Changes to Article 9 of the Uniform Commercial Code with Respect to Filing UCC Financing Statements

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.

• Old Rule: The name on the “public record” was the correct name of a registered organization.
• New Rule: The name on the “public organic record” (defined as any record available for public inspection) is the correct name of a registered organization.

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.

• Old Rule: A six factor test determined control.  
• New Rule: A system evidencing the transfer of ECP must “reliably establish the secured party as the person to which the chattel paper was assigned.” (The six factor test is retained as a “safe harbor.)

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.

• Old Rule: Security interests that attached prior to relocation remained perfected for four months.
• New Rule: As long as secured party has taken steps to perfect security interests in the original state, the secured party will be perfected with respect to newly acquired security interests that attach within a four month window AND will be automatically perfected with respect to security interests that attach within a four month window after the new debtor becomes bound by an existing security agreement with the existing debtor (e.g., pursuant to an interstate merger).  As under the current rule, a security interest perfected only under the original filing will be subordinate to any new filing in the new jurisdiction.

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.

• For registered organizations, the correct name is the name shown on the public organic record (per § 9-102(a)(68)).
• For a decedent’s estate, the correct name is the name of the decedent (with a separate indication, not in the name field, that “collateral is being administered by a decedent’s personal representative”).
• For a trust / trustee acting with respect to property in trust, if the trust qualifies as a registered organization, the correct name is the name shown on the public organic record (per § 9-102(a)(68)); if the trust is not a registered organization, the correct name is the name of the trust specified in its organic documents.  If no name is specified, the correct name is the name of the settlor (with a separate indication that collateral is held in a trust). Note that additional information must be provided to distinguish the trust from others with the same settlor in the collateral field of the UCC-1 Financing Statement, Section 12 of Addendum or an attached schedule.  The name of the trustee is never sufficient (unless the settlor is also the trustee), and the filer must never add capacity of debtor to the name field.
• For individual debtors, there are two alternative provisions and individual states may elect which one to adopt: the “only if” option (the correct name is the name exactly as it is shown on the debtor’s state-issued driver’s license or other unexpired identification), and the “safe harbor” option (the correct name is the name shown on the debtor’s state-issued driver’s license/ID, the debtor’s individual name (under current Article 9) or the debtor’s surname and first personal name). Note that the license must be issued by the state in which the financing statement will be filed. If the debtor does not have an unexpired driver’s license or other state-issued ID, the correct name is the debtor’s individual name (under current Article 9) or surname and first personal name; if the debtor holds two driver’s licenses, the correct name is the name shown on the most recently issued license.  (Both Virginia and North Carolina have adopted the “only if” approach.)

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.

• Old Rule: Any change in the debtor’s name would require the filing of an amendment.
• New Rule: An existing financing statement “becom[ing] seriously misleading” as to debtor name triggers the obligation to file an amendment.

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.

• Old Rule: Financing statements were required to include the debtor’s type of organization, jurisdiction of organization and organizational identification number (or a statement that debtor has none).
• New Rule: The revised approach eliminates the requirement for debtor’s type of organization, jurisdiction of organization and organizational identification number (or a statement that debtor has none).

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.

• Old Rule: Only the debtor could file a “correction statement.”
• New Rule: A secured party is permitted to file an “information statement” when it believes a record was filed by a party not entitled to do so under §9-509(d).

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.