Vol. 75, No. 4, April 2002

Revisions to UCC Law Create Uncertainty

by Ann Massie Nelson

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 new law.

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 remaining states.

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 credit transactions.

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 to Miller.

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 license agreements.

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 recommends.

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 residence.

"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," Miller notes.

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 jurisdictions.

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.

Wisconsin Lawyer