Article 9 of the Uniform Commercial Code (UCC) governs the creation, perfection, priority, and enforcement of security interests in most types of personal property and fixtures. The UCC, which all 50 states and the District of Columbia have adopted, also governs sales of goods, leases, negotiable instruments, bank deposits and collections, letters of credit, documents of title, and investment securities. In Wisconsin, Article 9 appears in Wis. Stat. chapter 409.
“Hundreds of millions of dollars of commercial and consumer credit are granted every year in secured transactions under UCC Article 9.”1 The Article 9 rules apply to transactions as varied as a consumer financing the purchase of kitchen appliances, a manufacturer financing acquisition of machinery, and a retailer financing the purchase of inventory.2 In addition, businesses routinely grant their lenders security interests in broad categories of business assets, including both tangible property (for example, equipment, HVAC systems, inventory, furniture, appliances) and intangible property (for example, accounts receivable, rents, contract rights, deposit accounts).
Changes to Article 9 became effective on July 1, 2013 in Wisconsin and most other states that have adopted the most recent amendments. These changes may catch some attorneys by surprise, particularly those who do not regularly practice in the area of lending. Any attorney who represents lenders, businesses that borrow money, buyers or sellers of businesses or business assets, or businesses that engage in collection actions needs to know Article 9’s rules.
This article provides an overview of Article 9, explains the recent amendments, and offers tips for attorneys who must comply with Article 9 now that the amendments have taken effect.
A security interest in personal property works much like a mortgage on real property. The borrower gives the lender a mortgage on real property to secure repayment of a loan. Recording of a mortgage with the register of deeds puts the public on notice of the lender’s security interest in the real property. The order in which mortgages and other liens are recorded generally determines the order in which creditors get paid if the real property is sold or foreclosed.
The process of obtaining a security interest in personal property has a few more steps. First, the security interest must be created through a process called attachment. Security interests generally are created when the owner of personal property (known as the debtor) signs a security agreement with the creditor (known as the secured party) by which the debtor pledges personal property as security for a debt. Unlike a mortgage, however, a security agreement is not recorded and does not give the secured creditor rights versus other creditors. Instead, the secured party establishes these rights through a process called perfection.
Norman D. Farnam, Illinois 1999, is a member of Stroud, Willink & Howard LLC, Madison, practicing business law and commercial litigation, including assisting lenders with all aspects of commercial finance transactions.
Krista R. Pleviak, U.W. 2008, is an associate with Stroud, Willink & Howard LLC. She represents lenders in complex foreclosures and problem loan workouts, commercial loan origination and due diligence, and negotiation and sale of owned real estate.
There are several ways to perfect under Article 9 depending on the type of personal property pledged. For example, sometimes Article 9 requires a secured party to perfect by taking possession or control of the personal property. The most common method of perfecting a security interest is by filing a financing statement, which gives the public notice of the interest just as does a mortgage. Whereas a mortgage is recorded with the register of deeds, in Wisconsin most financing statements are filed with the Wisconsin Department of Financial Institutions (DFI). The exception is financing statements covering personal property that is closely related to real property (such as fixtures); like mortgages, these financing statements must be recorded with the register of deeds.
Just as real property may have first and second mortgages, personal property may be pledged to more than one secured party. The term priority refers to the order in which secured parties may exercise their rights in the personal property. Priority is important when a debtor is in default and there is not enough personal property to pay every creditor. A security interest that has been perfected has priority over an unperfected security interest. Generally, for security interests that are perfected by filing, the first secured party to file has the first priority.
Article 9 also provides the remedies available to a secured party when a debtor defaults. Generally, if a debtor defaults, the secured party may possess and sell the personal property to help pay the debt. Article 9 sets forth the proper procedure for taking, handling, and selling personal property, including requirements for advertising a sale of the personal property.
The 2010 Amendments
The last major revision of Article 9 occurred in 1998 and went into effect on July 1, 2001. In 2010, following more than a decade of experience with the 1998 version of Article 9, the Uniform Law Commissioners and the American Law Institute approved amendments to Article 9 to address filing issues and other matters. As of the writing of this article, the 2010 amendments have been adopted in 39 states, including Wisconsin, and have been introduced in the legislatures of 10 others.3 Wisconsin adopted the 2010 amendments in 2011 Wis. Act 206, which was enacted on April 2, 2012. The new rules took effect simultaneously in most jurisdictions, including Wisconsin, on July 1, 2013.
The new rules have been adopted more or less uniformly by the states. However, many states have made their own modifications to the otherwise uniform provisions of Article 9, and many states will continue their respective nonuniform provisions after enacting the 2010 amendments.4
Most of the 2010 amendments are intended to clarify and refine existing law. Some of the most important changes are described below.
Some of Article 9’s most important revisions are related to the names of debtors that must be used on financing statements. “Since the adoption of the 1998 revision of Article 9, there have been at least a dozen court decisions dealing with the question of what name needs to be provided on a financing statement for an individual debtor.”5 Financing statements are indexed under and must be searched using the debtor’s name. If the wrong name is used, the secured party’s interest may be unperfected and vulnerable to subsequent priority claims. Likewise, someone searching using the wrong name might miss properly filed financing statements, with potentially disastrous consequences.
For individual debtors’ names, the 2010 amendments offer each state a choice between two alternatives:
- Alternative A (known as the only-if rule) provides that, if the debtor holds an unexpired driver’s license issued by the state in which the financing statement is filed, the financing statement must use the debtor’s name as it appears on the most recently issued driver’s license (even if the driver’s license contains an error). If the debtor does not hold a current driver’s license in the state, the financing statement may use either the debtor’s “individual name” or the debtor’s surname and first personal name.
- Alternative B (known as the safe-harbor rule) provides that any of the options above (driver’s license name, individual name, or surname and first personal name) may be used on a financing statement.6
Wisconsin has adopted Alternative A, except that instead of “driver’s license,” the Wisconsin law refers to “operator’s license under ch. 343 or identification card under s. 343.50.”7 Therefore, in Wisconsin, secured parties must look at the debtor’s operator’s licenses and identification cards and use the debtor’s name exactly as it appears on the most recently issued nonexpired card.
If the debtor does not have an operator’s license, the secured party may use the “individual name.” The term individual name is not defined by statute, and the comments in the UCC indicate that an individual name can mean many different things.8 Time will tell whether the decision to leave “individual name” undefined provides helpful flexibility or problematic ambiguity.
It also is important to note that the only-if rule for individual debtors does not apply when the secured party files a mortgage as a financing statement.9 On a mortgage, the debtor name will be sufficient if it uses any of the safe-harbor options.10
For debtor corporations, limited liability companies, or other registered organizations, the proper debtor name is the name that appears on the entity’s charter document that was filed with the state in which the entity was organized.11 A new definition, public organic record, has been created to clarify the correct source of a debtor name for registered organizations.12 For example, the public organic record of a corporation organized in Wisconsin is the corporation’s articles of incorporation filed with the DFI (as amended or restated by any subsequently filed record).
Therefore, if the debtor is a registered organization, secured parties must inspect the public records of the state in which the entity is organized and use the debtor’s name exactly as it appears on the entity’s organizational documents. The name on a certificate of good standing or in the state’s business-entity database might not be correct and should not be relied on.
The 2010 amendments also clarify the correct debtor name to use when the debtor is an estate,13 a trust,14 or a nonregistered organization.15
Article 9 permits the secured party to use multiple names for the same debtor on the financing statement.16 For instance, the secured party might use both a maiden name and a married name on the same filing. Given the importance of the debtor name in financing statements, secured parties may choose to provide all debtor names that meet the safe-harbor requirements and any other names by which a debtor might also be known.
The same considerations apply when searching the DFI’s records in connection with a purchase or other transaction involving personal property. The attorney must be aware of Article 9’s rules to search the proper name. For example, failing to conduct a proper search might cause a business buyer to purchase property already pledged to a secured party. The DFI has informed the authors that the online-search functionality will remain essentially the same and that searches after July 1, 2013, will continue to turn up relevant earlier filings.
Change in Name of Debtor
If, after the financing statement is filed, the debtor’s name changes so that the statement no longer sufficiently identifies the debtor, then the statement becomes “seriously misleading”17 and no longer effective. The 2010 amendments clarify when a secured party must take action to amend the debtor name. Generally, perfection will continue for any personal property acquired by the debtor before, or within four months after, the financing statement becomes seriously misleading.18
However, financing statements commonly cover personal property acquired by the debtor after filing (for example, a retailer’s inventory that is constantly turning over). The secured party must amend the financing statement to secure personal property acquired more than four months after the name change, or the secured party will not be perfected in that property.19
So, for example, if the debtor changes his or her name on an operator’s license, or a company merges into another company, those changes would require the secured party to file an amendment to the financing statement to protect its interest in after-acquired personal property. Secured parties should develop policies to ensure they keep track of changes in debtors’ names.
Change in Location of Debtor
The law of the state where the debtor is located determines how a security interest is perfected. If a debtor moves, financing statements typically must be refiled in the debtor’s new state. The 2010 amendments provide some additional protection for a secured party when the debtor relocates to another state.
Before the 2010 amendments, a perfected security interest remained effective for a four-month grace period to allow the secured party to perfect in the new state. However, there was no grace period for after-acquired property. When a debtor moved to another state, the secured party immediately became unperfected in any property acquired by the debtor after the move. The 2010 amendments establish a grace period for property acquired within four months after the debtor moves.20 If the secured party does not perfect its security interest in the new state within the grace period, the security interest will become unperfected at the end of the grace period and will be deemed never to have been perfected.21
UCC Standard Forms
Article 9 strongly encourages the use of standard-form financing statements and related filings. In Wisconsin, these forms are available on the DFI’s website, at www.wdfi.org/ucc/forms.htm. The forms have been revised to reflect the 2010 amendments’ changes and clarifications regarding filing information. Among other changes, form fields that call for individual-debtor information have been revised to reflect the new terms and requirements (for example, “individual’s surname” has replaced “individual’s last name,” and “first personal name” has replaced “first name”).
Extraneous information on the forms has been deleted. For example, secured parties will no longer be required to provide a debtor organization’s type, jurisdiction of organization, or identification number, and these fields have been removed from the paper forms. The tax ID number field (which was never required in Wisconsin) has been removed entirely.
Certain information has been relocated within the same form (for example, the alternative designation boxes), and some information has been moved to different forms (for example, the checkbox for indicating that the financing statement will be filed in the real estate records has been moved to the addendum form). The financing statement form also provides a mechanism for accommodating individual-debtor names that do not fit within the spaces provided.
Finally, the instructions that accompany each form have been updated to provide additional explanation and guidance to secured parties as they work their way through the new forms. When filling out the new forms, secured parties should carefully review the instructions. Images of the new forms are set forth within the text of Wis. Stat. chapter 409 and are available on the DFI’s website.
The DFI indicated that it would begin accepting the new versions of the forms (with revision dates of April 20, 2011, or later) on July 1, 2013. For 30 days after the effective date, the DFI will accept both versions of the forms. After this grace period, prior versions will be rejected. The DFI also indicated that it would update its electronic filing system on July 1, 2013, and that the system might briefly be down while these changes are implemented.
As a result of the 2010 amendments, “correction instruments” (called “statements of claim” in Wisconsin) have been renamed “information statements.”22 Current law permits debtors to file correction instruments when they dispute a financing statement’s validity or accuracy. However, a “correction instrument” does not actually correct anything. Instead, it merely provides debtors the opportunity to give public notice that they dispute a filing. Thus, renaming the instrument better reflects the document’s purpose. In addition, the 2010 amendments now permit secured parties to file information statements if they dispute the validity of a filing.23
The 1998 transitional provisions were quite challenging to understand. The 2010 transitional provisions are less so but still are somewhat difficult to read. They dictate how existing perfected security interests will be treated under the new rules during a five-year transitional period beginning on the effective date of the 2010 amendments and ending June 30, 2018.24
In general, a security interest that is perfected before July 1, 2013, will continue to be effective provided the requirements for attachment and perfection that apply to the security interest have not changed. If any of the requirements have changed, the secured party must satisfy any additional requirements within one year after July 1, 2013.25
The foregoing is neither an exhaustive description of Article 9 nor a comprehensive list of the 2010 amendments. Therefore, attorneys should carefully review the full text of the 2010 amendments and the official comments so as to be poised to advise their clients regarding the changes.
1 Uniform Law Commission, UCC Article 9 Amendments Enacted in 26 States (May 22, 2012), (last visited June 19, 2013).
3 Uniform Law Commission, Legislative Fact Sheet – UCC Article 9 Amendments (2010), (last visited June 19, 2013).
4 For example, Wisconsin adopted a nonuniform definition of good faith in 2009 Wisconsin Act 320 and maintained that definition after enactment of the 2010 amendments. For a state-by-state list of variations from the uniform 2010 amendments, see Paul Hodnefield, The 2010 Amendments to UCC Article 9: State Enactment Variations Current through Sept. 1, 2012, (last visited June 19, 2013).
5 Uniform Law Commission, UCC Article 9 Amendments (2010) Summary, (last visited June 19, 2013).
6 UCC § 9-503(a)(4), (5), (b), Alternative A & B, available at http://www.uniformlaws.org/Shared/Docs/UCC9/UCC9KitBundle.pdf. Unless otherwise noted, all references to the UCC are to the Code after adoption of the 2010 amendments.
7 See Wis. Stat. § 409.503(1)(dm), (e). Unless otherwise noted, all references to the Wisconsin Statutes are to the statutes after adoption of the 2010 Amendments.
8 UCC § 9-503, cmt. 2.d.
9 See UCC § 9-502(c)(3)(B); Wis. Stat. § 409.502(3)(c)2.
10 See UCC § 9-502(c)(3)(B); Wis. Stat. § 409.502(3)(c)2.
11 See UCC § 9-503(a)(1); Wis. Stat. § 409.503(1)(a).
12 See UCC § 9-102(a)(68); Wis. Stat. § 409.102(1)(qp).
13 See UCC § 9-503(a)(2); Wis. Stat. § 409.503(1)(b).
14 See UCC § 9-503(a)(3); Wis. Stat. § 409.503(1)(c).
15 See UCC § 9-503(a)(6); Wis. Stat. § 409.503(1)(f).
16 See UCC § 9-503, cmt. 2.d.
17 See UCC § 9-506(b); Wis. Stat. § 409.506(2).
18 UCC § 9-507(c)(1); Wis. Stat. § 409.507(3)(a).
19 UCC § 9-507(c)(2); Wis. Stat. § 409.507(3)(b).
20 See UCC § 9-316(h); Wis. Stat. § 409.316(8).
21 UCC § 9-316, cmt. 7.
22 See UCC § 9-518; Wis. Stat. § 409.518.
23 See UCC § 9-518; Wis. Stat. § 409.518.
24 UCC §§ 9-802 to 9-809.; Wis. Stat. §§ 409.802–.809.
25 UCC § 9-803(b); Wis. Stat. § 409.803(2).