The uniform effective date of the 2010 Amendments to UCC Article 9 (the “Amendments”) is rapidly approaching. Lenders and legal professionals must ensure that they are ready for the impact the Amendments will have on the UCC filing process. This article identifies some selected issues that lenders and legal counsel need to consider while preparing for the new law.
Most states have either enacted the Amendments or will do so before the uniform effective date of July 1, 2013. There are, however, a few jurisdictions that might not enact the legislation in time, and some others that probably will not to adopt the Amendments at all.
New York is the only state that has not introduced legislation to enact the Amendments. However, an omnibus UCC bill is in the works and should be introduced in June. The bill is likely to include the Amendments, plus Revised Articles 1 and 7 and updates to Articles 3 and 4.
Time is running out, but there is still a chance that New York will enact the Amendments before the effective date. After all, a similar situation occurred in 2001. Back then, the governor signed Revised Article 9 just a few hours before the effective date.
The U.S. Virgin Islands (“USVI”) legislature has not yet introduced a bill to enact the Amendments. However, it is expected that the USVI will eventually enact the Amendments.
A couple of U.S. jurisdictions are unlikely to enact the Amendments in the foreseeable future. Guam and the Northern Marianas have not adopted Revised Article 9 and have given no indication of plans to make changes anytime soon.
The possibility remains that one or more states will not enact the Amendments legislation this year. In that case, the Amendments might not take effect for at least another year in those states. Even if all the bills are enacted, it appears that a small number of states will delay the effective date.
Delayed Effective Dates
Two states have bills pending to enact the Amendments with a delayed effective date. A bill under consideration in Arizona, for example, provides an effective date of September 1, 2013, two months later than the uniform date. Likewise, the legislation pending in Oklahoma delays the effective date for a full year, until July 1, 2014. An amendment to the California legislation is pending in committee, which may delay the effective date so that filing offices have more time to prepare for the implementation.
It is possible that other states would consider delaying the effective date if they cannot get the legislation enacted with enough lead time for filing offices to make the necessary system changes. Therefore, when submitting records after July 1, 2013, UCC filers should verify that the Amendments have taken effect in the relevant jurisdiction.
The new UCC forms were designed to implement the Amendments and are identified by the revision date of 04/20/11. Those who file UCC records should review all the new forms and become familiar with the changes. The location of some required information has changed, and that could create traps for those unfamiliar with the new form layout.
One example is the new location of the check box used to indicate that the financing statement is to be filed in the real estate records. The box was moved from the UCC1 Financing Statement to the UCC1AD Addendum form. A filer could easily overlook this change and inadvertently omit the indication when preparing a fixture filing. That is a potentially costly error. The indication is required for sufficiency of a fixture filing under § 9-502(b). It is unclear whether a financing statement filed as a fixture filing is effective without that indication, even if the filing office accepts it.
Filers should plan to use the new UCC forms for written records submitted to filing offices on or after the effective date of the amendments in the jurisdiction. However, UCC filers must be careful not to use the new forms prior to the effective date.The new forms do not include information required for filing under current law. Filing offices in most states will have to reject any records submitted on the new forms until the Amendments take effect. Moreover, in certain situations, the new forms lack the indications required by current law for sufficiency of the record, such as when the debtor is a trust or decedent’s estate.
Most filing offices will accept prior versions of the UCC forms for a limited period of time after the effective date. The filing officers’ professional organization, The International Association of Commercial Administrators (“IACA”), recommends that its members provide a 30-day grace period for accepting the old forms. Most states are expected to follow the IACA recommendation, but some may extend the grace period to 60 or even 90 days.
Nevertheless, filers should take caution if they plan to submit any records on the old forms after the Amendments take effect in a jurisdiction. Prior versions of the forms do not allow the secured party to make certain indications required for sufficiency under the new law, such as that the collateral is held in a trust.
New Driver’s License Practices
Most states either have or will enact a new rule for sufficiency of individual debtor names that requires the financing statement to provide the name of the debtor indicated on the person’s driver’s license. Thus, UCC filers must have access to an individual’s driver’s license to ensure they correctly provide the debtor name.
One challenge with using the driver’s license as the source of an individual debtor name is that access to the document and underlying data are protected by various state and federal privacy laws. Furthermore, driver’s license data maintained by the states generally does not include the name change history.
For a variety of reasons, many secured parties currently do not retain a copy of an individual debtor’s driver’s license in the loan file after closing. Once the Amendments take effect, secured parties should start the practice of keeping a copy. If the name on the debtor’s driver’s license later changes, a copy of the driver’s license may be the only evidence available to prove that the secured party complied with the name requirements at the time of filing.
Records filed prior to the effective date of the Amendments will remain effective at least until the scheduled lapse date. If the filed record does not comply with the new debtor name rules, the secured party will need to take action to remain perfected if it intends to continue the effectiveness for another five years. This situation will most commonly occur when the debtor is an individual because, in most states, only the name on the individual debtor’s driver’s license will be sufficient for purposes of the financing statement.
To ensure compliance with the new debtor name rules, secured parties should build a review of individual debtor name sufficiency into the continuation process. If the secured party plans to continue a financing statement that names an individual debtor, it should compare the name on the record to the name on the debtor’s driver’s license. If the driver’s license name differs from the name on the financing statement in any way, the secured party should amend the record to add the driver’s license name before filing its continuation statement.
The Amendments will bring significant changes to the UCC filing process. Changes always create risk for those who are not prepared. Secured parties and their legal counsel can effectively manage these risks by ensuring that their due diligence procedures comply with the new debtor name rules, that those who prepare UCC records understand how to correctly complete the new forms, and that they review each record prior to continuation and verify that it complies with the new debtor name requirements. In addition, UCC filers will need to keep track of the effective date for the Amendments in each jurisdiction and file in compliance with the correct law.
For more detailed information on the 2010 Amendments, including current legislative status, FAQs and resources for compliance with the new rules, please visit http://csctransactionwatch.com/amendments/.
Paul Hodnefield is Associate General Counsel for Corporation Service Company and a frequent speaker/writer on UCC search and filing issues. Please feel free to contact him with questions or comments at firstname.lastname@example.org or 800-927-9801, ext. 62375.