California has enacted Assembly Bill 501, which will materially change the procedures governing allegedly unauthorized financing statements when it takes effect on January 1, 2027. A missed notice could put a lender’s perfected security interest in collateral at risk. Understanding how this new law applies, and how notices reach the people responsible for responding, is critical.
The legislation, enacted as Chapter 505 of the Statutes of 2026, creates a new affidavit procedure under which a person named—or apparently intended to be named—as a debtor may challenge a financing statement filed in California. And, unless a secured party of record acts promptly to obtain judicial relief, the filing office is required to file an immediately effective termination statement 30 days after accepting the affidavit.
The new procedure creates important operational and priority risks for lenders, lessors, factors, collateral agents, filing representatives, debtors, and parties conducting UCC due diligence.
How the New Procedure Works
New California Uniform Commercial Code (“Commercial Code”) section 9513.1 permits a person identified as a debtor, or a person who reasonably appears to have been the intended debtor, to file an affidavit under penalty of perjury that challenges a financing statement on the ground that it was not authorized under Commercial Code section 9509 or was filed in violation of Code of Civil Procedure section 765.010 (which, for several years, has provided a remedy for the victims of certain liens and encumbrances filed with ill intent).
After accepting an affidavit, the filing office must:
- Hold the affidavit in abeyance for 30 days.
- Immediately notify each secured party of record—who may be a third-party service provider or other representative rather than the actual secured party—at the mailing address provided in the financing statement.
- File an immediately effective termination statement after 30 days unless the filing office has received a court order enjoining the filing of the termination statement.
The response process is complicated by the fact that the statute authorizes only the secured party of record to petition for preliminary injunctive relief, not the actual secured party for whom the secured party of record may be acting. That third-party service provider may be unwilling, or even unable, to initiate a court proceeding in its own name—and any order directing the affiant in such a case to appear at the hearing must (i) schedule the related hearing no earlier than 14 days after the order and (ii) allow adequate time for notice, further compressing the practical window for obtaining relief before the 30-day period expires. (Although an action may be brought within 90 days after a termination statement is filed, only a court order received by the filing office within the initial 30-day period will prevent an interruption in perfection.)
The statute does provide that an affidavit and resulting termination statement are not effective with respect to a financing statement filed by or on behalf of either a public entity or a financial institution, as defined in specified statutes, and directs the filing office to reject an affidavit falling within that exemption. That exemption protects qualifying institutions as a matter of legal effectiveness, but the statute does not specify how the filing office is to determine whether a challenged financing statement was filed by or on behalf of an exempt entity. When a representative is named as secured party of record and the financing statement (as is typically the case) does not disclose the actual secured party, the filing office may nevertheless place an ineffective—but potentially confusing—termination statement in the public record. Noninstitutional lenders receive no comparable exemption.
If the court determines that a terminated financing statement was valid, the filing office must reinstate it. Reinstatement generally relates back to the original filing date, but not against a purchaser of the collateral who gave value in reliance on the termination statement. That exception could create significant priority issues with respect to transactions that occur during the period between termination and reinstatement.
Practical Steps for Secured Parties
Secured parties should consider taking the following steps before January 1, 2027:
- Review the names and mailing addresses shown for secured parties of record in active California filings. A notice sent to a stale or unattended address may not reach the appropriate person before the 30-day period expires.
- Reevaluate the use of collateral agents, servicing agents, corporate service companies, and other representatives as secured parties of record. If a representative will remain named, confirm that it is willing and able to act as the petitioner, and seek appropriate revisions to the engagement agreement, for example, to require immediate delivery of any filing-office notice and the service provider’s prompt cooperation, at the actual secured party’s direction and expense and in coordination with its counsel, in seeking injunctive relief.
- Preserve readily accessible evidence that each financing statement was authorized, including security agreements, amendments, separate filing authorizations, assignments, and merger or acquisition documents.
- Establish an internal response protocol identifying who will investigate an affidavit, retain litigation counsel, assemble evidence, and authorize emergency court proceedings.
- Financial institutions and public entities should monitor the Secretary of State’s implementation guidance and evaluate how best to make their exempt status apparent. They should not assume the filing office will be able to determine from the financing statement—particularly one naming a representative—that the filing was made by or on behalf of an exempt entity.
Considerations for Debtors
The affidavit procedure provides a potentially powerful remedy against unauthorized filings, but it should be used carefully. An affidavit must be signed under penalty of perjury, and an affiant may be liable for costs, attorney’s fees, actual damages, and a civil penalty of up to $5,000 if a court finds that the financing statement subjected to challenge was valid and the affidavit was made in bad faith.
The new procedure does not replace the existing termination procedures in Division 9 of the Commercial Code. When an originally authorized financing statement should be terminated because no secured obligation or commitment remains and the secured party has not yet taken appropriate action, a debtor ordinarily should use the signed-demand procedure under Commercial Code sections 9509 and 9513.
Other Changes
AB 501 also:
- Requires the Secretary of State to notify each debtor named in a financing statement within 21 days after the financing statement is filed.
- Expressly prohibits filing a financing statement for which no reasonable basis or legal cause exists.
- Increases the civil penalty for specified knowingly false and harassing filings from $5,000 to $15,000.
- Defers payment of court fees incurred by a debtor in a proceeding under Commercial Code section 9625 (not just challenges to allegedly unauthorized filings) until the end of the proceeding and makes a party deemed to have violated CCP section 765.010 liable to the debtor for three times all court fees paid.
The Secretary of State is required to make available a form affidavit. Secured parties and their representatives should evaluate how best to make their exempt status apparent and monitor the Secretary of State’s forms, instructions, and any implementation guidance, and begin preparing now for the statute’s January 1, 2027 effective date.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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