The New York Legislature unanimously passed Assembly Bill 9933 in late June. Once signed by the governor, this legislation will bring about a much-needed modernization of Articles 1, 7, and 9 of the New York Uniform Commercial Code, bringing New York up to date with comparable revisions enacted in other states.1
Historically, New York has been a leading state for commercial law and this status has generated substantial economic activity and employment in the state. Section 5-1401 of the General Obligations Law evidences a legislative desire to permit parties who may be located outside of the state to select New York law to govern their transactions. New York will soon join its sister states in modernizing its commercial law. When the bill is signed, New York will be the 47th state to enact Revised Articles 1 and 7 of the UCC, and the 49th state to enact the 2010 Amendments to Article 9 of the UCC.2 New York remains the only state that has not enacted Revised Articles 3 and 4 of the UCC.3 Without detailing every nuance, this article will summarize the bill and its principal changes to existing law.
Article 1 Revisions
Article 1 applies to every transaction governed by the UCC, including sales and leases of goods, various aspects of checks or other negotiable instrument, commercial electronic funds transfer, letters of credit, warehouse receipts and bills of lading, investment securities, and security interests in almost all personal property. These are the transactions governed by specific articles of the UCC and encompass a large portion of the commercial activity in the American economy. The rules and definitions of Article 1 apply across these specific articles, binding these various articles together into one code.
The bill’s revisions to Article 1 contain many changes of a technical, non-substantive nature, such as reordering and renumbering sections and adding gender-neutral terminology. In addition, the bill contains several changes to add greater clarity to its provisions of Article 1 that have been identified as confusing or imprecise. Finally, the bill contains certain substantive changes where developments in the law have led to the conclusion that such change was needed, such as: (1) revised section 1-102 clarifies the scope of Article 1 by expressly stating that the substantive rules of Article 1 apply only to transactions within the scope of other articles of the UCC; (2) revised section 1-103 clarifies the application of supplemental principles of law with clearer distinctions as to when the UCC is preemptive; and (3) under revised Article 1, evidence of “course of performance” may be used along with course of dealing and usage of trade to interpret a contract.4 The bill also includes non-uniform provisions intended to prevent choice of law clauses from being used to deprive New York consumers of the benefit of New York consumer protection law,5 and preserving New York law on accord and satisfaction.6
Article 7 Revisions
Article 7 governs “documents of title”—items such as bills of lading and warehouse receipts that control the right to the goods described therein during commercial storage and shipment. When goods are imported, they are frequently paid for by means of a letter of credit (governed by Article 5 of the Uniform Commercial Code) calling for payment against specific documents of title, as described in Article 7. Similarly, documents of title can be important collateral for secured loans and other transactions governed by Article 9 of the Uniform Commercial Code. Thus, although documents of title may appear to be obscure instruments, they are in fact utilized on a daily basis by New York businesses and residents importing goods into the state.
New York’s current Article 7 does not contemplate electronic documents of title, and therefore does not address the transfer or financing of goods covered by electronic documents. The bill’s provisions in Article 7 recognize electronic documents of title, and establish rules for the transfer of rights embodied therein from one person to another.7 Control of an electronic document of title (based on similar rules applicable to control of electronic chattel paper in Article 9 of the Uniform Commercial Code) is the equivalent of possession and endorsement of a tangible document of title.8
The bill permits the conversion of electronic documents to tangible documents and vice versa.9 In addition, the bill modifies statute of frauds requirements to include electronic records and signatures by creating new definitions of “record” and “sign.”10 The new definitions recognize information stored in electronic format and electronic symbols, respectively, as the term “writing” is replaced with the term “record” wherever used in the Article.
The revisions to Article 7 contained in the bill are consistent with the increasing recognition of electronic documents and instruments as equal in status to their paper counterparts under both New York and federal law.
Article 9 Amendments
Article 9 governs security interests in personal property. The Article was substantially revised and enacted in New York in 2001. The bill contains targeted amendments to Article 9 relating to the rules for the system for filing and searching financing statements and other discrete changes.
• Name to Be Provided on a Financing Statement When the Debtor Is an Individual. The most important change effected by the bill is that it establishes the name to use when filing a UCC financing statement against a debtor who is an individual.11 Currently, no law establishes the “legal name” of an individual. Many official documents—birth certificate, passport, and driver’s license—issued to the same person frequently contain different names, or variations of names. None of these may correspond to the name actually used by that person for business transactions. Foreign naming conventions further complicate matters, as the person’s family name, rather than the given name, may appear first. Yet it is the responsibility of the secured party making a UCC financing statement filing to establish the correct legal name of the individual, at the risk of making a filing that is legally ineffective.
To provide greater guidance, the bill provides that the name for an individual debtor is sufficient as the debtor’s name on the financing statement if the debtor’s name is the name shown on the debtor’s most recent unexpired driver’s license, (or non-driver photo identification card that has not expired if the debtor does not hold an unexpired driver’s license) issued by the state whose law governs perfection under Article 9′s conflict of laws rules. If the individual does not have such driver’s license or non-driver photo identification card, the bill provides that the financing statement must include the individual name of the debtor or the surname and first personal name of the debtor.12
For cooperative loan transactions, the debtor name rules contained in the bill may be counterintuitive, but can provide greater clarity. Unlike other types of collateral, the cooperative’s stock certificate and proprietary lease are issued with a specific name which may not match the debtor name on the driver’s license. In addition, a cooperative loan financing statement can last up to 50 years if accompanied by a cooperative addendum.
As time goes by, the possibility of a debtor changing his driver’s license name increases. If the debtor’s name has changed, it may be difficult for a searcher to discover the debtor’s name for filing purposes at the time the original filing was made. The searcher would, however, be able to discover the debtor name on the stock and lease. Therefore, although not required for perfection, in addition to filing the financing statement with the debtor’s driver’s license name, lenders should consider whether to also file using the name on the stock and lease as an additional debtor name on the financing statement. In no event, however, should a financing statement be filed solely in the name of the debtor on the stock and lease in lieu of the debtor’s driver’s license name, if different. Lenders should also use an affidavit specifically designed to establish the debtor name for UCC filing purposes.
The bill does not change the current version of the statute requiring certain information necessary for inclusion on financing statements (such as listing the debtor’s entity type) or delegating approval of financing statement forms to the secretary of state. Thus, the uniform UCC financing statement form that is accepted in all other states that have adopted the 2010 Amendments to Article 9 will not be appropriate for filings in New York, even after the bill is signed.13
• Definition of ‘Registered Organization.’ The bill modifies the definition of “registered organization” to reflect that an organization is a registered organization if it is formed or organized solely under the law of a single state by the filing of a public record with the state rather than, as under current law, by the state merely being required to maintain a public record showing that the organization has been organized.14 This change will more accurately reflect that a registered organization includes an organization whose “birth certificate” emanates from the act of making a public filing.
Furthermore, the bill expands the definition of “registered organization” to include a common law trust that is formed for a business or commercial purpose and is required by a state’s business trust statute to file with the state an organic record, such as the trust agreement for a common law trust. This change will mean that a Massachusetts business trust, for example, will be considered to be a registered organization rather than, as would appear to be the case under current law, an organization that is not a registered organization.
• Name of Registered Organization. The bill clarifies that, for a financing statement to be sufficient, the name of the registered organization debtor to be provided on the financing statement is the name reflected on the “public organic record” of the registered organization (rather than any electronic database maintained by the state, if different).15 In most cases, a registered organization’s “public organic record” is the publicly available record filed with the state to form or organize the registered organization.
• Name of Debtor When Collateral Is Held in Trust and When Collateral Is Administered by a Personal Representative. The bill provides certain changes for the name of the debtor when the collateral is held in a trust that is not a registered organization.16 The bill also more accurately refers to collateral that is being administered by a personal representative of a deceased debtor.17
• Debtor’s Change of Location. Under current law, if a debtor changes its location to a new jurisdiction, a secured party whose security interest was perfected by filing in the original jurisdiction has a period of up to four months to continue the perfection of its security interest by filing a financing statement in, or otherwise perfecting the security interest under the law of, the new jurisdiction.18 The four-month grace period applies, however, only to collateral in which the secured party’s security interest was perfected at the time of the change of location. Of course, a security interest in property acquired by the debtor after the time of the change of location will not be perfected at the time of the change because the security interest in the after-acquired property will not attach until the property is acquired by the debtor and the debtor then has rights in the collateral. There is no grace period under current law for perfection of any security interest that may attach to the debtor’s property that is acquired after a change in the debtor’s location.
The bill adds a grace period for the after-acquired property.19 It does so by providing that the financing statement filed in the original jurisdiction is effective with respect to collateral acquired within the four months after the debtor’s location changes. The secured party can continue perfection beyond the four-month period by filing a financing statement or otherwise perfecting under the law of the new jurisdiction. The bill will provide greater protection for a secured party with a security interest in after-acquired property of its debtor if the debtor changes its location.
• New Debtor. The bill provides similar protection for a security interest in after-acquired property if a new debtor becomes bound by the original debtor’s security agreement and the new debtor is located in a different jurisdiction from the jurisdiction in which the original debtor was located. For example, if Old Debtor located in State A merges into New Debtor located in State B, under current law there is a grace period of up to one year for the secured party of Old Debtor to file a financing statement against New Debtor in State B to continue the effectiveness of the financing statement that the secured party filed in State A against Old Debtor.
But the grace period applies only to a security interest that was perfected by filing in State A at the time of the merger. There is no grace period for perfection of any security interest that may attach to post-merger after-acquired property. Using an approach similar to that taken with respect to property acquired by a debtor after it relocates, the bill provides for a grace period of up to four months in the case of such an interstate merger.20
As under current law, a security interest in post-merger after-acquired property that is perfected solely by the financing statement filed by the secured party against Old Debtor in State A will be subordinate to a security interest of a competing secured party perfected by the filing of a financing statement against New Debtor in State B.21 This result for an interstate merger is consistent with the treatment of after-acquired property of a new debtor in the case of an intrastate merger.
Changes Unrelated to Filing
The bill contains some changes that are less connected to the filing rules in Part 5 of Article 9.
• The bill modifies the definition of the term “authenticate” to conform to the definitions of “sign” in the revisions contained in the bill to Article 1 and Article 7.22
• The bill modifies the definition of “certificate of title” to take into account state certificate of title systems that permit or require electronic records as an alternative to the issuance of certificates of title.23
• The bill clarifies that a registered organization organized under federal law, such as a national bank, that, by authorization under federal law, designates its main or home office as its location is located in the state of that office for purposes of Article 9.24
• The bill expands the list of collateral that a licensee or buyer takes free of a security interest if the licensee or buyer gives value without knowledge of the security interests and before it is perfected.25
• The bill confirms that a secured party’s authorization to record an assignment of a mortgage securing a promissory note assigned to the secured party, in order for that secured party to conduct a non-judicial foreclosure sale of the mortgaged real property, applies when there is a default by the mortgagor. The language in current law could arguably have been read to refer to a default by the assignor of the promissory note rather than by the mortgagor.26
• The bill contains non-uniform provisions largely modeled on non-uniform provisions of the Delaware UCC that are intended to clarify when a secured party has “control” over deposit accounts, and, through companion amendments to Article 8 of the Uniform Commercial Code, securities accounts and uncertificated securities.27
Another provision in the bill is a revision of current Article 8-103 to clarify that promissory notes, for which the issuer or maker (or a person on its behalf) does not in fact maintain records for the registration and transfer of such promissory notes, do not constitute certificated securities in registered form. This is so even if such person could maintain such records.28 Accordingly, most promissory notes will be instruments governed by Article 3 of the Uniform Commercial Code (if negotiable) and not securities governed by Article 8. This will ensure that commercial law rules applicable to promissory notes will not suddenly shift from Article 3 and the common law to Article 8. The statutory change included in this provision of the bill is consistent with changes to the Official Comments to Section 8-102 of the Uniform Commercial Code.
Having recently passed both houses of the Legislature, the bill will be effective immediately upon the governor’s signature and will apply to all transactions entered into thereafter.
New York is under increasing competition to maintain its rank as a leading commercial center. Today, significant commercial transactions may be domiciled in a U.S. jurisdiction that has modernized its law, or in a foreign locale that has a mature legal system. While sophisticated and complex commercial transactions are not themselves taxed, they generate both jobs and income for New Yorkers, particularly in the financial services sector. It has been estimated that for each professional job that is lost, at least one to two additional nonprofessional jobs are lost as well. Keeping New York’s commercial law as modern as any in the nation will help maintain its status as a preeminent commercial jurisdiction. When it becomes effective, the bill will further aid this goal.
1. Although the Official Comments to the uniform acts are not enacted as law, practitioners should note that there are important clarifications contained therein.
2. See http://www.uniformlaws.org.
3. See http://www.uniformlaws.org.
4. Section 1-303(a).
5. Section 1-301(a).
6. Section 1-308.
7. Section 7-501 et seq.
8. Section 7-106.
9. Section 7-105.
10. “Record” is found in Section 1-201(b)(31), and “Sign” is found in Section 7-102(a)(11).
11. Section 9-503(a)(4) and Section 9-503(a)(6)(g).
12. Section 9-503(a)(5).
13. Current Section 9-516 and 9-521.
14. Section 9-102(a)(71).
15. Section 9-102(a)(68).
16. Section 9-503(a)(3).
17. Section 9-503(a)(2) and Section 9-503(a)(6)(f).
18. Current Section 9-316(a).
19. Section 9-316(h).
20. Section 9-316(i).
21. Section 9-326(a).
22. Section 9-102(a)(7).
23. Section 9-102(a)(10).
24. Section 9-307(f)(2).
25. Section 9-317(b) and (d).
26. Section 9-607(b)(2)(A).
27. Section 9-104(a)(4) and (5), (c) and (d), and Section 8-106(h) and (i).
28. Section 8-103(g) and (h).