BY: JAMIE WATKINS BRUNO
Article 9 of the Uniform Commercial Code (“UCC”) deals with secured transactions in which a creditor takes a security interest in a debtor’s personal property or fixtures. In 1998, Article 9 underwent major revision; these sweeping changes took effect on July 1, 2001, and were adopted in all 50 states. In 2010, a review committee appointed by the American Law Institute and the Uniform Law Commission suggested several additional amendments to Article 9. These changes, which will go into effect on July 1, 2013, are not meant to substantively revamp Article 9, but rather to provide clarity on certain issues that were proving problematic in practice, particularly with regard to financing statement filings. A brief summary of the most notable amendments follows.
UCC §9-102(a)(68) – The new rule provides increased certainty regarding the name of an organizational debtor used on a financing statement.
In most cases, the public organic record is the publicly available record filed with the state to form or organize the entity (for example, the publicly available charter document for a corporation or limited liability company, the statute for an entity formed by legislation, or the original filing with the secretary of state for a business trust).
Practice Tip: Note the distinction between a state’s business entity database (which is not a “public organic record”) and the actual charter document for an entity. Often the state database may contain abbreviations or other omissions/errors that could render a filing seriously misleading if used in lieu of the name properly shown on the public organic record. When in doubt, a prudent secured party should always refer back to the charter document for the accurate debtor name.
UCC §9-105 – The new approach clarifies rules regarding “control” of electronic chattel paper (“ECP”) to allow more flexibility for secured parties to develop their own reliable tracking systems.
UCC §9-316 – The new rule keeps a secured party temporarily perfected if the debtor relocates to – or merges with an entity located in – another state.
Practice Tip: The grace period extended under revised §9-316 offers enhanced protection to a secured party with respect to after-acquired property. However, a new financing statement must be filed in the appropriate jurisdiction within the four month window to properly continue perfection. In addition, a prudent lender should conduct lien searches in the original jurisdiction of a relocated debtor during the four month period after a move.
UCC §9-503 – The amendments clarify how to determine the correct debtor name to be listed on a financing statement.
Practice Tip: The new driver’s license standard for individual debtors does have some associated risks. What if the debtor gets a new license after loan closing or the license expires? From a diligence perspective, a lender should (i) obtain a copy of the debtor’s current, unexpired driver’s license, and (ii) conduct UCC lien searches under the debtor’s correct name as well as likely name variations. In the loan documents, a lender should add representations and warranties that the debtor’s name and address are as they appear on his or her current, unexpired, state-issued driver’s license, as well as a covenant that the debtor will notify the lender if either the license expires or the debtor obtains a new license (in which case a copy of such new license should be provided to the lender). In the event the debtor’s license reflects a name variation other than as shown on the original financing statement, the lender must file a new financing statement within the four month grace period, referring to the debtor’s correct name, in order to remain properly perfected.
UCC §9-507 – The new approach clarifies when a secured party must amend the debtor name on a filed financing statement.
A financing statement is rendered ineffective four months after it becomes seriously misleading, unless an amendment is filed within such four month period.
UCC §9-516 – The new rule revises the information required to be provided on a financing statement.
Under revised Article 9, a financing statement cannot be rejected by a filing office for failure to include the debtor’s type of organization, jurisdiction of organization and/or organizational identification number. The review committee deemed these pieces of information not sufficiently useful in practice and decided that they often just added cost and delay to the filing process.
UCC §9-516 – The new approach expands the parties authorized to clarify inaccurate or wrongfully filed records.
In addition, the new rule changes the confusing nomenclature of such a filing from a “correction statement” to a more accurate “information statement”.
Please feel free to contact a member of the Williams Mullen team if you have any questions about the changes under revised Article 9.