Click here for a related article which was published in Law360.
In a little-noticed action and after years of being the nation’s most backward Uniform Commercial Code (UCC) state, New York finally adopted modern versions of UCC Articles 1, 7 and 9 in a bill signed by Governor Andrew M. Cuomo just before Christmas. See 2014 Sess. Law News of N.Y. Ch. 505 (A. 9933) (McKinney’s). New York’s failure to adopt the most current version of the UCC was both embarrassing and created a great risk of confusion because New York is the nation’s pre-eminent commercial law jurisdiction and its law is chosen as the governing law for many sophisticated commercial transactions.
While the recent amendment brings most of New York’s UCC up to date, the legislation did not address New York’s archaic versions of UCC Article 3 (commercial paper) and Article 4 (bank deposits and collections), which date to the 1960’s. In addition, New York did not adopt all of the changes proposed by the 2010 amendments to Article 9. The final act is missing random uniform amendments to Article 9. None of the missing provisions are controversial and there is no apparent reason for their deletion. Nonetheless, careful review of the statute will be necessary to avoid surprise. Thus, in several important respects, New York’s version of Article 9 is still out of sync with that of most states.
The biggest problem is the act’s confusing effective date provision. Most of the UCC revisions are technical and do not reflect substantial changes in the law, but some of the Article 9 amendments affect the jurisdiction in which a UCC financing statement must be filed or the name that must be used in order to perfect a security interest. The proposed 2010 amendments to Article 9 contained a carefully crafted set of transition rules to address the problems raised by such changes. For example, the uniform version provided a five-year grace period to revise pre-amendment financing statements to satisfy the new debtor name requirements, after which time non-complying financing statements would become ineffective. This ties into the five-year financing statement expiration period, so that financing statements could be revised as they are continued.
Unfortunately, New York did not include those transition rules, but instead provides that the changes “shall take effect immediately and shall apply to transactions entered into on or after” December 17th. Already, commentators disagree whether the changes apply to pre-amendment transactions. The “immediately” language suggests that they do, but the “transactions entered into” language suggests that they do not.
If the act applies immediately to pre-act transactions, then secured creditors have only four months, until mid-April 2015, to amend their financing statements. See UCC 9-316 & 9-507. Otherwise they risk becoming unperfected. In some cases it may already be too late. On the other hand, if the amendments apply only to post-enactment transactions, then pre-existing secured creditors are saved the trouble of revising their financing statements – probably forever. But this interpretation creates a host of other complications.
For example, the new rules require that the “driver’s license” name be used on financing statements for individual debtors. Under the proposed uniform version of the amendments, a pre-amendment financing statement using a different, but previously adequate, human name would have to be revised to reflect the driver’s license name within five years. New York’s failure to include such a “drop dead” date presumably means that a prospective lender many years in the future will have to search under both the old and new rules in order to be certain there is no prior financing statement that might prime its lien. Worse, if an existing lender decides to amend its financing statement to reflect a driver’s license name (and that name is one that would not be sufficient under prior law), will it become unperfected since the transaction was entered into before December 17th and is not governed by the amendments? Further, when is a transaction covering after-acquired property or future advances “entered into” for purposes of the effective date provision – when the deal was signed or when the later-acquired assets become collateral or the later advances are made? In addition, many of the Article 9 changes resolve unclear issues, generally in a way favorable to secured creditors, but those fixes may apply only to new transactions.
The problem of a potential lapse in perfection affects significant commercial lending transactions as well. For example, Massachusetts-type business trusts are now included in the definition of “registered organization,” which can change both the state where a financing statement must be filed and the name that must be used for the debtor. In addition, the name rules for decedent’s estates and property held in trust now require inclusion of additional information – information which must be in a separate part of the financing statement, not in the name box. Since New York did not adopt the uniform national filing form rules, but creates its own forms, the current forms do not include check boxes for this information so parties must be careful to add it in an addendum. In light of the uncertainty about the transition rules, secured parties should determine whether their existing financing statements are adequate under both sets of rules. If an amendment is required, adding the new name in an “additional debtor” box would be safer than a name amendment since that would preserve any perfection that might depend on the pre-amendment name.
While it is beyond the scope of this blog post to catalog all of the changes made by the legislation, a few stand out. UCC Article 1 contains generally applicable provisions and most of the UCC definitions. While the uniform version added an objective definition of good faith, the New York amendment retains the prior subjective “honesty in fact” definition. The new version of Article 7 tracks the model law and accommodates the development of electronic documents of title, like electronic bills of lading and warehouse receipts. The legislation also amends UCC Article 8 to overrule the Highland Capital Mgt LP v. Schneider, 8 N.Y.3d 406 (N.Y. App. 2007), holding that promissory notes not traded on an exchange could be “securities” governed by Article 8, instead of “instruments” governed by Article 3.
The major changes are in Article 9. As noted above, several important changes affect financing statements filed against human debtors, trusts, decedent’s estates, and business trusts. New York did not adopt a change that would have made it easier to perfect a security interest in electronic chattel paper by control. However, the legislation adopts a non-uniform amendment that makes it easier to perfect a security interest in a deposit account. Now, in addition to the three previously-allowed methods of obtaining control of a deposit account, a secured creditor can achieve control: (1) through an agent (which is consistent with the uniform version); (2) by the acknowledgement that a party already in control holds for its benefit; (3) by listing its name on the account (whether or not it becomes the bank’s customer); or (4) by indicating in the name on the account that it holds a security interest.