Financing Statements Under Revised UCC Article 9

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• Wisconsin Department of Financial Institutions Will Administer UCC Article 9, Lien Filing System

by Emory Ireland

Revised Article 9 of the Uniform Commercial Code has been signed into law in Wisconsin as 2001 Wisconsin Act 10, effective July 1, 2001. It also has been enacted in all 49 other states and the District of Columbia, which will help avoid conflict of law issues between states; however, Connecticut has delayed the effective date to Oct. 1, 2001, and Florida, Alabama, and Mississippi have delayed the effective date to Jan. 1, 2002. Revised Article 9 is a major revision of the law governing the creation and perfection of security interests in personal property, and will require significant changes in some of the most basic aspects of financing transactions secured by personal property.

This article discusses some of the basic rules for filing and searching for financing statements under revised Article 9, with an emphasis on the place of filing, the name of the debtor, and the open-drawer filing system.

Place of Filing

If the debtor is an individual, the financing statement should be filed in the jurisdiction of the debtor's principal residence.1

If the debtor is a "registered organization," the filing must be made in the state of organization, even if the organization goes into bad standing or is dissolved.2 The term "registered organization" is defined as: "an organization organized solely under the law of a single state or the United States and as to which the state or the United States must maintain a public record showing the organization to have been organized."3 Thus, the term "registered organization" generally includes corporations, limited liability companies, and limited partnerships. There are special rules for national banks, other creatures of federal law, and branches and agencies of foreign banks.4 Note that Delaware has a nonuniform variation.

For example, if the debtor is a Delaware corporation, the financing statements will be filed in Delaware. This should eliminate the need for multiple filings in large, multi-state transactions. Of course, the secured party must keep track of changes in the state of organization. If the state of organization changes, the secured party will have one year to discover the change and refile as to a new debtor, but only four months as to the original debtor.5 Secured parties will want to obtain certified copies of the articles of incorporation or other formation documents both to confirm the appropriate state for filing and to confirm the correct name to include on the financing statement.

What if the debtor is a trust, general partnership, or other organization that is not a "registered organization"? If the debtor has only one place of business, financing statements are filed in the state where the place of business is located.6 If the debtor has more than one place of business, the financing statements are filed where the chief executive office is located.7

In the case of trusts, it apparently is necessary to apply the location rules to the "owner" of the trust assets as determined by state law. If (as seems likely) the trust is the "owner" of the trust assets, the question is where the trust itself is located. If the trustee is the "owner" of the trust assets, the question is where the trustee is located.

What about foreign debtors? If the debtor is located in a jurisdiction that does not provide a system for filing or recording security interests, the financing statements should be filed in the District of Columbia.8

Name of Debtor

General. The debtor's correct name is the key to the new media-neutral filing regime. The goal is to permit electronic filings and electronic searches. A financing statement that fails to provide the debtor's correct name is treated as being seriously misleading, unless it would show up in a search under the debtor's correct name using the filing office's standard search logic.9 Trade names are not required, and are not sufficient.10 A financing statement can provide the name of multiple debtors and multiple secured parties.11 It is not necessary to indicate that a secured party is acting in a representative capacity.12

The debtor's name generally must be exact, but the search logic established by the Wisconsin Department of Financial Institutions does permit some leeway. For example: no distinction is made between upper and lower case letters; spaces are disregarded; punctuation marks and accents are disregarded until further notice on the department's Web site (www.wdfi.org); the word "the" at the beginning of the name is disregarded; and words such as "inc." or "corporation" are disregarded if they appear at the end of the name.13 These words are not disregarded and must be exactly correct if they appear at the beginning or in the middle of a name. For example, the word "corporation" would be disregarded in the name "XYZ of Wisconsin Corporation," but not in the name "XYZ Corporation of Wisconsin."14

If the debtor's name changes, the financing statements remain effective for collateral the debtor acquired before or within four months after the name change.15 Therefore, lien searches must cover prior names. The financing statement is not effective as to collateral acquired more than four months after a debtor's name change.16 So, the secured party must monitor name changes. The secured party also must be alert to transfers of collateral to a new debtor.17

Individuals. It may be particularly difficult to determine the correct name of an individual. Some secured parties may go to the extent of requiring a copy of a birth certificate or other official evidence of the individual's name.

Once the correct name is established, how should it be entered into the financing statement? The administrative rules promulgated by the Wisconsin Department of Financial Institutions provide some guidance. For example, titles and prefixes such as "Doctor," "Reverend," "Mr.," and "Ms." should not be entered.18 Similarly, titles or indications of status such as "M.D." and "Esquire" are not part of an individual's name and should not be provided.19 But suffixes that indicate which individual is being named, such as "Sr.," "Jr.," "I," "II," and "III" are appropriate.20 Middle names or initials should be included, because it is not clear that a financing statement with just the first and last names would be found by a search request that included a middle name or initial.21 In any event, the financing statement must clearly identify the last name.22 If the debtor has only one name (for example, "Cher"), that name should go in the box for the last name.23

Registered Organizations. In the case of a registered organization (for example, a corporation, limited liability company, or limited partnership), the financing statement must include the organization's exact legal name as shown "on the public record of the debtor's jurisdiction of organization which shows the debtor to have been organized."24 As above, secured parties will want to obtain copies of the articles of incorporation or other formation documents to confirm the correct name.

Trusts. If the debtor is a trust, the financing statement must disclose the name of the trust, not the name of the trustee.25 This provision apparently was intended to avoid confusion in situations where banks and trust companies were trustees of many trusts. The financing statement should provide the name specified for the trust in its organization documents, or, if no name is specified, provide "the name of the settlor and additional information sufficient to distinguish the debtor from other trusts having one or more of the same settlors."26 It also should indicate, in the debtor's name or otherwise, that the debtor is a trust or is a trustee acting with respect to the property held in trust.27 If an existing filing has been made in the name of the trustee instead of the name of the trust, it may be necessary to change the debtor's name when refiling. Delaware has adopted a nonuniform provision that eliminates the need for this name change in some situations.28 Note also that filing now is required to perfect a security interest in a beneficial interest in a trust.29

General Partnerships. If the debtor is a general partnership, the financing statement should use the partnership's exact legal name that is specified in the partnership agreement.30 If no specific name is clearly identified, the secured party should consider requiring an amendment to the partnership agreement to clearly designate a specific name. Otherwise, it is necessary to use the names of all partners in the partnership, which can be burdensome.31

Name of Secured Party. In a syndicated financing transaction, it is permissible to give only the lead bank's name and address. There is no need to list the other banks or indicate that the lead bank is acting in an agency capacity.32

Open-drawer Filing System

Financing Statements. One dramatic change made by revised Article 9 is that the debtor's signature is no longer required on a financing statement.33 Nevertheless, a financing statement is effective only if it is authorized by the debtor.34 If a debtor signs a security agreement, the debtor authorizes the filing of an initial financing statement covering the collateral described in the security agreement.35 The description of collateral as "all personal property" is effective in a financing statement, but not effective in a security agreement.36 Accordingly, in order to file an "authorized" financing statement that describes the collateral as "all personal property," the secured party must either describe the collateral as "all personal property" in the security agreement, even though that otherwise is ineffective (and raises an opinion issue), or obtain, in the security agreement or elsewhere, the debtor's authorization to use "all personal property" as a description of collateral. The "open-drawer" system means that a financing statement revealed by a lien search may be ineffective because it was not authorized by the debtor. Amendments to financing statements also do not require signatures. Nevertheless, in order for the amendments to be effective, they must be authorized by the secured party of record unless the amendments added a debtor or added collateral.37

Termination statements also do not require a signature, but are not effective unless they are authorized by the secured party. Nevertheless, the debtor can authorize the filing of a termination statement if the secured party is required to file one and has failed to do so, and the termination statement indicates that the debtor authorized it to be filed.38 Termination (or amendment) by one secured party may not affect the financing statement as to the other secured parties.39 This means that a financing statement may be effective even though a termination statement has been filed, if the termination statement was not properly authorized. This will make lien searches difficult by requiring inquiry into whether termination statements were properly authorized by the secured party(ies) of record.

This possible need for inquiry may create administrative problems and delays in connection with subsequent financing transactions as a new lender tries to verify that a termination statement filed by a prior lender was in fact properly authorized by that prior lender. Perhaps these difficulties could be minimized if secured parties made a practice of providing to their debtors, whenever a properly authorized termination statement was filed, a letter addressed "to whom it may concern" stating that the particular termination statement was in fact properly authorized. Such a letter would be helpful to the debtor because it would facilitate subsequent financing transactions. It also would be helpful to the terminating lender because it would reduce the administrative burden of future inquiries from new lenders wanting to confirm that the termination statement was authorized.

Financing Statements Filed Before the Effective Date

A financing statement filed before July 1, 2001, will be effective under revised Article 9 as long as it satisfies the requirements of revised Article 9, and is filed in the jurisdiction appropriate under revised Article 9.40 If the financing statement is filed in the correct location under the prior version of Article 9, but the wrong location under revised Article 9, the financing statement remains effective until the earlier of the time it would have ceased to be effective under the prior version of Article 9 (usually five years, unless properly continued), or June 30, 2006.41 This means that until June 30, 2006, lien searchers must search both the filing office appropriate under revised Article 9 and the filing office appropriate under the prior version of Article 9. Financing statements filed against transmitting utilities will not expire even on June 30, 2006, unless revised Article 9 would require filing in a different jurisdiction.42

Continuation of Financing Statements Filed Before the Effective Date

Financing statements filed before the effective date can be continued only by filings made in the appropriate state and filing office under revised Article 9.

A continuation statement effectively continues a financing statement filed before the effective date if it is timely filed and if revised Article 9 prescribes the same jurisdiction and the same filing office.43 The continuation statement is effective only if the financing statement and continuation statement taken together satisfy the requirements for an initial financing statement under revised Article 9 with respect to, for example, the sufficiency of the debtor's name, the secured party's name, and the indication of collateral.44

Otherwise, the filing of a continuation statement after the effective date will not continue the effectiveness of a financing statement filed before the effective date.45 Whenever revised Article 9 requires filing in a new jurisdiction or filing office, secured parties will want to file new initial financing statements to continue their pre-effective-date filings in order to retain their pre-effective-date priority. Simply filing a new initial financing statement in the new jurisdiction is not enough.46 If the new financing statement does not identify or continue the prior filings, the priority of the new financing statement will date only from its date of filing or, if later, the effective date of revised Article 9. The new initial financing statement must:

• satisfy the requirements of revised Article 9;
• identify the pre-effective-date financing statement by indicating the office where it was filed, the dates of filing, and the file numbers of the financing statement and the most recent continuation statement; and
• indicate that the pre-effective-date financing statement remains effective.47

The new initial financing statement is not a continuation statement, and may be filed at any time during the effectiveness of the pre-effective-date financing statement, and not only within the six months immediately prior to lapse. Accordingly, it could have been filed before the effective date. The new initial financing statement will have its own lapse date, which will bear no relation to the lapse date of the pre-effective-date financing statement that it continues. A single new initial financing statement may continue the effectiveness of more than one pre-effective-date financing statement.48 As discussed above, the filing of a new initial financing statement identifying prior filings may be crucial to retaining priority over other secured parties.

Authorization by the secured party of record is sufficient if the filing is necessary to continue the effectiveness of a financing statement filed before the effective date or to perfect or continue the perfection of a security interest.49

Impact of Delayed Effective Date in Other States

As discussed above, some states have adopted revised Article 9 with effective dates other than July 1, 2001. This raises complex conflict of law issues for secured parties perfecting security interests prior to Jan. 1, 2002, when revised Article 9 will become effective in all 50 states. These issues are beyond the scope of this article, but are addressed in detail by a report by the Permanent Editorial Board of the Uniform Commercial Code.50

Conclusion

Revised Article 9 makes major changes in some of the most basic aspects of financing transactions secured by personal property. Its adoption raises many complex legal and practical issues. Resolution of those issues will require care and attention from all attorneys involved in secured financing transactions.

Endnotes

1 UCC Rev. §§ 9-301(1), -307(b)(1) (1999); Wis. Stat. §§ 409.301(1), .307(2)(a) (as created by 2001 Wis. Act 10).

2 Rev. § 9-307(e), (g); Wis. Stat. § 409.307(5), (7).

3 Rev. § 9-102(a)(70); Wis. Stat. § 409.102(1)(rg).

4 Rev. § 9-307(f); Wis. Stat. § 409.307(6).

5 Rev. § 9-316(a); Wis. Stat. § 409.316(1)(b), (c).

6 Rev. § 9-307(b)(1); Wis. Stat. § 409.307(2)(b).

7 Rev. § 9-307(b)(2); Wis. Stat. § 409.307(2)(c).

8 Rev. § 9-307(c); Wis. Stat. § 409.307(3).

9 Rev. § 9-506(b), (c); Wis. Stat. § 409.506(2), (3).

10 Rev. § 9-503(b), (c); Wis. Stat. § 409.503(2), (3).

11 Rev. § 9-503(e); Wis. Stat. § 409.503(5).

12 Rev. § 9-503(d); Wis. Stat. § 409.503(4).

13 DFI-CCS § 5.04.

14 Id.

15 Rev. § 9-507(c)(1); Wis. Stat. § 409.507(3)(a).

16 Rev. § 9-507(c)(2); Wis. Stat. § 409.507(3)(b).

17 Rev. §§ 9-507(a), -508; Wis. Stat. §§ 409.507(1), .508.

18 Wis. Admin. Emergency Rule, DFI-CCS § 3.03(2) (2001).

19 DFI-CCS § 3.03(3).

20 Id.

21 DFI-CCS § 5.04(7).

22 Rev. § 9-516(b)(3)(C); Wis. Stat. § 409.516(2)(c)(3).

23 DFI-CCS § 3.03(1).

24 Rev. § 9-503(a)(1); Wis. Stat. § 409.503(1)(a).

25 Rev. § 9-503(a)(3); Wis. Stat. § 409.503(1)(c)(1).

26 Rev. § 9-503(a)(3)(A); Wis. Stat. § 409.503(1)(c)(1).

27 Rev. § 9-503(a)(3)(B); Wis. Stat. § 409.503(1)(c)(2).

28 Del. Code Ann. tit. 6, § 9-703 (2000).

29 Rev. § 9-309, cmt. 7.

30 Rev. § 9-503(a)(4)(A); Wis. Stat. § 409.503(1)(d)(1).

31 Rev. § 9-503(a)(4)(B); Wis. Stat. § 409.503(1)(d)(2).

32 Rev. § 9-503; Wis. Stat. § 409.503(4).

33 Rev. § 9-502; Wis. Stat. § 409.502.

34 Rev. §§ 9-509(a), -510; Wis. Stat. §§ 409.509(1), .510.

35 Rev. § 9-509(b); Wis. Stat. § 409.509(2).

36 Rev. §§ 9-108(c), -504; Wis. Stat. §§ 409.108(3), .504.

37 Rev. § 9-509(d); Wis. Stat. § 409.509(4).

38 Rev. § 9-509(d); Wis. Stat. § 409.509(4).

39 Rev. § 9-510(b); Wis. Stat. § 409.510(2).

40 Rev. § 9-705(b); Wis. Stat. § 409-705(2).

41 Rev. § 9-705(c); Wis. Stat. § 409-705(3).

42 Rev. § 9-705(e); Wis. Stat. § 409-705(5).

43 Rev. § 9-705(d), cmt. 5; Wis. Stat. § 409-705(4).

44 Rev. § 9-705(f), cmt. 6; Wis. Stat. § 409.705(6).

45 Rev. § 9-705(d); Wis. Stat. § 409.705(4).

46 Rev. § 9-706(a); Wis. Stat. § 409.706(1).

47 Rev. § 9-706(c); Wis. Stat. § 409-706(3).

48 Rev. § 9-706, cmt. 2; Wis. Stat. § 409.706.

49 Rev. § 9-707; Wis. Stat. § 409.708.

50 Permanent Editorial Board Report, June 13, 2001: Article 9 Perfection Choice of Law Analysis Where Revised Article 9 is Not in Effect in All States by July 1, 2001.

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