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Bankruptcy attorneys and others whose practice involves secured interests are bracing for a seismic shift that will make “best practices” seem like a minor tremor. A wholesale revision of Article 9 of the Uniform Commercial Code, the first since 1972, will likely take effect on July 1. It is, in the words of one of the drafters, Chicago-Kent School of Law professor Steven Harris, “the first complete revision of the entire article since it was originally promulgated.” How sweeping is the revision? The existing Article 9 is “a statute designed to provide limited rules in broad situations,” says Joel Glucksman, a member of the American Bar Association’s UCC task force. The new version, in contrast, is “vastly complicated,” providing “specific rules to specific situations.” As of last week, 28 states had already enacted the revised Article 9, with 14 others, including New Jersey, on their way to doing so. The New Jersey legislation, S-1382/A-3025, which passed 40-0 in the Senate on Dec. 18, is on the agenda of the Assembly Banking and Insurance Committee for March 1, says Chairman Christopher Bateman, who sponsored the Assembly bill. Bateman, a partner with Warren, N.J.’s DiFrancesco, Kunzman, Coley, Yospin, Bernstein & Bateman, P.C., says he is pushing for passage by July 1. The revision expands, reorders and even renumbers Article 9. While the current statute contains 55 substantive sections, the new version has 126, not counting the transition rules. New Article 9 significantly changes the rules governing filing, perfecting and enforcing security interests. It expands the types of collateral that can be subject to a security interest to encompass such property as brokerage accounts, commercial tort claims, health care receivables and deposit accounts — though not consumer deposit accounts. It also redefines such key terms as “good faith,” replacing the old subjective “honesty in fact” standard with an objective one also requiring “observance of reasonable commercial standards of fair dealing.” Sections 9-102(a)(43). Draftsman Harris singles out the change in place of filing as likely to have the biggest impact, at least in the short term. The new article generally requires filing where the debtor, rather than the collateral, is located, Sections 9-301, and at one central filing office in the state, Sections 9-501. For corporations, LLCs or limited partnerships that means where they are organized and for other types of business, their chief executive office. Dennis Patterson, a professor at Rutgers Law School-Camden, N.J., notes that a single filing will suffice to take a security interest in property located all over the country. John Cannel, director of the New Jersey Law Revision Commission, calls the new rules ” a lot clearer” on where to file. He says the commission tried to make them even clearer by suggesting an amendment to new Article 9, which kept fixture filings at the local level, which would have centralized them in Trenton, N.J. As introduced by Sen. Martin, R-Morris last May, S-1382 reflected that amendment. Paul Shur says he testified for the State Bar Association against retaining the amendment and it was dropped, leaving fixture filings in the counties. Shur, a partner with Princeton, N.J.’s Smith Stratton Wise Heher & Brennan, says the non-uniform amendment was “not advantageous to New Jersey” especially with regard to multistate transactions. Also at the urging of the State Bar, a non-uniform change was made providing that while new Article 9 permits the assignment of structured settlements, it does not override prohibitions against assigning structured settlements under the workers’ compensation law or lottery prizes. Other key aspects of the revision are: Electronic filings are allowed but not mandated through use of the term “record” rather than “writing” and elimination of the requirement for the debtor’s signature on the filing statement. Sections 9-502. In nonconsumer transactions, purchase money security interests do not lose their priority status merely because they also secure a nonpurchase-money obligation; the obligation is also secured by nonpurchase-money collateral; or the purchase-money obligation has been renewed, refinanced, consolidated, or restructured. Sections 9-109(f). A creditor must provide pre-foreclosure notice to all other secured parties even if they have not requested notice. Sections 9-611. For nonconsumer transactions, creditors who violate foreclosure rules now have a safe harbor, preserving their right to a deficiency judgment if they can show that the violations did not affect the outcome. Sections 9-626. Before collecting a deficiency, a creditor must notify the debtor how it was calculated. Sections 9-616. Part 5 standardizes filing-office procedures and requires them to retain lapsed financing statements for a year. Sections 9-522. A change that would allow debtors to challenge foreclosure sale amounts where the purchaser was the secured party or related to the secured party, even if the sale was technically compliant, isn’t a change at all for New Jersey. That’s because it codifies how state courts have been applying current Sections 9-507, says Patterson. Sections 9-615. Though, under the transition rules, new Article 9 applies to pre-effective date transactions, Sections 9-702, security interests perfected under the old law remain in effect after July 1 and until a continuation statement must be filed. Sections 9-703. Donald Rapson, who was involved in the drafting of the revision by the National Conference of Commissioners on Uniform State Laws, suggests that secured parties can attain peace of mind by complying with new Article 9 now on the issue of existing and new filings. They will also benefit by increasing their likelihood of receiving notice of foreclosure by another creditor, says Rapson, retired assistant general counsel of CIT Corp. Peter Donnelly, an associate with Morristown, N.J.’s Graham Curtin & Sheridan, says he has already changed the way he does UCC filings to comply with the impending change in the law. Not only is he also filing in the state of the debtor’s incorporation but he is doing searches in that state to uncover any filings made there by other creditors also anticipating the change. Glucksman, a partner with Scarinci & Hollenbeck in Secaucus, N.J., who mainly represents creditors in the bankruptcy context, predicts for the short run “a lot of litigation, a lot of mistakes and confusion.” “If enactment of the statute leads to mistakes being made, it can redound to the benefit of debtors” he says, who can seek “the avoidance of less than perfect security interests.”

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