Article 9 of the Uniform Commercial Code (the “UCC”) governs secured transactions between lenders and borrowers covering personal property which is pledged as collateral. The provisions of Article 9 apply to borrowers who are either individuals or a business entity. Putting third parties on notice of a security interest or perfection of a security interest is governed by the provisions of the UCC relating to the filing of financing statements. In order to be properly perfected the financing statement must contain certain information with respect to the debtor and must be filed in the appropriate place in each jurisdiction. If a lender fails to properly perfect, a subsequent lender may be able to take priority with respect to collateral where both lenders claim an interest or a security interest may be avoided in bankruptcy.
The last major revisions to Article 9 occurred in 1998. They went into effect on July 1, 2001 and were adopted in all fifty states. Ten years later a review committee was appointed to review the practical applications of Article 9 and the issues that had arisen since the 2001 revisions went into effect. This committee suggested several amendments which were not intended as a major overhaul of Article 9 but rather as recommendations for changes to remedy certain practical practice problems. These changes primarily relate to information contained in financing statements and the effect of a perfected security interest in the event of a jurisdictional change by a debtor. Congress passed the amendments in 2010. For those states that have enacted the revisions (including Virginia), they are scheduled to take effect on July 1st of this year. Although not as broad as amendments that were enacted in 1998, there are certain things a lender (or its counsel) needs to know.
Some of the key revisions are as follows:
Registered Organization Name on Financing Statement
UCC §§9-102(a) and 503(a)(1)
UCC §9-503(a) states that a financing statement must sufficiently provide the name of the debtor. In the case of a registered organization (i.e. corporation), the financing statement must provide the name of the debtor indicated on the public record of the debtor’s jurisdiction of organization which shows the debtor to have been organized. UCC §9-503(a)(1). Issues have arisen regarding what types of records are “public records.” There may be minor variations in the names of organizations in various publically filed documents.
Under the amendments to both UCC §§9-102(68) and 503(a)(1), the correct name is now the name on the “public organic record,” which is defined as a record available for public inspection and that is “…a record consisting of the record initially filed with or issued by a state or the United States to form or organize an organization and any record filed with or issued by the state or the United States which amends or restates the initial record….” Revised UCC 9-§102(68). This includes documents filed with the state to form an organization, like the articles of incorporation, articles of organization and limited partnership agreements. This change provides greater certainty to the secured creditor that the proper debtor’s name used on a UCC financing statement is the name as reflected in the original formation documents and not any name that may be listed in the state’s data base.
Relocation of Borrower
Under the current version of the UCC, for a perfected security interest that attaches prior to a debtor’s move to another jurisdiction, there is a four month period after the debtor’s relocation within which the secured creditor must file its financing statement or otherwise perfect its security interest under the laws of the new jurisdiction. The grace period, however, only applies to collateral in which the secured party was perfected at the time of the move. Collateral acquired after the move is not covered.
Under the amendments, a new subsection (h) is added that provides for continued perfection of the creditor’s interest in newly acquired property as long as the secured party has taken steps that would have perfected the security interest in the debtor’s original state. The perfection extends until the end of the four-month period or the time the financing statement would have otherwise become ineffective under the law of the original jurisdiction if that period is within the four month timeframe. This obviously helps the existing secured creditor but creates additional search burdens for a new lender making a loan to the same debtor after the relocation.
A new subsection (i) has also been added which is applicable in the event of a merger or similar transaction and the original debt is assumed by an entity located in a different jurisdiction. The amendment provides for automatic perfection of security interests in after-acquired property that attaches within four months after the new debtor becomes bound by the existing security agreement with the original debtor or the time the financing statement would have otherwise become ineffective under the law of the original jurisdiction if that period is within such four month timeframe. This applies so long as the secured party is properly perfected as to the original debtor.
Individual Debtor Name on Financing Statement
UCC §§ 9-102 and 9-503
UCC §9-503 sets forth guidelines with respect to the name of an individual debtor used in a financing statement and whether it is sufficient. In most states there is little guidance on what constitutes a sufficient name of an individual debtor. Of course, problems arise when an individual may go by different names (alias or nickname) in business transactions. As a result, there may be different names on legal documents for the same person. This has in the past led to conflicting opinions by courts and created issues for secured parties who may have had difficulty determining the proper name for a financing statement and how best to search when attempting to determine the existence of prior security interests. In Virginia, however, there is already an additional provision from a 2009 amendment to the Virginia Code that is close to what will be forthcoming in the new amendments. The UCC as enacted in Virginia states that the name is sufficient “…if the debtor is an individual, if the financing statement provides the individual’s name shown on the individual’s driver’s license or identification card issued by the individual’s state of residence…” Code of Virginia §8.9A-503(a)(4).
Under the revisions to Article 9, for individual debtors, there are two options provided to each state enacting the amendments to determine the appropriate name information to be included in the UCC financing statement. The “only if” option (selected by most states, including Virginia) sets forth “… (4) subject to subsection (g), if the debtor is an individual to whom the Commonwealth has issued a driver’s license or identification card pursuant to Title 46.2 that has not expired, only if it provides the name of the individual which is indicated on the driver’s license or identification card…” Revised Code of Virginia §8.9A-503(a)(4). If the debtor has a driver’s license or other state identification that has not expired, the name on that document shall be used for the financing statement. If the debtor does not have an unexpired state ID, the secured party may use the debtor’s first personal name and surname. A very few states have opted for a second “safe harbor” option where the debtor’s name is sufficient for the financing statement if it is (a) the debtor’s individual name (as under current Article 9), (b) the debtor’s surname and first personal name, or (c) the name on an unexpired driver’s license or other state identification.
Under either option, the name on an unexpired driver’s license or other state identification is appropriate. Although this has not been a big issue in Virginia because of the prior amendment to the Virginia Code, in other states these changes provide a much needed level of certainty for secured creditors.
Information for Financing Statement
The changes to this provision revise the information required to be included in the financing statement. The current version of the UCC requires that the financing statement include the debtor’s type of organization, jurisdiction and organizational ID number. The review committee determined that the burden of obtaining this information did not produce any significant corresponding benefit so the requirement for these informational items was eliminated.
There are a number of other technical changes as well which are designed to further address practice issues. Although not as comprehensive as the prior amendments, these amendments to Article 9 are important and lenders and their counsel should become familiar with the changes.