Are Your Procedures in Compliance with the Updated UCC Article 9?

Despite the lack of fireworks and fanfare, July 1, 2013, ushered in new changes to the Uniform Commercial Code that are important to bankers, lenders and legal practitioners.  The revisions to UCC Article 9 (“Article 9”) relating to security interests in personal property have been enacted at present by 41 states, including Massachusetts, Rhode Island and Delaware.

Unlike the 1998 revisions to Article 9, which were considered to be a major overhaul, the current amendments were designed to address practical issues that have arisen since July 1, 2001. For example, the revisions provide greater guidance regarding the name of the individual/business/trust debtor to be provided on a financing statement.

Prior to the current revisions, UCC financing statements were required to set forth the business debtor’s name as it appeared in a “public record.” The definition of a “public record” was perceived to be too broad as documents such as tax good standing certificates were relied upon to establish the validity of a business debtor’s name.

The revisions now require secured parties to rely on the name of a business debtor as set forth in the organizational documents filed with the State or U.S. office where the debtor was formed. The revisions have also amended the filing requirements as they pertain to individuals.  Prior to the current revisions, no specific guidance was provided as to the precise name to use for an individual.  This led to confusion and the need to search various iterations of a person’s name to determine if a filing had been made against him/her.  The revisions to Article 9 provide two alternatives to determine a person’s name.  Alternative A is referred to as the “only if” rule. Under this option the financing statement must state the debtor’s name as it appears on a current unexpired driver’s license or state issued identification card.  If the person has such a state issued license/card, the filing is valid “only if” the name as it appears on the license/card is used.  Alternative B is known as the “safe harbor” rule. This option provides that the financing statement may contain the debtor’s driver’s license name, individual name or surname and first personal name.  Most states, including Rhode Island and Massachusetts have adopted Alternative A.

The names of trusts in the context of financing statements have also been addressed by the Article 9 revisions. If the trust is registered with a state (such as Massachusetts Business Trust), the name on the financing statement must correspond with the name of record in that jurisdiction.  If the trust is being administered by the personal representative of a decedent, then the financing statement must name the decedent as the debtor.  If the debtor is a trust that is not a registered organization, such as a common law trust, then the financing statement must provide the name of the trust as specified in the trust documents, and if no such name exists, then the name of the debtor must correspond to the name of the settlor or testator. In cases where there are multiple settlors or testators, a secured party must file financing statements in each jurisdiction where such parties are located.

Another significant change set forth by the revisions relates to after-acquired collateral when a debtor moves or a new debtor located in a new jurisdiction assumes the obligations of a former debtor (such as when a debtor merges into a new entity located in a new jurisdiction).  Under the pre-2013 changes, a secured party has four months (in the case of a move) and one year (in the case of a new debtor (i.e. merger)) to continue its perfection in existing collateral by filing a new financing statement.  These existing rules relate only to collateral that existed at the time of the move or merger.  They do not address issues relating to collateral acquired after the move or merger.  New section 316(h) and 316(i) of Article 9 provides that a financing statement is effective to perfect a secured party’s security interests in after-acquired collateral (such as inventory) obtained within four months after the debtor has changed jurisdictions (by way of a move or merger).  A secured party must file in the new jurisdiction within the four-month window to maintain its perfection in the after-acquired collateral.

The amendments also require the use of newly revised forms of financing statements.  The amendments contain transition rules similar to the transition rules implemented in 2001, which will allow most secured parties to implement changes over time.  Secured parties, however, may have to act more quickly to make necessary changes to any filings that are continued after July 1, 2013.  Continued filings must comply with the new rules.  In order to remain properly perfected, such filings may need to be amended before they are continued.  While these latest revisions to Article 9 are not as far-reaching as the 1998 amendments, secured parties such as banks must be aware of the new changes and adopt policies and procedures to comply with the new rules.

Topics:  Article 9, Compliance, Creditors, Debtors, Financial Statements, Financing, Public Records, UCC

Published In: Business Organization Updates, General Business Updates, Finance & Banking Updates, Wills, Trusts, & Estate Planning Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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