United States: The Transition To Revised Article 9 Of The Uniform Commercial Code

The Uniform Commercial Code (the "UCC") is a comprehensive body of state commercial law, Article 9 of which governs the creation, perfection, priority and enforcement of security interests in almost all forms of personal property. A significantly revised version of Article 9 of the UCC (the "Revised UCC")¹ has been enacted in 35² states and the District of Columbia. A bill to enact the statute has been introduced in the New York Assembly.³

Regardless of the date of enactment in a particular state, the Revised UCC provides that it becomes effective on July 1, 2001.⁴

The Revised UCC represents the most dramatic change to U.S. commercial law since the 1972 revisions to the UCC. Although the Revised UCC in many important respects will benefit secured creditors by clarifying the current UCC (the "Current UCC") and expanding its scope,⁵ the transition to the new statute unavoidably raises complex transitional issues. Understanding and managing the transitional rules is of paramount importance, since failing to do so can result in the loss of perfection or priority of existing security interests, even if properly perfected and having first-priority status under the Current UCC.

This memorandum is designed as a first step in assisting secured creditors both in avoiding the pitfalls of the transition rules of the Revised UCC and achieving the maximum benefits of its substantive rules. This memorandum is divided into three parts: first, the transition rules are described generally; second, the application of these rules to various categories of collateral is addressed; and, third, recommended creditor actions are summarized.

a As noted above, the Revised UCC has a uniform effective date of July 1, 2001.⁶

a The Revised UCC applies to transactions entered into, and security interests created and perfected, prior to its effective date (and, of course, on such date and thereafter).⁷

a A security interest will be enforceable and perfected under the Revised UCC if the actions taken prior to the effective date satisfy the applicable requirements for attachment and perfection under the Revised UCC.⁸

b The Revised UCC has a generally applicable one-year grandfather clause. Specifically, if the requirements for enforceability or perfection under the Revised UCC are not satisfied, a security interest created and perfected before July 1, 2001 will become unenforceable or unperfected, or both, on July 1, 2002.⁹

The Revised UCC has a different grandfather provision applicable to certain security interests perfected by filing. Before describing this provision, however, it is useful to review the changes to the choice of law rules for filing collateral that necessitate the special grandfather treatment.

a The Revised UCC in almost all cases changes the jurisdiction in which to file a financing statement. With limited exceptions,¹⁰ the proper place to file is in the jurisdiction in which the debtor, not the collateral, is located.¹¹

a A debtor that is a "registered organization,"¹² e.g., a corporation, limited liability company, limited partnership or statutory business trust, is located in its jurisdiction of organization,¹³ rather than the location of its place of business.¹⁴

b A debtor that is an individual is located at his or her principal residence.¹⁵

c A debtor located in a foreign jurisdiction whose laws do not provide for a notice filing system is located in the District of Columbia.¹⁶

a A financing statement filed in the appropriate filing office under the Current UCC, which filing office is not the proper filing office under the Revised UCC, will remain effective until the earlier of (i) its scheduled lapse date¹⁷ or (ii) June 30, 2006.¹⁸

b Moreover, such a security interest will have priority until such time over a competing security interest perfected by a filing made on or after July 1, 2001 in the correct Revised UCC jurisdiction.¹⁹

i) Example: A financing statement filed on May 1, 2001 with the Secretary of State of New Jersey with respect to a Delaware corporation that has its chief executive office in New Jersey will remain effective until May 1, 2006, even though a filing against such a debtor on or after July 1, 2001 would be ineffective unless made in Delaware.

ii) Example: In addition, the creditor filing in New Jersey will have priority until May 1, 2006 over another creditor that files in Delaware on or after July 1, 2001.

iii) Example: A financing statement filed on May 1, 2001 with the Maryland Department of Assessments and Taxation with respect to a Delaware corporation that has its chief executive office in Maryland will remain effective only until June 30, 2006, even though the current version of the UCC as enacted in Maryland provides that a financing statement is effective for twelve years.²⁰

a "Initial Financing Statement in Lieu of Continuation Statement"

i) In order to assure uninterrupted protection and priority, a security interest perfected by filing in a jurisdiction that was proper under the Current UCC but not under the Revised UCC must be continued by filing an "initial financing statement in lieu of continuation statement" in the appropriate Revised UCC jurisdiction.²¹

• Example: A financing statement filed with the New Jersey Secretary of State on May 1, 2001 against a Delaware corporation having its chief executive in New Jersey must be continued through filing an "in lieu" financing statement in Delaware on or before April 30, 2006.

ii) An "in lieu" financing statement must:

• satisfy the requirements for a regular financing statement;²²
• identify the original financing statement to which it relates by indicating (1) the office in which such financing statement was filed, and (2) the date of filing and filing number(s) of such financing statement and the most recent continuation statement, if any;²³ and
• indicate that the original financing statement remains effective.²⁴

iii) An "in lieu" financing statement need not be authorized or signed by the debtor.²⁵

b Amendments

i) Under the Revised UCC, the term "amendment" is used to describe a filing that adds or deletes collateral, continues or terminates the effectiveness of a financing statement, or otherwise amends a financing statement.²⁶

ii) A financing statement filed before July 1, 2001 in a jurisdiction that is not the appropriate jurisdiction under the Revised UCC may (except for an amendment that terminates a prior financing statement) be amended only by filing an "in lieu" financing statement and the amendment (or an "in lieu" financing statement with the amended information) in the proper jurisdiction under the Revised UCC.²⁷ The amendment can be filed concurrently with, or subsequent to, the filing of the "in lieu" financing statement.²⁸

iii) An amendment that terminates a financing statement may be filed either as described in clause (ii) above in the filing office that is the proper filing office under the Revised UCC or, if different, the office in which the original filing was made under Current UCC.²⁹

• Example: A creditor files a financing statement covering chattel paper with the Secretary of State of New Jersey on May 1, 2001 against a Delaware corporation having its chief executive office in New Jersey. On July 1, 2002, the creditor decides to amend the financing statement to cover the debtor’s accounts. This can only be accomplished by filing an "in lieu" financing statement and an amendment (or an "in lieu" financing statement that includes an amended collateral description) in Delaware.
• Example: A creditor files a financing statement with the Secretary of State of New Jersey on May 1, 2001 against a Delaware corporation having its chief executive office in New Jersey. On September 1, 2002, the loan facility terminates. The financing statement may be terminated either by using the procedure described in clause (ii) above or, more simply, by filing a termination statement in New Jersey.

c "True" Continuation Statement or Amendment

i) A financing statement filed in a jurisdiction that is the proper jurisdiction under both the Revised UCC and the Current UCC (e.g., with respect to a Delaware LLC that has its chief executive office in Delaware) may be continued or amended, as the case may be, by filing a "true" continuation statement or amendment.³⁰

a Debtor Name

i) The exact name of the debtor must be used in the financing statement.³¹

• In the case of a debtor that is a registered organization, this is the name indicated on the public record of the debtor’s jurisdiction of organization which shows the debtor to have been organized.³²
• The Revised UCC clarifies that a trade name is neither necessary nor sufficient on a financing statement.³³
• In the case of a debtor that is a trust or a trustee acting with respect to trust property, this is the name specified in the trust’s organizational documents.³⁴
• No rule is specified for determining the name of an individual.
• In the case of an individual, passports, birth certificates and driver’s licenses, for example, may be examined, although the information appearing in such documents may not be dispositive in all cases.

b Other Debtor Information

In addition to the information required under the Current UCC, e.g., debtor name and mailing address, secured party name and address, and a description of the collateral,³⁵ the Revised UCC requires the inclusion of certain additional information in the financing statement:

i) In the case of a registered organization, the financing statement must include (1) an indication of the type of organization, (2) the jurisdiction of organization and (3) the organizational identification number.³⁶

ii) In the case of a trust or a trustee acting with respect to trust property, the financing statement must indicate that the debtor is a trust or such a trustee.³⁷

iii) In the case of an individual, the financing statement must indicate that the debtor is an individual.³⁸

c Debtor Must Authorize Filing

i) Under the Revised UCC the debtor must "authorize" the filing of the financing statement, but need not sign it.³⁹

ii) The debtor’s "authentication" (which includes an electronic as well as manual signature)⁴⁰ of the security agreement constitutes authorization of the filing.⁴¹

• Secured creditors wishing to file a financing statement prior to execution of the security agreement should either (1) enter into a side letter authorizing such a filing or (2) have the financing statement manually executed by the debtor.

d Collateral Descriptions In Financing Statements

i) "Supergeneric" collateral descriptions (e.g., "all personal property of the debtor, now owned or hereafter acquired") are permitted in financing statements.⁴²

• In contrast, the collateral description in the security agreement must, "reasonably identify" the collateral.⁴³ A "supergeneric" description is not adequate in this regard.⁴⁴

a Because financing statements filed in the proper jurisdiction under the Current UCC will remain perfected for some time under the Revised UCC even if the Revised UCC specifies a different filing jurisdiction,⁴⁵ creditors will need to conduct UCC searches in both jurisdictions in many instances.

i) Example: On August 1, 2001, a creditor makes a loan secured by accounts to a Delaware limited partnership having its chief executive office in New Jersey. The creditor should conduct searches in Delaware and New Jersey.

ii) Example: On September 15, 2001, a creditor makes a loan secured by accounts to a Delaware corporation. On June 15, 2001, the borrower changed the location of its chief executive office from New Jersey to Connecticut. Because any prior filing in New Jersey remains effective for four months after the change in the debtor’s location under the Current UCC, the creditor should conduct a search in New Jersey, as well as in Connecticut and Delaware.

iii) Example: On October 1, 2001, a creditor makes a loan to a Delaware corporation secured by inventory located in Connecticut, Maryland and New Jersey. Because the proper jurisdiction in which to file against inventory under the Current UCC is the jurisdiction in which the inventory is located,⁴⁶ the creditor should search in Connecticut, Maryland and New Jersey, as well as in Delaware.

1. Security interests in deposit accounts are perfected by "control."⁴⁸

2. A secured party has control over a deposit account if the secured party either:

a becomes the "customer" of the bank with respect thereto;⁴⁹ or

b the bank, the debtor and the secured party have agreed in an "authenticated record"⁵⁰ that "the bank will comply with instructions originated by the secured party directing disposition of the funds in the deposit account without further consent by the debtor."⁵¹

3. A creditor with a security interest in a deposit account perfected under the common law or a nonuniform provision of the Current UCC (such as the nonuniform provisions in effect in California⁵² and Illinois⁵³) must obtain control (within the meaning of the Revised UCC) on or before June 30, 2002 in order to maintain perfection.⁵⁴

4. If such a creditor waits until June 30, 2002 to obtain control under the Revised UCC, it may lose priority to a subsequent creditor that obtains control earlier.⁵⁵

5. Security interests perfected under the Current UCC in identifiable cash proceeds of filing collateral⁵⁶ and investment property⁵⁷ will remain perfected under the Revised UCC.⁵⁸

• Nevertheless, a secured creditor that does not obtain control over the related deposit account risks losing priority to another creditor that obtains control over such deposit account.⁵⁹

1. Security interests in electronic chattel paper are perfected by control⁶¹ or filing.⁶²

2. Control requires satisfaction of the following elements:⁶³

a the existence of a single authoritative copy of the record that is unique, identifiable and, except as described below, unalterable;

b an indication on such copy that the secured party is the assignee;

c maintenance of such copy by the secured party or its custodian;

d implementation of procedures that require the participation of the secured party in connection with any changes to the identified assignee;

e ready identifiability of a copy of the authoritative copy as a copy; and

f ready identifiability of revisions to the authoritative copy as authorized or unauthorized.

3. A creditor with a perfected security interest in electronic chattel paper must either obtain control or, if it has not already done so, file a financing statement on or before June 30, 2002 in order to maintain perfection.⁶⁴

4. A security interest in electronic chattel paper that is perfected solely by filing generally will be subordinate to a competing security interest therein that is perfected by control.⁶⁵

5. A creditor that waits until June 30, 2002 to obtain control may lose priority to a later creditor that obtains control before such date.⁶⁶

1. Security interests in letter-of-credit rights⁶⁷ are perfected by control.⁶⁸

a Control is obtained when the issuer or nominated person has consented to an assignment of the proceeds of the letter of credit under UCC Section 5-114(c) or other applicable law or practice.⁶⁹

2. A creditor with a security interest perfected by possession of the L/C under the Current UCC⁷⁰ must obtain control on or before June 30, 2002 in order to maintain perfection.⁷¹

3. A creditor that waits until June 30, 2002 to obtain control may lose priority to a later creditor that obtains control before such date.⁷²

1. Perfection of a security interest in an instrument,⁷³ document⁷⁴ or chattel paper⁷⁵ in the possession of a bailee requires that the bailee "authenticate a record" in which it acknowledges that it holds possession for the secured party’s benefit.⁷⁶

a An exception to the acknowledgement requirement under the Revised UCC arises where a secured party in possession delivers the collateral to a bailee in connection with a contemplated secondary market transaction. In this case, mere notification to the bailee suffices to maintain perfection.⁷⁷

1. A security interest in instruments may be perfected by filing.⁷⁹

2. A security interest therein perfected by filing will be subordinate to the security interest of a third party that takes possession for value, in good faith and without knowledge that it is violating the rights of another secured party.⁸⁰

3. The period during which a nonpossessory security interest in instruments (as well as documents⁸¹ and certificated securities⁸²) remains automatically perfected is reduced from 21 days⁸³ to 20 days.⁸⁴

1. Perfection is achieved by filing in the District of Columbia.⁸⁵

2. A creditor with a security interest in such collateral perfected under the Current UCC through "notification to the account debtor"⁸⁶ must file a financing statement describing such collateral on or before June 30, 2002 in order to maintain the perfection of its security interest.⁸⁷

3. A secured party that waits until June 30, 2002 may lose priority to another creditor that files before such date.

1. In addition to deposit accounts, the Revised UCC covers several types of personal property that are excluded under the Current UCC:⁸⁸

a Health-care-insurance receivables.⁸⁹

b Commercial tort claims.⁹⁰

2. Coverage of these assets under the Revised UCC does not, however, ensure that the secured party will be able to realize upon them, or compel the underlying obligor to render performance to the secured party, if such property is subject to contractual or legal prohibitions on assignment.⁹¹

1. The Revised UCC includes a significantly expanded definition of "account."⁹²

2. The new definition includes rights to payment in connection with (i) property that is sold, leased or licensed, (ii) issuance of a policy of insurance, (iii) energy provided, (iv) lottery winnings, and (v) use of a credit card, among other things.

a Accordingly, creditors must exercise care in preparing security documentation to describe as "accounts" many types of property formerly classified as "general intangibles."⁹³

b A filing made to perfect a security interest in, e.g., lottery winnings, that describes such property as "general intangibles" can be continued only if the collateral description is amended to cover "accounts."⁹⁴

• Because several states have enacted laws governing the transfer of interests in lottery winnings, secured creditors financing such assets will need to consider complying with such laws, as well with as the Revised UCC.

1. The Revised UCC includes an alternative that permits enacting jurisdictions either to (i) continue the broad exclusion from Article 9 of the Current UCC of security interests created by governments and governmental entities⁹⁵ or (ii) narrow the exclusion so that it applies only to the extent that another statute expressly governs the creation, perfection, priority or enforcement of a security interest granted by such a debtor.⁹⁶

• Determine debtor’s "location."
• Ensure that "tickler" systems are programmed to take into account the proper jurisdiction in which to continue financing statements.
• Ensure familiarity with the requirements of an "initial financing statement in lieu of continuation statement," i.e., a special financing statement filed to continue a financing statement filed in a jurisdiction that was proper under the Current UCC but is not otherwise the proper jurisdiction under the Revised UCC.
• Become aware of the new information required on financing statements.
• Conduct searches in the jurisdiction of the debtor’s organization and, if different, the jurisdiction in which the debtor maintained its chief executive office on June 30, 2001 (or where the debtor maintained its equipment and inventory on such date).
• Conduct an additional search if, on or after March 1, 2001 and before June 30, 2001, the debtor (or its equipment or inventory) was located in a jurisdiction different from that in which the debtor (or its equipment or inventory) was located on June 30, 2001.
• Implement control procedures for deposit accounts, electronic chattel paper and letter-of-credit rights.
• Ascertain whether bailee acknowledgements are required for possessory collateral.
• Monitor developments concerning the governmental entity exception.
• Monitor Revised UCC enactments.
• Proceed especially carefully in transactions closing on or after July 1, 2001 that have contacts with both a Current UCC jurisdiction and a Revised UCC jurisdiction.

1 Revised Article 9. Secured Transactions (With Conforming Amendments to Articles 1, 2, 2A, 5, 7, and 8).

2 As of May 14, 2001, the Revised UCC had been enacted in Alaska, Arizona, Arkansas, California, Delaware, Georgia, Hawaii, Idaho, Illinois, Indiana, Iowa, Kansas, Kentucky, Maine, Maryland, Michigan, Minnesota, Mississippi, Montana, Nebraska, Nevada, New Mexico, North Carolina, North Dakota, Oklahoma, Rhode Island, South Dakota, Tennessee, Texas, Utah, Vermont, Virginia, Washington, West Virginia and Wyoming.

3 See S. 1147, A. 1999.

4 Revised UCC § 9-701.

We are aware of at least one instance in which an enactment included a nonuniform effective date of January 1, 2002. See 2001 Miss. Laws 495.

5 Readers wishing to obtain a copy of a CWT memorandum discussing the Revised UCC in greater detail should contact Kristen Casselman at (212) 504-6618; kristen.casselman@cwt.com.

6 Revised UCC § 9-701. But see note 4, supra.

7 Revised UCC § 9-702(a). The Revised UCC does not, however, affect any action or proceeding begun prior to its effective date. Revised UCC § 9-702(c).

8 Revised UCC § 9-703(a).

9 Revised UCC § 9-703(b).

10 In the case of timber to be cut, as-extracted collateral and fixture filings regarding goods, the proper place to file is the jurisdiction where such collateral is located. Revised UCC §§ 9-301(3), (4), 9-501(a)(1).

11 Revised UCC §§ 9-301(1), 9-501(a)(2).

12 Defined in Revised UCC § 9-102(a)(70).

13 Revised UCC § 9-307(e).

14 See Current UCC § 9-103(3)(d).

A debtor that is a general partnership or other type of unincorporated entity is located at its place of business or, if it has more than one place of business, at its chief executive office. Revised UCC § 9-307(b)(2), (3).

15 Revised UCC § 9-307(b)(1).

In contrast, Section 9-103(3)(d) of the Current UCC provides that an individual debtor is located, in the first instance, at his or her place of business or, otherwise, at his or her residence.

16 Revised UCC § 9-307(c).

17 In general, five years from the date of filing. Current UCC § 9-403(2).

18 Revised UCC § 9-705(c).

19 Revised UCC § 9-709(a).

20 Maryland UCC § 9-403(2).

21 Revised UCC § 9-706(a).

22 Revised UCC § 9-706(c)(1).

The requirements for a financing statement include indicating the name and address of each of the debtor and the secured party and providing a description of the collateral. Revised UCC §§ 9-502, 9-504.

23 Revised UCC § 9-706(c)(2).

24 Revised UCC § 9-706(c)(3).

25 Revised UCC § 9-708.

26 Revised UCC § 9-512.

27 Revised UCC § 9-707(c)(2), (3).

28 See Off. Cmt. 3 to Revised UCC § 9-707.

29 Revised UCC § 9-707(c).

30 Revised UCC §§ 9-705(d), 9-707(c)(1).

31 Revised UCC § 9-502(a)(1).

32 Revised UCC § 9-503(a)(1).

33 Revised UCC § 9-503(b)(1), (c).

34 Revised UCC § 9-503(a)(3).

35 Current UCC § 9-402(1).

36 Revised UCC § 9-516(b)(5)(B), (C). The filing office is required to reject a filing that omits this information. Revised UCC § 9-520(a). Nevertheless, if such a filing is accepted by the filing office, it is legally effective. Revised UCC § 9-520(c).

37 Revised UCC § 9-503(a)(3)(B).

38 Revised UCC § 9-516(b)(5)(B). See note 36, supra.

39 Revised UCC § 9-509(a)(1).

40 See Revised UCC § 9-102(a)(7).

41 By executing the security agreement, the debtor only authorizes a filing describing collateral described in the security agreement. Id. Accordingly, a creditor wishing to file against "all property" of the debtor should obtain an express authorization for a filing including the broader description. Revised UCC § 9-509(b).

42 Revised UCC § 9-504(2).

43 Revised UCC § 9-108(a).

44 Revised UCC § 9-108(c).

45 Revised UCC § 9-705(c).

46 Current UCC § 9-103(1)(b).

47 Defined in Revised UCC § 9-102(a)(29) to include demand, time, savings, passbook and similar accounts maintained with a bank.

48 Revised UCC § 9-314(a).

49 Revised UCC § 9-104(a)(3).

50 See Revised UCC § 9-102(a)(7), (69).

51 Revised UCC § 9-104(a)(2).

52 Illinois UCC § 9-302(i).

53 California UCC § 9302(g).

54 Revised UCC §§ 9-703(b), 9-314(a), 9-104(a).

55 In such a situation, the first creditor would, however, have at least a colorable agreement that it maintains priority, as well as perfection, without further action until June 30, 2002. See Revised UCC §§ 9-703(b), 9-709(a); but see Revised UCC § 9-327(1).

56 Current UCC § 9-306(3)(b).

57 Current UCC § 9-306(3)(c).

58 Revised UCC § 9-315(d).

59 Revised UCC § 9-327(1).

60 Defined in Revised UCC § 9-102(a)(31).

61 Revised UCC §§ 9-314(a), 9-107.

62 Revised UCC § 9-312(a).

63 Revised UCC § 9-105.

64 Revised UCC §§ 9-703(b), 9-312(a), 9-314(a), 9-105.

65 Revised UCC § 9-330(a), (b).

66 Id.

67 Defined in Revised UCC § 9-102(a)(51).

68 Revised UCC § 9-314(a).

A security interest in letter-of-credit rights will be automatically perfected as a "supporting obligation" (defined in Revised UCC § 9-102(a)(77)) when a security interest in the supported obligation is perfected. Revised UCC § 9-308(d). Such an automatically perfected security interest will be subordinate, however, to a competing security interest that is perfected by control. Revised UCC § 9-329(1).

69 Revised UCC § 9-107. Obtaining control does not, however, make the secured party the beneficiary of the letter of credit or otherwise entitle the secured party to draw on it. Off. Cmt. 4 to Revised UCC § 9-107.

70 Current UCC §§ 5-116, 9-305.

71 UCC §§ 9-703(b), 9-314(a), 9-107.

In some circumstances, a security interest in letter-of-credit rights will be automatically perfected as a supporting obligation. Revised UCC § 9-308(d); See also note 68, supra.

72 Revised UCC § 9-329.

73 Defined in Revised UCC § 9-102(a)(47).

74 Defined in Revised UCC § 9-102(a)(30).

75 Defined in Revised UCC § 9-102(a)(11).

76 Revised UCC § 9-313(c). The Current UCC, in contrast, merely requires notification to the bailee.

77 Revised UCC § 9-313(h); Off. Cmt. 9 to Revised UCC § 9-313.

78 Defined in Revised UCC § 9-102(a)(47).

79 Revised UCC § 9-312(a).

80 Revised UCC § 9-330(d).

81 Defined in Revised UCC § 9-102(a)(30).

82 Defined in UCC § 8-102(a)(4).

83 Current UCC § 9-304(4), (5).

84. Revised UCC § 9-312(e), (g).

85 Revised UCC §§ 9-307(c), 9-501(a)(2).

Under the Current UCC, the exclusive means for perfecting a security interest "in accounts or general intangibles for money due or to become due" of such a debtor is through "notification to the account debtor." Current UCC § 9-103(3)(c).

86 Current UCC § 9-103(3)(c).

87 Revised UCC §§ 9-703(b), 9-312(a).

88 See generally Current UCC § 9-104.

89 Defined in Revised UCC § 9-102(a)(46).

90 Defined in Revised UCC § 9-102(a)(13).

91 Sections 9-406 and 9-408 of the Revised UCC elaborate complex rules governing the legal effect of contractual and statutory anti-assignment provisions that, although beyond the scope of this memorandum, generally preserve the full assignability of property rights while, at the same time, protecting an underlying obligor from being forced to render performance to a person (i.e., the creditor of the obligor’s counterparty) with whom it has not bargained to render performance.

92 Defined in Revised UCC § 9-102(a)(2).

93 See Current UCC § 9-106.

94 See Example 6 to Revised UCC § 9-705.

95 See Current UCC § 9-104(e).

96 Revised UCC § 9-109(c), (d).

We note that the nonuniform version of UCC § 9-104 currently in effect in New York embodies the substance of the more limited exception under the second alternative.