The National Conference of Commissioners on Uniform State Laws has approved revisions to Article 9 of the Uniform Commercial Code. Article 9 governs most types of secured transactions. Revised Article 9, including conforming amendments to other Articles of the UCC, is expected to be submitted to the state legislatures this year. To achieve uniform applicability in the 50 states and the District of Columbia -- and avoid the legal nightmare associated with the piecemeal enactment of the recent revisions to Article 8 -- revised Article 9 has an effective date of July 1, 2001.
One major objective of revised Article 9 is to simplify the law applicable to securitizations and provide greater legal certainty for these transactions. Revised Article 9 more generally will modernize, clarify and expand the scope of current Article 9.
This article reviews the expanded scope of revised Article 9, discusses certain improvements to choice-of-law rules and outlines steps that secured creditors and their counsel should consider taking now to prepare for its enactment.
Expanded Scope
Revised Article 9 will apply to a significantly broader range of assets and will include flexible means for perfecting security interests in those assets.
First, sales of payment intangibles, which will be a subset of general intangibles arising where the debtor's principal obligation is to pay money, will be covered. This change will clarify the treatment under commercial law of sales of certain intangible assets, such as loan participations, whose status under current law is unclear.
Sales of payment intangibles will be automatically perfected; neither the seller nor the purchaser will be required to make a public filing or take other action in order to protect the purchaser vis-`-vis creditors of, and subsequent transferees from, the seller.
In a related change, the definition of accounts will be expanded to include, among other things, (i) energy provided or to be provided, (ii) lottery winnings, (iii) credit and charge card receivables and (iv) health care insurance receivables. Sales of, and security interests in, accounts will continue to be perfected by filing a financing statement.
Security interests in deposit accounts as original collateral will also be within the scope of revised Article 9. By contrast, except for a few states that have enacted non-uniform changes to their versions of the UCC, current Article 9 governs deposit accounts only as proceeds of other collateral.
Revised Article 9 will provide for perfection of security interests in deposit accounts by "control," which will be obtainable in three ways. First, if the creditor is the bank where the account is maintained, it will automatically have control. Second, a creditor will have control if it enters into an agreement with the depositary bank, with the consent of the debtor, under which the bank agrees to comply with the creditor's instructions regarding the disposition of funds held in the account without further consent of the debtor. Finally, a creditor will obtain control if it becomes the bank's "customer" on the account.
In circumstances where the creditor is not also the depositary bank, becoming the bank's customer will usually be the preferred method of obtaining control, because obtaining control through the type of agreement described in the preceding paragraph will render the creditor's security interest subordinate to the depositary bank's right of set-off.
In addition, revised Article 9 will introduce the concept of electronic chattel paper -- chattel paper in the form of records consisting of information stored in an electronic medium. A security interest in electronic chattel paper will be perfected by filing a financing statement or by obtaining control, although a security interest perfected by control will have priority over a competing security interest perfected by filing.
Control over electronic chattel paper will require (i) the existence of an "authoritative copy" of the chattel paper that identifies the secured party as assignee, (ii) maintenance of that copy by the secured party or its designee and (iii) the implementation of methods that make it impossible to add or change an identified assignee without the consent of the secured party. Revised Article 9 does not specify the means of achieving the latter condition, but leaves matters for technical and commercial development.
Finally, in a very significant development for secured creditors, Revised Article 9 will cover (i) supporting obligations -- guaranties, letters of credit and similar obligations that support the payment of collateral such as accounts or payment intangibles and (ii) any property (including real property) that secures a payment or performance obligation that is subject to a security interest, such as a mortgage securing a promissory note that has been pledged as collateral. A security interest in these assets will be automatically perfected when a security interest is perfected in the supported obligation or the secured payment obligation, as applicable.
Choice-of-Law Rules Regarding Perfection by Filing
Revised Article 9 will simplify choice-of-law rules regarding security interests perfected through filing financing statements. Under current Article 9, the perfection of security interests in goods (except "mobile" goods) is accomplished through filing in the jurisdiction where the goods are located, while perfection in intangible collateral such as accounts and general intangibles is accomplished through filing in the jurisdiction where the debtor is located. Revised Article 9 will unify these rules by providing, in nearly all cases, for filing in the jurisdiction where the debtor is located.
Revised Article 9 will also introduce a less burdensome rule for determining the "location" of most types of debtor. Under current Article 9, a debtor other than a natural person is deemed located at its "place of business," if it has only one, or at its "chief executive office," if it has more than one. In a corporate world characterized by large multinationals and frequent mergers and restructurings, determining which office is the "chief executive office" can be nearly impossible -- and an incorrect judgment in this regard can render a creditor's security interest worthless.
In contrast, under revised Article 9, the "location" of a corporation, LLC or limited partnership will be its jurisdiction of organization, thereby substituting an objective, readily determinable standard for one that is subjective and elusive.
Transitional Issues
Because many current secured transactions will still be outstanding when revised Article 9 takes effect, creditors should consider now what steps are advisable to preserve the uninterrupted perfection and priority of their security interests. Fortunately, revised Article 9 will include several safe harbors. Under the generally applicable safe harbor, perfected security interests will remain perfected for one year after the enactment of revised Article 9, even if the new statute requires different or additional action for perfection.
Additionally, security interests already perfected by filing in the correct jurisdiction under current Article 9 will remain perfected until the earlier of their expiration pursuant to current Article 9 or the fifth anniversary of the effective date of revised Article 9, even if revised Article 9 mandates a different filing jurisdiction.
Nevertheless, if the appropriate filing jurisdiction has changed under revised Article 9, the continuation of filings that have expired under the rules of current Article 9 will not be achieved by filing a continuation statement in the jurisdiction in which the original filing was made. Instead, perfection in such cases will be maintained only by filing an original financing statement in the appropriate jurisdiction under revised Article 9.
Accordingly, secured creditors must ensure that their "tickler" systems for UCC filings are programmed to take into account the jurisdiction of the debtor's organization, as well as its chief executive office. Moreover, both for current transactions and transactions that will settle before July 1, 2001, a creditor whose debtor's jurisdiction of organization differs from the location of its chief executive office would be prudent to file in both jurisdictions. *