The Uniform Law Commission (ULC) recently approved a number of changes to Article 9 of the Uniform Commercial Code, which governs secured transactions. Although the changes are not dramatic, they will affect secured parties’ filing, searching, and due diligence practices.
The ULC has proposed a nationwide effective date of July 1, 2013, with a five-year transition period. It is likely that most states will attempt to meet this timeframe, but there is no guarantee as to all fifty.
Included below is a brief summary of the most significant official amendments, plus a quick analysis of the possible effects of these changes on secured parties:
- Change to Definition of Public Records (UCC § 9-102(a)(68))
Article 9 currently states that the correct name for a registered organization for inclusion in a financing statement is the one on the “public record.” Because of uncertainty about which types of records are “public records,” the revised code will instead use the term “public organic record,” meaning a record that is available for public inspection. “Public organic records” will include records filed with, or issued by, the state to form an organization, e.g. articles of incorporation, articles of organization, or limited partnership agreements.
This change provides greater certainty that the debtor name a secured party records on its financing statement is the correct one for purposes of the statute, and therefore that its security interest is properly perfected. It may still be prudent to cross-check against other official entity documents, e.g. bylaws, stock certificates, tax returns, etc., but for perfection purposes, the organizational document will control. For more information on individual borrowers, see section V below.
- Clarification to Rules Relating to “Control” of Electronic Chattel Paper (UCC § 9-105)
Currently, this section provides a six-factor test for whether a secured party has control of electronic chattel paper (ECP). The revision adds a general test, requiring that the system employed to evidence the transfer of ECP “reliably establish the secured party as the person to which the chattel paper was assigned.” The six-factor test has been retained as a safe harbor.
The section now defers to emerging systems and innovation taking place in the market, and it should give secured parties more leeway to develop reliable systems for keeping track of and controlling ECP.
- Change to Location of Debtor Provision (UCC § 9-307)
This section provides the rules for determining a federally-organized debtor’s “location,” and thus the state in which a financing statement naming that debtor must be filed. The revisions clarify that for registered entities organized under federal law (e.g. banks), the “main office” or “home office” (terms frequently used in the federal statutes) is the organization’s “location” for purposes of filing the financing statement.
This change is important for secured transactions involving federally-chartered institutions. In other cases with ordinary individual or entity borrowers, secured parties may continue to use the state of incorporation/organization for business entities and the state of principal residence for individuals.
- Continued Perfection of Security Interest Following Change of Governing Law (UCC § 9-316(h)-(i))
This section currently provides that perfected security interests that attach prior to a debtor’s move to another state remain perfected for four months after the move. The revisions add a new subsection (h) that provides for continued perfection of newly-acquired security interests that attach within four months after the debtor moves, so long as the secured party has taken steps that would have perfected the security interest in the debtor’s original state. The perfection continues until the end of the four-month period. Similarly, a new subsection (i) provides for automatic perfection of security interests that attach within four months after a new debtor in another state becomes bound by an existing security agreement with the original debtor (e.g. by merger) – so long as the secured party has taken steps that would have perfected the security interest against the original debtor.
Although these changes are aimed at two fairly narrow situations, they should make it more likely that a secured party will remain perfected if a borrower moves to another state or sells to (or merges with) a debtor in another state. There is still only a limited window of four months, so filings should be made in the new state and on the new entity as soon as possible.
- Changes to Debtor Name Provisions (UCC § 9-503)
Section 9-503 determines when a financing statement sufficiently provides the correct name of a debtor. In the past, small variations in the names of organizations and individuals have made it difficult for secured parties to determine the proper name to call a debtor in a financing statement. Amended § 9-503 states that for registered organizations, the name of the debtor will be sufficient if it matches the name on the public organic record most recently filed in the jurisdiction of organization. See section I above. For individual debtors, the code provides two alternative provisions. State legislatures may choose the one that best meets the needs of their constituents:
- Alternative A, the “Only if” option: If the debtor has a driver license (or other state i.d.) that has not expired, the financing statement may use the name on the driver’s license. If (and only if) the debtor does not have a driver’s license, the financing statement may use the debtor’s first personal name and surname.
- Alternative B, the “Safe Harbor” option: The financing statement sufficiently names the debtor by providing (a) the debtor’s individual name as determined by state law, (b) the debtor’s surname and first personal name, or (c) the name on an unexpired driver license (or other state i.d.).
This is possibly the most significant of the upcoming changes. For filing financing statements against a registered organization, the change should ease the challenge of determining the organization’s proper name. See section I above. For filing against individuals, the exact test will depend on which option the borrower’s state adopts, but in all cases, a secured party should be able to rely on using the name on an unexpired driver’s license or other official state i.d. Secured parties may want to consider a protocol to use when the debtor’s driver’s license is not available.
- Organizational Information on a Financing Statement (UCC § 9-516)
Current § 9-516 provides that a financing statement can be rejected if it fails to state the debtor’s (1) type of organization, (2) jurisdiction of organization, and (3) organizational identification number. The section was intended to help searchers eliminate filings that appear to relate to their debtors but instead relate to other, similarly-named, debtors. The ULC concluded that the burden of providing these three items was not worth the marginal benefit. The information is generally relevant only to registered organizations, and states already preclude the use of duplicative or deceptively similar names for such organizations. Thus, the new amendments eliminate any requirement for this data.
This change should eliminate the possibility of a financing statement being rejected for failure to accurately record the debtor’s (1) type of organization, (2) jurisdiction of organization, or (3) organizational identification number.
- UCC-5 Correction Statement
Currently, a debtor may file a UCC-5 Correction Statement when it wishes to add a remark to the public record regarding a given financing statement. The statement has no legal effect. The revisions rename these filings “Information Statements” and allow secured parties to file them as well.
Secured parties may consider filing Information Statements in certain clarification situations. However, the statements will continue to have no specific legal effect.
- Changes to National UCC Forms (UCC-1 and UCC-3)
The ULC has proposed new national UCC forms that incorporate the proposed revisions to Article 9. Copies of those new forms are available at: http://www.iaca.org/downloads/2010Conference/STS/4_Draft_UCC_Forms_041910.pdf.
It is important to note that these changes will not go into effect in each state until adopted by the given state legislature, and even then the legislature may modify or decide not to adopt specific changes suggested by the ULC. Again, the current goal for nationwide adoption is July 1, 2013, with a five-year transition period.