FYI
News Briefs
New statute requires perfection of security interests by secured
parties
By Anthony C. Marino
With the recent enactment of revised article 8 and the corresponding
amendments to article 9 of the Uniform Commercial Code (UCC), a new
class of collateral comes into effect: investment property. The new
statute, which went into effect July 1, 1998, affects transactions
entered into as of that date, and requires secured parties to make
existing transactions comply with the new rules by Oct. 31, 1998, or
face losing their security interest.
The statute sets forth rules for creating and perfecting security
interests in the new "investment property" class of collateral. While
the old article 8 assumed that most securities would be uncertificated
(not physically represented by a certificate), the new statute reflects
the reality that most securities are certificated and held by a
securities intermediary for the actual owner. Thus, the most significant
sections clarify how secured parties obtain and perfect security
interests in securities accounts and mutual funds.
Investment property
Investment property is comprised of equity interests and debt
obligations that people directly own ("securities," for example, stocks
and bonds); securities that people indirectly own ("securities
entitlements" and "securities accounts," for example, stocks and bonds
held in brokerage accounts); and commodity options and futures
("commodity contracts" and "commodity accounts").1 Partnership interests and limited liability
company membership interests are included only if 1) they are traded on
an exchange or in a securities market (not a requirement for corporation
shares, which are always securities); 2) the terms of the interest
expressly provide that it is a security under article 8; or 3) the
interest was issued by an investment company.2
Creating and perfecting a security interest in investment
property
The general rule under article 9 - that the debtor must sign a
written agreement granting a security interest in the collateral in
order to create a security interest - also applies to investment
property.3 No written fee agreement is
needed if 1) the secured creditor has possession of certificated
securities;4 and 2) the secured party has
control of the investment.5
Secured parties may perfect their security interests in investment
property by gaining control of the investment property or by filing a
financing statement.6 In general, a secured
party obtains control by taking actions to be able to sell the
investment property without further action by the debtor.7
A secured party has control over a certificated security if the party
(or its bailee) possesses the certificate and any necessary
endorsements.8 A secured party has control
over an uncertificated security if the issuer either 1) lists on its
books the secured party as the security's registered owner, or 2) agrees
that it will comply with the secured party's instructions without any
further consent from the registered owner.9
Similarly, a secured party has control over a securities entitlement
or securities account if 1) the entitlement or account is in the secured
party's name, or 2) the securities intermediary agrees to comply with
the secured party's instructions without any further consent from the
entitlement or account owner.10 This second
way to obtain control typically is accomplished through a "control
agreement" among the securities intermediary, the debtor, and the
secured party. Securities intermediaries are not obligated to enter into
control agreements, however.11
Finally, securities intermediaries have automatic control over
securities entitlements and accounts in which they have a security
interest.12 Essentially, this codifies the
broker's lien.
Priorities among competing perfected security interests in
investment property
Four basic priority rules govern competing perfected security
interests in the same investment property: 1) A secured party with
control always beats a secured party without control.13 2) Conflicting security interests of secured
parties, each of whom has "control," rank equally.14 3) This rule of equality will not usually apply
to securities intermediaries - their perfected security interests in a
debtor's securities entitlement or securities account that they hold
trump all other security interests.15 4)
Conflicting security interests of secured parties who perfected only by
filing a financing statement rank according to who filed first.16
The retroactive effect of revised article 8
Under revised UCC article 8, secured parties have until Oct. 31,
1998, to make existing security interests in investment property comply
with the new rules or they will become unperfected.17 Under many circumstances, no action by the
secured party is necessary. For example, under both the old and new
rules, possession of a certificated security and the necessary
endorsements perfects the secured party.
Perhaps the situation that will require the most attention is pledges
of partnership and LLC membership interests. If such interests do not
meet the requirements outlined to qualify as securities, they are
general intangibles which can only be perfected by filing a financing
statement.18 Thus, a secured party must act
if he or she and the debtor have not executed a security agreement or
the secured party has not filed a financing statement.
Anthony C. Marino, Texas 1997, is an
associate in the banking department at Reinhart, Boerner, Van Deuren,
Norris & Rieselbach S.C., Milwaukee.
Proposed supreme court rule would keep juror's identities
secret
On Aug. 13, the Director of State Courts, on behalf of the Records
Management Committee (RMC), filed a petition seeking the adoption of SCR
73.04 - a rule that would keep a juror's or prospective juror's personal
information confidential to all but clerks of court.
According to the proposed rule, a juror would be identified by
number, and personal information such as name, address, workplace,
spouse, and children's names could not be elicited on juror
questionnaires or during voir dire. Exceptions would be granted if, upon
petition and a showing of good cause, such information was required for
a fair and impartial jury trial. In that case, the juror would provide
the necessary information in a private environment.
Following a verdict, a party may petition the court for access to a
juror's personal information "for the purpose of developing a motion for
a new trial or any other lawful purpose." The petition must establish a
compelling argument that the information was necessary. If the
petitioning party is granted access to the information, the party may
not disclose it to any other person or entity.
The RMC states in its petition that the Wisconsin Supreme Court has
an obligation to protect a citizen/juror's right to privacy. The
proposed rule would "create a sense of security, encourage jury service,
decrease juror fear, increase juror honesty, and insulate jury
deliberations from the corrupting influence of fear," according to the
RMC's petition.
In a recent Milwaukee Journal Sentinel article, Director of
State Courts J. Denis Moran commented, "Our job is to protect the
legitimate privacy rights of people who come on a voluntary basis and
make the court system work." The article quoted several former jurors
saying that they felt uncomfortable giving out information that could
wind up in the hands of those they helped convict.
The proposed rule has met some opposition by Wisconsin's legal
community; many State Bar members believe it is a solution to a problem
that does not exist. Milwaukee attorney and State Bar Board of Governors
member Thomas L. Shriner understands that there may be a need to deal
with possible threats and dangers to jurors by preventing those who
might threaten them from getting jurors' personal information. "However,
the proposed rule would reverse the presumption and make a party who
wants to know who the jurors are in his or her case carry the burden of
showing cause."
"The trial judge already has inherent authority to adopt specialized
jury procedures in the rare case where juror protection is warranted,"
says fellow board member James M. Brennan of the Legal Aid Society of
Milwaukee Inc. "Quite simply, the proposed rule depersonalizes my
approach to jury selection and undercuts my effectiveness at trial,"
Brennan continues.
Shriner points out, "The juror could be your opponent's next-door
neighbor or work for your client's chief competitor, and you would not
be aware of these facts."
Brennan also believes that, however unintentional, the RMC's proposal
may set back the movement toward gender and race neutrality in the jury
selection practice. "A voir dire examination without an inquiry into
prospective jurors as persons leaves race and gender as salient features
in the selection process. It deprives the trial attorney of significant,
nondiscriminatory information with which to exercise and justify
challenges and strikes."
The State Bar's Litigation and Criminal Law sections oppose the
change, with the Criminal Law Section citing potential constitutional
problems regarding the right to a fair trial, the lack of need for the
measure, and an overly broad definition of "identifying information" as
reasons. The Milwaukee Bar Association also has stated its opposition.
The State Bar Board of Governors is expected to formally oppose the
proposal at its Nov. 13 meeting. A public hearing on the RMC's petition
is scheduled for Nov. 17 at the Wisconsin Supreme Court. [Proposed] SCR
73.04 was published on page 30 of October's Wisconsin
Lawyer.
Endnotes
1 Wis. Stat.
§ 409.115.
2 Wis. Stat.
§ 408.103(3).
3 Wis. Stat. § 409.203(1).
4 Wis. Stat. § 409.115
(6).
5 Wis. Stat. §
409.203(1)(a).
6 Wis. Stat. § 409.115(4).
7 Official Comment No. 1 to Wis.
Stat. § 408.106.
8 Wis. Stat. §
408.106(a)-(b).
9 Wis. Stat. § 408.106(c).
10 Wis. Stat. §
408.106(d).
11 Official Comment No. 4 to Wis.
Stat. § 409.115.
12 Wis Stat. §
408.106(e).
13 Wis. Stat. §
409.115(5)(a).
14 Wis. Stat. §
409.115(5)(b).
15 Wis. Stat. §
409.115(5)(c).
16 Wis. Stat. §
409.115(5)(f).
17 Wis. Stat. §
408.603(1).
18 Wis. Stat. § 409.302.
Wisconsin Lawyer
