United States: Amendments To Chapter 9 Of The Texas UCC

On May 17, 2011, Texas Governor Rick Perry signed Senate Bill No. 782 into law, thereby making Texas the fifth state to adopt a version of the 2010 uniform amendments to the 1998 version of Article 9 of the Uniform Commercial Code ("Revised Uniform Article 9"). Revised Uniform Article 9, which became effective in Texas and most other states in July of 2001, and is codified in Texas Chapter 9 of the Texas Business and Commerce Code ("Texas Chapter 9"), has been the subject of various amendments in Texas and other states since its enactment. The 2010 uniform amendments (the "NCCUSL Amendments"), which were promulgated by the Uniform Law Commission (also known as the National Conference of Commissioners on Uniform State Laws or "NCCUSL") and the American Law Institute, are, however, the first uniform, and the most extensive, amendments proposed since Revised Uniform Article 9 was adopted. The NCCUSL Amendments are largely technical in nature, correcting certain provisions of Revised Uniform Article 9 that, in practice, did not work well and filling gaps and holes that were discovered in the ten years that Revised Uniform Article 9 has been in effect. The 2011 amendments to Texas Chapter 9 adopted pursuant to Senate Bill No. 782 (the "Texas Amendments") generally conform to the NCCUSL Amendments; however, the Texas Amendments do include some non-conforming provisions. The following summary highlights certain of the Texas Amendments which will become effective on July 1, 2013. Unless otherwise indicated, these Texas Amendments generally conform to the NCCUSL Amendments.

CHANGES RELATED TO FILING

A. Name of Debtor (§§ 9.503 and 9.102)

Probably the most significant and comprehensive modifications reflected in the NCCUSL Amendments relate to those provisions that set forth the methodology for determining the name of the debtor for purposes of filing financing statements and searching the records of a Texas UCC filing office. Section 9.502(a)(1), which was not amended, requires that a financing statement must, among other things, provide the name of the debtor in order to be sufficient. Section 9.503 provides the methodology for determining the correct name for the various types of persons that may become debtors under Texas Chapter 9.

Individuals

In 2007, in response to confusion as to the sufficiency of financing statements reflecting individual debtors' names, the Texas legislature adopted Section 9.503(a)(4), a non-uniform amendment to Texas Chapter 9 that provided that the name of an individual as reflected on a driver's license or identification certificate issued by the state of the individual's residence would be sufficient for the purpose of a financing statement. While the non-uniform Texas amendment addressed the problem of individual name identification, many other states did not take any corrective action and, as a result, questions remained in those states as to the name that sufficiently identifies an individual debtor. In an attempt to solve this problem, the NCCUSL Amendments provide two options for states choosing to revise Section 9.503(a)(4) — an "Alternative A" and an "Alternative B" — of which Texas has chosen "Alternative A."

Alternative A to Section 9.503(a)(4) provides for an exclusive method of perfection, such that the name on a financing statement filed in Texas sufficiently identifies an individual debtor only if that name is the same as that indicated on the most recently issued and unexpired Texas driver's license or unexpired Texas personal identification card (a "Texas ID Card") (issued by the same office that issues Texas driver's licenses) of the debtor. As revised by the Texas Amendments, Section 9.503(a)(5) provides that if Texas has not issued a driver's license or Texas ID Card to the debtor as provided in subsection (4) (or it has expired), then the financing statement must reflect either (i) the individual name of the debtor or (ii) the surname and first personal name of the debtor. These Texas Amendments provide a definitive method for identifying an individual debtor holding an unexpired Texas driver's license or Texas ID Card, which will cover the vast majority of individual debtors, and provide greater certainty to secured parties; however, traps for the unwary remain. For instance, subsection (g) of Section 9.503 provides that if Texas has issued more than one driver's license or Texas ID Card to an individual, only the name reflected on the most recently issued unexpired license or Texas ID Card will be sufficient. Reliance on a replaced (or expired) license or Texas ID Card, or a license or card from another state, could result in the use of an insufficient name on a financing statement. Careful due diligence and compliance with Section 9.503 will continue to be of the utmost importance in making a name determination for an individual debtor.

Note that revised Section 9.502(c) (discussed below) provides that adherence to Section 9.503(a)(4) is not required with respect to a mortgage filed as a financing statement covering fixtures, as-extracted collateral or timber to be cut.

Registered Organizations

The Texas Amendments revise Section 9.102(71) by modifying the defined term "registered organization," which is used in Section 9.307 to determine the "location" of certain debtors and in Section 9.503 to determine the correct name of such debtors, in each case, for the purpose of perfecting a security interest by means of filing a financing statement or searching the records of a filing office in Texas for outstanding financing statements.

The former definition of "registered organization" was found by NCCUSL to be flawed in that there was some uncertainty as to whether corporations, limited liability companies, limited partnerships or other entities that filed their organizational/formation documents with a state were "registered organizations" because the definition of that term required that the relevant state must maintain a public record showing the organization of the entity. The duty of a state, including Texas, to maintain a public record is not clear in many cases, even if the state does in practice maintain public records of these entities. Furthermore, there was confusion as to what public record a secured party should refer in order to determine the name of a registered organization.

The revised definition attempts to solve these issues by removing the "must maintain" language and replacing the undefined term "public record" with a new defined term, "public organic record," which is found in new Section 9.102(68-a). A public organic record, in most cases, is a publicly available document filed with or issued by a state or the United States to form or organize an organization (that is, the organizational/formation document of an entity). In order to qualify as a registered organization, the entity must be organized solely under the laws of a single state or the United States by the filing of a public organic record with, or the issuance of a public organic record by, that state or the United States. As discussed below, the revised definition of "registered organization" also now expressly recognizes business trusts.

Now, with the revision of the defined term "registered organization," the addition of the new term "public organic record" and the use of those terms in Section 9.503(a), secured parties can be more assured that a financing statement will sufficiently reflect the name of the debtor if the name on the financing statement matches the name reflected on the organizational/formation document of a corporation, limited partnership, limited liability company or trust (to the extent the trust is required to file an organizational/formation document with the state in order to be formed). Reliance on good-standing certificates alone should be avoided.

Trusts

The Texas Amendments also modify the definition of "registered organization" so that statutory business trusts (those required to file a record with a state or the U.S. pursuant to statute in order to be formed) and even certain common-law business trusts (those business trusts that are created from private action without a filing, but are thereafter required to file their organizational/formation documents with a state or the U.S.), like corporations, limited partnerships and limited liability companies, will be "registered organizations" under Texas Chapter 9. Section 9.503 has also been amended to distinguish between the correct name for a trust that is a registered organization and a trust that is not. Under revised Section 9.503(a), the correct name to be shown in a financing statement for a debtor that is a registered organization trust is as reflected on its "public organic record" most recently filed with the state in which such trust was organized or formed (as discussed above). If the debtor trust is not a registered organization, revised Section 9.503(c) provides that the financing statement will reflect the correct name of the debtor only if the financing statement reflects (x) the name specified in the document that created the trust or (y) if no name is so specified, the name of the settlor or testator. If the name of the debtor trust is reflected correctly in accordance with foregoing clause (x), there must also be an indication in a separate part of the financing statement that the collateral is held in trust. If the name of the debtor trust is identified by a correct reference to the settlor or testator of the trust as in clause (y) of the second preceding sentence, additional information must be provided that is sufficient to distinguish the debtor trust from other trusts to which the named settlor or testator is acting in the same capacity and, if not reflected in such additional information, an indication that the collateral is being held in trust. New subsection (h) of Section 9.503 also provides a methodology for correctly identifying the name of a settlor or testator.

B. Effect of Change in Governing Law (§§ 9.316 and 9.326)

Two new subsections, (h) and (i) have been added to Section 9.316 to address a gap in the existing rules governing continuity of perfection in assets of a debtor that becomes subject to the laws of another state whether by a change in the location of the original debtor or the addition of a new debtor.

Debtor's Change in Location

Section 9.316(a) provides that a secured party that has perfected as to collateral of a debtor by filing a financing statement will remain perfected in that collateral for up to four months after the debtor changes its location to a new jurisdiction, notwithstanding that no new financing statement has been filed by or on behalf of the secured party in the jurisdiction of the debtor's new location. The existing Section 9.316(a) did not, however, protect the secured party with respect to new collateral acquired by the debtor during such four-month period after the debtor's location has changed even though the secured party may have been granted a security interest in "after-acquired" property of the debtor. New subsection (h) remedies this gap by providing that collateral acquired by the debtor for up to four months after the location change will also remain subject to the secured party's security interest notwithstanding the location change and the secured party's failure to file a financing statement in the new jurisdiction during the four-month period. By the end of that four-month period, however, the secured party must perfect under the laws of the new jurisdiction or it will lose its continuous perfection in those assets of the debtor in which it obtained perfection through its original filing in the old jurisdiction. While this change is favorable to existing secured parties of a debtor, potential new secured parties having an interest in property acquired after a debtor's location change will face more risk that they will be subordinate to an existing secured party perfected in a debtor's former location.

New Debtor

Similarly, new subsection 9.316(i) provides additional protection for a secured party that has a security interest in property of a debtor perfected by a financing statement in one jurisdiction, when a new debtor located in another jurisdiction becomes bound by the original debtor's security agreement. Probably the most typical circumstance in which a new debtor becomes bound by an original debtor's security agreement is when an original debtor is merged into another entity located in another jurisdiction. Under existing Section 9.316(a)(iii), the secured party having a security interest in collateral of a debtor that is merged into another entity in another jurisdiction remains perfected as to collateral owned by the original debtor at the time of the merger, without taking any action, for a period of up to one year. There is, however, no perfection in property acquired within the one-year grace period after the merger, but prior to the filing of a new financing statement. To correct this gap in perfection, new subsection (i) provides that a secured party also will be perfected in the assets acquired by the new debtor both before and within four months from the date the new debtor becomes bound (to the extent such assets are described as collateral in the original financing statement). Section 9.316(i)(2) provides that failure to so file a new financing statement within the four-month period will result in the secured party's becoming unperfected as to the new debtor's collateral and being deemed never to have been perfected as against a purchaser of the collateral for value. Notwithstanding a secured party's failure to so perfect in the post-merger property of the new debtor within the four-month grace period, the one-year grace period provided by existing Section 9.316(a)(iii) continues to remain available with respect to the collateral owned by the original debtor prior to the merger.

Modifications to Section 9.326 were also made in connection with those of Section 9.316 to address priority issues with respect to conflicting security interests in assets of a new debtor located in a different jurisdiction than the original debtor.

C. Other Changes Related to Filing

Section 9.311(a)(2) - The existing text provides that a financing statement is ineffective to perfect a security interest in property subject to the provisions of a specific list of Texas statutes (Chapter 501, Transportation Code (motor vehicles), Subchapter B-1, Chapter 31, Parks and Wildlife Code (vessels and outboard motors) and Chapter 1201, Occupations Code (manufactured homes)). The Texas Amendments replace that specific list with a generic reference to those statutes of Texas that provide for a security interest to be indicated on the certificate of title as a condition or result of perfection or such alternative to notation as may be prescribed by such statutes. Note, however, that Section 9.311(a)(2) also continues to make specific reference to Chapter 261 of the Business and Commerce Code relating to utility security instruments as perfection in those instruments is unrelated to certificates of title. The changes made to Section 9.311(a)(2) of Texas Chapter 9 are not reflected in the NCCUSL Amendments, but are modeled after the State of New York's version of the same section.

Section 9.502(c) - The existing text provides that, in order to make a record of a mortgage effective as a financing statement filed as a fixture filing or as a financing statement covering as-extracted collateral or timber to be cut, such record must satisfy the requirements of a financing statement. As amended, Section 9.502(c) provides that the record need not (x) indicate that it is to be filed in the real property records nor (y) provide an individual debtor's name, if any, in accordance with new Section 9.503(a)(4) (requiring identification of the debtor by the most recently issued and unexpired Texas driver's license or most recently issued and unexpired Texas ID Card issued by the same office that issues Texas driver's licenses) if the record otherwise reflects the individual name of the debtor or the surname and first personal name of the debtor.

Section 9.503(a)(2) - Provides for identification of the correct name of the debtor for collateral related to the estate of a deceased person.

Section 9.507(c) - Modifies the existing text to reflect that any event (as opposed to just a name change) that results in the name of a debtor as reflected on a financing statement becoming insufficient under Section 9.503(a) so that the financing statement becomes seriously misleading will trigger the four-month temporary perfection period under Section 9.507(c).

Section 9.515(f) - Clarifies that only indication on the initial financing statement of a transmitting utility will be effective to achieve perfection until a termination statement is filed. Existing Section 9.515(f) was not clear whether such an indication could be made on an amendment to an initial financing statement and be effective to achieve permanent perfection. The Texas Amendments make it clear that only an indication on the initial financing statement is effective.

Sections 9.516 and 9.518 - Existing Section 9.516 of the Texas UCC contains non-uniform provisions. The deviation from the model Article 9 has become more pronounced as the Texas Amendments do not delete Section 9.516(b)(5)(C) as recommended in the NCCUSL Amendments. Instead, subsection 9.516(b)(5)(C) of Texas Chapter 9 continues to permit the Secretary of State's office to refuse to file a financing statement for a debtor that is a registered organization if any of (i) the type of organization for the debtor, (ii) the jurisdiction of organization for the debtor or (iii) an organizational identification number for the debtor (or an indication that the debtor has no such number), are not provided in the appropriate places on the financing statement. Therefore, financing statements to be filed in Texas should continue to reflect these three pieces of information.

Both Section 9.516 and Section 9.518 were, however, modified in conformance with the NCCUSL Amendments to reflect new nomenclature by replacing each use of "correction statement" with "information statement" and each use of "last name" to "surname."

Financing Statement Forms - Texas continues to ignore the financing statement forms promulgated by NCCUSL and did not adopt the financing statement forms contained in Section 9.521 of the NCCUSL Amendments. In 2004, Texas repealed Section 9.521 of Texas Chapter 9 and added Section 9.5211 instead. Section 9.5211 prohibits the rejection by an officer of a filing office in the State of Texas that accepts written records of either (i) a written initial financing statement or (ii) a written record that is, in each case, made on an industry standard form, including a national standard form or a form approved by the International Association of Commercial Administrators, adopted by rule by the Secretary of State of the State of Texas.

CHANGES UNRELATED TO FILING

A. Electronic Chattel Paper (§ 9.105)

While Revised Uniform Article 9 and existing Texas Chapter 9 officially recognize that electronic chattel paper constitutes a form of collateral in which a secured party may obtain a perfected security interest, secured parties have yet to become entirely convinced that methods and technology have been (or can be) developed to permit compliance with the perfection requirements mandated by Section 9.105. In the hopes of facilitating transactions secured by e-chattel paper, the Texas Amendments conform Section 9.105 to similar provisions in Chapter 7 of the UCC so that the detailed method of perfection set forth in the existing version of Section 9.105 is now a "safe harbor" rather than the only way to gain control and, thus, perfection of e-chattel paper. Under the Texas Amendments, control over e-chattel paper will also be obtained if "a system employed for evidencing the transfer of interests in the chattel paper reliably establishes the secured party as the person to which the chattel paper was assigned." Whether this change will encourage more secured parties to accept e-chattel paper as collateral remains to be seen.

B. Buyers That Take Free of Security Interest (§ 9.317)

Subsections (b) and (d) of Section 9.317 address the circumstances in which a buyer for value of various assets subject to a security interest will take free of that security interest upon purchase. Existing subsection (b) addresses buyers of tangible chattel paper, tangible documents, goods, instruments and certificated securities, which are assets that can be delivered to the purchaser. Existing subsection (d) addresses specific types of intangible collateral, delivery of which to the purchaser is generally impracticable or impossible. As between existing subsections (b) and (d), not all possible collateral types are addressed. The Texas Amendments to subsection (d) address that gap by expanding the types of collateral that are subject to that subsection to all asset types covered by Texas Chapter 9 other than those specifically addressed by subsection (b).

C. Restrictions on Assignment and Creation of Security Interest (§§ 9.406 and 9.408)

Existing Section 9.406(d) generally permits an obligee's assignment of or creation of a security interest in promissory notes, accounts, chattel paper and payment intangibles notwithstanding any anti-assignment or anti-security interest language in the promissory note or other agreement between the obligor and the obligee. However, pursuant to subsection (e), subsection (d) is not applicable to a sale of a payment intangible or a promissory note. The Texas Amendments modify subsection (e) to clarify that sales of payment intangibles and promissory notes are permitted notwithstanding any such anti-assignment language if the sale is made pursuant to Section 9.610 (Disposition of Collateral After Default) or upon acceptance of collateral pursuant to Section 9.620 (Acceptance of Collateral in Full or Partial Satisfaction of Obligation). A corresponding change has been made to Section 9.408(b) to provide that the limitations in that subsection as to the applicability of Section 9.408(a) (which like Section 9.406 addresses anti-assignment/anti-security interest provisions) to the creation of security interests in payment intangibles and promissory notes do not apply if the security interest arises out of a disposition made under Section 9.610 or an acceptance of collateral under Section 9.620.

The Texas Amendments also provide for a new subsection (k) addressing assignments of lottery installment winnings, which are subject to certain restrictions on assignment found in Section 466.410 of the Texas Government Code. Subsection (k) clarifies that, notwithstanding the anti-assignment provisions of Section 9.406(f), an assignment of lottery installment winnings will remain subject to the restrictions on assignment found in Section 466.410 of the Government Code other than the provision of the Government Code that prohibits an assignment within the final two years of the prize payment schedule. This amendment to subsection (k) is a non-uniform change to the Texas UCC and is not reflected in the NCCUSL Amendments.

D. Other Changes Unrelated to Filing

Section 9.102 - Modifies the definitions of "Authenticate" (to conform to the definitions of "sign" in Chapters 1 and 7 of the UCC), "Certificate of Title" (to take into account state certificate of title systems that permit or require electronic records as an alternative to the issuance of paper certificates of title) and "Jurisdiction of Organization" (to clarify that the definition includes a jurisdiction in which an organization is "formed or organized").

Section 9.307(f) - Clarifies the methodology for determining the location of (i) a registered organization that is organized under the law of the United States and (ii) a branch or agency of a bank that is not organized under the law of the United States or a state.

Section 9.607(b) - Clarifies that the secured party's sworn affidavit to be recorded in connection with a nonjudicial foreclosure on a mortgaged property must reflect that a default has occurred "with respect to the obligation secured by the mortgage."

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.