statement is appended to the bogus UCC-1 and makes the public aware that the UCC-1 is ineffective. Under revised Article 9, financing statements are not removed from the records; instead, additional information in the form of correction (UCC §9-519) and termination statements (UCC §9-509) are added. Unfortunately, the termination statement does not differentiate between a legitimate financing statement and a bogus one, but a court ordered termination statement may include a clear statement that the UCC-1 was bogus and include or cross-reference the court's order specifying the same.

Should a trial be required, it will be summary in nature. The petitioner demonstrates by credible sworn testimony that there was no agreement between him/her and the bogus filer that could be the basis for the false filing. The burden then shifts to the bogus filer who must substantiate a specific legal or factual basis for their allegations, and as per §§1-207 and 9-607, as the UCC requires a bona fide agreement between the parties. In Brown v. Thompson, a summary trial was held and Supreme Court Justice James P. Dollard in Queens County determined that the bogus filer had failed to prove that a valid security agreement existed, had failed to prove his allegations that the petitioners violated his common law copyright in his name, and found that the bogus filing was done with the intent to establish an invalid lien and harass the public officials involved. Justice Dollard granted injunctive relief, ordering the termination of the lien, barred future unauthorized liens, and ordered statutory damages as well as other specific relief. Similarly, in another Article 4 proceeding, before Justice Martin J. Schulman in Queens County, the court terminated another inmate's bogus lien against public officials and ordered statutory damages against the inmate bogus filer. See Brown v. Peoples, —Misc. 3d — (Queens Co. Sup. Ct., Index No. 4212/2010, April 14, 2010).

Pre-Screening UCC-1's

The New York Department of State does not pre-screen UCC-1 filings. There are no legal grounds for refusing a statement as set forth in UCC §9-516(b). Moreover, UCC Article 9 does not contain any provision permitting or requiring the state office to pre-screen UCC-1 financing statements. Several states do allow for pre-screening of UCC-1's. See, e.g., State v. Lutz, 2003 Ohio 275 (2003); UCC §9-512. It should be noted that New York receives thousands of new UCC-1 filings each day. Moreover, courts have determined that it is the function of the courts—not the state filing office—to determine the validity of a challenged lien. Injunctive relief and the awarding of statutory damages against a bogus filer per UCC §9-625(b) is a particularly effective remedy. The section permits damages in the amount of $500 for each bogus filing.

Conclusion

The foreclosure crisis has led some homeowners to adopt the sovereign citizen methodology using the UCC-1 bogus lien scam to retaliate against banks, courts, referees and attorneys involved in the foreclosure action. Although time consuming and costly, the CPLR Article 4 special proceeding continues to be a viable and effective option available to public officials victimized by the UCC-1 bogus lien scam.

Peter A. Crusco is executive assistant district attorney in charge, investigations division, Office of the Queens County District Attorney. The views expressed herein are the author's, and do not necessarily reflect the policies or views of the office.