September 02, 2012
Author: Michael A Fagone
Organization: Bernstein, Shur, Sawyer & Nelson, P.A.
In 2010, the National Conference of Commissioners on Uniform State Laws (“NCCUSL”) proposed amendments to Article 9 of the UCC. The target effective date for these amendments is July 1, 2013. Like other NCCUSL proposals, these amendments do not have the force of law until enacted in a particular state or jurisdiction. Nevertheless, it is expected that most jurisdictions will adopt the amendments as proposed without significant variation. As of November 2011, nine states had enacted the proposed amendments, and several others had introduced them in their legislative sessions.
The following is a description of the more significant changes in the current proposed amendments. The 2010 changes to Article 9 are nowhere near as dramatic as the changes that resulted from the last major revision to Article 9 (which took effect in 2001 in most jurisdictions).
A. Changes to the Filing Rules and Related Changes
1. Individual Debtor’s Name
A sufficient financing statement identifies the name of the debtor. See 9-502(a). In general, section 9-503 provides rules for determining the debtor’s name. However, problems have arisen with identifying the name of an individual debtor. For example, if the Debtor’s name on his birth certificate is “David Sam Anderson” but the Debtor is generally known as “Sam Anderson,” what is the correct name to appear on the financing statement? The amendments attempt to resolve these problems. The amendments offer two alternatives for the name of an individual debtor provided on a financing statement to be sufficient. The alternatives appear in Amended 9-503.
The first alternative is called “Alternative A.” If Alternative A is in effect in the state in which the financing statement is filed and if the debtor holds a driver’s license that has not expired and that has been issued by that state, then the financing statement must contain the name of the debtor as it appears on the driver’s license. This has been dubbed the “only if” rule.
The name on the financing statement will be sufficiently only if it matches the name on the driver’s license.
Under Alternative A, if the debtor does not hold a driver’s license issued by the state in which the financing statement is filed, then either of the following names for the debtor would be sufficient as the debtor’s name on the financing statement: (1) the individual name of the debtor, as under current Article 9, or (2) the debtor’s surname and first personal name.
Most of the states that have enacted the amendments to Article 9 thus far have elected to use Alternative A.
The second alternative is known as “Alternative B,” and has been dubbed the “safe harbor” approach. Under Alternative B, any of the following names for the debtor would be sufficient as the debtor’s name on the financing statement: (1) the debtor’s name as shown on the debtor’s driver’s license if the debtor holds an unexpired driver’s license issued by the state, (2) the individual name of the debtor, as under current Article 9, or (3) the debtor’s surname and first personal name.
Under either Alternative A or Alternative B, the secured party should rely on the most recently issued license if the debtor holds multiple drivers’ licenses.
Individuals sometimes change their names. They get married or divorced, or they simply desire to have a different moniker. When that happens, there are implications for the continued effectiveness of a financing statement. If a search for the new debtor’s name would not disclose the existing financing statement, the existing financing statement would become seriously misleading. In that case, section 9-507(c) would be triggered: the financing statement would remain effective for collateral in existence on the date of the name change and for collateral acquired by the debtor during the four-month period after the date of the name change. For the financing statement to be effective for collateral acquired by the debtor after the end of the four month period, the secured party would need to amend the financing statement to provide the new debtor’s name. The amendment would need to be made within the four month period. Failing an amendment within that period, financing statement would become seriously misleading. See 9-506(b).
2. Definition of “Registered Organization”
Under current law, a debtor that is a registered organization is “located” in the state where it is organized. See 9-307(e). Knowing a debtor’s location is important, as it implicates rules regarding the filing of a financing statement (which is often important in order to achieve perfection and priority).
Under current law, an entity is a “registered organization” if a state is required to maintain a public record showing that the organization has been organized. See 9-102(70). The amendments change this rule, and provide that an entity is a registered organization if it is formed or organized by the filing of a public record with the state. In other words, the filing of the entity’s “birth certificate” is the act that makes the entity a “registered organization” for Article 9 purposes.
The amendments also bring certain types of trusts, such as statutory trusts and certain common law business trusts, within the definition of “registered organization.” A common law business trust will be a “registered organization” only if it is required to file a public record with a state. Otherwise, the trust will not be a “registered organization.” The Amendments identify the Massachusetts business trust as an example of the type of trust that will be a “registered organization.”
3. Name of Registered Organization
If a debtor is a “registered organization,” the debtor’s name on the financing statement will need to match the name reflected on the debtor’s “public organic record.” In most cases, that will be the entity’s “birth certificate,” such as articles of incorporation for a Maine business corporation or the certificate of formation for a Maine LLC. If the registered organization is formed by legislation, the legislation is the public organic record. If the registered organization is a business trust, the registered organization’s name is that reflected on the required publicly available filing, which in most cases will be a trust agreement. If the Secretary of State’s office maintains a database that shows a different name, the secured party should not use the name shown on the database. Secured parties are not advised to rely on the records maintained by the Secretary of State, which may use abbreviations or may have errors. The actual “public organic record” is what the secured party should review to determine the correct name of a debtor that is a registered organization.
4. Name of Debtor When Collateral is Held in Trust
As discussed above, if collateral is owned by a trust that is a registered organization, the financing statement must identify the name of the trust shown on the public organic record. See Amended 9-503(a) (1), (a)(3). But not all trusts will fall within the definition of “registered organization.”
If collateral is held in a trust that is not a registered organization, the name to be provided on the financing statement must be (i) the name of the trust itself or (ii) if the trust does not have a name, the name of the settlor. In the case of a testamentary trust, the name of the testator must be used.
There are two other new rules when collateral is owed by a trust that is not a registered organization. First, the financing statement must indicate that the collateral is held in trust. This will require a change to the form of financing statement in use in most jurisdictions. Second, if the amendments require the use of the settlor’s name or the use of the testatory’s name, the financing statement must contain sufficient information to distinguish the trust from other trusts of the same settlor or testator. In many cases, this will be the date of the trust agreement or the will under which the testamentary trust was created.
5. Personal Representatives
Current Article 9 allows an estate to be a debtor. See 9-503(a)(2). The amendments clarify that a personal representative (or some similar person) does not own the collateral, but rather is simply administering the collateral for the benefit of the devisees. In that case, the name to be included on the financing statement is the name of the decedent as shown on the court document appointing the personal representative.
6. Change of Debtor’s Location
Under existing law, if a debtor changes its location and if the secured party had perfected by the filing of a financing statement, the secured party has four months in order to file a new financing statement in the new location (or to take other steps to perfect under the law of the new jurisdiction). See 9-316(a)(2). This period only applies to collateral in which the secured party’s security interest was perfected at time of the change of location. Under existing law, the financing statement is not effective with respect to after-acquired property obtained by the debtor after the location change.
The amendments effectively extend this rule to property after by the debtor after the change of location. They add a “grace period” for after-acquired property acquired by a debtor within four months of a change in the debtor’s location when perfection is accomplished by filing. This provides increased protection for an existing secured creditor, but also places a greater burden on a prospective lender, which needs to understand whether the debtor has been “located” in a different jurisdiction at any point during the prior four months and, if so, to search in that different jurisdiction.
7. New Debtor
Under existing law, if a debtor merges into another company located in a different jurisdiction (thereby becoming a “new debtor”), there is a grace period of up to one year for the effectiveness of a financing statement filed against the debtor. See 9-316(a)(3). But this grace period only applies with respect to security interests that were perfected at the time of the merger; it does not, under current law, apply to post-merger, after-acquired property.
The amendments contain a similar rule if a “new debtor” becomes bound by the original debtor’s security agreement and the debtors are located in different jurisdictions.2 Specifically, there is a four-month grace period in the case of an interstate merger and, during that four month period, the secured party remains perfected in after-acquired property of the new debtor. See Amended 9-316(i)(1). During the four-month period, the secured party will need to take steps to continue the perfection of its security interests under the law of the new debtor’s location.
8. Miscellaneous Changes Related to Filing
The amendments contain other miscellaneous changes relating to filing. They relate to transmitting utilities, to prohibiting a filing office from rejecting financing statements that do not contain certain information, and to certain terminology. The uniform forms of initial financing statement and amendment have been updated to reflect the amendments.
B. Changes Unrelated to Filing
The amendments contain some changes that are less connected to the filing rules in Part 5 of Article 9. Two of the more substantive changes are described below. Others are of a more technical nature, or simply clarify ambiguities in the existing law.
The first deals with anti-assignment provisions in payment intangibles and promissory notes. Current section 9-406 makes certain anti-assignment provisions unenforceable. Specifically, an anti-assignment term of an account, chattel paper, payment intangible, or promissory note that secures an obligation is unenforceable.3 Where 9-406 applies, the anti-assignment term is ineffective (i) to prohibit the creation of the security interest; or (ii) to make the creation of the security interest a default. Moreover, holder of the security interest is entitled to enforce the payment obligation against the person obligated to make payment to the debtor. See 9-406(d)(1). On the other hand, current section 9-408 permits a sale of a payment intangible or promissory note notwithstanding an anti-assignment term but does not require the account debtor or maker to attorn to or otherwise recognize the buyer. In order words, the buyer cannot “enforce” the security interest against the account debtor or the person obligated on the note. The amendments clarify that effectiveness of an anti-assignment term of a payment intangible or promissory note: in the case of a disposition of collateral under 9-610 or in the case of an acceptance of the collateral under 9-620, section 9-406 applies and section 9-408 does not. The net effect of this is that purchaser can directly enforce the obligation after it becomes the “owner” of the obligation. The Reporter’s Note to Amended 9-408 gives the following example to illustrate:
Lender makes a loan to Borrower. The loan is not evidenced by chattel paper. The loan agreement (or note) provides that Lender’s rights may not be assigned and, if Lender wrongfully assigns the rights, an assignee may not enforce Borrower’s obligation to pay. Lender assigns the right to payment (i.e., the payment intangible or instrument) to Assignee.
If the assignment to Assignee is a sale, then Section 9-408(a) applies and the contractual restrictions are ineffective with respect to the creation, attachment, and perfection of Assignee's security interest.
If the assignment to Assignee is for security, the restriction would not be effective if Assignee itself sought to collect or if Assignee sold to a buyer at foreclosure (and, presumably, if the foreclosure buyer resold). However, the restriction would be effective against nonforeclosure buyers who did not take through a foreclosure buyer.
Section 9-406 is clear that a contractual restriction would not be effective to restrict the assignee’s right qua assignee to enforce the account debtor’s obligation under Section 9-607. The amendment would eliminate any doubt that the restriction would not be effective to restrict the assignee’s right to enforce if the assignee became the owner of the payment intangible or promissory note by accepting it in a \"strict foreclosure\" under Section 9-620.
Second, a licensee or buyer in the ordinary course takes free of certain unperfected security interests if the licensee or buyer gives value without knowledge of the security interests. See 9- 317(d). The amendments expand the list of the types of collateral that are subject to this rule to include most types of “intangible collateral” that are not susceptible to possession. This rule does not apply to secured parties, but only to other types of “buyers in the ordinary course.”
C. Transition Rules
The amendments contain a set of transition rules, which can be found in Part 8 of Article 9. The transition rules for the amendments are modeled on the transition rules used in connection with the 1998 revisions to Article 9. Because the current revisions are less dramatic in scope, the transition rules are not as significant as they were about a decade ago when the last major revisions occurred. Nevertheless, they are important and secured parties need to understand them. As used in the part of the materials, “Article 9” refers to existing Article 9 and “Amended Article 9” refers to Article 9 as amended by NCCUSL in 2010.
9-801: Effective Date
The amendments are effective as of July 1, 2013 (the “Effective Date”).
9-802. Savings Clause
The amendments do not affect causes of action in litigation pending on the Effective Date.
9-803. Security Interest Perfected Before Effective Date
Security interests perfected under Article 9 that also satisfy the requirements for perfection under Amended Article 9 remain effective. With one major exception (discussed below), security interests perfected under Article 9 that do NOT satisfy the requirements for perfection under Amended Article 9 will become unperfected in one year unless the requirements for Amended Article 9 are satisfied. The exception relates to security interests that were perfected by the filing of a financing statement. That exception is discussed below in connection with Amended 9-805.
9-804. Security Interests Unperfected Before Effective Date
Security interests unperfected under Article 9 that satisfy the requirements for perfection under Amended Article 9 will become effective immediately on the Effective Date. Security interests unperfected under Article 9 also do not satisfy Amended Article 9 will remain unperfected until such time, if ever, as the requirements for perfection are satisfied. This makes sense: if you’re not perfected under either version of Article 9, then you’re not perfected.
9-805. Effectiveness of Action Taken Before Effective Date
This section creates a maximum five-year transition period for the secured party to bring existing financing statements into compliance with the new filing requirements. Specifically, filing a financing statement that complies with Amended Article 9 before that law actually takes effect is effective perfect a security interest. In other words, an eager lender need not wait until July 1, 2013 to perfect its security interest under the Amended Act.
A financing statement that was filed under Article 9 and was sufficient to perfect under Article 9 will remain effective once Amended Article 9 takes effect until the lapse of the statement in the ordinary course, if the financing statement is filed in the office specified by Amended Article 9. If the financing statement was filed an office other than the office specificed by Amended Article 9 then it will cease to be effective either at the lapse of the statement in the ordinary course, or on June 30, 2018, whichever is earlier. 8-806. When Initial Financing Statement Suffices To Continue Effectiveness of Financing Statement
This section explains when a financing statement filed prior to the Effective Date can be continued or when a financing statement must be filed in lieu of a continuation statement. If a financing statement filed before the Effective Date remains effective on the Effective Date, despite the fact that it was filed in a jurisdiction and office that would not have been the jurisdiction or office required for perfection of the security interest under Amended Article 9, to avoid lapse that financing statement must be continued as an “in lieu” initial financing statement in the jurisdiction or office required by Amended Article 9.
In addition, in order to put subsequent searchers on notice that the “in lieu” initial financing statement was intended to continue the original financing statement filed in a different jurisdiction and office, the “in lieu” initial financing statement must identify the original filing by filing office, dates of filing and filing numbers (both for original filing and the most recent continuation statement, if any, of the original filing) and must indicate that the original filing remains effective.
9-807. Amendment of Pre-Effective Date Financing Statement
This section explains when and how a financing statement filed before the 2010 Amendments take effect can be amended.
9-809. Priority
Amended Article 9 determines the priority of conflicting claims to collateral. However, if the relative priorities of the claims were established before Amended Article 9 takes effect, then Article 9 determines priority.
D. Amendment to Official Comments
It is anticipated that the amendments will also contain recommended changes to the Official Comments to Article 9. For a thorough discussion of the changes that are currently anticipated, see “A Summary of the 2010 Amendments to Article 9 of the Uniform Commercial Code,” by Edwin E. Smith. This article can be located at 42 U.C.C.L.J. No. 4 (2010).
1 Mr. Fagone is a shareholder in Bernstein Shur, where his practice focuses on bankruptcy, insolvency, and commercial transactions.
2 “New debtor” is defined in Section 9-102(56).
3 Note that 9-406 does not apply to an outright sale of a payment intangible or a promissory note. See 9-
406(e).