The changes provide modernization but with some nonuniform provisions.
On December 17, 2014, New York Governor Andrew Cuomo signed into law New York Assembly Bill 9933, which amends the Uniform Commercial Code (the UCC) of the State of New York. The bill, enacted as Chapter 505 of the Session Laws of 2014, generally adopts the 2001 revision of Article 1, the 2003 revision of Article 7, and the 2010 amendments to Article 9. However, the bill contains a number of provisions that differ from the uniform provisions promulgated by the American Law Institute and the Uniform Law Commission. The New York nonuniform provisions are noteworthy but, in some cases, raise further questions. Here is a summary.
UCC Article 1—General Provisions
The bill generally adopts the uniform revisions to Article 1. The revisions reorganize a number of Article 1’s sections, explicitly state that the substantive rules in Article 1 apply only to transactions within the scope of the other UCC’s articles, and add the concept of “course of performance” (taken from Article 2, dealing with sales of goods, and Article 2A, dealing with leases of goods) to the list of contract interpretation tools that already includes course of dealing and usage of trade.
But a number of nonuniform Article 1 provisions are included in the bill:
- The bill does not adopt the uniform definition of “good faith” as “honesty in fact and the observance of reasonable commercial standards of fair dealing.” Rather, the bill retains the existing definition of good faith: “honesty in fact in the transaction or conduct concerned.” Among other things, this means that (i) the duties of nonmerchants in New York’s Articles 2 and 2A and (ii) the standards for becoming a holder in due course under New York’s Article 3 (New York is the only state that has enacted neither the 1990 nor 2002 revised versions of UCC Articles 3 and 4), as well as other rights under Articles 3 and 4, will continue to be measured by the “honesty in fact” standard.
- In the definition of “conspicuous,” the bill continues some nonuniform language in the former definition and omits examples that are contained in the uniform definition.
- The bill retains the statute of frauds from the former version of Article 1, now renumbered as § 1-207, for sales of personal property not otherwise covered by Article 2, 8, or 9 of the UCC, even though § 1-102 of the Article 1 revisions states that Article 1 applies only to transactions within the other UCC Articles. Because virtually all sales of personal property other than those covered by Articles 2, 8, and 9 are outside the UCC’s scope, it is unclear what effect the retained statute of frauds will have.
- The bill contains an exception to the choice-of-law provision in § 1-301. That section permits parties to contract for a governing law as to their mutual rights and duties when a transaction bears a reasonable relation to the state whose law is chosen. The nonuniform exception generally requires the application of New York law where one of the parties to the transaction is a consumer resident in the State of New York.
- Because the bill does not include adoption of the 1990 revisions to Articles 3 and 4, the bill omits the uniform language in § 1-308(b) that a reservation of rights does not apply to an accord and satisfaction.
UCC Article 7—Documents of Title
The bill adopts the uniform revisions to Article 7. The revisions (a) permit electronic documents of title in addition to the paper-based ones contemplated by former Article 7, (b) provide rules for the conversion of paper-based documents of title to electronic ones and vice versa, and (c) create a concept of “control” of an electronic document that substitutes for the paper-based concepts of possession and indorsement.
Except as discussed under “transition” below, the bill contains no significant nonuniform changes to the revisions to Article 7.
UCC Article 8—Investment Securities
The bill contains a nonuniform provision in the definition of the term “security” in § 8-102(a)(15) by adding to the definition the following:
(h) An obligation, share, participation, or interest does not satisfy § 8-102(a)(13)(ii) or 8-102(a)(15)(i) merely because the issuer or a person acting on its behalf
(1) maintains records of the owner thereof for a purpose other than registration of transfer; or
(2) could, but does not, maintain books for the purpose of registration of transfer.
The nonuniform addition is intended to change the result in Highland Capital Management L.P. v. Schneider, 8 N.Y.3d 406 (2006), which found that a set of promissory notes issued by an issuer were securities rather than instruments even though the issuer did not maintain a transfer register for the promissory notes. The Official Comments to the UCC, as well as a commentary by the Permanent Editorial Board for the UCC, suggest that the case was wrongly decided. But, because the decision was issued by New York’s highest court, a nonuniform amendment to New York’s UCC was considered advisable.
The bill also modifies the definition of “control” for investment property in § 8-106 to add the following new provisions modeled from similar nonuniform provisions in Delaware’s UCC:
(h) Under subsection (c)(2) or (d)(2), authentication of a record does not impose upon the issuer or securities intermediary any duty not expressly agreed to by the issuer or securities intermediary in the record.
(i) A purchaser has “control” under subsection (c)(2) or (d)(2) even if any duty of the issuer or the securities intermediary to comply with instructions or entitlement orders originated by the purchaser is subject to any condition or conditions (other than further consent by the registered owner or the entitlement holder).
UCC Article 9—Secured Transactions
The bill generally has adopted the amendments to Article 9 promulgated in 2010 and summarized below:
- If the debtor is an individual whose principal residence is in New York, and the debtor holds an unexpired New York driver’s license or nondriver photo identification card, a financing statement filed to perfect a security interest granted by the debtor must provide as the name of the debtor the name as shown on the debtor’s license or card.
- The definition of “registered organization,” which enables a secured party to determine where a debtor that is a corporation, limited liability company, limited partnership, or statutory business trust is located for purposes of filing a financing statement to perfect a security interest granted by the debtor, now also includes a Massachusetts-type business trust.
- The name of a registered organization debtor to be provided on the financing statement must be the name reflected on the “public organic record” of the registered organization. In most cases, a registered organization’s “public organic record” is the articles or certificate of organization or other publicly available record filed with the state to form or organize the registered organization.
- If a debtor changes its location to a new jurisdiction, or if a new debtor located in a new jurisdiction becomes bound by the original debtor’s security interest, a financing statement filed in the original jurisdiction is effective to perfect a security interest in collateral acquired within the four months after that event. The secured party can continue the perfection beyond the four-month period by filing a financing statement or otherwise perfecting under the law of the new jurisdiction within the four-month period.
- Only an initial financing statement may indicate that the debtor is a transmitting utility.
However, the bill did not adopt other uniform 2010 amendments:
- The filing office will still be permitted to reject a financing statement that fails to provide the debtor’s type of organization or the debtor’s jurisdiction of organization. The uniform 2010 amendments eliminated these requirements to avoid filing office rejection. As a result of the nonuniform provision in the bill, the uniform form of financing statement that may be used in other states that have adopted the 2010 amendment will likely not be acceptable in New York. Although the former forms may likely be used, nevertheless, if the debtor is a trustee or trust, the financing statement should include the language required by new § 9-503(a)(3) that the collateral is held in a trust.
- The uniform 2010 amendments expanded § 9-518 to permit a secured party to file an “information statement” that a record relating to a financing statement was not authorized by the secured party. The bill does not contain the changes to § 9-518.
- The bill did not adopt the uniform change to § 9-105 to convert the existing requirements for “control” of electronic chattel paper into a “safe harbor” in conformity with the definitions of “control” in § 7-106 and the Uniform Electronic Transactions Act.
- The bill did not adopt the changes in the 2010 amendments to §§ 9-406 and 9-408 to clarify that a foreclosure sale of a negotiable instrument or payment intangible is governed by the antiassignment overrides of § 9-406 rather than § 9-408.
The bill also expands the definition of “control” for a deposit account in § 9-104 modeled after similar nonuniform provisions in Delaware’s UCC. The bill adds the following two new methods of control to the methods of control already contained in § 9-104(a):
(4) the name on the deposit account is the name of the secured party or indicates that the secured party has a security interest in the deposit account; or
(5) another person has control of the deposit account on behalf of the secured party or, having previously acquired control of the deposit account, acknowledges that it has control on behalf of the secured party.
Moreover, the bill adds the following new clauses (c), (d), and (e) to § 9-104:
(c) No implied duties of bank. The authentication of a record by the bank under subsection (a)(2) does not impose upon the bank any duty not expressly agreed to by the bank in the record. The naming of the deposit account in the name of the secured party or with an indication that the secured party has a security interest in the deposit account under subsection (a)(4) does not impose upon the bank any duty not expressly agreed to by the bank.
(d) Conditions not relevant. A secured party has control under subsection (a)(2) even if any duty of the bank to comply with instructions originated by the secured party directing disposition of the funds in the deposit account is subject to any condition or conditions (other than further consent by the debtor).
(e) No inferences. The procedures and requirements of subsection (a)(4) available to obtain control shall not be used in interpreting the sufficiency of a secured party’s compliance with the procedures and requirements of subsection (a)(1), (a)(2) or (a)(3) to obtain control. The provisions of subsection (a)(4) shall create no inference regarding the requirements for compliance with subsection (a)(1), (a)(2) or (a)(3).
In addition, the bill provides that a security interest in an account that is a right to payment of lottery winnings is automatically perfected under § 9-309. This is a uniform provision that was not previously adopted by New York in the 2001 revisions to Article 9.
The bill omits the finely tailored transition rules for the Article 7 revisions and the 2010 amendments to Article 9 in favor of a simple but inexact overall transition rule. The bill applies to any “transaction” entered into, on, or after December 17, 2014. Presumably, a loan made and secured by collateral existing before that date will not be covered by the changes to the UCC contained in the bill. However, because the term “transaction” is not defined in the bill, it may be unclear whether a future advance or the debtor’s acquisition of new collateral, or an amendment, joinder, or the like, occurring or made on or after December 17, 2014 is a new, post-effective date transaction to which the UCC changes apply. A secured party would be prudent, if there is any doubt about the applicability of the changes, to comply with the changes as well as with the pre-effective date rules. Because there is no “transition period” and the new rules are effective immediately, compliance with the new rules should not be delayed.
The New York transition rule will also complicate searches in New York for financing statements filed against debtors, especially individual debtors, because a searcher will not be able to be sure whether a financing statement may have been filed against a debtor relating to a pre-effective transaction. Accordingly, searches will need to be made under both the pre-effective date rules and the new rules for debtor names for the foreseeable future.
Other Conforming Changes
The bill does not contain conforming amendments to other New York statutes that reference the affected UCC provisions. For example, General Obligations Law § 5-1401, which deals with New York choice-of-law clauses, still refers to former § 1-105 rather than the new § 1-301.
Despite the nonuniform provisions, the bill is a significant modernization of New York’s UCC. It may be hoped at some point that New York will adopt the 1990 revisions and the 2002 amendments to Articles 3 and 4 and perhaps revisit some of the nonuniform provisions contained in the bill, so that New York’s UCC will be fully up to date with the UCCs of other states. In addition, it may be hoped that New York will conform other New York statutes whose UCC cross-references are affected by the bill.