The Uniform Law Commission (ULC) has recently submitted amendments to Article 9 of the Uniform Commercial Code, which governs secured transactions. These recommendations represent the first significant changes to Article 9 since 1998. The purpose for these amendments was not to rewrite Article 9 but rather to address specific issues that became apparent after Revised Article 9 was enacted in 2001. In several instances multiple sections of Article 9 had to be amended to rectify a specific issue.  These changes will affect the secured parties’ filing, searching, and due diligence practices.

There are many credit professionals who do not believe Article 9 has any bearing on their credit practices because they do not obtain security agreements from their customers. Regardless of whether security agreements are obtained or not, the understanding and use of Article 9 informs the credit professional not only of additional trade references but also reveals those creditors who have obtained a security interest in their product and accounts receivable. Furthermore, knowledge of Article 9 provides the credit professional the ability to challenge the claim of any improperly filed secured creditor.

There are numerous cases including a secured creditor who lost a claim of $296,000.00 because they failed to include the periods following the debtors' initials on their financing statement. Another secured creditor lost their claim of $310,000.00 due to their omission of the word "Inc" in the debtors' name on their financing statement. These examples, unfortunately, are not isolated incidents but everyday occurrences. The knowledgeable credit professional can recover hundreds of thousands of dollars for their company by just knowing the rules of Article 9.

The ULC has proposed a nationwide effective date of July 1, 2013, along with a five-year transition period. It is believed this will provide the majority of states time to ratify and implement the proposed changes. Already nine states, Connecticut, Indiana, Minnesota, Nebraska, Nevada, North Dakota, Rhode Island, Texas, and Washington state have ratified Section 9-503(a)(4).

In all, there are thirty-five proposed changes to Article 9 including changes to the UCC-1 Financing Statement and Addendum forms and the UCC-3 Amendment and Addendum forms. This article discusses the most significant changes:

Section 9-102(a)(10). Certificate of Title

       Some state statutes require the security interest be indicated on the certificate as a condition of perfection, while other states provide that perfection occurs when the application is delivered to the issuing agency. This section has been amended to clarify that the term applies to both statutes. It also applies to electronic records created as an alternative to the issuance of a paper certificate. Section 9-311 has also been changed to reflect the revised definition.  

Section 9-102(a)(68). Public Organic Record

This is a new definition. It is a clarification of which public record is the correct source of a debtors' name for purposes of Section 9-503(a)(1).

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.

Section 9-102(a)(71). Registered Organization

This definition has changed to incorporate the new definition of "public organic record" added by Section 9-102(a)(68). The result is that some entities that are formed without the need for the filing of a public record will become registered organizations when the 2010 Amendments take effect. The requirements for sufficiency of a registered organization debtor name in section 9-503(a)(1) have been modified to reflect the new definition.

Section 9-105. Clarification to Rules Relating to “Control” of Electronic Chattel Paper 

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.

Section 9-307. Location of Debtor

Subsection (f)(2) added language to clarify existing law for determining the location of a registered organization organized under federal law.

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.

Section 9-316(h)-(i) Continued Perfection of Security Interest Following Change of Governing Law 

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. The new subsections are reflected in corresponding changes to Section 9-326.

Section 9-406. Discharge of Account Debtor; Notification of Assignment; Identification and Proof of Assignment; Restrictions on Assignment of Accounts, Chattel Paper, Payment Intangibles, and Promissory Notes Ineffective.

The text of subsection (e) was amended to clarify the rights of a buyer of accounts at a foreclosure.

Section 9-503. Changes to Debtor Name Provisions 

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 Section 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. For individual debtors, the code provides two alternative provisions. State legislatures may choose the one that best meets the needs of their constituents:

a) 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.

b) 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.

Section 9-507. Effect of Certain Events of Effectiveness of Financing Statement.

Subsection (c) has been amended to clarify when the secured party must take action to amend the debtor name on a filed financing statement. The new version focuses on when the financing statement becomes seriously misleading rather than when the debtor actively changes its name. Secured parties should keep in mind that the expiration of an individual's driver's license would be a name change event if the jurisdiction (state) has adopted Alternative A of Section 9-503.

Section 9-515. Duration and Effectiveness of Financing Statement; Effect of Lapsed Financing Statement.

Subsection (f) has been amended to address a filing office concern. The new version adds the word "initial" before "financing statement." Technically, this is a change in the law, but not a change in practice.

Section 9-516. Organizational Information on a Financing Statement 

Current  Section 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.

Section 9-518. Information Statement

Subsections (c) and (d) are new. Currently, only the debtor may file a Correction Statement. The new subsections expressly allows the secured party to file the record when it believes a record was filed by a person that was not entitled to do so under Section 9-509(d). The amended section also changes the title of the record from "correction statement" to "information statement". However, the statements will continue to have no specific legal effect.

Section 9-521. UCC Forms (UCC-1 and UCC-3) Changes to National Forms

The 2010 Amendments contain new UCC-1 and UCC-3 forms that have been designed to replace the current national forms in use. The new forms which carry a revision date of April 20, 2011, were designed to implement the statutory changes to Article 9 through non-substantive changes to layout and wording. The forms do not change the statute in any way. The forms received final approval by the International Association of Commercial Administrators (IACA) Board of Directors on April 21, 2011 and are now part of the official version of the 2010 Amendments.

It is important that filers do not use the new forms until the 2010 Amendments go into effect in each state and until adopted by the given state legislature. The new forms do not provide the information required for filing under current law. Consequently, filing offices must reject any record submitted on new forms prior to the individual states effective date. Even then the state legislature may modify or decide not to adopt specific changes suggested by the ULC. 

Section 9-801. Effective Date.

This section sets a uniform effective date of July 1, 2013.

Section 9-802. Savings Clause

Similar to Section 9-702, except that provisions from the Revised Article 9 that are not applicable to the 2010 Amendments have been deleted.

Section 9-803. Security Interest Perfected Before Effective Date

This section provides that security interests perfected before the effective date remain effective, but must satisfy any new requirements for perfection within a year.

Section 9-804. Security Interest Unperfected Before Effective Date

This section provides when a security interest unperfected under former law becomes perfected after the 2010 Amendments take effect.

Section 9-805. Effectiveness of Action Taken Before Effective Date

This section creates a five-year transition period for the secured party to bring existing financing statements into compliance with the new filing requirements.

Section 9-806. 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.

Section 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.

If you have any questions or would like assistance in preparing for these changes in UCC Article 9, please contact David Balovich at (214) 914 1311or 3jmcompany@gmail.com.

I wish you well

The information provided above is for educational purposes only and not provided as legal advice. Legal advice should be obtained from a licensed attorney in good standing with the Bar Association and preferably Board Certified in either Creditor Rights or Bankruptcy.