After years of failing to revise its Uniform Commercial Code (UCC), New York finally adopted modern versions of UCC Articles 1, 7 and 9 in a bill signed by Gov. Andrew M. Cuomo in late December 2014. See 2014 Sess. Law News of N.Y. Ch. 505 (A. 9933) (McKinney’s). The new Article 9 amendments bring New York largely into conformity with the rest of the states, all of which had adopted the 2010 amendments to Article 9. In most states, those amendments became effective in 2013.
The most important practical impact is that the requirements for UCC financing statements have changed for individual debtors, certain business trusts, decedent’s estates and trusts. It will be necessary to revise your procedures for New York filings and may be necessary to amend some existing financing statements promptly.
Unfortunately, the State chose not to modernize its entire UCC and adopted a confusing effective date provision. New York’s failure to adopt the most current version of the UCC creates 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. New York is now the only state without a modern version of Articles 3 and 4.
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 other states.
Must You Amend Existing Financing Statements?
The most serious problem with New York’s new law is that the effective date provision is unclear. In other states, effectiveness of the Article 9 amendments was delayed to give parties time to adjust their forms and practices and the new perfection rules were phased in over five years to preserve the effectiveness of financing statements filed before the effective date. The New York legislation has neither provision, but instead provides that “This act shall take effect immediately and shall apply to transactions entered into on or after such date.” 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.
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. Since most of the UCC revisions are technical and do not reflect substantial changes in the law, the applicability of the new rules to existing transactions will be important in only a few cases. However, the amendments that 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 pose serious risks of destroying the perfected status of existing transactions.
If the act applies immediately to pre-act transactions, then it may be necessary to revise old financing statements promptly. In cases where the amendments change the state of filing, a new financing statement must be filed in the new jurisdiction within a four-month grace period that expires in mid-April 2015. See UCC 9-316(a). For cases where the amendments change the name that must be used for a debtor, will a pre-enactment financing statement be rendered ineffective as to existing collateral? The uniform version expressly continued the effectiveness of such financing statements, but expressly rendered them ineffective if not amended by their normal five-year expiration date. Without either express rule, the New York answer could be that they became ineffective Dec. 17, or that they remain effective without any need to ever amend the debtor’s name. While section 9-507(b) may preserve perfection since the information on the financing statement was correct when filed, the safer practice would be to amend the financing statement to add the new name. This will also help future lenders discover the financing statement and reduce the likelihood of a dispute.
One 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 since the law will never apply to their transactions. But this interpretation creates other complications. 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? If the “transactions entered into” language requires a revised filing for later advances or after-acquired property, then section 9-507(c) arguably provides a four-month grace period with respect to after-acquired property. By its terms, that section applies only if the “debtor … changes its name” so the rule may not apply where the law changes which name to use. Again, the safer practice would be to add the newly-required name to the financing statement.
To use an example, the new rules require that the “driver’s license” name be used on financing statements for individual debtors. If a pre-amendment financing statement using a different, but previously adequate, human name remains effective, that means 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.
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 – which information must be in a separate part of the financing statement, not in the name box. New York did not adopt the uniform national filing form rules, but requires use of its own forms. As of Feb. 12, 2015, the forms on the Secretary of State’s website had not been revised and did not include the new language, so careful parties should 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 because that would preserve any perfection that might depend on the pre-amendment name.
New York Choice of Law Provisions
New York law is often chosen in large commercial transactions even if the transaction has no relationship to New York. This was accomplished by General Obligations Law § 5-1401, which contained an express provision overriding the “reasonable relation” test of the old UCC choice of law provision, former UCC § 1-105. While revised Article 1 retains the “reasonable relation” test, it moves that provision to section 1-301. Although a number of amendments should have been made to other laws to conform to the revised UCC provisions, including six for new UCC § 1-301, the legislature failed to include any of them in the final bill. Hopefully the legislature will correct this quickly (or the courts will follow the apparent intent of section 5-1401), but technically new section 1-301 applies and requires a reasonable relation for New York law to apply to a transaction.
Subjective Good Faith
While the legislation makes numerous changes, a few require special mention. UCC Article 1 contains generally applicable provisions and most of the UCC definitions. Since the amendment changes the numbering of most sections, form documents need to be revised to reflect the new section numbers. While the uniform version added an objective definition of good faith that required both “honesty in fact” and “the observance of reasonable commercial standards of fair dealing,” the New York amendment retains the prior subjective “honesty in fact” definition. This is of limited impact because most Articles of the UCC (including Articles 2 and 9) contain their own definitions of good faith that do incorporate the objective requirement. Thus the principal importance of the Article 1 good faith definition is in the section 1-309 “acceleration at will” provision and in Articles 3 and 4, because New York still has the older versions that use the Article 1 definition. New York also retained its non-uniform language for the section 1-308 “reservation of rights” provision, thus continuing the existing law of accord and satisfaction. New York’s prior exclusion of rare coins from the definition of “money” was not retained and this could affect perfection of security interests in collections or inventory of rare coins..
Promissory Notes and Electronic Documents of Title
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. Article 7 provides a mechanism for “control” of electronic documents that allows their transfer and use in financing. Conforming amendments to Article 9 permit perfection in electronic documents by satisfying the Article 7 requirements for control.
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.
Financing Statement Changes
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. Human names have always presented a problem. The uniform amendment provided states with two options: (1) they could designate the driver’s license name as the only permissible name to use; or (2) they could provide a safe harbor where use of the driver’s license name would be sufficient, but other names might also be sufficient. New York chose the first option. Thus, a financing statement filed against a human debtor to whom New York has issued an unexpired driver’s license (or a non-driver photo identification card) must use the exact name as shown on that document. The surname and first personal name would be used for debtors without such a document. Note that while this gives secured creditors a clear rule for human names, many problems can arise if the license expires, the debtor changes the name on the license, or the debtor holds multiple licenses. Care must be taken in financing co-operative apartments since the driver’s license name must be used and it may be different from the name as listed on the stock certificate and proprietary lease. Listing the stock certificate name as an additional debtor, while not legally relevant, may help future lenders discover the financing statement and avoid potential priority disputes.
Some, but not most, business trusts are now “registered organizations.” The distinction is a subtle one that turns on whether the statutes of the state of its organization require that the business trust’s organic record be filed with the state. Massachusetts has such a requirement so Massachusetts-type business trusts are registered organizations, but most states do not require this. If the trust qualifies as a registered organization, the financing statement must be filed in the state of organization instead of the jurisdiction where the place of business or chief executive office is located. Also, the financing statement must use the name exactly as stated in the entity’s public organic record, which may be different from the name previously used.
Perfection by Control
One of the missing sections of Article 9 is a change that would have made it easier to perfect a security interest in electronic chattel paper by control. Current law requires satisfaction of a strict per se list of factors in order to achieve control. The proposed amendment would have converted the factor list to a safe harbor and permitted control to be obtained if the system of evidencing transfers “reliably establishes” the secured party as the assignee. A virtually identical provision was adopted in the Article 7 amendments for electronic documents, but it is missing from the Article 9 revisions. Thus, in transactions governed by New York law, parties must be careful to ensure that the difficult to satisfy factor-list has been complied with for electronic chattel paper.
On the positive side, 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 (useful when a senior lender has control); (3) by listing its name on the account (without having to become the bank’s customer or assume any attendant duties or liabilities); or (4) by indicating in the name on the account that it holds a security interest.
After-Acquired Property and Changes
When a debtor changes jurisdiction, the prior law gave the secured party a four-month grace period in which to file a financing statement in the new jurisdiction and avoid any gap in perfection. Unfortunately, the grace period applied only to collateral in existence prior to the jurisdiction shift. The amendments extend this protection to after-acquired property so that the financing statement in the old jurisdiction will perfect collateral acquired within four months of the move as long as a financing statement is filed in the new jurisdiction during that period. A similar rule provides a four-month grace period covering after-acquired collateral in cases like a merger where a new debtor in a different jurisdiction becomes bound by the original debtor’s security agreement. Note that the law retains the one-year grace period to refile for existing collateral that is transferred to a new debtor located in a different jurisdiction.