Impact Of Revised Article 9 On Asset Securitizations
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1. General Comments
After nearly a decade of drafting, revised Article 9 1 of the UCC has been given final approval by the National Conference of Commissioners on Uniform State Laws. The final OK came during the Conference’s 1998 Annual Meeting in Cleveland at the end of July. During fall 1998, the Reporters put together the Official Comments, and the final version of the both text and Official Comments are being submitted to state legislatures for adoption during 1999. The Rev. UCC will take effect July 1, 2001 subject to certain transition rules outlined in Rev. UCC 9- 701, 702, 703, 704, 705, 707 and 708.
2. Scope
Revised Article Nine makes a number of important changes to the UCC which, in theory at least, will simplify process of asset securitization.
Revised Article Nine expands the scope of the statute to include:
- deposit accounts as original collateral,2
- most sales of payment intangibles, defined in Rev. UCC 9-102(a)(61) as general intangibles where the account debtor’s obligation is to pay money;
- expanding the definition of account to include many underlying transactions beyond the sale of goods or services, including lottery winnings 3;
- the sales of promissory notes;
- healthcare insurance receivables assigned to a health care provider allowing the packaging of noninsurance receivables and private insurance receivables 4;
- nonpossessory statutory agricultural liens 5;
- consignments treated as purchase money security interests 6;
- automatically covering support obligations for receivables, such as guarantees and letters of credit 7;
- assignment of commercial tort claims 8;
- security interests granted to state and local governments except to the to the extent another statue governs security interests 9;
- a security interest in lease interests, letter of credit rights, health care receivables, promissory notes and general intangibles, including contracts, permits, licenses, and franchises, will attach even though there may be a contractual or statutory limit on assignment 10.
3. Simplified Perfection
Revised UCC Article 9 contains a number of new rules with respect to perfection. The most import change for asset securitization may be that for most collateral the place to file will be the debtors "location." If the debtor is a registered organization of any type,the "location" will be the jurisdiction where the entity was formed 11. Once consistently in effect, this new rule may reduce transaction cost and legal risk by enabling the secured party to simplify the packaging of all types of collateral into a single filing for perfection.
Revised UCC Article 9 also contains certain exceptions to the general "birth certificate filing" for perfection described above. With respect to certain types of collateral, deposit accounts, letter of credit rights, and investment property, Revised Article 9 allows perfection to be established by either taking "control" over the collateral or filing 12. Agricultural and tort claims are also perfected by filing. Control over the collateral creates a perfected security interest that will take prior to that perfected by filing, but in asset securitizations, filing in the appropriate jurisdiction may be the only reasonable way to perfect.
Filing as an alternative to possession for perfection of documents of title, instruments, tangible and electronic chattel paper and certain forms of investment property is an important related change that started with the 1995 revisions to Article 8 and 9 and is expanded in Revised Article 9 13. As with control, possession is a stronger form of perfection than filing, but again filing may be the only practical way to establish perfection in asset securitizations.
There is one type of collateral that is perfected without possession, control or filing. Outright sales of payment intangibles are perfected automatically without filing. However, outright sales of accounts will be required to perfect 14.
4. Proceeds
Following the theme of "packaging", Revised Article 9 has a much broader definition of proceeds than the current U.C.C. It includes distributions on account of collateral such as cash or stock dividends from securities. The definition also included claims arising from defects or damage in the collateral, such as claims brought against a third party for fraud. Since support obligations are automatically picked up with an original collateral filing, collections from the support obligations will be included in the definition of "proceeds" as well 15.
5. Mechanics Of Filing
Revised Article 9 also simplifies the mechanics of filing 16. First, it embraces a concept of medium-neutrality where a financing statement can be filed by a media other than paper. Accordingly, Revised Article 9 does not care who makes a filing as long as the filing is made by a person who was authorized to file a record with the filing office 17. To further facilitate electronic filing, the debtor's signature is not required but the debtor's correct legal name is required. Using a trade name for filing is not acceptable under Revised Article 9 because in most cases it will be missed by "legal name" search 18. In addition, Revised Article 9 now allows the use of supergeneric description of collateral on the financing statement 19. This eliminates the need for numerous pages describing the collateral in the financing statement. Revised Article 9, however, does not permit supergeneric descriptions in the security agreement.
6. Potential Problems
As outlined in the preceding paragraphs, Revised Article 9 seems to facilitate asset securitizations by expanding the scope of the Article to cover new collateral and sales of payment intangibles and instruments, by simplfing the rules for determining the filing location and mechanics of filing and by using filing as an alternative to other methods of perfection. Unfortunately, the practical application of Revised Article 9 may complicate rather than simplify the structuring and documentation of asset securitization. This is the result of certain filing exceptions contained in Revised Article 9, the transition rules in Revised Article 9 and the likelihood that not all states will adopt Article 9 so that it will be effective in all jurisdictions as of July 1, 2001.
Footnotes
1 Ref. to revised Article 9 are to be 1998 Official text.
2 Rev. UCC § 9-109 (d) (13)
3 Rev. UCC § 9-102 (a) (3)
4 Rev. UCC 9-102 § (a) (2) (61)
5 Rev. UCC 9-109 § (d) (8)
6 Rev. UCC § 9-109 (a) (2), 9-102(a)(5)
7 Rev. UCC § 9-109 (a) (4)
8 Rev. UCC § 9-308 (d)
9 Rev. UCC § 9-109 (d) (12)
10 Rev. UCC §
11 Rev. UCC § 9-407, 9-408 and 9-409
12 Rev. UCC § 9-301
13 Rev. UCC § 9-328, 5-114, 8-106
14 Rev. UCC §
15 Rev. UCC §
16 Rev. UCC § 9-102 (a) (64), 9-322 and 9-324
17 Rev. UCC 9-102 (a)(39)
18 Rev. UCC § 9-509
19 Rev. UCC § 9-503 - 9-506
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