ucc article 9 amendments: operating under the...

UCC Article 9 Amendments: Operating Under the New Rules Navigating New Secured Lending Rules, Filing and Search Procedures, and Due Diligence Practices for Lenders

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Presenting a live 90-minute webinar with interactive Q&A

Kevin Caiaccio, The Caiaccio Law Firm, Atlanta

Richard R. Gleissner, Partner, Gleissner Law Firm, Columbia, S.C.

Neil B. Cohen, Professor, Brooklyn Law School, Brooklyn, N.Y.

Edwin E. Smith, Partner, Bingham McCutchen, New York

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5

2010 AMENDMENTS

TO

ARTICLE 9 OF THE UNIFORM

COMMERCIAL CODE

Selected Problems: Statutory Amendments and Official Comment Changes

Kevin Caiaccio

The Caiaccio Law Firm, Atlanta, Georgia

Richard Gleissner

Gleissner Law Firm, Columbia, South Carolina

Edwin E. Smith

Bingham McCutchen LLP, New York City, NY and Boston, MA

Professor Neil B. Cohen

Jeffrey D. Forchelli Professor of Law, Brooklyn, N.Y.

6

Introduction

Article 9 is the secured transaction article of the Uniform Commercial

Code

Article 9 was most recently revised, extensively, in 1998, with a

uniform effective date of July 1, 2001.

The revised Article 9 is now in effect in all states

The revised Article 9 was a total re-write of the Article

The 2010 amendments are not

They are surgical strikes at a few statutory changes and changes to

the Official Comments

7

Introduction

Rationale for the amendments

Different approaches as to when to consider revisions to a UCC Article

One approach is that the UCC must be perfect

The other is the “percolate” approach

Here the sponsoring organizations - the American Law Institute and the

Uniform Law Commission - had to respond to two initiatives

•Individual debtor name amendments

•IACA proposals

8

Introduction

Standards

No alteration of policy decisions made in the 1998 revisions

unless significant problems have arisen in practice

The amendments should focus on ambiguities in the existing

statutory text that are causing either substantial problems in

practice, or addressing the promulgation of non-uniform statutory

amendments

A change to the Official Comments would be preferred where the

statutory language is clear and produces the desired result, but

judicial experience or experience in practice indicates that some

clarification may be desirable

9

Introduction

Enactment Process

Uniform effective date of July 1, 2013

Transition provisions

The 2010 amendments have been enacted in all states, except

Alabama, Arizona, New York, Oklahoma and Vermont

The 2010 amendments have been enacted in the District of

Columbia but not in the U.S. Virgin Islands

The effective date of the 2010 amendments in California is July 1,

2014

9-503 Alternative A vs. Alternative B; California non-uniform

approach

10

Characterization

Problem 1

Lender 1 has extended credit to Debtor and has taken a security interest in all of

Debtor’s investment property. The security interest has been perfected by Lender 1

filing a financing statement against Debtor covering “investment property”. Debtor

wants to borrow funds from Lender 2 and offers to Lender 2 as collateral a promissory

note issued by Issuer to Debtor. The promissory note is one of several issued by Issuer

to Debtor and Debtor’s family members in connection with an acquisition several years

earlier. Is the promissory note considered investment property?

Revision: Highland Capital Management LP v. Schneider, 8 N.Y. 3d 406

(2007). Official Comment 13 to UCC § 8-102 (2010).

11

9-102(a)(49) Defines Investment Property Copyright © 2010 by The American Law Institute and the National Conference of Commissioners on Uniform

State Laws. Reproduced with the permission of the Permanent Editorial Board for the Uniform Commercial

Code. All rights reserved.

12

Comment 13 to 8-102 (2010)

Copyright © 2010 by The American Law Institute and the National Conference of Commissioners on Uniform



13

Characterization

Problem 2

Lender is extending credit to Debtor, a Massachusetts business trust. Under

Massachusetts law a business trust is formed by a declaration of trust. Massachusetts

law then requires the declaration of trust to be filed with the Massachusetts Secretary of

State’s office in order for Debtor to have the attributes of a Massachusetts business

trust, such as limited liability for the trustees. Is Debtor a registered organization or a

common law trust?

Revision: UCC § 9-102(a)(71) (2010).

14

9-102(a)(71) (2010) Copyright © 2010 by The American Law Institute and the National Conference of Commissioners on Uniform



15

Comment 11 to 9-102 (2010) Copyright © 2010 by The American Law Institute and the National Conference of Commissioners on Uniform



16

Comment 11 continued Copyright © 2010 by The American Law Institute and the National Conference of Commissioners on Uniform



17




18

Characterization

Problem 3

Buyer purchased an automobile from Dealer and granted to Dealer a security

interest in the automobile to secure payment of the purchase price. The state

Department of Motor Vehicles (DMV) issued a certificate of title, but the certificate of

title did not indicate a security interest in favor of Dealer. However, the security

interest is indicated on the electronic records maintained by the DMV. The electronic

records are publicly searchable. Is Dealer’s security interest perfected?

Revision: UCC §§ 9-102(a)(10) and 9-311(a)(2) and (3) (2010).

19




20

9-311(a)(2) and (3) (2010) Copyright © 2010 by The American Law Institute and the National Conference of Commissioners on Uniform



21

Characterization

Problem 4

Dealer leases motor vehicles to end-users. Buyer buys from Dealer “all rights to

payment arising from [certain identified leases] ”. What is the characterization under

Article 9 of the rights to payment arising from the identified leases? Would the

characterization be different if Buyer had expressly disclaimed any recourse to the

motor vehicles when it bought the rights to payment?

Revision: In re Commercial Money Center, Inc., 350 B.R. 465 (B.A.P. 9th Cir.

2006). Official Comment 5.d to UCC § 9-102 (2010)

22

Comment 5(d) to 9-102 (2010) Copyright © 2010 by The American Law Institute and the National Conference of Commissioners on Uniform



23

Comment 5(d) continued Copyright © 2010 by The American Law Institute and the National Conference of Commissioners on Uniform



24

Comment 5(d) continued Copyright © 2010 by The American Law Institute and the National Conference of Commissioners on Uniform



25

Commend 5(d) continued Copyright © 2010 by The American Law Institute and the National Conference of Commissioners on Uniform



26

Perfection and Priority

Problem 5 Bank lends funds to ABC Corporation, an Illinois corporation (“ABC Illinois”),

and takes a security interest in ABC Illinois’ existing and future accounts. Bank files a

financing statement against ABC Illinois with the Secretary of State of Illinois covering

accounts. ABC Illinois, without Bank’s knowledge or consent, reincorporates in

Delaware on January 4, 2011, by forming a Delaware corporation (“ABC Delaware”)

into which ABC Illinois is merged. Does Bank have a perfected security in ABC

Delaware’s accounts arising after January 4, 2011?

Bank does not file a financing statement against ABC Delaware in Delaware

before the end of January of 2011. Finance Company lends funds to ABC Delaware on

January 25, 2011, and takes a security interest in ABC Delaware’s existing and future

accounts. On January 25, 2011, Finance Company files a financing statement with the

Secretary of State of Delaware covering ABC Delaware’s accounts. Whose security

interest in the post-January 4, 2011, accounts has priority - Bank’s or Finance

Company’s?

Revision: UCC § 9-316(i) (2010).

Revision: UCC § 9-326 (2010).

27

9-316(i) (2010) Copyright © 2010 by The American Law Institute and the National Conference of Commissioners on Uniform



28

9-316(i) continued Copyright © 2010 by The American Law Institute and the National Conference of Commissioners on Uniform



29

9-326 (2010) Copyright © 2010 by The American Law Institute and the National Conference of Commissioners on Uniform



30




31


Problem 6

Finance Company lends funds to Debtor and takes a security interest in Debtor’s

assets including a commercial tort claim that is described in the security agreement.

Finance Company files a financing statement against Debtor. The collateral indication

on the financing statement refers to “all commercial tort claims” but does not describe

more specifically the commercial tort claim identified in the security agreement or

indicate that the collateral is “all assets”. Debtor sells the commercial tort claim for

cash to Securitization Asset Trust. Does Securitization Asset Trust take the commercial

tort claim subject to Finance Company’s security interest?

Revision: UCC § 9-317(d) (2010).

32

9-317(d) (2010) Copyright © 2010 by The American Law Institute and the National Conference of Commissioners on Uniform



33


Problem 7

Creditor obtains a judgment against Debtor. Debtor is unable to post an appeal

bond but deposits funds in a special deposit account maintained with Bank in lieu of

posting an appeal bond. Bank’s customer on the deposit account is the clerk of court.

Debtor grants to Creditor a security interest in the deposit account in order to secure

Debtor’s liability under the judgment if Debtor does not prevail on appeal. Debtor,

Creditor and the clerk of the court enter into an agreement by which the clerk of court

acknowledges that it has control of the deposit account on behalf of Creditor. Bank is

not a party to the agreement. Under what provision of Article 9 does Creditor have

control of the deposit account?

Revision: Official Comment 3 to UCC § 9-104 (2010). Cf. UCC § 8-

106(d)(3).

34

Comments to 9-104 (2010) Copyright © 2010 by The American Law Institute and the National Conference of Commissioners on Uniform



35

Comments – 9-104 continued Copyright © 2010 by The American Law Institute and the National Conference of Commissioners on Uniform



36

Comments – 9-104 continued Copyright © 2010 by The American Law Institute and the National Conference of Commissioners on Uniform



37


Problem 8

Lenders A, B and C extend credit to Debtor in a syndicated loan for which A acts

as agent. A is also a depositary bank, and Debtor maintains a deposit account with A.

Debtor grants to A, for the benefit of A, B and C, a security interest in the deposit

account. Is the security interest perfected by control for the benefit of all three lenders?

Revision: Official Comment 3 to UCC § 9-104 (2010).

38

Comments to 9-104 (2010) Copyright © 2010 by The American Law Institute and the National Conference of Commissioners on Uniform



39


Problem 9

Debtor has been negotiating for a loan from Finance Company secured by

Debtor’s existing and future accounts. After Finance Company has agreed to make the

loan, but before a security agreement is executed, Finance Company, without

authorization from Debtor, files a financing statement against Debtor covering Debtor’s

accounts. Subsequently, Bank extends credit to Debtor secured by a security interest in

Debtor’s existing and future accounts. Bank perfects by filing a financing statement

against Debtor covering accounts. Still later, Finance Company extends credit to

Debtor and obtains a security interest in Debtor’s existing and future accounts under a

security agreement then executed by Debtor. In the security agreement Debtor ratifies

the filing of Finance Company’s financing statement. Whose security interest in the

accounts has priority - Finance Company’s or Bank’s?


40




41

Comment 4 continued Copyright © 2010 by The American Law Institute and the National Conference of

Commissioners on Uniform State Laws. Reproduced with the permission of the Permanent

Editorial Board for the Uniform Commercial Code. All rights reserved.

42




43

Comment 4 continued

Copyright © 2010 by The American Law Institute and the National Conference of Commissioners on Uniform



44


Problem 10

Secured Party buys chattel paper from Debtor. The chattel paper is tangible

chattel paper, but some provisions of the chattel paper have been amended

electronically. Secured Party takes possession of the tangible chattel paper and obtains

control of the electronic amendments. Has Secured Party perfected its purchase?

Would it matter if Secured Party had not obtained control of the electronic amendment?


45




4. Possession and Control. The priority afforded by this section turns in

part on whether a purchaser “takes possession” of tangible chattel paper.

Similarly, the governing law provisions in Section 9-301 address both

“possessory” and “nonpossessory” security interests. To qualify for

priority under subsection (a) or (b), a purchaser must “take[ ] possession of

the chattel paper or obtain[ ] control of the chattel paper under Section 9-

105.” When chattel paper comprises one or more tangible records and one

or more electronic records, a purchaser may satisfy the possession-or-

control requirement by taking possession of the tangible records under

Section 9-313 and having control of the electronic records under Section 9-

105. In determining which of several related records constitutes chattel

paper and thus is relevant to possession or control, the form of the records

is irrelevant.

46




Rather, the touchstone is whether possession or control of the record would

afford the public notice contemplated by the possession and control

requirements. For example, because possession or control of an

amendment extending the term of a lease would not afford the

contemplated public notice, the amendment would not constitute chattel

paper regardless of whether the amendment is in tangible form and the

lease is in electronic form, the amendment is electronic and the lease is

tangible, the amendment and lease are both tangible, or the amendment and

lease are both electronic.

...

47




A secured party may wish to convert tangible chattel paper to electronic

chattel paper and vice versa. The priority of a security interest in chattel

paper under subsection (a) or (b) may be preserved, even if the form of the

chattel paper changes. The principle implied in the preceding paragraph,

i.e., that not every copy of chattel paper is relevant, applies to “control” as

well as to “possession.” When there are multiple copies of chattel paper, a

secured party may take “possession” or obtain “control” of the chattel

paper if it acts with respect to the copy or copies that are reliably identified

as the copy or copies that are relevant for purposes of possession or

control. This principle applies as well to chattel paper that has been

converted from one form to another, even if the relevant copies are not the

“original” chattel paper.

48

Third Party Rights

Problem 11

Secured Party lends funds to Debtor and takes a security interest in a promissory

note issued by Maker and payable to Debtor. The promissory note states conspicuously

on its face “This promissory note may not be transferred by [Debtor] without [Maker’s]

prior written consent.” Debtor defaults and Secured Party sells the promissory note to

Buyer in a private sale. May Buyer enforce the promissory note against Maker?

Revision: UCC §§ 9-406(e) and 9-408(b) (2010).

49

9-406(e) and 408(b) (2010) Copyright © 2010 by The American Law Institute and the National Conference of Commissioners on Uniform



50

Proposed 9-408(a) Copyright © 2010 by The American Law Institute and the National Conference of Commissioners on Uniform



51

Filing - Debtor’s Name

Problem 12

Secured Party is about to extend credit to Debtor secured by a security interest in

Debtor’s existing and after-acquired inventory and accounts. Debtor is a corporation.

In its charter, the title line shows the name as “Inn of the 6th Happiness”, Article One of

the charter states the name of the corporation to be “Inn of the Sixth Happiness, Inc.”,

and the signature block on the charter shows the name as “Inn of 6th Happiness Corp.”

The name on the Secretary of State’s web site listing corporations organized in the state

is “IN OF 6TH HAPPINESS” What name should be provided on the financing

statement as Debtor’s name?

Revision: UCC § 9-503(a)(1) (2010).

52




53




(68) “Public organic record” means a

record that is available to the public for inspection and is:

(A) a record consisting of the

record initially filed with or issued by a State or the United

States to form or organize an organization and any record

filed with or issued by the State or the United States which

amends or restates the initial record; ...

54

Filing - Debtor’s Name

Problem 13

Secured Party is about to extend credit to Debtor, an individual doing business as

a sole proprietor. The credit will be secured by a security interest in Debtor’s existing

and after-acquired inventory and accounts. The name on Debtor’s birth certificate is

Lester Henry Smith. The name shown on his passport is Lester H. Smith. The name

shown on his driver’s license is L. Henry Smith. His friends, customers and suppliers

call him “L.H.”. What name should be provided on the financing statement as Debtor’s

name?

Revision: UCC §§ 9-503, 9-506 and 9-507 (2010).

55

9-503 (2010) – Alternative A Copyright © 2010 by The American Law Institute and the National Conference of

Commissioners on Uniform State Laws. Reproduced with the permission of the

Permanent Editorial Board for the Uniform Commercial Code. All rights reserved.

56

Alternative B Copyright © 2010 by The American Law Institute and the National Conference of

Commissioners on Uniform State Laws. Reproduced with the permission of the Permanent

Editorial Board for the Uniform Commercial Code. All rights reserved.

57

Filing - Other

Problem 14

Secured Party extends credit to Debtor secured by a security interest in Debtor’s

equipment. Secured Party prepares a financing statement to be filed against Debtor

covering the equipment but neglects to provide on the financing statement Debtor’s

jurisdiction of organization, type of organization or organizational identification

number. Will the filing office accept the financing statement?

Revision: UCC § 9-516 (2010).

58




60




61




62




63




64

Filing - Other

Problem 15

Secured Party extends credit to Debtor, a radio station. To secure the credit,

Secured Party takes a security interest in Debtor’s existing and after-acquired inventory

and accounts and perfects the security interest by filing a normal initial financing

statement. After the closing, Secured Party determines that, since Debtor is a radio

station, Debtor qualifies as a transmitting utility. May Secured Party amend the initial

financing statement to designate Debtor as a transmitting utility in order to have the

benefit of UCC § 9-515(f)’s anti-lapse provision?

Revision: UCC § 9-515(f) (2010).

66

Filing - Other

Problem 16

Finance Company has extended credit to Debtor secured by a security interest in

Debtor’s existing and after-acquired inventory and accounts. Finance Company filed a

financing statement against Debtor covering inventory and accounts. Bank had

previously filed a financing statement against a different debtor. Later, intending to

terminate the effectiveness of its financing statement, the Bank filed a termination

statement that inadvertently transposed two digits of the file number to which Bank had

intended to refer. As a result, Bank’s termination statement was linked to Finance

Company’s financing statement. A search of the filing office’s records against Debtor

would now suggest that Financing Company’s financing statement had been terminated.

What action should Finance Company take, if any?

Revision: UCC § 9-518 (2010).

70

Filing - Other

Problem 17

Judge sentenced Defendant to time in prison. In prison Defendant managed,

without Judge’s authorization or consent, to file a financing statement against Judge

covering all of Judge’s assets. Judge discovers and wants to remove the financing

statement from the public record. What can Judge do?

Revision: UCC § 9-518 (2010). See also UCC § 9-509(d)(2).

74

Enforcement

Problem 18

Lender holds a promissory note issued by Maker secured by a real estate

mortgage granted by Maker in favor of Lender. The mortgage has been recorded in the

local real estate recording office. Under the law of the state in which the real estate is

located, only the mortgagee of record may foreclose non-judicially on the mortgaged

property.

Lender sells the promissory note to Buyer. No assignment of the mortgage from

Lender to Buyer is recorded in the real estate office. Later, Maker defaults, and Buyer

seeks to foreclose on the mortgage non-judicially. May Buyer do so without obtaining

an assignment of the mortgage from Lender and recording the assignment?

Revision: UCC § 9-607(b) (2010).

76

Enforcement

Problem 19

Lender extended credit to Debtor secured by a security interest in Debtor’s

equipment. Following Debtor’s default, Lender, in reliance upon a waiver by

Debtor in the security agreement of UCC § 9-610(c), purchased the equipment at

its own private sale. Is the waiver enforceable?

Revision: Official Comment 3 to UCC § 9-602 (2010) and Official

Comment 7 to UCC § 9-610 (2010) and Official Comment 2 to UCC § 9-624; see

UCC § 9-602(10).

78




79

Enforcement

Problem 20

Lender extended credit to Debtor secured by a security interest in Debtor’s

equipment. Following Debtor’s default, Lender proposes to sell the equipment in an

auction over the Internet. Bids will be accepted at the Internet site for a period of 72

hours after which bidding will be closed and the winning bidder will be determined.

How can Lender satisfy the requirement of UCC § 9-613(1)(E) to state in its

notification of disposition the time and place of a public disposition or the time after

which a private disposition will be made?

Revision: Official Comment 2 to UCC § 9-610 (2010) and Official Comment 2

to UCC § 9-613 (2010).

80




81




82

Transition

• Uniform effective date of July 1, 2013

• Debtor name on a financing statement – registered organization or individual

debtor

• Effective pre-effective date

• Not effective post-effective date

• Debtor location – Massachusetts-type business trust

• Financing statement filed in the correct location pre-effective date

• Financing statement not filed in the correct location post-effective date

83

Kevin Caiaccio

The Caiaccio Law Firm, Atlanta, Georgia

404.846.4990, [email protected]

Richard Gleissner

Gleissner Law Firm, Columbia, South Carolina


Professor Neil B. Cohen

Brooklyn Law School, Brooklyn, N.Y.


Edwin E. Smith

Bingham McCutchen LLP, New York City, NY and Boston, MA


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