Vol. 75, No. 4, April
Revisions to UCC Law Create Uncertainty
Here are 10 questions lawyers should ask their clients when filing
financing statements under Revised UCC Article 9.
by Ann Massie Nelson
Ann Massie Nelson is a regular
contributor to Wisconsin Lawyer and communications director at
Wisconsin Lawyers Mutual Insurance Co.
Major changes to the law governing the creation, perfection,
priority, and enforcement of security interests in personal property may
confound clients and their lawyers as they attempt to comply with the
Wisconsin, along with most states and the District of Columbia,
adopted revised Article 9 of the Uniform Commercial Code (UCC) July 1,
2001. The revised law became effective on or before Jan. 1, 2002, in all
The new law changes the information required, filing form, fees, and
location for filing non-real estate liens in commercial and consumer
transactions. The revision is the first major modification of Article 9
in 30 years.
In Wisconsin, revised Article 9 creates a central, electronic filing
system at the state Department of Financial Institutions (DFI),
replacing county registers of deeds as the filing place for
agricultural-related financing statements. County registers of deeds
continue to serve as the filing place for fixture financing statements.
County offices may elect to become agents of the DFI. (See "Financing
Statements Under Revised UCC Article 9" and "Wisconsin
Department of Financial Institutions Will Administer UCC Article 9, Lien
Filing System" in the August 2001 Wisconsin Lawyer.)
The new system makes information about lien holders and secured
creditors more accessible to the public. Conflict of law issues among
states have been simplified, and the code has been made more uniform
nationwide. Authors of the revisions believe the new system will bring
greater certainty to financing transactions, reducing the costs of
The price of progress is a steep learning curve for lawyers who
advise debtors and secured lenders. Lenders can lose their lien
perfection and priority if documents are filed improperly, according to
Emory Ireland, a partner in Foley & Lardner, and John P. Miller of
Miller, McGinn & Clark S.C. Both attorneys practice commercial law
in the Milwaukee area.
Following are 10 questions Ireland and Miller recommend lawyers ask
when counseling clients in financing transactions. These questions touch
on a few of the significant changes in the law.
1. Has the debtor signed a security agreement? A
signed security agreement generally is required to create a security
interest. Once a debtor signs a security agreement, lenders
automatically are authorized to file financing statements. Debtors are
no longer required to sign the financing statement.
"If the lender wants the ability to amend the financing statement,
then a power of attorney should be included in the security agreement,
which should state that the power of attorney is coupled with an
interest and is irrevocable," Miller says.
2. Where should financing statements be filed?
Filings made on or after July 1, 2001, generally fall under revised
Article 9, which, among other things, requires financing statements to
be filed in the state where the debtor is organized (if a registered
organization), rather than the state where the secured property or the
debtor's chief executive office is located.
Financing statements filed before July 1, 2001, fall under old
Article 9 and remain in effect for up to five years, which means an old
filing could be effective up to June 30, 2006, unless amendments or
changes are made that require a new filing prior to that time, according
Filings expire four months after a change in the debtor's name or the
jurisdiction where the debtor is organized. All new financing statements
are subject to the revised law, making it necessary to search under both
the old and new name and location.
"Unless required by contract in the loan document, the debtor has no
obligation to inform the secured creditors of changes in name or state
of organization. The debtor should do so to protect itself," says
Miller. "In practicality, the issue won't come up unless the debtor
can't pay the debt."
3. If collateral is subject to revised Article 9, how is it
categorized? Determining the proper category is important if
the collateral will be described by category in the security agreement
or financing statement. For purposes of the financing statement,
categorization matters only if the lender is not taking a security
interest in all of the debtor's personal property.
The revisions establish new categories for collateral and redefine
the previous categories. For example, software that is separate from
equipment is defined as a "general intangible," but software embedded in
equipment is defined as "goods." The new law expands the definition of
"accounts" to include credit card receivables, health care insurance
receivables, and payment obligations for property, such as software
4. Is a general description of collateral in the new
financing statement appropriate? "Supergeneric" terms like "all
personal property" are now allowed in a financing statement but are not
sufficient for a security agreement. If a term such as "all personal
property" is used, good practice would be to add "including but not
limited to" and a list of specific items that can be identified, Miller
5. Is the debtor a registered organization?
Financing statements must contain the correct name of the debtor. If the
debtor is a registered organization, lawyers need to get the correct
name from current, certified copies of articles of incorporation or
other organizational documents.
Counsel need to perform a lien search in all names the debtor goes by
or has used in the past. Miller represented a party in a transaction in
which the owner of a local fast food restaurant had previously obtained
financing in his individual name, the name of the owner's limited
liability company, and the franchise name.
"Sophisticated lenders may require borrowers to set up LLCs to make
it easier to track changes. In the future, every mom and pop store is
going to need to be a limited liability company (LLC) or a similar
entity," Miller explains.
Depending on the search protocols of the filing system, even minor
variations in names can thwart attempts to locate debtors. A search of
the DFI system located a single debtor named "Dairy" Queen (R) in one
list and "Diary" Queen in another. Had the letters been transposed
differently, would the search have been successful?
6. Have you performed a lien search in the appropriate
jurisdiction(s) to identify competing claimants? As noted
earlier, revised Article 9 changes the location for filing financing
statements to the state where the entity is organized, rather than the
location of the goods or company headquarters. For other entities and
individuals, the location is the chief executive office or principal
"The DFI lists the state of incorporation of foreign corporations
authorized to do business in Wisconsin. However, if a Utah corporation
merges with a Delaware concern and reincorporates in Delaware, I would
be surprised if the Utah corporation would refile in all 50 states,"
7. Have the financing statements and other lien perfection
documents been filed before or within 10 days after credit is
extended? Prompt perfection is important to reduce the risk
that the lender's security interest may be challenged as a preference
under the U.S. Bankruptcy Code.
8. Are there any nonuniform variations to revised Article 9
or special form requirements for filing in a particular
jurisdiction? Prior to filing financing statements in other
states, lawyers will need to check the statutes and regulations to
ensure the financing statements conform to requirements of the foreign
9. Does a post-filing lien search confirm the filing was done
correctly? Ireland suggests lawyers test the accuracy of the
filing by going online and performing a search. Does the secured party's
name appear where expected?
10. Is the loan secured by any collateral that is not subject
to filing under revised Article 9? If so, how is the lien
perfected? For example, filing generally is not effective to
perfect security interests in motor vehicles subject to certificates of
title (except vehicles held as inventory). Such security interests must
be noted on the certificate of title. As to collateral outside the scope
of Article 9, counsel must ensure that perfection under the other
applicable rules occurs.
Miller recommends that lawyers who represent secured lenders inform
clients - in writing - that lenders must refile financing statements
every five years to maintain their position. During the five-year
transition period, dual searches will be necessary.