Legislative Watch
State Bar Urges Adoption of UCC Revised Article 9
The State Bar Board of Governors urges the
Wisconsin Legislature to adopt the Uniform Commercial Code Revised
Article 9 - Secured Transactions (1999). Wisconsin must enact the
revision by July 1, 2001, to avoid conflict of law issues between
states.
by Ralph Anzivino
Ralph Anzivino, Case Western Reserve 1971,
teaches contracts, UCC, and bankruptcy at Marquette University Law
School. He has written several treatises and books on UCC and bankruptcy
law and numerous other articles. He serves as a State Bar Business Law
Section board member and contributing editor to the Insolvency
Newsletter, and as vice chair of the UCC Committee.
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REVISED ARTICLE 9 OF THE Uniform Commercial Code currently is being
considered by the Wisconsin Legislature for adoption. The Uniform Law
Commissioners, in conjunction with the American Law Institute, completed
the revision in 1999. Thus far, it has been adopted by 28 states and is
under consideration in 14 others. The effective date for all states to
have Revised Article 9 enacted is July 1, 2001, without which
potentially serious "conflict of law" issues may arise. Article 9 of the
Uniform Commercial Code was last revised in 1972 and has been adopted in
every state. The State Bar of Wisconsin has recommended that the
Wisconsin Legislature adopt the current revision.
Revised Article 9 is a substantial improvement to personal property
financing. Since 1972, personal property financing has grown enormously
in amount, number of transactions, and variety of types of personal
property available as collateral. Consistent with its predecessor,
Revised Article 9 draws heavily on current commercial practices for its
revisions. There are significant changes in scope, substantive rules,
and procedures. The following briefly summarizes some of the
revisions.
Scope
Revised Article 9 expands the "scope" of Article 9. The kinds of
property in which a security interest can be taken by a creditor under
Revised Article 9 increases over those available under old Article 9.
Some of the new kinds of collateral available are sales of payment
intangibles and promissory notes, security interests created by
governmental debtors, health insurance receivables, consignments, and
commercial tort claims. Certain kinds of transactions that did not come
under old Article 9 now come under Revised Article 9. For example,
nonpossessory, statutory agricultural liens now come under Article 9 for
determination of perfection and priority.
Attachment
The current rules for the creation and attachment of the security
interest remain substantially the same under Revised Article 9.
Attachment continues to require a security agreement, value, and that
the debtor have rights in the collateral. Revised Article 9 clarifies
that the exception to the signature requirement where the secured party
has possession "pursuant to agreement" means that the agreement must be
a security agreement. Revised Article 9 also clarifies that a
description in the security agreement can be by "type"(for example,
equipment), but generic descriptions are not acceptable (for example,
all the debtor's personal property). As with old Article 9, a security
interest attaches to proceeds, but Revised Article 9 expands the
definition of proceeds.
Perfection
Under Revised Article 9, filing a financing statement remains the
dominant way to perfect a security interest in most kinds of personal
property. Revised Article 9, however, greatly expands the kinds of
collateral where a secured party can use filing to perfect. For example,
filing now can perfect instruments and investment property. As in the
past, different methods of perfection are not mutually exclusive.
"Control" is a new method of perfection for letter of credit rights and
deposit accounts. Under old Article 9, control was available only to
perfect security interests in investment property. A creditor has
control when the secured party has the authority to transfer the
property without the debtor's consent. Possession continues as an
alternative method of perfection and is the only method for perfecting a
security interest in money that is not proceeds. Automatic perfection
for a purchase money security interest is increased from 10 days to 20
days in Revised Article 9. Thereafter, another method of perfection must
be used to continue the perfected security interest. As in the past, the
purchase money security interest in consumer goods remains perfected
automatically for the duration of the security interest.
Choice of Law
Revised Article 9 changes the rules for the location of filing a
financing statement. Old Article 9 required the filing of a financing
statement in the state where the goods were located, and in the state of
the debtor's chief executive office for intangible collateral, such as
accounts and general intangibles. Revised Article 9 specifies only one
place to file for all collateral, and that is the state of the debtor's
location. Revised Article 9 further defines a debtor's location. For an
entity created by a filing within a state, the entity's location is that
state. For example, a debtor incorporated in Delaware, with its chief
executive office in Chicago, would file the financing statement in
Delaware for all collateral where filing was a means of perfection. For
an entity not created by a filing, the entity's location is the place of
its chief executive office. Finally, for an individual, the individual's
location is that person's residence. Experience suggests that collateral
shifts location much easier than does the debtor's location.
The Filing System
Revised Article 9 endorses a full commitment to centralized filing -
one place in every state where financing statements are filed. Under
Revised Article 9, the only local filing of financing statements occurs
in the real estate records for fixtures. Fixtures are items of personal
property that become physically part of the real estate, and are treated
as part of the real estate until severed from it.
Revised Article 9 also anticipates a filing system that will evolve
from the world of filed documents to the world of electronic
communications and records. In a dramatic change, Revised Article 9 has
eliminated the requirement that the debtor sign the financing statement.
This change will facilitate the electronic filing of financing
statements and electronic searches. The paper filing of financing
statements already is disappearing in many states where electronic
filing is available. Revised Article 9 encourages this transition from
paper to electronic filing without further revision.
Revised Article 9 also makes filing office operations more
ministerial than old Article 9. The office that files financing
statements has no responsibility for the accuracy of information on the
statements and is fully absolved from any liability for the contents of
any statements received and filed. Revised Article 9 contains a
statutory rule to determine when a mistake in the debtor's name is so
incorrect as to render the financing statement ineffective
(unperfected). A financing statement is effective if a computer search
run under the debtor's correct name turns up the financing statement
with the incorrect name. If it does not, then the financing statement is
ineffective. A court has no discretion to determine that the incorrect
name is not seriously misleading. The computer search logic used by the
state's filing office becomes the legal standard for an error in the
debtor's name.
Consumer Transactions
Revised Article 9 clearly distinguishes between consumer and
commercial transactions. It contains many provisions providing special
rules in consumer transactions. A consumer transaction is defined in the
traditional manner as one involving a personal, family, or household
purpose. Some examples of consumer provisions are: a consumer cannot
waive redemption rights in a security agreement; a consumer buyer of
goods who prepays in whole or in part has an enforceable interest in the
purchased goods and may obtain the goods as a remedy; a consumer is
entitled to disclosure of the amount of any deficiency assessed against
him or her, and the method for calculating the deficiency; and a secured
creditor may not accept collateral as partial satisfaction of a consumer
obligation, so that choosing strict foreclosure as a remedy means that
no deficiency may be assessed against the debtor.
Default and Enforcement
Default and enforcement provisions, which are triggered by the
debtor's default, prescribe the procedures for repossessing the
collateral and selling it to satisfy the debt. Revised Article 9
includes new rules dealing with "secondary" obligors (guarantors), new
special rules for some of the new kinds of property subject to security
interests, new rules for the interests of subordinate creditors with
security interests in the same property, and new rules for aspects of
enforcement when the debtor is a consumer debtor.
Some of the specific new rules are: a secured party is obliged to
notify a secondary obligor when there is a default, and a secondary
obligor generally cannot waive rights by becoming a secondary obligor; a
secured party who repossesses goods and sells them is subject to the
usual warranties that are part of any sale; junior secured creditors and
lienholders must be notified when a secured party repossesses
collateral; and if a secured party sells collateral at a low price to an
insider buyer, the price that the goods should have obtained in a
commercially reasonable sale, rather than the actual price, is the price
that will be used in calculating the deficiency. The latter rule has no
application in a consumer transaction.
Transition Rules
The many changes in Revised Article 9 make the transition rules
complex. The proposed uniform effective date of July 1, 2001, is
intended to reduce the disruptive effect of transitioning from old
Article 9 to Revised Article 9 between states. There are many transition
rules contained in Revised Article 9 that may or may not be applicable,
depending upon the facts of each situation. One common transition
problem will illustrate how a transition rule will be applied. How will
a security interest perfected by filing under old Article 9 fare under
Revised Article 9 once it goes into effect? The filing of an effective
financing statement under old Article 9 remains effective under Revised
Article 9 (including after acquired property) until the earlier of the
normal lapse of the financing statement or five years after the
effective date of Revised Article 9. A corollary transition rule
provides that the filing of a financing statement prior to the effective
date of Revised Article 9 is effective to perfect a security interest
under Revised Article 9 if the description requirements are satisfied
under Revised Article 9 and the filing is in the correct state as
required by Revised Article 9.
Conclusion
There are many reasons to support the adoption of Revised Article 9.
First and foremost, uniformity between the states in commercial
transactions must be maintained. By July 1, 2001, nearly all of the
states will have adopted Revised Article 9. Paper-based transactions are
giving way to electronic transactions. Revised Article 9 facilitates
this change. New kinds of property and transactions have been developed
since Article 9 was last amended in 1972. The scope of Article 9 is
increased to facilitate these new kinds of collateral. Revised Article 9
substantially improves the perfection by filing method by prescribing
the debtor's location rather than the location of the collateral as the
appropriate place to file. Particularly for businesses as opposed to
individuals, the location of the collateral changes more often than the
location of the debtor, resulting in a more reliable filing system.
Statutory, nonpossessory liens, which typically have no public notice
requirement, have proliferated since 1972. These liens often conflict
with security interests. Revised Article 9 brings these liens into
coverage for the purpose of providing public notice and setting
priorities between creditors. Finally, Revised Article 9 addresses
certain consumer financing issues that have never been addressed by old
Article 9.
Wisconsin Lawyer