Proposed UCC Article Amendments That Will Impact Secured Lending
With Article 9 provisions changing and inconsistencies among the codes of various jurisdictions, maintaining a secure position can be a complex responsibility. Bottom line, secure positions are the lifeblood to an asset-based lender and an understanding of changing regulation is critical to success.
The financial health of asset-based lenders is dependent on maintaining perfected security interests. But underwriting and risk management will soon have to undergo a new treatment. The National Conference of Commissioners on Uniform State Laws (NCCUSL), the organization responsible for approving revisions to the Uniform Commercial Code (UCC), recently adopted new amendments to the UCC Article 9, which carry important implications to the perfection and priority of security interests. Over the next several years, individual states will adopt these amendments in whole or in part at their discretion, likely with an effective date of July 1, 2013.
Below are four amendments that will likely be most critical to the search, filing and entity monitoring practices of asset-based lenders. The full text of all proposed amendments can be found on the University of Pennsylvania Law School website.
Individual Debtor Name
Two new options will be offered for determining an individual debtor name. Alternative A would require that the name matches the name that is provided on the individual’s driver’s license, or, in the absence of such document, the debtor’s surname and first personal name. This approach provides greater protection for searchers of the UCC.
Alternative B would deem the driver’s license a “safe harbor,” meaning the secured party would be protected should it file under the name listed on the license. However, equal treatment would be provided for the “name of the debtor” as more loosely defined in the current code. This approach makes searching more challenging, but provides greater lenience for a filer.
Practical Implication: Watch out for driver’s license expirations resulting in name changes. Where Alternative A is adopted, the individual debtor name will be determined by a single source — the driver’s license — so there will be a greater risk of imperfection if a secured party does not revise the debtor’s name upon expiration of the license.
Registered Organization Debtor Name
Current law provides that the correct debtor name of registered organizations is that which is indicated on the “public record.” This ambiguity is proposed to be clarified through the revised term “public organic record,” a record that is available for public inspection, and was initially filed with or issued by a state to form or organize an organization. It also includes subsequently filed records, which amend or restate the initial record.
Practical Implication: Any amendments and other subsequently filed records should always be consulted. Furthermore, certain records, such as a certificate of good standing, would not be sufficient to identify the correct debtor name because its issuance or publication does not form or organize the corporation.
Continued Perfection of Security Interest
Under current law, in the event of a debtor location change, a first secured party enjoys protection of only existing collateral under a four-month grace period. Security interests in collateral acquired after the change of location are not perfected until a filing is made in the new location. A proposed amendment would protect after-acquired collateral if the secured party files a financing statement in the new location during the four-month period.
Practical Implication: First secured parties would have greater protection under the 2013 amendments, with a grace period in which to maintain their interest in all collateral.
With Article 9 provisions changing and inconsistencies among the codes of various jurisdictions, maintaining a secure position can be a complex responsibility. Professionals in the lending community need to make themselves aware of these changes and how they will impact their day-to-day business. Bottom line, secure positions are the lifeblood to an asset-based lender and an understanding of changing regulation is critical to success.
Dan Lias is the UCC business consultant in the Chicago office of CT Corporation. He works primarily with area law firms in terms of their due diligence searches and filings. Lias shares market knowledge and assists in developing strategies that meet each firm’s specific needs. He graduated from the University of South Dakota Law School, and has several years of experience working with UCC-related issues in both his private practice and when he was corporate counsel for an invoice factoring firm.