The California Legislature passed, and Governor Brown signed, Assembly Bill No. 1858, which changes the way individual debtors are identified in Uniform Commercial Code financing statements. The bill brings California into line with 40 other states, the District of Columbia and Puerto Rico, which have already enacted similar legislation. It becomes effective January 1, 2015.
I. The Existing Rule and the Change
The California Uniform Commercial Code says that when a financing statement is filed to perfect a security interest in personal property of an individual, the financing statement is to be filed in the state in which the individual’s principal residence is located.[1] It says that the “name” or the “surname and first personal name” of the individual should be stated on the financing statement.[2] The existing version of Article 9 provides no guidance as to how that should be determined. Financing statements are used almost exclusively for business (as opposed to consumer) transactions.[3]
This lack of guidance for names of individuals has led to confusion, because the same person may use several different names. For example, a person may commonly use a nickname (Bob vs. Robert) or use a middle name rather than the first name shown on his or her birth certificate. In addition, a person may change his or her name as a result of marriage, divorce, or otherwise, with the result that a name shown on a particular document may no longer be correct. Also, because laws have been enacted in recent years prohibiting the inclusion of Social Security numbers on UCC financing statements, it is sometimes difficult or impossible to determine whether a particular name (e.g., John Smith) belongs to the proposed borrower or whether it belongs to an entirely different person.
This confusion frequently arises when a lender considering making a secured loan conducts a search to determine whether a UCC financing statement has previously been filed against the prospective borrower covering the property the lender proposes to take as collateral. UCC financing statements are indexed by the debtor’s name, and searches are conducted by a computer search under the name. For a search to be effective, therefore, the lender would have to search under every name the borrower has ever used. If the lender is unaware of a particular name the borrower has used, it would not know to search under that name.
Assembly Bill No. 1858 revised California UCC Section 9503 to provide that, if an individual has an unexpired driver’s license or a DMV-issued personal identification card (the DMV will only issue one of those items to an individual), a financing statement identifying that person as a debtor must, in order to be effective, state that person’s name as set forth on the driver’s license or personal identification card.[4] If the person does not have either an unexpired driver’s license or DMV-issued personal identification card, it is sufficient if his or her “individual name” or “surname and first personal name” is shown on the financing statement (which is the current standard).
The bill affects certain transactions secured by deeds of trust, as well as transactions secured solely by personal property. Many deeds of trust in commercial transactions cover not only real estate, but also personal property located on or used in connection with the real estate. Under existing law (which is not changed by the new law), it is necessary to file a UCC financing statement with the Secretary of State to perfect the beneficiary’s security interest in most types of personal property described in the deed of trust. The debtor’s name to include on the financing statement, if that of an individual, must comply with Assembly Bill No. 1858. That may or may not be the same as the name in which the individual debtor took title to the real property (which typically is the name of the trustor on the deed of trust).
In addition, a secured party, in its capacity as beneficiary of a deed of trust, may want to record with the county recorder a “fixture filing,” which is necessary to perfect a security interest in fixtures located on the real property to the extent it is governed by real property law. Existing UCC Section 9502(c) states that the fixture filing may be included as part of the deed of trust if, among other things, it satisfies the requirements for a financing statement. This means that it must contain the name of the debtor as required under the UCC. If the debtor is an individual and the name that would otherwise be on the deed of trust (i.e., the name in which the individual took title to the real property) is different than the name required for a UCC financing statement, therefore, a secured party seeking to take advantage of this provision would need to include both names on the deed of trust – e.g., Robert Smith, also known as Bob Smith.
The Assembly Judiciary Committee raised a concern that this bill would result in individuals who lack either a driver’s license or DMV-issued personal identification card, and whose security interest would be perfected by filing a UCC financing statement, being discriminated against, because the benefit provided to secured parties by the new law (i.e., the increased certainty) would not apply to them. The concern was resolved by the addition of a new paragraph (7) to the amended UCC Section 9503(a), which limits the ability of a secured party to refuse to provide credit to an individual, or make the terms and conditions of the credit less favorable, because of the fact that the debtor’s name to be put on the financing statement would be the “individual name or surname and first personal name,” rather than the name on a driver’s license or personal identification card.
II. Availability of Information About Driver’s License/Personal Identification Card Name
Existing federal and California law allow a lender to verify driver’s license or personal identification card information of this type.
The federal Driver’s Privacy Protection Act of 1994, as amended,[5] contains certain prohibitions on state departments of motor vehicles from disclosing information from state motor vehicle records, but contains certain exemptions allowing disclosure (a) to verify personal information submitted by the individual provided that certain conditions are satisfied; (b) for use in any, civil, criminal, administrative, or arbitral proceeding before a government agency; or (c) if the affected individual consents in writing to the disclosure.[6]
Similarly, although California law prohibits or strictly limits disclosure of certain DMV information such as information about a person’s address or medical condition, and pictures of a person, it does permit disclosure of information to verify that an individual does in fact have an unexpired driver’s license or personal identification card, and to verify the name on that driver’s license or personal identification card if done in compliance with the federal law. The DMV has established procedures for non-governmental “commercial requesters” and “casual requesters” to obtain information from the Department of Motor Vehicles of this type.[7]
III. Transition Rules
Assembly Bill No. 1858 is effective January 1, 2015. The bill states that a financing statement that was effective prior to the effective date of the amendment remains effective until it would have ceased to be effective had the amendment not taken effect. Thus, existing perfected security interests remain so.
At expiration of a financing statement, any continuation statement necessary to continue the effectiveness of the financing statement must contain an amendment to the debtor’s name if necessary to comply with the statute as amended.
IV. The Change is Desirable
The change is desirable for numerous reasons, including the following:
1. Most individuals who borrow money for a business transaction have either a driver’s license or personal identification card, and have it readily available. They are commonly used means of identification, and thus familiar to most people. If the lender so desires, the information provided can be readily verified by reference to a public record.
2. The “correct” name to put on the UCC financing statement, and the “correct” name under which to conduct a search, will be easily ascertainable by reference to the driver’s license or personal identification card, and will therefore greatly simplify the process and reduce the chances that previously filed UCC financing statements will be overlooked.
3. The vast majority of states have adopted this provision. Many transactions cover multiple states or involve parties doing business in multiple states. A uniform standard will significantly improve efficiency and minimize the possibility of mistakes.
[1] UCC Section 9307(b)(1).
[2] UCC Section 9503(a)(5).
[3] See, e.g., UCC Section 9309(1), which provides that a UCC financing statement is not required to perfect a purchase money security interest in consumer goods. Perfection of a security interest in a motor vehicle is accomplished by registration with the Department of Motor Vehicles, not by a UCC financing statement.
[4] This is similar to the rule if the debtor is a registered organization such as a corporation, limited liability company, or limited partnership, in which the name on the UCC financing statement must be the name indicated on the public organizational document (e.g., articles of incorporation). See UCC Section 9503(a)(1).
[5] 18 U.S.C. Sections 2721-2725.
[6] Special restrictions exist for “highly restricted personal information,” defined as an individual’s photograph or image, social security number, medical or disability information.
[7] California Code of Regulations, Title 13, Division 1, Chapter 1, Article 5.
