Author: Michael Ripp
Most states recently adopted the 2010 amendments to the 2001 Uniform Commercial Code ("UCC") Article 9, with an effective date of July 1, 2013. Unfortunately, Arizona and a few other states have not yet adopted the 2010 amendments, which leaves us with a not-quite-uniform UCC for at least a few more months. While the 2010 amendments will not have a significant general impact on searching and filing against entity debtors, they will change the way in which lenders search and file against individual debtors (natural persons). It is therefore particularly important for lenders who deal with individual debtors whose principal residence is outside of Arizona to be aware of the changes described below.
Individual debtor names
The most significant issue addressed by the 2010 amendments concerns individual debtor names. The 2001 UCC required a financing statement to identify the "name of the debtor". Lenders discovered that it is not always easy to determine an individual debtor's name (considering the name changes associated with marriages and divorces, the use of middle names and nicknames, etc.). However, instead of mandating a uniform approach, the 2010 amendments offer two alternatives:
(a) Alternative A (the so-called "only if" approach) requires a lender to use the name that appears on the debtor's driver's license or other specified document (for example, an identification card issued by the state of residence), or, if the person has no such document, his or her surname and first personal name. Under Alternative A, if the driver's license includes a typographical error, the lender had better reproduce the typographical error on its UCC filing. A relevant identification document can no longer be used to determine the person's name after it expires.
(b) Alternative B (the so-called "safe harbor" approach) retains the 2001 UCC's "name of the debtor" approach, but also provides a safe harbor for using the name designated by statute (i.e., the name appearing on the person's driver's license or state-issued identification card). Alternative B could significantly increase the universe of permissible debtor names to include nicknames and other variations that were searched under the 2001 UCC.
The 2010 amendments allow each state to choose between the Alternatives A and B; the attached chart identifies which states have adopted which alternative.
As the driver's license is a permissible means of determining the debtor's name under either Alternative A or Alternative B, a lender needs to review the debtor's driver's license as the starting point for every UCC search it conducts on an individual debtor name after the effective date. The name on a driver's license may be abbreviated, contain errors or include nicknames that would not be disclosed by a search on what would otherwise appear to be a correct name of the debtor, and a searcher cannot determine exactly what name variations need to be searched without first reviewing the driver's license.
A UCC search in the state that issued the debtor's driver's license will generally not be necessary unless it is also the state of the debtor's principal residence, except where the debtor has relocated from the state that issued the driver's license within the previous year (in which case relocation may have changed the governing law as described below). A financing statement filed in the former state may remain effective for up to a year following the debtor's move to a new state.
Registered organization name
A question arose under the 2001 UCC as to which public records were dispositive in determining the name of a registered organization (which normally includes corporations, LLCs and limited partnerships, but not general partnerships). The 2010 amendments make it clear that the "public organic record" to be used for that purpose is generally the document filed with or issued by the relevant state or the United States to form or organize the registered organization. Therefore, a certificate of good standing is not an appropriate source for determining the registered organization's name. Delaware statutory trusts and Massachusetts business trusts are considered registered organizations.
Lenders will notice that the new UCC Financing Statement form to be used in the states that have adopted the 2010 amendments no longer includes boxes for tax ID numbers, type of entity, state of formation or organizational ID number (thereby eliminating the bottom row of section 1 of the 2001 UCC Financing Statement form they have used for the past dozen years). However, the UCC Financing Statements you will continue to file in Arizona and other non-adopting states will include that row of boxes, so make sure you file the correct form, especially if you will be advancing funds before you get your filed financing statement back from the filing office (or are able to view it online).
Trusts and trustees
The 2010 amendments no longer require a UCC filing to indicate whether the debtor is "a trust" or "a trustee acting with respect to property held in trust" – they now require only an indication that "the collateral is held in a trust". Transitional rules provide that financing statements filed before the effective date of the 2010 amendments (generally July 1, 2013) and meeting the then current requirement will not cease to be effective because they fail to comply with the new requirement. The 2010 amendments will generally not change UCC searches for trusts after the effective date (the only options are the name of the trust, if it has a name, or the name of the settlor of an unnamed trust). The lender must still determine who constitutes the debtor (the trust or the trustee), as the appropriate filing office is determined by the jurisdiction in which the debtor is located.
The previous poorly named "correction statement" has been renamed "information statement" to make clear that it is informational only and has no legal effect. The UCC Article 9 correction statement was intended to allow a debtor to add an objection or explanation regarding a filed financing statement (similar in effect to a statement a debtor is permitted to file with a consumer credit reporting agency to express its disagreement with an entry in its credit report). Unfortunately, lenders in a couple of high-profile cases had filed correction statements seeking to undo terminations filed in error, only to later discover that filing a correction statement had no legal effect. The new information statement can be filed by either a debtor or a secured party.
Change in governing law
Under the 2001 UCC, the perfection of security interests that attached prior to a change in the debtor's location (for example, due to a merger of the debtor into an entity existing under the laws of another state) continued for four months after the change. The 2010 amendments allow perfection of the lender's security interests that attach within four months after a change in the debtor's location if the lender has previously taken steps that would have allowed it to be perfected absent the change in location. For example, if a lender has properly perfected its security interest by filing in Colorado against a debtor located in Colorado and the debtor thereafter changes its location to Delaware, the 2001 UCC would allow the lender to remain perfected for four months following the change in location in any collateral in which it was perfected before the change. The 2010 amendments take the concept a step further by allowing the lender to be perfected in any newly acquired collateral to which its security interest first attaches during the four-month period following the change in location (perfection then continues until the end of the four-month period).
The 2010 amendments generally have a July 1, 2013 effective date, and there is generally a five-year transition period before filings made in conformity with the 2001 UCC must be amended or otherwise revised to conform to the 2010 amendments. The transition issue likely to require the greatest number of amendments will involve the identification of individual debtor names. If, for example, an individual debtor name on the filed UCC does not match the name on the debtor's driver's license, the lender must file an amendment when it continues the effectiveness of a pre-effective date financing statement. Be aware that pre-effective date filings with debtor name variations (i.e., names that do not match the driver's license) remain effective even in Alternative A states during the transition period.
Other changes and cautions
The 2010 amendments also made a number of other changes dealing with less frequent (but potentially critical to those involved) situations. Be aware that the 2010 amendments in many of the adopting states vary from the model 2010 amendments. Therefore, lenders are cautioned to consult the version of the UCC adopted by the state in question. And finally, remember that Arizona has not yet adopted the 2010 amendments.
Opinions expressed in this Client Alert are those of the author and do not constitute legal advice regarding any specific matter or situation. Legal advice can be given, and an attorney-client relationship can be formed, only on the basis of specific facts discussed between client and attorney pursuant to an engagement to perform legal services.