X

Thank you for sharing!

Your article was successfully shared with the contacts you provided.
A generation ago, the adage “Today is the first day of the rest of your life” was repeated so often that it became a hackneyed clich�. For commercial lawyers, though, last Monday truly was the first day of the rest of your professional life. Why? Because Monday was the first business day since Revised Article 9 of the Uniform Commercial Code became effective on July 1, 2001. In an impressive display of uniformity, the legislatures of all 50 states and the District of Columbia have enacted Revised Article 9. It became effective July 1, 2001, in all but four states — Connecticut (in which it becomes effective on Oct. 1, pending the signature of the governor on the bill) and Mississippi, Alabama and Florida (in which it becomes effective Jan. 1, 2002). Lawyers should know that while Revised Article 9 follows the same general concepts and parameters as former Article 9, almost every aspect of the law governing secured credit has been changed in some material way. TIPS FOR PRACTITIONERS For those who may not have been paying attention during the three years since promulgation of Revised Article 9 by the American Law Institute and the National Conference of Commissioners on Uniform State Laws, however, we present in this column several tips for commercial lawyers confronting the new statute this month for the first time: 1. Don’t panic now about existing transactions.While Revised Article 9 makes significant changes in the rules governing enforceability and perfection of security interests, the transition rules preserve the enforceability and perfection of all interests that were perfected under former Article 9 or other law before July 1. In other words, no security interest becomes unenforceable or unperfected solely because Revised Article 9 has gone into effect. (If and when action is required in the future to maintain perfection, however, the rules of Revised Article 9 are, obviously, highly relevant.) 2. If you don’t understand the new choice of law rules, avoid new transactions.Some of the most significant changes in Revised Article 9 involve the choice-of-law rules that determine which jurisdiction’s law governs perfection and priority. In other words, among the changed rules are those that tell us in which state we must file. The rules of former UCC �9-103, grossly simplified, provided (i) that in the case of nonmobile goods or other tangible collateral, filing was to be made in the state in which the goods or other collateral are located, and (ii) in the case of intangible collateral (such as accounts and general intangibles), filing was to be made in the state in which the debtor was located. Revised UCC �9-301 generally provides that perfection of nonpossessory security interests in both tangible and intangible collateral are governed by the law of the state in which the debtor is located. Thus, in either case, only a filing in the state of the debtor’s location is necessary (and a filing in the location of the goods or other tangible collateral will be insufficient for purposes of perfection). To keep us all on our toes, however, Revised Article 9 defines the location of a person differently than did former Article 9. Former law provided that a business was located in the state in which its chief executive office is located. Revised Article 9, on the other hand, provides that a debtor that is a “registered organization” (a domestic corporation or similar organization, such as a limited partnership, created by charter from the state) is located in the state in which it is chartered. Thus, a New Jersey corporation with its chief executive office in New York City was deemed to be located in New York under former Article 9 but is deemed to be located in New Jersey under Revised Article 9. Thus, to perfect a security interest in accounts of that corporation, one would have filed in New York under former Article 9, but now one must file in New Jersey under Revised Article 9. Quite obviously, no one sets out to create an unperfected security interest. Therefore, it is highly inadvisable for an attorney to represent a creditor entering into new secured transactions unless the attorney has mastered these new choice of law rules. 3. Don’t forget the old choice-of-law rules just yet.Because Revised Article 9 is not yet effective in all 50 states, secured parties must prepare for the possibility that the issue of perfection will be litigated in one of the states in which the statute is not yet effective. Because such a state does not have the new Article 9 choice-of-law rules, its courts will look to the law of the state specified in former �9-103 to determine whether the security interest is perfected. In some cases under former �9-103, the court is directed to look to the internal law of that state (i.e., without regard to that state’s choice-of-law rules) while in other cases the court is directed to look to the full law (including choice-of-law rules) of that state. Thus, a court in one of the states in which Revised Article 9 is not yet effective might look to a different state than the one specified in Revised Article 9. For example, Revised Article 9 tells us that to perfect a security interest in goods, located in Pennsylvania, that are owned by a Delaware corporation with its chief executive office in New York, one must file in Delaware. Former Article 9, though, told us that one was required to file in Pennsylvania to perfect the security interest. If the secured party files only in Delaware, but the issue of perfection is litigated in Connecticut before the effective date of Revised Article 9 in Connecticut, the Connecticut court will conclude that the security interest is unperfected because there was no filing in Pennsylvania. Accordingly, until Revised Article 9 is effective in all states, secured parties should consider the advisability of taking steps to perfect their security interests both in the jurisdiction designated by Revised Article 9 and in the jurisdiction(s) specified by former Article 9. This subject is analyzed in much greater depth in a report just issued by the Permanent Editorial Board for the Uniform Commercial Code. FINANCING STATEMENT FORMS 4. Your old financing statement forms probably won’t work anymore.Revised Article 9 changes the form of financing statements in several ways. For one thing, financing statements no longer need to be signed by the debtor (although the debtor must have authorized the filing of the financing statement). Also, under Revised Article 9, the financing statement must provide several items of information not required under former Article 9. Either by statute (in states that have enacted the official text of Revised Article 9 in this regard) or by regulation, virtually every state will accept the new nationwide uniform form of financing statement. Attorneys who prepare financing statements should update their practices accordingly. New York’s forms can be downloaded from the Web site of the Department of State at www.dos.state.ny.us/ corp/uccforms.html. UNDERSTAND PART 6 5. Master Part 6 of Revised Article 9 now.Part 7 of Revised Article 9 — the new statute’s transition rules — provides generally that, as of July 1, 2001, Revised Article 9 applies to all secured transactions, even those entered into before the effective date. The rules described above that preserve enforceability and perfection under prior law are explicit exceptions to this general principle, but the general principle applies to enforcement of security interests. Thus, post-default actions by the secured party are now governed by Part 6 of Revised Article 9 rather than by Part 5 of former Article 9, even if the security interest was created before July 1, 2001. There are quite a few differences between old Part 5 and new Part 6. Many of these changes affect the duties of the secured party (including new notifications or forms of notification that are required) or the foreclosure process (such as rules limiting the effect of dispositions of collateral in which the secured party or an affiliate is the buyer), but some changes afford the secured party new flexibility. One of the more important changes in this regard extends the concept of strict foreclosure in nonconsumer transactions to agreements to accept the collateral in partial (as opposed to full) satisfaction of the secured indebtedness. 6. Beware of changed definitions.Some of the terms used in former Article 9, with which terms commercial lawyers have become familiar over the years, are also used in Revised Article 9 — but with different meanings in Revised Article 9. A good example is provided by “accounts.” Under former Article 9, an account was the right to payment for goods sold or leased or services rendered. Those rights to payment remain as accounts under Revised Article 9 but, under the revised article, many other payment rights are also classified as accounts. Similarly, as the category of “accounts” has grown, the category of “general intangibles” has shrunk. These changes have important implications not only for statutory rules that apply to accounts or chattel paper but also for collateral descriptions in security agreements and financing statements. 7. Be aware of the broader scope of Revised Article 9.Revised Article 9 governs more security interests than did former Article 9. In particular, while former Article 9 only covered security interests in deposit accounts as proceeds of other collateral, Revised Article 9 covers security interests in deposit accounts as original collateral. As a result, a lender that wants to take a security interest in a borrower’s bank accounts can find the rules for effectuating this formerly difficult task in Revised Article 9. (Perfection of such an interest is by “control” rather than by filing.) This is a major step forward. In addition, the exclusion for claims under a policy of insurance now contains an exception for health care insurance receivables. Thus, this major form of receivable can now be the subject of an Article 9 security interest. 8. Get control of “control.”Commercial lawyers who are familiar with the latest revisions to UCC Article 8 (and the corresponding revisions to Article 9) are familiar with the concept of “control” as a method of perfection. Revised Article 9 re-enacts “control” as an optional method of perfection for investment property. In addition, Revised Article 9 provides for control as a method of perfection for “electronic chattel paper” (a new subtype of collateral in Revised Article 9) and as the only method of perfection for deposit accounts and “letter-of-credit rights.” When control is an optional method of perfection, parties who perfect by control typically have priority over those who perfect by other means. Just to make matters more interesting, Revised Article 9 defines “control” differently for each of the different types of collateral for which it is a method of perfection. THE ELECTRONIC AGE 9. Get ready for the electronic age.Former Article 9 required the security agreement to be signed by the debtor. Essentially, this required a written security agreement. In line with our new electronic age, Revised Article 9 has replaced all requirements for writings or signatures with requirements that there be a “record” or that the record be “authenticated.” Thus, the path has now been paved for paperless secured transactions. 10. Get ahead of the game.This column touches on only a small percentage of the changes in Revised Article 9. It is highly likely that most transactions engaged in by commercial lawyers are affected in some significant way by Revised Article 9. Don’t let these changes bite you at a later date. Learn them now. Many treatises and other secondary sources are available to explain Revised Article 9 and continuing legal education courses abound. Practicing in this area without mastering the new statute could be dangerous! Neil B. Cohen Gerald T. McLaughlin is a professor of law at Loyola Law Schoolin Los Angeles. Neil B. Cohen is a professor at Brooklyn Law School.

This content has been archived. It is available exclusively through our partner LexisNexis®.

To view this content, please continue to Lexis Advance®.

Not a Lexis Advance® Subscriber? Subscribe Now

Why am I seeing this?

LexisNexis® is now the exclusive third party online distributor of the broad collection of current and archived versions of ALM's legal news publications. LexisNexis® customers will be able to access and use ALM's content by subscribing to the LexisNexis® services via Lexis Advance®. This includes content from the National Law Journal®, The American Lawyer®, Law Technology News®, The New York Law Journal® and Corporate Counsel®, as well as ALM's other newspapers, directories, legal treatises, published and unpublished court opinions, and other sources of legal information.

ALM's content plays a significant role in your work and research, and now through this alliance LexisNexis® will bring you access to an even more comprehensive collection of legal content.

For questions call 1-877-256-2472 or contact us at [email protected]

 
 

ALM Legal Publication Newsletters

Sign Up Today and Never Miss Another Story.

As part of your digital membership, you can sign up for an unlimited number of a wide range of complimentary newsletters. Visit your My Account page to make your selections. Get the timely legal news and critical analysis you cannot afford to miss. Tailored just for you. In your inbox. Every day.

Copyright © 2020 ALM Media Properties, LLC. All Rights Reserved.