- Revised UCC Article 9 Changes Rules Governing Perfection of Security Interests
- December 30, 2003 | Author: Andrew W. Lapin
- Law Firm: Much Shelist Denenberg Ament & Rubenstein, P.C. - Chicago Office
After nearly a decade of legislative effort, Revised Article 9 of the Uniform Commercial Code has been adopted by the State of Illinois and is expected to become law in all states on July 1, 2001. The first major change in the laws governing secured transactions since 1972, the new legislation is intended to bring greater certainty to transactions intended to create security interests, to expand the scope of the law to embrace more of the transactions which have become popular in the secured financing industry, and to accommodate modern technology by facilitating electronic (as opposed to paper-based) transactions.
What does Revised Article 9 mean to the average secured lender? Plenty! At a minimum, the lender must consider three critical matters: new filing rules, transition rules, and new searching rules.
Where to file As noted above, Revised Article 9 significantly alters the rules governing the place for perfecting security interests by means of filing financing statements. Under current law, secured parties who wish to perfect their security interests in intangible property do so by filing financing statements in the state where the debtor is located. Revised Article 9 simplifies this by making the state of the debtor's location the place to file for most collateral.
Determining debtor's location An individual debtor (i.e., a human being) is deemed to be located in the state of his or her principal residence. An unregistered organization debtor (e.g., a general partnership, joint venture, or personal trust) is located in the state of its place of business. And a registered organization or statutory entity (e.g., a corporation, limited liability company, or limited partnership) is located in the state under whose law it was formed. Because an entity's jurisdiction of formation can be determined (and verified) more readily than the location of the property can, Revised Article 9 gives secured parties greater simplicity, certainty, and safety.
Transition Rules After Revised Article 9 takes effect on July 1, 2001, what will become of financing statements that were filed under Current Article 9 and that remain outstanding? The "Transition Rules" take care of this important matter by providing that perfected security interests under Current Article 9 are also perfected security interests under Revised Article 9. In order to keep such financing statements valid, however, a creditor must "continue" them by filing either a "true" or an "in lieu" continuation. But which type of continuation statement should the creditor file? The answer is determined by using the rules discussed above to determine the debtor's location.
Searching Rules Searching is easy, at least after the Transition Rules end (June 30, 2006). The secured party will search in the same place it files. And where is that? The debtor's location, of course. But what about searching during the Transition Rules period? Since financing statements filed under Current Article 9 may remain effective for five years after the effective date of Revised Article 9 (assuming the effective date is July 1, 2001) double searching is the order of the day until the Transition Rules come to an end. Thus, if the place of filing would differ under Revised and Current Article 9, creditors will need to search the debtor's location (new rules) and the location they would have searched under the old rules (e.g., the property's location).
While there are certain risks to security interests that were perfected under Current Article 9, revised Article 9 promises much greater certainty for the future.