FYI

News Briefs

New statute requires perfection of security
interests by secured parties

By Anthony C. Marino

The statute sets forth rules for creating and perfecting security interests in the new "investment property" class of collateral. While the old article 8 assumed that most securities would be uncertificated (not physically represented by a certificate), the new statute reflects the reality that most securities are certificated and held by a securities intermediary for the actual owner. Thus, the most significant sections clarify how secured parties obtain and perfect security interests in securities accounts and mutual funds.

Investment property

Investment property is comprised of equity interests and debt obligations that people directly own ("securities," for example, stocks and bonds); securities that people indirectly own ("securities entitlements" and "securities accounts," for example, stocks and bonds held in brokerage accounts); and commodity options and futures ("commodity contracts" and "commodity accounts").¹ Partnership interests and limited liability company membership interests are included only if 1) they are traded on an exchange or in a securities market (not a requirement for corporation shares, which are always securities); 2) the terms of the interest expressly provide that it is a security under article 8; or 3) the interest was issued by an investment company.²

Creating and perfecting a security interest in investment property

The general rule under article 9 - that the debtor must sign a written agreement granting a security interest in the collateral in order to create a security interest - also applies to investment property.³ No written fee agreement is needed if 1) the secured creditor has possession of certificated securities;⁴ and 2) the secured party has control of the investment.⁵

Secured parties may perfect their security interests in investment property by gaining control of the investment property or by filing a financing statement.⁶ In general, a secured party obtains control by taking actions to be able to sell the investment property without further action by the debtor.⁷

A secured party has control over a certificated security if the party (or its bailee) possesses the certificate and any necessary endorsements.⁸ A secured party has control over an uncertificated security if the issuer either 1) lists on its books the secured party as the security's registered owner, or 2) agrees that it will comply with the secured party's instructions without any further consent from the registered owner.⁹

Similarly, a secured party has control over a securities entitlement or securities account if 1) the entitlement or account is in the secured party's name, or 2) the securities intermediary agrees to comply with the secured party's instructions without any further consent from the entitlement or account owner.¹⁰ This second way to obtain control typically is accomplished through a "control agreement" among the securities intermediary, the debtor, and the secured party. Securities intermediaries are not obligated to enter into control agreements, however.¹¹

Finally, securities intermediaries have automatic control over securities entitlements and accounts in which they have a security interest.¹² Essentially, this codifies the broker's lien.

Priorities among competing perfected security interests in investment property

Four basic priority rules govern competing perfected security interests in the same investment property: 1) A secured party with control always beats a secured party without control.¹³ 2) Conflicting security interests of secured parties, each of whom has "control," rank equally.¹⁴ 3) This rule of equality will not usually apply to securities intermediaries - their perfected security interests in a debtor's securities entitlement or securities account that they hold trump all other security interests.¹⁵ 4) Conflicting security interests of secured parties who perfected only by filing a financing statement rank according to who filed first.¹⁶

The retroactive effect of revised article 8

Under revised UCC article 8, secured parties have until Oct. 31, 1998, to make existing security interests in investment property comply with the new rules or they will become unperfected.¹⁷ Under many circumstances, no action by the secured party is necessary. For example, under both the old and new rules, possession of a certificated security and the necessary endorsements perfects the secured party.

Perhaps the situation that will require the most attention is pledges of partnership and LLC membership interests. If such interests do not meet the requirements outlined to qualify as securities, they are general intangibles which can only be perfected by filing a financing statement.¹⁸ Thus, a secured party must act if he or she and the debtor have not executed a security agreement or the secured party has not filed a financing statement.

Anthony C. Marino, Texas 1997, is an associate in the banking department at Reinhart, Boerner, Van Deuren, Norris & Rieselbach S.C., Milwaukee.

Proposed supreme court rule would
keep juror's identities secret

According to the proposed rule, a juror would be identified by number, and personal information such as name, address, workplace, spouse, and children's names could not be elicited on juror questionnaires or during voir dire. Exceptions would be granted if, upon petition and a showing of good cause, such information was required for a fair and impartial jury trial. In that case, the juror would provide the necessary information in a private environment.

Following a verdict, a party may petition the court for access to a juror's personal information "for the purpose of developing a motion for a new trial or any other lawful purpose." The petition must establish a compelling argument that the information was necessary. If the petitioning party is granted access to the information, the party may not disclose it to any other person or entity.

The RMC states in its petition that the Wisconsin Supreme Court has an obligation to protect a citizen/juror's right to privacy. The proposed rule would "create a sense of security, encourage jury service, decrease juror fear, increase juror honesty, and insulate jury deliberations from the corrupting influence of fear," according to the RMC's petition.

In a recent Milwaukee Journal Sentinel article, Director of State Courts J. Denis Moran commented, "Our job is to protect the legitimate privacy rights of people who come on a voluntary basis and make the court system work." The article quoted several former jurors saying that they felt uncomfortable giving out information that could wind up in the hands of those they helped convict.

The proposed rule has met some opposition by Wisconsin's legal community; many State Bar members believe it is a solution to a problem that does not exist. Milwaukee attorney and State Bar Board of Governors member Thomas L. Shriner understands that there may be a need to deal with possible threats and dangers to jurors by preventing those who might threaten them from getting jurors' personal information. "However, the proposed rule would reverse the presumption and make a party who wants to know who the jurors are in his or her case carry the burden of showing cause."

"The trial judge already has inherent authority to adopt specialized jury procedures in the rare case where juror protection is warranted," says fellow board member James M. Brennan of the Legal Aid Society of Milwaukee Inc. "Quite simply, the proposed rule depersonalizes my approach to jury selection and undercuts my effectiveness at trial," Brennan continues.

Shriner points out, "The juror could be your opponent's next-door neighbor or work for your client's chief competitor, and you would not be aware of these facts."

Brennan also believes that, however unintentional, the RMC's proposal may set back the movement toward gender and race neutrality in the jury selection practice. "A voir dire examination without an inquiry into prospective jurors as persons leaves race and gender as salient features in the selection process. It deprives the trial attorney of significant, nondiscriminatory information with which to exercise and justify challenges and strikes."

The State Bar's Litigation and Criminal Law sections oppose the change, with the Criminal Law Section citing potential constitutional problems regarding the right to a fair trial, the lack of need for the measure, and an overly broad definition of "identifying information" as reasons. The Milwaukee Bar Association also has stated its opposition. The State Bar Board of Governors is expected to formally oppose the proposal at its Nov. 13 meeting. A public hearing on the RMC's petition is scheduled for Nov. 17 at the Wisconsin Supreme Court. [Proposed] SCR 73.04 was published on page 30 of October's Wisconsin Lawyer.

Endnotes

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¹ Wis. Stat. § 409.115.

² Wis. Stat. § 408.103(3).

³ Wis. Stat. § 409.203(1).

⁴ Wis. Stat. § 409.115 (6).

⁵ Wis. Stat. § 409.203(1)(a).

⁶ Wis. Stat. § 409.115(4).

⁷ Official Comment No. 1 to Wis. Stat. § 408.106.

⁸ Wis. Stat. § 408.106(a)-(b).

⁹ Wis. Stat. § 408.106(c).

¹⁰ Wis. Stat. § 408.106(d).

¹¹ Official Comment No. 4 to Wis. Stat. § 409.115.

¹² Wis Stat. § 408.106(e).

¹³ Wis. Stat. § 409.115(5)(a).

¹⁴ Wis. Stat. § 409.115(5)(b).

¹⁵ Wis. Stat. § 409.115(5)(c).

¹⁶ Wis. Stat. § 409.115(5)(f).

¹⁷ Wis. Stat. § 408.603(1).

¹⁸ Wis. Stat. § 409.302.