The Uniform Commercial Code ("UCC") was drafted by two independent commissions (the Uniform Law Commission and the American Law Institute). It was recommended for adoption to all 50 states in the U.S. in an effort to harmonize the law of sales and other commercial transactions in the U.S. With certain state specific revisions, Article 9 of the UCC, governing secured transactions, has been enacted in all 50 states, the District of Columbia, Puerto Rico, Guam, and the U.S. Virgin Islands. While there are state variations in Article 9 as adopted, the substantive content is largely similar. In 2010, to address issues that have arisen in practice, these two commissions proposed amendments to Article 9 with a recommended effective date of July 1, 2013. As of January 1, 2012, nine states (Connecticut, Indiana, Minnesota, Nebraska, Nevada, North Dakota, Rhode Island, Texas, and Washington) have adopted these amendments.
This Alert will review some of the more significant proposed amendments to Article 9 and how they can provide additional protections to the secured creditor.
2010 Amendments to UCC Article 9
The proposed amendments to Article 9 are designed to correct ambiguities in the current law and address issues that have arisen in practice. Many of these issues are the result of non-uniform language adopted by various states or involve inconsistencies that have been raised by judicial decisions. The amendments provide greater protection to the secured creditor and streamline the process. The most notable proposals are the amendments regarding the correct name of the debtor, treatment of after-acquired collateral in the event of a debtor's relocation or merger into a new entity, and the new opportunity for secured creditors to file "information statements."
In addition, there are a number of "technical amendments" including those dealing with the content of the UCC-1 financing statement, accommodation of collateral in an electronic form, and the transfer and disposition of electronic collateral. Finally, there is additional commentary to Article 9 which addresses, among other issues, certain judicial decisions criticized by UCC scholars and practitioners. Of all the amendments, the issue of the correct name of the debtor is the most significant as it addresses those situations where, because of an error in the name of the debtor, a secured creditor's seemingly perfected security interest is in fact found to be unperfected, causing the security interest to be subordinate to the rights of a lien creditor or other filers and affecting the secured creditor's priority in the case of the debtor's bankruptcy.
The Debtor's Name: Individuals and Registered Organizations. As mentioned above, probably of most practical significance to the secured creditor are the amendments that provide greater guidance as to the name to be provided on a financing statement for an individual debtor. Financing statements are effective to perfect most security interests provided that the financing statement complies with the requirements of Article 9, such as providing the debtor's name. Currently, with respect to individual debtors, Article 9 instructs the filer to use the "individual name" of the debtor. The 2010 amendments provide states with two alternative solutions regarding a debtor's name. Alternative A requires a filer to provide the name on the debtor's unexpired driver's license. If the debtor does not have a driver's license, the filer must use either the "individual name" of the debtor (i.e., the debtor's name as required under current law) or the debtor's surname and first personal name. Alternative B leaves intact the current requirement to use the debtor's "individual name" but also provides that either the name on the debtor's driver's license or the debtor's surname and first personal name will be sufficient as well. Further, the majority of the nine states which have thus adopted the 2010 amendments have added identification cards as alternatives to the driver's license under Alternative A.
This clarification as to which name of the individual debtor to provide on the financing statement is of paramount importance as failure to perfect under the correct name can result in loss of priority. So long as the debtor has a driver's license, which in most cases will be true, use of the name on the license is available under either alternative and gives the secured creditor some certainty.
With respect to registered organizations (which includes most business entities), the filer currently must provide the name of the debtor indicated on the public record of the debtor's jurisdiction of organization which shows the debtor to have been organized. Under the 2010 amendments, the filer must use the name of the registered organization on the "public organic record" most recently filed with or issued by the registered organization's jurisdiction of organization. "Public organic record" has been added as a new definition which describes which records to use in determining the proper name for a registered organization. Also, the term "registered organization" has been clarified to confirm that it includes corporations, limited partnerships, limited liability companies and statutory trusts.
After-Acquired Property. Under current law, if a debtor relocates to a new state, the security interest in the assets of the debtor at the time of relocation continues perfected for four months after the change. So long as the secured creditor files in the new jurisdiction within this four-month period, it will maintain its perfection and priority in such assets. Oftentimes, a debtor will also grant to a secured creditor a security interest in "after-acquired property," which is property the debtor does not yet have rights in, such as future inventory or accounts. Security interests in after acquired property acquired by a debtor after relocating are unperfected until the secured lender files in the new state. Similarly, in the case of a party which acquires property from a debtor located in a different state, typically through a merger or consolidation, and the property is subject to a security interest, the secured creditor has a one-year grace period to file against the new debtor in the new state in order to maintain its perfection and priority. However, again, the security interest in after-acquired property acquired after the merger or consolidation is unperfected until there is a new filing. The 2010 amendments change this by providing that security interests in after-acquired property arising within four months after a debtor relocates or assumes collateral are perfected, and will remain perfected provided a filing is made in the new jurisdiction within the four-month grace period.
Information Statements. Article 9 currently provides that a debtor may file a "correction statement" providing notice to third parties that a filed financing statement or other record is inaccurate. The 2010 amendments change this term to "information statement" and now also afford the secured party the right to file an "information statement" in the event it believes that a filing, such as a termination statement, has been wrongfully filed. As before, the filing of an information statement does not affect the effectiveness of the initial financing statement or other record. It does, however, put third parties on notice that there is a disputed filing. Technical Amendments. There are also a number of amendments which have been characterized as being "technical" but nonetheless have a significant impact on procedures and definitions. A few of them are outlined below:
- Financing Statements. Certain information currently required on financing statements such as the type of organization, jurisdiction of organization, and organizational identification number of a debtor will no longer be necessary. There is also clarification as to the proper information to be contained on a financing statement when the collateral is held in a statutory or common-law trust or in a decedent's estate.
- Sale of Payment Intangibles and Promissory Notes. The amendments clarify that while, as a general rule, the override to contractual restrictions on security interests found in Section 9-406(d) does not apply to the sale of a payment intangible or promissory note, it does apply to the enforcement of a security interest through the sale or strict foreclosure of payment intangibles and promissory notes due to a debtor's default.
- Electronic Forms and Dispositions. Several amendments deal with issues raised by collateral in an electronic form and the electronic filings and dispositions of collateral. For example, the general rule for perfection of electronic chattel paper has been made consistent with the Uniform Electronic Transactions Act. Clarification is also given with respect to treatment of certificates of title where the certificates of title are, in whole or in part, in electronic form. The definition of "certificate of title" will now encompass electronic records where such records are maintained by states in lieu of issuing certificates of title. Additionally, further guidance is given with respect to the notice requirements applicable to electronic dispositions of collateral (specifically, time and "electronic location" of on-line auctions) when a security interest is enforced by sale or other disposition of the collateral.
- Commentary. In addition to new commentary explaining the various proposed amendments, Comment 3 to Section 9-307 adds that an additional requirement for deeming a non-U.S. debtor to be located in the District of Columbia is that none of the special rules applicable to registered organizations organized under state or federal law, foreign banks or foreign air carriers apply.
Status
As of January 1, 2012, nine states have adopted the 2010 proposed amendments. The legislation is currently pending in five other states, the District of Columbia, and Puerto Rico. It is hoped that all 50 states, the District of Columbia, and the other relevant jurisdictions will adopt the amendments uniformly, including the recommended effective date of July 1, 2013, so as to avoid any confusion in interstate transactions.
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.
