September, 2001
The Revised Article 9 - Secured Transactions Made Easier
Revisions to Article 9 of the Uniform Commercial Code have been adopted in 47 jurisdictions (including the District of Columbia, Maryland and Virginia) and are pending in the other states. While there are some differences in the amendments adopted by the various states, for the most part the amendments recommended by the Article 9 Drafting Committee have been adopted without change, thereby providing "uniform" laws governing secured transactions throughout the states. This article summarizes some of the changes that became effective July 1, 2000 in most of the states that have adopted the revised Article 91.
Article 9 governs security interests in personal (but not real) property. These security interests arise when the creditor makes a loan to the debtor which is secured by personal property of the debtor. A creditor may obtain a security interest in tangible personal property (such as cars, furniture, fixtures, computers, etc.), investment property (such as stocks), accounts (including accounts receivable), general intangibles (such as computer software and other intellectual property rights), chattel paper, deposit (bank) accounts, crops, and the like and in the proceeds (including royalties) from any collateral.
A security interest is enforceable only if (1) value has been given; (2) the debtor has rights in the collateral and (3) one of the following conditions is met: (a) the debtor has signed or otherwise authenticated a written security agreement, (b) if the collateral is not a certificated security, it is in the "possession" of a third party who acknowledges in writing that the third party is holding the collateral for the benefit of the secured party, (c) if the collateral is a certificated security, the security certificate has been delivered to the secured party, or (4) if the collateral is deposit accounts, electronic chattel paper, investment property or letter of credit rights and the secured party has "control." The security agreement may provide that the collateral covers not only the debt existing at the time the security agreement is entered into, but also that it secures future advances.
The revised Article 9 makes it easier for a secured party to "perfect" his security interest. By signing or otherwise authenticating a written security agreement, the debtor authorizes the secured party to file a financing statement covering the collateral. A financing statement must state the debtor's correct name. If the debtor is a corporation, limited partnership or limited liability company, the name listed must be the name indicated on the public records of the state of formation. Trade names are not acceptable. In addition, the financing statement must reasonably describe the collateral by a specific listing, a category listing or any other method by which the identity of the collateral is objectively determinable.
Where before financing statements needed to be filed with each state and/or county where the collateral was located, under the revised Article 9, financing statements will, for the most part, be filed only with the state where a corporation, limited partnership or limited liability company is organized. If the security interest is granted by a partnership, sole proprietorship or individual, the financing statement will be filed in the state or states where the partners or individuals reside.
The central filing location rule governs new filings made after July 1, 2001 for the states where the revisions became effective as of July 1, 2001. However, during a five year transition period creditors will still have to search for prior filings in the state and county offices where the debtor's various offices are located and/or the collateral is or was located.
A security interest in some types of collateral can only be perfected by taking "control" of the collateral. In some instances this is physical control (for instance, taking possession of a stock certificate). In other instances, control can be had by entering into a "control agreement" with a third party (for instance the stockbroker who holds the debtor's stock in street name) which gives the secured party the right to direct the third party to turn the collateral over to the secured party in the event of a default by the debtor.
The revised Article 9 allows a creditor to accept the collateral as either full or partial payment for the debt if, after the default has occurred, the debtor consents to the acceptance of the collateral as full or partial payment and any other person who claims an interest in the collateral does not object. If the above conditions are not met, the creditor must sell the collateral in a commercially reasonable manner.
This newsletter provides only a brief summary of some of the changes to Article 9, is presented for informational purposes only, and cannot substitute for advice of counsel. For additional information, please contact us at (202) 331-0123 or by e-mail at .
1 The revisions will become effective in Connecticut on October 1, 2001 and in Alabama, Florida and Mississippi on January 1, 2002. « archived newsletters