A transition issue under revised Article 9 of the Uniform Commercial Code may require special attention by our lender clients who make secured loans.

Revised Article 9, of course, went into effect in 46 states and the District of Columbia on July 1, 2001, and went into effect in the remaining states by January 1, 2002. Under the transition rules of revised Article 9, June 30, 2006, is an important date. That date is the outside date on which the effectiveness of financing statements filed under former Article 9 will lapse unless their effectiveness has been continued under the transition rules of revised Article 9.

This June 30, 2006, cut-off date for former Article 9 financing statements, created by revised UCC Section 9-705(c)(2), works very smoothly except for one scenario. That scenario is where a financing statement was originally filed in the second half of 1996 (or filed five or more years earlier and continued for a new five-year period beginning in the second half of 1996) and its effectiveness was continued by the filing of a continuation statement under former Article 9 early in the six-month continuation window in the first half of 2001 — before revised Article 9 went into effect. Under the rules of former Article 9 then in effect, the continuation statement would have continued the effectiveness of the financing statement to a date falling in the second half of 2006. Yet revised UCC Section 9-705(c)(2) provides that the outside lapse date for a former Article 9 financing statement is June 30, 2006 — i.e., at the end of the first half of 2006.

Consider the following example.

A former Article 9 financing statement was filed on November 1, 1996, and a continuation statement was filed under former Article 9 on May 2, 2001. Under the rules of former Article 9, the filing of the continuation statement would have continued the effectiveness of the financing statement for five years from the date on which it would have expired. Thus, application of the rules of former Article 9 would lead to the conclusion that the effectiveness of the financing statement was continued for five years from November 1, 2001, to November 1, 2006 — four months beyond the June 30, 2006, outside lapse date under revised Article 9.

How does the outside lapse date of June 30, 2006, operate, and how can a secured party maintain the effectiveness of a former Article 9 financing statement in this scenario? The answer depends in part on whether the former Article 9 financing statement is on file in the same state and same office as the state and office in which to file a financing statement to perfect the same security interest under revised Article 9.

If the office in which to file a financing statement to perfect the security interest under revised Article 9 has changed from the office specified under former Article 9 (e.g., a security interest with respect to which the debtor is a Delaware corporation with its chief executive office in New York), the outside lapse date for the financing statement filed and continued under former Article 9 is clearly June 30, 2006 (rather than, in the example above, the November 1, 2006 date supplied by the continuation rules of former Article 9); and its effectiveness can be continued beyond that date only by the filing of an "in lieu" initial financing statement (in Delaware in our example) no later than June 30, 2006. An "in lieu" initial financing statement can be filed at any time; there is no need to calculate a "window" in which this action must be taken.

If, however, the office in which to file a financing statement to perfect the security interest under revised Article 9 has not changed from the office specified under former Article 9 (e.g., the debtor is a California corporation with its chief executive office in California), the analysis as to the outside lapse date is more difficult. There are three possible legal theories suggesting different outcomes:

  • Theory 1: The effectiveness of the former Article 9 financing statement will lapse on June 30, 2006. Under revised UCC Section 9-705(d), though, the effectiveness of the former Article 9 financing statement may be continued by the filing of a continuation statement. The normal six-month window for filing continuation statements applies; therefore, the continuation statement may be filed at any time in the first half of 2006.

  • Theory 2: The effectiveness of the former Article 9 financing statement will lapse on June 30, 2006. Under revised UCC Section 9-705(d), though, the effectiveness of the former Article 9 financing statement may be continued by the filing of a continuation statement. However, calculation of the "continuation window" is a bit more complicated. Revised UCC Section 9-705(d) refers only to the "timely filing" of a continuation statement. Timeliness is determined by revised UCC Section 9-515(d), which states that a continuation may be filed "within six months before the expiration of the five-year period" of effectiveness. The only five-year period in sight, though, is the one that would end, in the example above, on November 1, 2006. Thus, under this theory, the continuation statement could not be filed earlier than May 1, 2006 (six months before the expiration of the five-year period of effectiveness under former Article 9), leaving only a two-month window in which to file the continuation statement.

  • Theory 3: The third theory is that revised UCC Section 9-705(c) does not apply to a former Article 9 financing statement as to which the filing office did not change as a result of revised Article 9. This theory, while not easily justified by the literal language of the statutory text, is supported by the heading for that subsection: "Pre-effective date filing in jurisdiction formerly governing perfection." Under this theory, the effectiveness of the financing statement in the example above would expire on November 1, 2006, and a continuation statement could be filed at any time during the six months before that date (i.e., on or after May 1, 2006).

This statutory ambiguity with respect to "same office, same state filings" causes two sets of problems — one for secured parties and one for filing officers. The problem for secured parties is how to continue the effectiveness of a former Article 9 financing statement that falls into this narrow category. One answer is easy: file a continuation statement during the period that is effective under all three theories. In the example above, all theories lead to the conclusion that filing a continuation statement between May 1, 2006, and June 30, 2006, will continue the effectiveness of the financing statement with no gap in its effectiveness.

The problem for filing officers is that their computer systems are typically programmed to reject continuation statements that are not filed during the correct window. Most such systems are programmed merely to count back six months from the listed expiration date. Thus, in the scenario that we have used as an example — a former Article 9 financing statement originally filed on November 1, 1996, and that was continued on May 2, 2001 — most of the automated systems in the filing offices will reject a continuation statement filed before May 1, 2006.

Because neither secured parties nor filing officers can know which of the three legal theories will ultimately be adopted by a court, filing officers have been urged to accept for filing any continuation statement filed from January 1, 2006 through the lapse date under former Article 9 with respect to a financing statement as to which the correct application of UCC Section 9-705(c) is in doubt. Ultimately, a court will have to decide whether, in the context of our example, a continuation statement filed between January 1 and May 1, or between July 1 and November 1, is effective. We prefer the first theory (which would give effect to a continuation statement filed between January 1 and May 1 [as well as between May 1 and June 30], but would not give effectiveness to a continuation statement filed on or after July 1), and believe that a court should so rule. But even so, since under revised Article 9 a "record" (such as a continuation statement) is filed when tendered with the proper fee, it is better to have questionable continuation statements on the record where everyone can see them (even if they are ultimately adjudicated as ineffective) than to reject them with the result that they will be hidden even if a court concludes that they were effective.

The Permanent Editorial Board of the Uniform Commercial Code will likely issue an advisory report alerting filers to this issue. The International Association of Commercial Administrators, whose members operate the various state filing offices, is also closely monitoring the situation. In the meantime, our lender clients may wish to determine whether any of their former Article 9 financing statements may be affected by this transition issue. In this regard, note that the analysis in this Alert is based on the Official Text of UCC Section 9-705, which is in effect in most states. The rules differ in a few states, though. For example, in three states, the outside lapse date is later than June 30, 2006. In two other states, more specific guidance is given as to the period in which a continuation statement may be filed. As a result, the rules in effect in the state whose law governs perfection of each security interest under Revised Article 9 should be consulted.

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.