Corporate counsel are well aware that virtually all business financing involving the extension of credit against inventory, equipment, accounts, chattel paper, documents of title, or other forms of personal property comes within the scope of Uniform Commercial Code Article 9 ("Article 9"), as do sales of accounts and chattel paper. The current version of Article 9 was approved, after nearly a decade of study and preparation, by the National Conference of Commissioners on Uniform States Law (now referred to as the Uniform Law Commissioners or "ULC") in July 1998. Subsequently, all 50 states and the District of Columbia enacted some form of this version of Article 9 and, with the exception of four states, the effective date for the application of the current version of Article 9 was July 1, 2001. In 2008 the ULC and the American Law Institute formed an Article 9 Review Committee (the "Review Committee") to review the operation of the revisions to Article 9 that went into effect in 2001. In 2010 a small number of amendments to Article 9 (the "2010 Amendments") were approved and became effective July 1, 2013, which was the uniform effective date specified in the 2010 Amendments.
Most of the changes made in the 2010 Amendments dealt with perfection issues and, in general, were relatively unremarkable; however, the Review Committee noted that it spent a significant amount of its time and attention focusing on the statutory requirement for providing the name of an individual debtor on a financing statement. UCC section 9-503(a) as written prior to the 2010 Amendments provided that a financing statement was sufficient with respect to an individual debtor's name if it simply "provides the individual . . . name of the debtor." The Review Committee noted that these provisions were extremely difficult to apply and that courts had often invalidated UCC financing statements on the basis that the secured party failed to correctly identify the individual's name using standards that made it extremely difficult for secured parties to predict if and when one of their filings might be deemed seriously misleading and thus insufficient. The Review Committee realized that it should make an effort to clarify UCC section 9-503(a); however, members of the Review Committee found this to be the most contentious and perhaps the most difficult issue that it had attempted to address and recognizing the diversity of views within the Review Committee it recommended that states be given two alternatives, "A" or "B", to choose from.[1]
Under Alternative A, the name of an individual debtor which is sufficient for a financing statement is the name that appears on the most recent unexpired driver's license issued to the debtor by the state in which the debtor maintains the principal residence. Interestingly, application of this rule means that where a debtor has a valid driver's license but the spelling of the debtor's name on the license is incorrect, the UCC financing statement must be the same as the incorrect spelling on the license. This Alternative is referred to as the "Only if" option since a financing statement against a debtor with an unexpired driver's license issued by the state is effective "only if" the name on the driver's license is used on the financing statement. The debtor's name requirement for a debtor who does not hold an unexpired driver's license issued by the state of principal residence can be met in either of two ways: (1) a financing statement would be sufficient if it provides the "individual name of the debtor" or (2) the financing statement would be sufficient if it provides the debtor's surname and first personal name.
Under Alternative B, referred to by the Review Committee as the "Safe Harbor Approach", there are three ways in which a financing statement may sufficiently provide the name of an individual who is a debtor: (1) the individual name of the debtor; (2) the debtor's surname and first personal name; or (3) if the individual holds a current driver's license issued by the state of principal residence, the name on the driver's license. In addition, the Safe Harbor Approach provides that debtor names that were sufficient under the law prior to the enactment of the 2010 Amendment would still be sufficient afterwards.
While Alternative B clearly provides secured parties with more flexibility than Alternative A, liens searches in Alternative B jurisdictions would need to be broadened beyond the driver's license names to include all of the three ways that a financing statement could sufficiently provide the name of an individual in those jurisdictions. Early indications, based on those jurisdictions that have enacted the 2010 Amendments, are that Alternative A will be the most commonly elected option. Corporate counsel needs to be aware of how states are implementing this provision of the 2010 Amendments as they assist internal clients in preparing and filing financing statements. In addition, while the transition provisions in the 2010 Amendments allow secured parties to review pre-July 1, 2013 financing statements for accuracy as they come up for renewal, corporate counsel should be sure that the filing of each continuation statement going forward is accompanied by review of the identifying information for the debtor in light of the 2010 Amendments.
For further information on the 2010 Amendments, see the website maintained by the American Bar Association which tracks enactment status of the 2010 Amendments by jurisdiction and the choices made in each jurisdiction with respect to election of Alternative A or B in connection with the revisions to UCC section 9-503(a).[2] For further discussion of UCC Article 9 and a library of forms and checklists for handling secured transactions, see Gutterman, Business Transactions Solutions, Secured Transactions (sectionsection 61:1 et seq.).
End Notes
[1] UCC section 9-503(a)(4) and (5).
[2] A useful summary of the 2010 amendments to Article 9 appears in R. Hakes and S. Sepinuck, "The Uniform Commercial Code Survey: Introduction", The Business Lawyer, 65 (August 2010), 1205.
Alan S. Gutterman is the founder and principal of Gutterman Law & Business (http://www.alangutterman.com), a leading provider of timely and practical legal and business information for attorneys, other professionals and executives in the form of books, online content, newsletters, programs, training and consulting services. Mr. Gutterman has three decades of experience as a partner and senior counsel with internationally recognized law firms counseling small and large business enterprises in the areas of general corporate and securities matters, venture capital, mergers and acquisitions, international law and transactions, strategic business alliances, technology transfers and intellectual property, and has also held senior management positions with several technology-based businesses including service as the chief legal officer of a leading international distributor of IT products headquartered in Silicon Valley and as the chief operating officer of an emerging broadband media company. All editions of the Business Counselor Advisor are compiled into Business Counselor Update, which is released monthly and available along with other publications by Mr. Gutterman on the Thomson Reuters Legal Solutions site and through Westlaw Next at Business Counselor. Mr. Gutterman can be reached at agutterman@alangutterman.com.