by Jeffrey Alan Grabowski, Esq.
Whether you are a lender or borrower, the recent revisions to the Uniform Commercial Code Article 9 (Secured Transactions) will affect how you document your secured loan. The revisions are the first true overhaul of Article 9 since its creation. The revisions affect all aspects of taking a security interest in personal property, from categories of collateral to filing procedures to collection rules. Keep in mind these top ten items when reviewing proposed or existing financing arrangements.
10. Media neutral. The revisions to Article 9 are forward looking by eliminating references to paper documents. A security agreement may now take the form of an electronic transmission (e.g. e-mail), an audio recording (e.g. voice-mail) or even a video recording. The key element is authentication. The party pledging the collateral must indicate its consent in a verifiable manner.
9. Standardized new UCC filing statements. Throw out your old UCC filing forms. The new forms required by revised Article 9 require new information concerning the borrower’s location and correct legal name. The new forms do not require the signature of the borrower and are authenticated automatically by virtue of the borrower’s authentication of the security agreement.
8. New categories of collateral. Revised Article 9 alters the definitions of some categories of collateral and adds new categories. For example, in keeping with its media neutral theme, Article 9 includes new categories for electronic instruments, such as electronic chattel paper. It also encompasses new types of collateral such as consignments, health care receivables, investment property, commercial tort claims, software, and supporting obligations.
7. Existing security agreements do not benefit from changed definitions. The new definitions of collateral are not incorporated into security agreements which predate the adoption of revised Article 9 (July 1, 2001 in New Jersey). The new Article 9 is not intended to rewrite existing contractual arrangements. Lenders seeking to obtain, or borrowers seeking to pledge, additional collateral must obtain a new security agreement. The old definitions will remain in effect as to the old security agreement until the expiration or amendment of that agreement.
6. Simplified filing requirements. Under old Article 9, the lender was required to perfect its security interest by filing a UCC financing statements where the property was located. The result was potentially numerous filings in different states and counties. Under revised Article 9, the UCC financing statement is filed only where the debtor is located. For any entity created by a state filing (e.g. corporations and limited liability companies) the debtor’s location is the state where creation by filing took place. For partnerships, the location is state where the principal office of the debtor is located. For individuals, the location is the state of the debtor’s residence. For collateral with a connection to real estate (e.g. fixtures, and crops) the filing must still be made in the county property records where the collateral is located.
5. Transition Rules. The revised filing procedure creates some temporary transition problems until all existing UCC financing statements expire. In general, upon the expiration of an existing financing statement, the new financing statement should be filed in the state where the debtor is located, specifically referencing the prior filing by location and filing number. Nonetheless, the transition rules are specific and each situation should be analyzed separately to ensure that the filing is done properly.
4. Perfection by Possession Will Trump Perfection by Filing. Possession of certain collateral by the creditor, or by a bailee who acknowledges holding the collateral for the benefit of the creditor, will perfect a security interest. A security interest perfected by possession will have priority over a security interest perfected by filing, even if the perfection by possession is later in time than the filing. When taking a security interest in promissory notes or other instruments, investment property or other tangible property, remember that perfection by filing does not provide total protection to the lender.
3. Good Faith in Collection Procedure. Revised Article 9 specifically requires a creditor to act in good faith when collecting a secured debt. Good faith is defined as honesty in fact and the observance of commercially reasonable standards. Further, the creditor must act in good faith in each aspect of the transaction. The failure to act in good faith will reduce any deficiency claim to the extent any failure to act in a commercially reasonable manner reduced the price at which the collateral was disposed.
2. Describe Collateral with Specificity. Under revised Article 9, a security agreement must describe the collateral specifically. Most collateral may be described by type, e.g., “all equipment of the debtor.” Commercial tort claims must be described specifically and not by type. The security agreement may not generally describe the collateral, i.e., “all property of the debtor.”
1. U.C.C. Insurance. Because the revisions to Article 9 are new, lenders, borrowers and their attorneys will have no guidance from court interpretations of the new statutes and definitions. Further, during the transition period, security interests may appear both in the records of the state of location of the debtor, but also in the states and counties where the collateral is located. Additionally, the transition rules contain specific requirements for amending and renewing existing security interests. If the transaction is sufficiently complex, or sufficiently large, the creditor may wish to consider a new type of insurance, similar to real estate title insurance, which insures the creditor’s perfection and priority of the security interest. Insurance will give the creditor peace of mind that it has complied with revised Article 9.
This Article was written by Jeffrey Alan Grabowski, Esq., a member of Capehart Scatchard’s Commercial Group. For further information regarding the issues discussed in this Article, please contact Mr. Grabowski at 856.914.2088, by fax at 856.235.2786, or by e-mail at jgrabowski@capehart.com. For more information on Capehart Scatchard, visit our website at www.capehart.com.
This article is designed to provide general information on the topic presented and is provided with the understanding that the author is not rendering any legal or professional services or advice, This article is not a substitute for such legal or advice. If such services are required, you should retain competent legal counsel.
© 2002 Capehart & Scatchard, PA
