In 2010, the Uniform Law Commission promulgated several amendments (Amendments) to Article 9 of the Uniform Commercial Code (Article 9) designed to address problems that have arisen since revised Article 9 went into effect in 2001. Most, but not all, of the Amendments address the proper way to reflect debtor names on financing statements.
Timing and Enactment
To promote uniformity, the drafters proposed a national enactment date of July 1, 2013. As of June 26, 2013, 40 states and the District of Columbia had passed the Amendments.1 In the majority of these jurisdictions, the enactment date was July 1, 2013.
The Amendments clarify what is deemed to constitute the correct debtor name for purposes of a financing statement. There also are changes to the rules on perfection with respect to after-acquired property where a debtor changes its location for filing purposes or a new debtor becomes bound by a security agreement. Finally, there are changes to the form of financing statement and the provisions regarding correction statements, which are now referred to as “information statements.”2
Pre-amendment Article 9 provided that the correct name for a registered organization (e.g., corporations and limited liability companies) was that stated in the “public record.” This led to confusion when the public record contained different names for the registered organization. Section 9-503(a)(1) has been amended to address this concern, directing filers to look to “the name of the debtor indicated on the public organic record most recently filed with or issued or enacted by the registered organization’s jurisdiction of organization.”
A new definition describing what qualifies as a “public organic record” has been introduced to Article 9. See § 9-102(a)(68). Generally, records filed by the organization with the organizing authority will meet the definition, whereas documents generated by the governmental authority will not.3
Despite the drafters’ efforts to clarify what record should be used to determine the correct name of an organization, there likely will be instances where there are uncertainties as to whether a given record is a public organic record. In these instances, the safest course is to file multiple financing statements for each name that may be applicable.
With respect to individual debtors, the drafters put forward two alternatives, one of which relies primarily on the debtor’s most recent unexpired driver’s license (Alternative A). The other adopts a more lenient standard under which the “individual name” of the debtor, the “surname and first personal name” of the debtor, or the name reflected on the debtor’s most recent unexpired driver’s license will be deemed correct (Alternative B). See UCC § 9-503(a).
The most important difference between the two approaches is that in those jurisdictions opting for Alterative A, if the debtor has a driver’s license that has not expired, the name shown on the license must be used. By contrast, under Alternative B, the filer may use the name shown on the debtor’s most recent unexpired license, or it may use the debtor’s individual name, or the debtor’s surname and first personal name.
The Amendments and comments also address expected issues with the new individual name rules. First, the drafters suggested that in some jurisdictions it may be appropriate to expand the phrase “driver’s license” to include other forms of identification, such as state-issued identification cards. Additionally, section 9-503(g) provides that if a debtor has multiple driver’s licenses, a filer should use the most recent license. Finally, according to the official comments to the Amendments, a financing statement does not “provide the name of the individual … unless the name it provides is the same as the name indicated on the license. This is the case even if the name indicated … contains an error.”
Despite these attempts to anticipate and eliminate potential areas of confusion, several questions remain. For example, how does a secured party verify whether a debtor has provided it with the correct driver’s license or, for that matter, whether the debtor has a license – particularly in those states where the DMV website does not maintain a searchable database? Additionally, according to the comments, a filer should not “mechanically” follow a driver’s license when completing the financing statement. Rather, regardless of the order of the names shown on the license, it is the responsibility of the filer to ensure that the surname of the debtor is placed in the correct box on the financing statement. Finally, must the name on the financing statement precisely match the name on the driver’s license? For example, what would be the effect of a filer leaving out a middle initial or a suffix? The comments appear to suggest this would result in a failure to state the correct debtor name.
Impact of a Debtor’s Change in Location on After-Acquired Property
The Amendments create a new four-month grace period for perfection on property acquired after a debtor “changes” location. Previously, if a debtor changed its location to a different jurisdiction, a secured party remained perfected for only four months on property acquired prior to the change of location. The Amendments expand the grace period to cover after-acquired property. However, as before, if the secured party does not file a new financing statement, or otherwise perfect its interest, within four months of the change of the debtor’s location, the secured party will become unperfected. See § 9-316(h).
This change is good news for a secured party of a debtor whose location (i.e., jurisdiction governing perfection by filing under Article 9) changes, but the burden of gaining timely knowledge of the change still rests with the secured party.
New Debtor Who Assumes Old Debtor’s Security Agreement
Under the previous rules, when a “new debtor” became bound by an existing security agreement – such as after a merger between the original debtor and a new debtor where the new debtor was the surviving entity – a secured party would remain secured for one year on property acquired by the old debtor prior to the merger. Notably, this did not protect property acquired after the merger. The Amendments change this, providing that the secured party will be seamlessly perfected on after-acquired collateral, but only if it acts to perfect with respect to the new debtor within four months of the time the new debtor becomes bound by the security agreement. See § 9-316(i).
As with the amendment to the change of jurisdiction rule, secured parties must be vigilant to ensure that the transaction resulting in a new debtor does not adversely affect their priority over the debtor’s property.
Changes to Financing Statements
Some information that was previously required on financing statements will no longer need to be included. Specifically, a filer will no longer be required to list the debtor’s type of organization, jurisdiction or identification number. The goal in making these changes is to streamline the financing statement and eliminate unnecessary information.
The drafters also updated the documents previously known as “correction statements.” They will now be referred to as “information statements.” Secured parties, as well as debtors, may file these statements. Like the former correction statements, information statements have no legal effect on perfection or priority.
The newly adopted Amendments call for renewed attention and revisions to the process of determining the critical information and taking the necessary actions to assure the effectiveness of security agreements and the perfection of security interests. We would be pleased to provide further details on these and other financing, secured transactions and insolvency issues.