Financial Services Alert

Scope. The general scope of Article 9 is expanded from the existing coverage of the creation by contract of security interests in personal property and the sale of accounts and chattel paper to include statutory liens in farm products, the sale of payment intangibles and promissory notes, consignments and security interests created in certain sales transactions and bank collections. In addition to the general expansion of coverage, Revised Article 9 covers a number of transactions that in most states had been expressly excluded from the existing Article 9. These transactions include assignments of bank deposit accounts in non-consumer transactions, commercial tort claims and security interests created by a state or its governmental units.

Media Neutrality. Documents may be in written form or in an electronic or other medium so long as they are "retrievable in perceivable form" and may be authenticated not only by a written signature, but also by any symbol, encryption or other electronic process.

Expanded And Changed Definitions. Revised Article 9 includes a great number of new defined terms. Some of the new terms cover categories or subcategories of collateral not previously covered, for example "commercial tort claim," "electronic chattel paper," "letter-of-credit right," "health-care-insurance receivable" and "payment intangibles." One of the most significant definitional changes is the shift of certain property from the definition of "general intangibles" to "accounts." A number of types of property under the general intangible category in the current statute have been shifted to accounts in Revised Article 9; these include rights to payment of license fees, for insurance coverage, for indemnity under guaranties, for the provision of energy, arising out of credit cards, arising out of lottery winnings and health-care-insurance receivables. The effect of this shift will be a further expansion of Article 9 to cover sales of all assets coming within the broader, new definition of accounts. With the increased scope of Article 9 to cover sales of payment intangibles and promissory notes as well as accounts, Article 9 will cover the transfer of a broad range of financial assets, whether by collateral assignment or outright sale.

Perfection. Revised Article 9 provides four major methods of perfection: (1) automatic upon attachment, (2) the filing of financing statements, (3) possession, and (4) control. Security interests automatically perfected upon attachment include purchase money security interests in consumer goods, the sale of payment intangibles or promissory notes and the assignment of a health-care-insurance receivable to the provider of health-care goods or services. Perfection by the filing of financing statements suffices for almost all categories of collateral with the exception of security interests in deposit accounts, letter-of-credit rights and money. Security interests in negotiable documents, goods, instruments, money, tangible chattel paper and certificated securities may be perfected by possession. Security interests in securities and other investment property, deposit accounts, letter-of- credit rights and electronic chattel paper may be perfected by control.

Law Governing Perfection And Priority. The perfection of most non-possessory security interests is governed by the law of the jurisdiction where the debtor is located, regardless of where the collateral is located. An individual is located at his or her principal residence and an organization generally is located at its place of business and, if it has more than one place of business, at its chief executive office. However, a "registered organization," namely one that is organized under the laws of a single state where there is a record of the organization maintained in the state, such as a corporation, limited partnership or limited liability company, is deemed to be located in the state of its organization. Revised Article 9 also sets forth rules for the location of registered organizations organized under federal law, organizations organized in foreign jurisdictions, foreign bank branches and foreign air carriers.

Filing. There will be a single filing office in each state for financing statements covering collateral not related to real estate. Financing statements for real estate related collateral, such as oil, gas or minerals, timber to be cut and fixtures, are to be filed with the land records. Financing statements no longer need to be signed by the debtor and, in fact, will not require the signature of any party. The elimination of any signature requirements should foster the development of electronic filing systems. While no signature is required, Revised Article 9 provides that financing statements only may be filed if authorized by the debtor and goes on to provide that a debtor’s entry into a security agreement constitutes authorization for the secured party to file a financing statement covering the collateral described in the security agreement. Financing statements must provide the name and address of the debtor; an indication as to whether the debtor is an individual or an organization and, if the debtor is an organization, the type of organization, the jurisdiction of organization and the organizational identification number; the name and address of the secured party or a representative of the secured party; and must indicate the collateral covered by the financing statement.

Defaults. The rules on defaults are expanded and clarified. Prior notice of sale or other disposition must be given not only to the debtor but also to guarantors and, in non-consumer goods transactions, to other parties with rights in the collateral including other secured parties, whether junior or senior, whose security interests are perfected by the filing of financing statements or which have notified the secured creditor of an interest in the collateral. In non-consumer transactions, 10 days’ advance notice is deemed to be sufficient. Safe-harbor forms of notification are provided.

Consumer Transactions. There are a number of provisions giving specific substantive rights to consumers and imposing special duties on secured creditors in consumer transactions and transactions involving consumer goods. These are sprinkled throughout Revised Article 9 and include special requirements on the description of collateral and a prohibition on assignment of consumer deposit accounts as collateral. The statute has special notice requirements for the sale or disposition of collateral in consumer goods transactions. The requirements are mandatory and have no safe-harbor provisions for minor errors. This makes consumer goods transactions particularly sensitive since there are statutory damages for the failure of a secured party to comply with the default provisions of the Article, regardless of whether any injury resulted.

Transition. Following the July 1, 2001 effective date, new secured transactions, the continuation of financing statements from pre-effective date transactions, the rules on scope, exclusions, definitions, substantive provisions and default will all be governed by Revised Article 9. The impact will be felt in all states, whether or not the particular state has adopted Revised Article 9, since secured transactions tend to have multi-state implications—debtor located in another jurisdiction, debtor organized under the laws of another jurisdiction, collateral located in another jurisdiction, etc. There is, however, a limited grace period provided for secured transactions created prior to the effective date. Security interests created and perfected by filing prior to the effective date will remain perfected until the earlier of (a) the time the original financing statement would have lapsed under existing Article 9, or (b) June 30, 2006. (There is a shorter, one year grace period for security interests perfected by a method other than by the filing of financing statements.). The priority position established by the filing of a financing statement prior to the effective date may be maintained following that grace period if appropriate steps are taken to amend the financing statement to comply with Revised Article 9 and if the financing statement is properly continued in accordance with Revised Article 9. If Revised Article 9 requires filing in a different filing office, the pre-effective date financing statement may be continued by the filing of an initial financing statement in lieu of a continuation statement. The "in lieu" initial financing statement must satisfy Revised Article 9, be filed with the appropriate filing office under Revised Article 9 and must identify by date, filing number and filing office the pre-effective date financing statement to be continued.

Preparing For Revised Article 9. It is not possible to make recommendations on planning for Revised Article 9 that would have universal application. Each financial institution must determine the particular steps best for its needs. There are, however, a number of actions that should be taken and others that should be considered: filing of continuation statements for all existing financial statements that would be eligible for renewal prior to July 1, 2001; revision of security agreement and financing statement forms and preparation of forms of amendment for existing security agreements and financing statements to comply with Revised Article 9; establishment of preclosing procedures for searches at filing offices under Revised Article 9 and also at filing offices grandfathered under the transition rules; adoption of a system to review existing transactions to identify actions needed to amend and continue pre-effective date financing statements that would otherwise lapse on or after the effective date of Revised Article 9; identification of all pre-effective date secured transactions perfected by methods other than by the filing of financing statements and establishment of programs to perfect under Revised Article 9; review of all procedures and forms related to consumer transactions or involving consumer goods and development of procedures and forms complying with Revised Article 9. The statute is extremely complex. It is important to remember that any generalizations about the statute, such as those in this Article, must be accepted with caution since nearly everything in the statute is subject to sub-rules and exceptions.