July 30, 2013
Changes To UCC Article 9
Written By: Michael J. Shavel
EFFECTIVE JULY 1, 2013
Pennsylvania Senate Bill 381 was signed into law on June 27, 2013 and became effective on July 1, 2013. This legislation amended Article 9 of the Uniform Commercial Code (“Code”). Although the changes are not dramatic, they affect secured parties’ filing, searching, and due diligence practices.
Included below is a brief summary of the most significant official amendments, plus an analysis of the possible effects of these changes on secured parties:
I. Change to Definition of Public Records (UCC § 9-102(a)(68))
Former Article 9 provided that the correct name for an entity on a financing statement is the one set forth in the “public record.” Because of uncertainty about which types of records are “public records,” the revised code instead uses the term “public organic record,” meaning a record that is available for public inspection. “Public organic records” will include records filed with, or issued by, the state to form an organization, e.g. articles of incorporation, certificate of organization, or certificate of limited partnership. These records generally are available from the Secretary of State (in Pennsylvania and Delaware) or Department of Revenue (in New Jersey).
It is still prudent to cross-check against other official entity documents, e.g. bylaws, stock certificates, tax returns, etc., but for perfection purposes, the applicable public organic record will control.
II. Clarification Relating to “Control” of Electronic Chattel Paper (UCC § 9-105)
This section previously set forth a six-factor test for whether a secured party has control of electronic chattel paper (ECP). The revision adds a general test, requiring that the system employed to evidence the transfer of ECP “reliably establish the secured party as the person to which the chattel paper was assigned.” The six- factor test has been retained as a safe harbor.
The section now allows for new technology and innovation in the market, and it should give secured parties more leeway to develop reliable systems for keeping track of and controlling ECP.
III. Change to Location of Debtor Provision (UCC § 9-307)
This section provided a means for determining a federally-organized debtor’s “location,” for filing purposes. The revision clarifies that for registered entities organized under federal law (e.g. banks), the “main office” or “home office” (terms frequently used in the federal statutes) is the organization’s “location” for purposes of filing the financing statement.
This change is important for secured transactions involving federally-chartered institutions. In other cases with borrowers who are natural persons or entities organized under state law, secured parties may continue to use the state of incorporation/organization for business entities and the state of principal residence for individuals.
IV. Continued Perfection of Security Interest (UCC § 9-316(h)-(i))
Previously, perfected security interests that attach prior to a debtor’s move to another state remained perfected for four months after the move. The revision adds a new subsection (h) that provides for continued perfection of newly-acquired security interests that attach within four months after the debtor moves, provided that the secured party has taken steps that would have perfected the security interest in the debtor’s original state. The perfection continues until the end of the four-month period. Additionally, a new subsection (i) provides for automatic perfection of security interests that attach within four months after a new debtor in another state becomes bound by an existing security agreement with the original debtor (e.g. by merger) – so long as the secured party has taken steps that would have perfected the security interest against the original debtor.
These changes are aimed at two fairly narrow situations, and should make it more likely that a secured party will continue to be perfected if a borrower moves to another state or sells to or merges with a debtor in another state. There is still only a four month window so secured creditors should be diligent and file in the new state and on the new entity as soon as possible.
V. Changes to Debtor Name Provisions (UCC § 9-503)
Section 9-503 provides a mechanism to determine when a financing statement sufficiently provides the correct name of a debtor. Small variations in the names of organizations and individuals have made it difficult for secured parties to determine the proper name to call a debtor in a financing statement. The revisions to § 9-503 provide that for registered organizations, the name of the debtor will be sufficient if it matches the name on the public organic record most recently filed in the jurisdiction of organization. See section I above.
For individual debtors, the new revisions to the Code in Pennsylvania require that the name on the financing statement conform to the name as set forth on a Pennsylvania Department of Transportation issued driver's license which has not expired under 75 Pa.C.S. § 1510(a) (relating to issuance and content of driver's license) or an identification card under 75 Pa.C.S.§ 1510(b). If (and only if) the debtor does not have an expired driver’s license or identification card, the financing statement may use the debtor’s first personal name and surname.
This is the most significant change in the Code. For filing financing statements against a registered organization, the revisions ease the challenge of determining the organization’s proper name. For individuals, the secured party should be able to rely on using the name on an unexpired driver’s license or other official state issued identification card. Clients may want to consider a procedure to use when the debtor’s driver’s license is not available. It is important to consider the legal ramifications of the perfection issues that may arise when a loan is issued to a person claiming to be a Pennsylvania resident, maintaining a home in Pennsylvania, but having a driver license issued from another state.
VI. Organizational Information on a Financing Statement (UCC § 9-516)
Section 9-516 previously stated that a financing statement may be rejected if it failed to state the debtor’s (1) type of organization, (2) jurisdiction of organization, and (3) organizational identification number. The section was intended to help searchers eliminate conflicts between similarly-named debtors. The new amendments eliminate any requirement for this information as most states prohibit organizations from having similar names to avoid confusion.
VII. UCC-5 Correction Statement
Under the prior Code a debtor was permitted file a UCC-5 Correction Statement when it wishes to comment to the public record regarding a given financing statement. The statement has always had no legal effect. The revisions rename these UCC-5 Correction Statements as “Information Statements” and will allow secured parties to file them as well.
While a secured party may consider filing Information Statements in certain clarification situations, these statements will continue to have no specific legal effect.
VIII. Changes to National UCC Forms (UCC-1 and UCC-3)
To implement these changes, the UCC-1 and UCC-3 forms have been revised. Pennsylvania will continue to accept the old UCC-1 and UCC-3 forms until August 1, 2013. Beginning on August 1, 2013, only the new forms will be accepted and the filing office will refuse to accept all other forms.
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This article provides information of general interest and is not intended, and should not be used, as a substitute for consultation with legal counsel. Any questions regarding the specific issues raised in this article should be directed to the authors or to your contacts at Hill Wallack LLP.