Typically, from deal to deal, I don’t (and can’t imagine many of my colleagues do) get too worked up about Article 9 of the UCC…I know what it says, I know what to do, especially when it comes to creating and perfecting creditors’ security interests in collateral. But this year, I have reason to pause, as the 2010 Amendments to UCC Article 9, which have been adopted by more than 40 states (but not NY (and some others)—as of yet) went into effect on July 1, 2013
By way of background, UCC Article 9 governs secured transactions in personal property (i.e., how security interests may be obtained in a debtor’s personal property to secure a debt). The debtor may be an individual or any business entity (e.g., partnership, corporation, limited liability company etc). If the debtor defaults, the creditor may possess and sell the personal property to satisfy the debt. Perfection (which is governed by Article 9) of the creditor’s security interest establishes the creditor’s priority over other creditors.
While the amendments are designed to better reflect what is actually done in practice, some of the amendments will impact the way we all go about perfecting creditors’ security interests in debtors’ personal property. For instance, when filing UCC-1 Financing Statements (at the state or county level) for deals (including, loans, securitizations etc) that close on or after July 1, 2013, the new forms (see below for more info) may (I say may, as not all states have adopted the amendments) need to be used. Also, it is imperative that going forward, the UCC, as amended by these amendments, is complied with in order for creditors to maintain their perfected security interests. For the most part (assuming the creditors’ security interest was perfected by a filing), creditors will have a 5 year grace period (unless continuation statements or other filings are required to be made sooner) to ensure that all financing statements comply with the amendments.
Below please find a brief summary of the key amendments to Article 9 (note, for purposes of the following, the model UCC sections have been used. Please consult the state specific UCC legislation for more accurate citations):
1. Changes to Definitions
New Version: The UCC now defines and clarifies what is a “public record”, adding the defined term “public organic record” to §9-102(a)(68). A “public organic record” is a record available for public inspection and consists of the record initially filed with or issued by the applicable state to form the applicable business entity, and which includes, for example, articles of incorporation and articles of organization, and any subsequent amendments or other filings. This change clarifies the location of certain entities, such as Massachusetts Business Trusts, for Article 9 purposes.
2. Sufficiency of Debtor’s Name
Old Version: The debtor’s name is sufficient if the debtor is a registered organization, “only if the financing statement provides 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”. §9-503(a)(1)
New Version: In addition to clarifying what constitutes a “public record” for the purposes of determining whether a financing statement sufficiently identifies the name of the debtor which is an entity, in determining the correct legal name of an individual debtor, there are 2 alternatives: (a) the financing statement sufficiently names the individual debtor, if the financing statement uses the same name as is indicated on an unexpired state driver’s license; or (b) the financing statement sufficiently names the individual debtor, if the financing statement (i) provides the individual name of the debtor, (ii) provides the surname and first personal name of the debtor, or (iii) uses the same name as is indicated on an unexpired state driver’s license. The states may select whether to use the formulation in clause (a) requiring the use of a driver’s license if it exists or that of (b) using the driver’s license as a ‘safe harbor’.
3. What Constitutes Filing; Effectiveness of Filing
Old Version: §9-516(b)(5)(C) provides that a filing office may reject a UCC filing for certain reasons, including, the failure to indicate the type of organization of the debtor, a jurisdictional identification number for the debtor, or an organizational identification number for the debtor.
New Version: §9-516(b)(5)(C) is deleted and the requirement to list the type of organization of the debtor, a jurisdictional identification number for the debtor, or an organizational identification number for the debtor has been removed from the new UCC forms.
4. Correction Statement
Old Version: The current Article 9 allows a debtor to file a UCC-5 correction statement, if the debtor believes that the filing statement is inaccurate or was wrongly filed.
New Version: The “correction statement” is now referred to as an “information sheet” and secured parties may now file an information sheet as well as the debtor.
5. Continued Perfection of Security Interest Following Change of Governing Law
Old Version: § 9-316 currently provides, among other things, that a security interest remains perfected until the earliest to occur of (a) the time perfection would have ceased under the law of the jurisdiction designated in §§ 9-301 or 9-305(c), (b) the expiration of four months after a change of the debtor's location to another jurisdiction, or (c) the expiration of one year after a transfer of collateral to a person that thereby becomes a debtor and is located in another jurisdiction.
New Version: A new subsection (h) has been added to § 9-316 providing for continued perfection of a security interest in newly-acquired (i.e., after-acquired) collateral that attaches within 4 months after the debtor moves, so long as the secured party has taken steps to perfect the security interest in the debtor’s original state. In other words, a filed financing statement that would have been effective to perfect the secured party’s security interest in the debtor’s newly-acquired collateral if the debtor had not moved is effective to perfect a security interest in such collateral for four months after the move. The perfection continues until the end of the four-month period, giving the secured party 4 months to file a new security interest in the debtor’s new state.
In addition, a new subsection (i) has been added to § 9-316 providing for automatic perfection for 4 months of security interests after a new debtor in another state becomes bound by an existing security agreement with the original debtor (e.g., post merger). In other words, a filed financing statement that would have been effective to perfect the secured party’s security interest in the original debtor’s collateral is effective to perfect a security interest in the “new debtor’s” collateral (i.e., collateral owned by the original debtor before the merger) and in collateral acquired within four months after the new debtor in another state becomes bound by the existing security agreement. The perfection continues until the end of the four-month period, giving the secured party 4 months to file a new security interest in the debtor’s new state.
6. New Forms
Effective July 1, 2013, for the new financing statement forms that should be used click here.
For more information, on the proposed amendments click here and on the Full Text of Proposed Amendments click here.