In this second and last part of this series (click here for Part 1) we discuss the changes to Article 9 (Secured Transactions) of the Uniform Commercial Code of the State of New York (the “NYUCC”), as recently amended by Chapter 505 of the New York Assembly Session Laws of 2014 (the “Act”) and the pitfalls to beware of given differences between the NYUCC, as amended, and those recommended amendments by the National Commissioners on Uniform State Laws (“NCCUSL”) and the American Law Institute (“ALI”).

NYUCC Article 9 (Secured Transactions)

As revised, Article 9 prescribes new requirements for NYUCC financing statements with respect to individual debtors, certain business trusts, decedent’s estates and trusts.

The most important concern that arises for creditors is whether the Act invalidates filed financing statements naming individual debtors. This is because the Act fails to adopt the detailed set of transition rules contained in the 2010 amendments (the “proposed amendments”) promulgated by NCCUSL and ALI. As a result, debtors and creditors should be aware of the new provisions as they may need to:

revise their forms of UCC-1 statement and procedures for NYUCC filings; amend pre-existing UCC-1 financing statements; revise collateral documentation; and understand how the differences between the NYUCC as revised and the Uniform Commercial Code as in effect in other states can impact the creation and perfection of security interests when the governing law is not that of the NYUCC.

Collateral Documentation

The Act provides for additional methods of obtaining control of a deposit account. Accordingly, a secured party can achieve control:

through an agent; by the acknowledgement that a party already in control holds for its benefit; by listing its name on the account; or by indicating in the name on the account that she holds a security interest.

As a result, parties to secured transactions and their counsel may need to revise their forms of security agreements granting security over cash deposits, to provide that perfection of security by control can arise through a contractual relationship with another party gaining or previously having control over the deposit account.

Further, the Act adopts a non-uniform provision, modelled after the Uniform Commercial Code as in effect in the State of Delaware, providing that a secured party shall be deemed to have control over a deposit account, even if the depository bank’s obligation to comply with instructions from the secured party under the relevant deposit account control agreement is subject to conditions set by said depository bank, as long as such conditions do not include the requirement of further consents from the debtor. Parties should be aware that provisions in deposit account control agreements reflecting this change may not be effective in transactions where the cash collateral is not governed by the NYUCC however, as such revisions are not in effect in several other states.

UCC-1 Financing Statements

The Act adopts certain important revisions with respect to naming individual debtors and registered entity debtors on UCC-1 financing statements. However, it does not adopt uniform revisions eliminating some requirements with respect to the form of the UCC-1 financing statements to be filed, even though such revisions are in effect in most other states.

Naming Individual Debtors

In regard to sufficiency of an individual debtor’s name as set out in Article 9 Section 503(a)(4), the Act adopts the Alternative A “Only If” approach suggested by the proposed amendments. This means that the name used for an individual on a financing statement must now reflect the name set forth in her current driver’s license.

Naming Registered Entity Debtors

With respect to debtors that are organizations, the Act retains the requirement that the financing statement provide the type of organization and jurisdiction of organization for such debtor.

Prior to the amendments, Article 9, provided that the correct name of a registered entity was “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.” As a result, problems had arisen with respect to the definition of the term “public record” since certain entities often file various documents publicly.

The Act addresses the issue of the exact source for determining the correct name of a debtor that is a registered entity by: a) setting forth a new definition designed to determine what constitutes a “public organic record” and b) setting forth which public organic record controls when there is more than one such record. Further, the Act clarifies that the definition of “registered organization” includes statutory trusts. The amendments further clarified that good standing certificates, which are not records filed by the relevant entity, are not “public organic records” for the purpose of determining the name to be used in the UCC-1 filing.

Form of Financing Statement

The Act does not incorporate the language of the proposed amendments with regard to Section 9-516 of Article 9, which removes the requirement to include the organizational type, jurisdiction of organization and state issued identification number of the debtor from the form of UCC-1 to be filed in New York State. In contrast, almost all other states have adopted this revision and are currently accepting the new form UCC-1 that omits this information. As a result, parties to secured transactions should ensure that they file the correct form of UCC-1, as New York is one of the states that will not accept the new form UCC-1.

Is my financing statement still effective?

The proposed amendments provided for a delayed effective date to allow parties in secured transactions to adjust their practices to the new requirements. A second important feature of the proposed amendments is that they provided for a five year grace period during which secured parties would have the opportunity to revise pre-amendment filings and satisfy the new debtor name requirements, after which the old financing statements would be automatically invalidated. However, the Act contains no such provision; neither does it clarify the effective date for the amendments introduced.

The Act simply provides that it “shall take effect immediately and shall apply to transactions entered into after such date”. Whether that means that the Act applies to the pre-amendment transactions (as suggested by the “immediately” prong) or not (as suggested by the “ transactions entered into after such date” prong) is yet to be seen. And, with no legislative guidance on the matter, the Act has left the legal community in disagreement.

So, secured parties are legitimately concerned as to whether their preexisting financing statements are still effective.

To prevent further headaches, it seems wise for parties in pre-existing secured transactions to amend financing statements if these are found inadequate to fulfill the requirements of the revised Article 9. For example, a pre-existing financing statement using a different human name would have to be revised to reflect the name of the debtor shown on her driver’s license. And, to preserve any perfection that depends on the pre-amendment name, parties should rather add the new name in the “new debtor” box than file a name amendment.