On July 1, 2013, a series of revisions to Article 9 (Secured Transactions) of the Uniform Commercial Code (UCC) will take effect throughout the country. The last time Article 9 of the UCC was amended was in 2001. Although these revisions are not as drastic as the revisions which went into effect more than a decade ago, it is critical to pay attention to even the smallest details. Failure to do so could cost a secured lender its perfection and priority over other creditors, or even its rights to the collateral itself. While there are many changes in the 2013 revisions, ranging from drastically important to grammatical, the following changes are the three most important for a secured lender to know.
1. Article 9 goes “organic”: UCC § 9-102
In order to perfect a security interest, the interest must be attached to the collateral and a financing statement must be filed at the appropriate location. While the requirements for the content of a financing statement are not arduous or especially complicated, the consequences of a mistake can be drastic. One of the most important factors is that the financing statement properly identifies the debtor. When the debtor is a corporation, it is vital that the financing statement properly identify the corporation and not confuse it with another entity.
In the previous version of Article 9, secured lenders were instructed to use the name of the debtor that appears on the “public record.”1 Such documents include the articles of incorporation, bylaws filed with the secretary of state or any other documents that a corporation had to file on the public record. The availability of so many options may lead to problems. The debtor may use different names, either unintentionally or nefariously, on different documents, leading to the type of confusion which must be avoided in financing statements. In order to solve this problem, the 2013 revisions instruct a secured lender to use the name on the “public organic record.” The public organic record is the record that created the entity. Thus, the only names that should be used are names listed on the articles of incorporation, limited liability organizational documents, partnership agreements, or other originating documents.
2. UCC makes it easier to control electronic chattel paper: UCC §9-105
The control of electronic chattel paper (ECP) is a difficult concept to legislate. How can one truly “control” an electronic document? Since 2001, Article 9 has attempted to answer this question with a six factor test.2 The test focused on making sure the electronic document was unique, secure and that any amendments were made in a way to keep the document in the firm control of the secured lender. However, the last decade has shown innovation, especially in the data management field, needs to be allowed to grow organically. In order to create more flexibility, the drafters have added a general test. A secured party has control of electronic chattel paper if a system employed for evidencing the transfer of interests in the chattel paper reliably establishes the secured party as the person to which the chattel paper was assigned. A system satisfies this requirement if the records meet the same six factor test. The practical effect of this amendment is to provide secured parties more leeway in creating systems of control.
3. Article 9 offers secured lenders two new protections after a debtor moves out-of-state: UCC § 9-316
When a person moves to a new state and takes property that was subject to a security interest with them, the secured lender only has four months to re-file a financing statement in order to ensure its priority is maintained.3 The drafters of Article 9 have added two new protections for secured lenders to help ensure their priorities will be maintained.
First, a new subsection provides for continued perfection of newly acquired security interests that attach within four months after the debtor moves, so long as the secured party has taken steps that would have perfected the security interest in the debtor’s original state.4 This particular provision is useful for secured lenders whose interests do not attach unless a condition subsequent occurs. In such a case, the lender can file a security interest as if the debtor had not moved. The lender then has four months to ascertain where the debtor is currently located and re-file a security interest in the proper jurisdiction without losing its priority.
Second, a security interest is now automatically perfected when it attaches within four months after a new debtor in another state becomes bound by an existing security agreement with the original debtor.5 This situation will most likely occur when two entities, in different states, merge. Thus, just like the first protection, when a secured lender has a security interest attach because of a condition subsequent, the secured creditor can file as if nothing has changed, and then has four months to analyze where the financing statement should be re-filed.
The devil is always in the details with Article 9 and the UCC as a whole. Secured lenders must have a team of professionals who they can trust to understand how all the intricacies of Article 9 operate. McDonald Hopkins LLC has a long history of providing advice and efficient solutions to Article 9 and UCC problems.
For more information, please contact:
Scott N. Opincar216.348.5753
T. Daniel Reynolds
The twists and turns of business restructuring are complex and demanding. Our attorneys approach every case with creativity and insight to ensure the solutions are cost-effective and practical. At every turn, you can be confident that our attorneys will guide you through the process, always providing practical and informed advice. We are positioned to respond to the special demands of a variety of matters in a wide range of industries, including health care, automotive, retail/distribution, real estate/construction, telecommunications, and mining/exploration.