- Frequently Asked Questions about the Impact of Revised Article 9 of the Uniform Commercial Code
- May 5, 2003 | Authors: Timothy E. Davis; George L. Cass; Thomas S. Galey
- Law Firms: Buchanan Ingersoll, Professional Corporation - Philadelphia Office ; Buchanan Ingersoll, Professional Corporation - Pittsburgh Office
The purpose of this article is to provide brief and understandable answers to some commonly asked questions regarding Revised Article 9 of the Uniform Commercial Code ("UCC") which will become effective in many states, including Pennsylvania, on July 1, 2001. We hope that this article will bring to your attention some of the more important revisions that will have a significant impact on how and where you file financing statements and what will happen to your existing filings.
Where do I file?
The most significant change under Revised Article 9 is the conversion to a central filing system based on the state of formation of "registered organizations" such as corporations, limited partnerships and limited liability companies. Under Revised Article 9, Secured Creditors will generally file UCC-1s at the location of the Debtor's state of formation as opposed to the state in which the Debtor's chief executive office is located. If the Debtor is a general partnership or other entity which is not registered, then its "location" is its place of business, or chief executive office if the Debtor has more than one place of business. Secured Creditors will file against individual Debtors with the Secretary of State of the state in which such person's principal residence is located. Local filing will still be necessary as to certain types of collateral such as fixtures, timber to be cut and minerals to be extracted, but will no longer be necessary as to most types of collateral such as accounts, general intangibles, inventory and equipment.
How will changes in certain collateral definitions affect my existing filings?
Revised Article 9 amends certain collateral definitions to either expand or contract the type of collateral which they describe. For example, the definition of "Account" has been expanded beyond payment rights arising out of the sale or lease of goods and services to include rights to payment, whether or not earned by performance, arising out of the transfer of rights in tangible and intangible personal property, such as license fees, credit card receivables, payments for incurring suretyship obligations, and government sponsored or licensed lottery winnings. Similarly, "Chattel Paper" has been expanded to include software licenses. Conversely, the definition of "General Intangibles" has contracted as a result of the expansion of other collateral definitions and the creation of new collateral definitions.
For example, rights to receive royalty payments under a trademark license have been reclassified under Revised Article 9 as an "Account", rather than as a "General Intangible" under existing Article 9. As a practical matter, this means that certain types of collateral which were previously covered by the term "General Intangibles" under existing Article 9 will no longer be included in the definition of "General Intangibles". Furthermore, the definition of "General Intangibles" has been revised to specifically exclude commercial tort claims and deposit accounts, both of which will be defined as their own separate category. As a result of these and other revisions to collateral classifications, Secured Creditors will want to evaluate their security agreements to determine if the definitional changes contained in Revised Article 9 will result in the loss of any collateral or whether additional categories of collateral should be added.
To make sure that you pick up all general intangibles without any reduction in the meaning of "general intangibles", for example, you may want to define General Intangibles as those defined in Article 9 and "including general intangibles that are classified otherwise under Revised Article 9." In addition to "Commercial Tort Claims" and "Deposit Accounts", the Revised Article 9 contains several other newly defined categories of collateral, such as "Electronic Chattel Paper", "Letter of Credit Rights", "Payment Intangibles" and "Software".
What is the One Year Rule?
Secured Creditors need to be aware that certain rules for perfecting a security interest by methods other than by filing financing statements are also changing, and perfection by such other methods may lapse sooner under the transition rules for Revised Article 9. For example, a security interest that is perfected under existing Article 9 remains effective when Revised Article 9 takes effect if the applicable requirements for enforceability and perfection under Revised Article 9 are satisfied without any further action. On the other hand, if a security interest is enforceable and perfected other than by filing under existing Article 9, but does not satisfy requirements for enforceability and perfection under Revised Article 9, then the security interest will remain perfected for only one year after the effective date of Revised Article 9.
Perfection of a security interest in instruments under the existing Article 9, for example, requires a bailee's receipt of notification of such security interest. Under Revised Article 9, however, notification is not sufficient -- the bailee must acknowledge that it is holding the instrument for the benefit of the Secured Creditor. This acknowledgment must be obtained within one year following the effective date of Revised Article 9 or the security interest becomes unperfected. Similarly, Revised Article 9 requires the consent of the issuer in order for the Secured Creditor to perfect its security interest in letter of credit rights.
Will my existing filings be effective after July 1, 2001?
If you properly perfected a security interest by filing financing statements under existing Article 9, then your perfection will continue under Revised Article 9 until the earlier of: (a) the normal lapse date of the previously filed financing statement, or (b) June 30, 2006. If a filed financing statement is scheduled to lapse after July 1, 2001, and the jurisdiction in which you need to file to perfect under Revised Article 9 is different than under existing Article 9, you need to file an initial financing statement in the new jurisdiction in lieu of a continuation statement in the old jurisdiction, and this "in lieu" initial financing statement would need to be filed prior to lapse of the old financing statement.
An "in lieu" financing statement is a new financing statement which causes the perfection to relate back to the initial filing date in the prior jurisdiction and perfects the security interest for a period of five years from the new filing. In order to relate back, the in lieu financing statement must (a) satisfy the requirements of a new financing statement, (b) identify the earlier financing statement or financing statements by providing the filing offices, the filing numbers and the filing dates of the original financing statement or statements and the last continuation statements, and (c) indicate that the pre-effective date financing statement remains effective.
How do I perfect a security interest in deposit accounts under Revised Article 9?
In order to perfect a security interest in a deposit account under Revised Article 9, a Secured Creditor must (a) arrange for the Debtor to transfer the account into the name of the Secured Creditor, (b) enter into a control agreement with depository institution where the account is located, or (c) serve as the depository institution where the deposit account is maintained.
Will Revised Article 9 make my life any easier?
Yes. With the newly created central filing system for all collateral except fixtures and certain other collateral closely tied to real estate, lenders will no longer need to keep track of their collateral in various states or incur the expense of filing in multiple states. As a result, inadvertent or fraudulent movement of collateral by a Debtor will no longer be an issue of concern. In Pennsylvania, for example, filings at the Prothonotary level are will no longer be required. In addition, the signature of Debtors on financing statements will no longer be required to perfect by filing a security interest granted by a written security agreement.
You should note that until the five year transition period relating to the filing of financing statements has expired, some additional diligence is necessary. In those instances where the Debtor's jurisdiction of organization is different that the jurisdiction of its chief executive office, a Secured Creditor will want to conduct any lien searches in both jurisdictions since perfection by another Secured Creditor could be effected by filings under existing Article 9 or Revised Article 9.
The items discussed above are just a few of the numerous substantive revisions to Article 9 of the Uniform Commercial Code.