By Cale Battles, Government Relations Coordinator, State Bar of Wisconsin

June 23, 2010 – Shortly before the Wisconsin State Legislature adjourned its session in May, they made a number of changes to three articles of Wisconsin’s Uniform Commercial Code.  Three of the changes were recommended by the National Uniform Law Commission (ULC), a non-governmental body created over a century ago to promote the “uniformity of state law.”

The Uniform Commercial Code (UCC) was first published in 1952 with an aim to help uniformly govern commercial transactions in all 50 states.  The UCC is considered one of the most important uniform acts that the ULC has developed.

Changes to Article 1

2009 Wisconsin Act 320 made a number of definition changes in UCC Article 1.   The legislation was authored by Senator Fred Risser and Represenative David Cullen, who are both members of Wisconsin’s ULC delegation. UCC Article 1 generally acts as an “umbrella” in that it provides definitions and general principles that are applied throughout the other UCC articles.  The Business Law Section of the State Bar has a specific committee that reviews all the law changes involving the articles of the UCC.  After reviewing the proposed legislation, the section requested an amendment that would retain the existing definition of “good faith”.

The proposed revised Article 1 would have changed the definition of good faith from the narrow “honesty in fact” standard, to a broader standard that includes both honesty in fact and the observance of reasonable commercial standards of fair dealing.  The changed definition would create a new standard for determining good faith under Article 1 that is no longer only subjective, but rather would require decision-makers to use both a subjective and an objective standard.    A total of 35 other states have adopted the revised Article 1, and 23 of them adopted the new definition of good faith Wisconsin now joins the 12 other states that have adopted other revisions to Article 1 but have retained the original definition of good faith.

Repeal of Article 6

The repeal of Article 6 was recommended in 1989 by the National Conference of Commissioners on Uniform State Laws and the American Law Institute; that recommendation was also supported at the national level by the American Bar Association.  Wisconsin became the 47th  jurisdiction to repeal Article 6 when 2009 Wisconsin Act 110 became law.  Senator Risser and Representative Cullen also authored this legislation.

The bulk transfer provision, Article 6 of the Uniform Commercial Code, states that notice must be given to creditors if a seller will be making a large sale of inventory (i.e., a bulk transfer).  Decades ago the provision was originally enacted to catch the "fly by night" merchant who, usually in collusion with a buyer, would sell off large parts of inventory.  Both would then disappear with the profits into the darkness of the night, leaving creditors unpaid.  At that time, the provision was needed to provide a level of protection against such acts by unscrupulous merchants.  In today’s economy it is not possible for either a bulk transferor or transferee to disappear across state lines to avoid creditors’ actions.

The Business Law Section supported the legislation because the notice provision was no longer necessary in light of other protections against loss and fraud available to suppliers of inventory that are available under today's laws.  These include:

• Cheap and readily available credit reports. 
• Security interest laws; a supplier can, for example, take a UCC Purchase Money Security Interest in all inventory supplied.
• The Uniform Fraudulent Transfer Act (Chapter 242 Wis. Stats.), which gives much greater protection against sales of inventory at less than fair value.  This is the real, legitimate protection against transfers that are unfair to creditors, and it provides better remedies, without jeopardizing the legitimate transaction.
• Insolvency laws, which have within them avoidable transfer provisions for recovering assets which may have been wrongfully transferred, for the benefit of all creditors.  Involuntary insolvency proceedings are available to creditors who believe they have been wronged.

Changes to Article 7

The Business Law Section also supported 2009 Wisconsin Act 322which made changes to UCC Article 7 (“Documents of Title”).  These changes were made to maintain uniformity with the other adopting jurisdictions and to modernize the act with current business practices.  Article 7 had not been revised since its original promulgation in 1951; a principle reason for revising it is to accommodate electronic documents of title.

More Changes to Come

The Uniform Law Commission has recently established a drafting committee to make specific revisions to UCC Article 9 that address ambiguities in the current law.  The drafting committee presented the first draft at the July 2009 annual meeting and will present the act for a final approval by the ULC in July 2010. Any changes to Wisconsin law would have to be adopted during the next session of the Wisconsin Legislature when it convenes next year.

For more information please contact  Cale Battles at (800) 444-9404, ext. 6077 or (608) 250-6077.

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