Vol. 74, No. 2, February 2001

Legislative Watch

State Bar Urges Adoption of UCC Revised Article 9

Ralph Anzivino, Case Western Reserve 1971, teaches contracts, UCC, and bankruptcy at Marquette University Law School. He has written several treatises and books on UCC and bankruptcy law and numerous other articles. He serves as a State Bar Business Law Section board member and contributing editor to the Insolvency Newsletter, and as vice chair of the UCC Committee.

REVISED ARTICLE 9 OF THE Uniform Commercial Code currently is being considered by the Wisconsin Legislature for adoption. The Uniform Law Commissioners, in conjunction with the American Law Institute, completed the revision in 1999. Thus far, it has been adopted by 28 states and is under consideration in 14 others. The effective date for all states to have Revised Article 9 enacted is July 1, 2001, without which potentially serious "conflict of law" issues may arise. Article 9 of the Uniform Commercial Code was last revised in 1972 and has been adopted in every state. The State Bar of Wisconsin has recommended that the Wisconsin Legislature adopt the current revision.

Revised Article 9 is a substantial improvement to personal property financing. Since 1972, personal property financing has grown enormously in amount, number of transactions, and variety of types of personal property available as collateral. Consistent with its predecessor, Revised Article 9 draws heavily on current commercial practices for its revisions. There are significant changes in scope, substantive rules, and procedures. The following briefly summarizes some of the revisions.

Scope

Revised Article 9 expands the "scope" of Article 9. The kinds of property in which a security interest can be taken by a creditor under Revised Article 9 increases over those available under old Article 9. Some of the new kinds of collateral available are sales of payment intangibles and promissory notes, security interests created by governmental debtors, health insurance receivables, consignments, and commercial tort claims. Certain kinds of transactions that did not come under old Article 9 now come under Revised Article 9. For example, nonpossessory, statutory agricultural liens now come under Article 9 for determination of perfection and priority.

Attachment

The current rules for the creation and attachment of the security interest remain substantially the same under Revised Article 9. Attachment continues to require a security agreement, value, and that the debtor have rights in the collateral. Revised Article 9 clarifies that the exception to the signature requirement where the secured party has possession "pursuant to agreement" means that the agreement must be a security agreement. Revised Article 9 also clarifies that a description in the security agreement can be by "type"(for example, equipment), but generic descriptions are not acceptable (for example, all the debtor's personal property). As with old Article 9, a security interest attaches to proceeds, but Revised Article 9 expands the definition of proceeds.

Perfection

Under Revised Article 9, filing a financing statement remains the dominant way to perfect a security interest in most kinds of personal property. Revised Article 9, however, greatly expands the kinds of collateral where a secured party can use filing to perfect. For example, filing now can perfect instruments and investment property. As in the past, different methods of perfection are not mutually exclusive. "Control" is a new method of perfection for letter of credit rights and deposit accounts. Under old Article 9, control was available only to perfect security interests in investment property. A creditor has control when the secured party has the authority to transfer the property without the debtor's consent. Possession continues as an alternative method of perfection and is the only method for perfecting a security interest in money that is not proceeds. Automatic perfection for a purchase money security interest is increased from 10 days to 20 days in Revised Article 9. Thereafter, another method of perfection must be used to continue the perfected security interest. As in the past, the purchase money security interest in consumer goods remains perfected automatically for the duration of the security interest.

Choice of Law

Revised Article 9 changes the rules for the location of filing a financing statement. Old Article 9 required the filing of a financing statement in the state where the goods were located, and in the state of the debtor's chief executive office for intangible collateral, such as accounts and general intangibles. Revised Article 9 specifies only one place to file for all collateral, and that is the state of the debtor's location. Revised Article 9 further defines a debtor's location. For an entity created by a filing within a state, the entity's location is that state. For example, a debtor incorporated in Delaware, with its chief executive office in Chicago, would file the financing statement in Delaware for all collateral where filing was a means of perfection. For an entity not created by a filing, the entity's location is the place of its chief executive office. Finally, for an individual, the individual's location is that person's residence. Experience suggests that collateral shifts location much easier than does the debtor's location.

The Filing System

Revised Article 9 endorses a full commitment to centralized filing - one place in every state where financing statements are filed. Under Revised Article 9, the only local filing of financing statements occurs in the real estate records for fixtures. Fixtures are items of personal property that become physically part of the real estate, and are treated as part of the real estate until severed from it.

Revised Article 9 also anticipates a filing system that will evolve from the world of filed documents to the world of electronic communications and records. In a dramatic change, Revised Article 9 has eliminated the requirement that the debtor sign the financing statement. This change will facilitate the electronic filing of financing statements and electronic searches. The paper filing of financing statements already is disappearing in many states where electronic filing is available. Revised Article 9 encourages this transition from paper to electronic filing without further revision.

Revised Article 9 also makes filing office operations more ministerial than old Article 9. The office that files financing statements has no responsibility for the accuracy of information on the statements and is fully absolved from any liability for the contents of any statements received and filed. Revised Article 9 contains a statutory rule to determine when a mistake in the debtor's name is so incorrect as to render the financing statement ineffective (unperfected). A financing statement is effective if a computer search run under the debtor's correct name turns up the financing statement with the incorrect name. If it does not, then the financing statement is ineffective. A court has no discretion to determine that the incorrect name is not seriously misleading. The computer search logic used by the state's filing office becomes the legal standard for an error in the debtor's name.

Consumer Transactions

Revised Article 9 clearly distinguishes between consumer and commercial transactions. It contains many provisions providing special rules in consumer transactions. A consumer transaction is defined in the traditional manner as one involving a personal, family, or household purpose. Some examples of consumer provisions are: a consumer cannot waive redemption rights in a security agreement; a consumer buyer of goods who prepays in whole or in part has an enforceable interest in the purchased goods and may obtain the goods as a remedy; a consumer is entitled to disclosure of the amount of any deficiency assessed against him or her, and the method for calculating the deficiency; and a secured creditor may not accept collateral as partial satisfaction of a consumer obligation, so that choosing strict foreclosure as a remedy means that no deficiency may be assessed against the debtor.

Default and Enforcement

Default and enforcement provisions, which are triggered by the debtor's default, prescribe the procedures for repossessing the collateral and selling it to satisfy the debt. Revised Article 9 includes new rules dealing with "secondary" obligors (guarantors), new special rules for some of the new kinds of property subject to security interests, new rules for the interests of subordinate creditors with security interests in the same property, and new rules for aspects of enforcement when the debtor is a consumer debtor.

Some of the specific new rules are: a secured party is obliged to notify a secondary obligor when there is a default, and a secondary obligor generally cannot waive rights by becoming a secondary obligor; a secured party who repossesses goods and sells them is subject to the usual warranties that are part of any sale; junior secured creditors and lienholders must be notified when a secured party repossesses collateral; and if a secured party sells collateral at a low price to an insider buyer, the price that the goods should have obtained in a commercially reasonable sale, rather than the actual price, is the price that will be used in calculating the deficiency. The latter rule has no application in a consumer transaction.

Transition Rules

The many changes in Revised Article 9 make the transition rules complex. The proposed uniform effective date of July 1, 2001, is intended to reduce the disruptive effect of transitioning from old Article 9 to Revised Article 9 between states. There are many transition rules contained in Revised Article 9 that may or may not be applicable, depending upon the facts of each situation. One common transition problem will illustrate how a transition rule will be applied. How will a security interest perfected by filing under old Article 9 fare under Revised Article 9 once it goes into effect? The filing of an effective financing statement under old Article 9 remains effective under Revised Article 9 (including after acquired property) until the earlier of the normal lapse of the financing statement or five years after the effective date of Revised Article 9. A corollary transition rule provides that the filing of a financing statement prior to the effective date of Revised Article 9 is effective to perfect a security interest under Revised Article 9 if the description requirements are satisfied under Revised Article 9 and the filing is in the correct state as required by Revised Article 9.

Conclusion

There are many reasons to support the adoption of Revised Article 9. First and foremost, uniformity between the states in commercial transactions must be maintained. By July 1, 2001, nearly all of the states will have adopted Revised Article 9. Paper-based transactions are giving way to electronic transactions. Revised Article 9 facilitates this change. New kinds of property and transactions have been developed since Article 9 was last amended in 1972. The scope of Article 9 is increased to facilitate these new kinds of collateral. Revised Article 9 substantially improves the perfection by filing method by prescribing the debtor's location rather than the location of the collateral as the appropriate place to file. Particularly for businesses as opposed to individuals, the location of the collateral changes more often than the location of the debtor, resulting in a more reliable filing system. Statutory, nonpossessory liens, which typically have no public notice requirement, have proliferated since 1972. These liens often conflict with security interests. Revised Article 9 brings these liens into coverage for the purpose of providing public notice and setting priorities between creditors. Finally, Revised Article 9 addresses certain consumer financing issues that have never been addressed by old Article 9.