Goldberg Kohn

Forthcoming Amendments to Article 9 of the Uniform Commercial Code

Illinois has joined numerous other States in adopting, effective July 1, 2013, changes to Article 9 of the Uniform Commercial Code, the primary legislation governing the perfection of security interests in personal property. These changes are the first statutory modification of Article 9 since the extensive legislative overhaul of Article 9 in 2001. In the main, the changes are technical and limited in nature, and should have a relatively small impact on the documentation of middle market secured transactions. The narrow scope of these amendments signals, importantly, a general commercial acceptance of the broad legislative changes effected in 2001, and the success, to date, of this commercially critical legislation to accommodate material changes in technologies that have developed in the ten-plus years of transactional practice since initial adoption.

The amendments to Article 9 of the Illinois Uniform Commercial Code, enacted into law by Governor Quinn on August 17, 2012 with a delayed effective date of July 1, 2013 (a uniformly accepted delayed effective date throughout the States), are based on a uniform set of amendments initially developed in 2010 (and are referred to within applicable legal circles as the "2010 Amendments") which have been introduced, and in some cases, accepted into legislation, throughout the States. The goal of the sponsoring organizations behind the 2010 Amendments, the American Law Institute and the Uniform Law Commission, is to have all States approved by the July 1, 2013 delayed effective date. 

Set forth below is a brief summary of some of the more material provisions of the 2010 Amendments from a middle market transaction perspective.

Rules regarding debtor name on UCC-1 Financing Statements.

1. Organization names: The 2010 Amendments clarify, through the addition of a new definition of "public organic record", that the articles of organization or formation (as applicable) of a chartered debtor (which includes corporations and limited liability companies, the predominate borrower entity choice in middle market financings), specifically the section that states the organization's name, is the source that should be used to determine the exact debtor name for UCC-1 Financing Statement filing purposes. This is true even if good standing certificates or other records issued by a State show a different variation of the name.

2. Individual names: Article 9 of the Uniform Commercial Code as presently in effect leaves unresolved the appropriate name to be listed on UCC-1 Financing Statements in the case of individual debtors (persons, as opposed to corporations or other business entities). To illustrate the issue, consider the case of an individual having a birth certificate listing his name as "James B. Smith", whose driver license lists "Jim Smith", but who conducts business throughout the community as "J.B. Smith". As a result of an unresolved debate among the legislative sponsors, the 2010 Amendments offer the States two different approaches to the appropriate individual debtor name to be listed on UCC-1 Financing Statements. The first alternative, referred to among practitioners as the  "only-if" rule, provides that the individual debtor's name is sufficient only if it is the same as the name on the debtor's driver's license  (so long as the debtor has a current driver's license and is a resident of the State which issued the license). The second alternative, the "safe harbor" rule, provides that various sources may be used, including but not limited to the name on an individual's driver's license or state-issued identification. Illinois has joined a strong majority of adopting States in selecting the "only-if" rule. As a result, in the relatively limited case, in middle market transactions, of perfection of security interests granted by individuals, counsel will need to determine the applicable perfection rules in each applicable jurisdiction, and may seek to modify security documentation to require periodic deliveries of key documentation (driver's licenses or, in the case of "safe harbor" jurisdictions, various other identification documents) to ensure that filed UCC-1 Financing Statements continue to match individual debtor names as listed in such materials. (To highlight the risk, if an individual debtor changes his or her name during the course of a transaction, for instance as the result of marriage, filed UCC-1 Financing Statements must be amended to reflect the name change, or they will cease to be sufficient to perfect).

Information required to file a financing statement.

Article 9 of the Uniform Commercial Code as presently in effect allows filing offices to reject UCC-1 Financing Statement filed against a chartered debtor if the filing does not specify certain information, including the organizational identification number, the type of organization and the jurisdiction of organization of the debtor. The 2010 Amendments eliminate this information for filing purposes, as such information has been determined to be unessential and, accordingly, a commercially inappropriate basis for rejection of filings. New form UCC-1 Financing Statements will be promulgated that eliminate these particular fields. 

Perfection against deposit accounts.

Article 9 of the Uniform Commercial Code as presently in effect provides that a depository bank is automatically perfected against a debtor's deposit accounts maintained by that bank (effectively codifying the common law right of setoff). It also provides that, in the cases of a third-party secured creditor, a tri-party deposit account control agreement among the debtor, depository bank and the third-party secured creditor is required to perfect. A question unaddressed by current Article 9 is which approach governs in the case of a depository bank that acts as "Administrative Agent" for a syndicate of lenders. The 2010 Amendments clarify that an "Administrative Agent" depository bank enjoys automatic perfection, just as it would as a stand-alone institution. For some practitioners, this clarification will be welcomed as a basis for eliminating control agreements in agented structures where the Agent has cash management, the negotiation of which has always been a bit of an oddity as two of the three parties (bank and secured creditor) are the same institution. However, this rule clarification may not eliminate the practice of seeking control agreements in these "overlap" situations, as some practitioners may prefer a documented control agreement, with express enforcement mechanics, over reliance on statutory setoff provisions.

Filing against trusts and trustees.

The 2010 Amendments do not change the rules for filing against trusts that are registered organizations, but, instead, simplify the rules for filing against trusts that are not registered organizations. While Article 9 of the Uniform Commercial Code as presently in effect provides that the debtor name would depend on whether trust law indicated that the trust or the trustee holds legal title to the collateral, the 2010 Amendments provide that, if the organic records of a debtor trust specify a name, that name should be used. If such records do not specify a name, the name of the trust's settlor should be used. In both cases, the UCC-1 Financing Statement must also indicate that the collateral is held in a trust. The 2010 Amendments further clarify that a Massachusetts business trust (and other common law business trusts that must file with a particular State) are registered organizations for Article 9 purposes.

Unauthorized filings.

Under Article 9 as currently in effect, it is unclear whether an unauthorized UCC-1 Financing Statement that is later ratified by the debtor is effective to perfect a security interest. The 2010 Amendments clarify that an unauthorized UCC-1 Financing Statement does become effective upon ratification by the debtor, and further provide that, for purposes of priority against third parties, the date of filing is dispositive, even though the filings were not authorized as of that earlier date. While it may seem that this amendment encourages the pre-filing of UCC-1 Financing Statements without upfront debtor authorization (with such authorization provided concurrent with closing), Article 9 of the Uniform Commercial Code continues to provide for penalties for unauthorized UCC-1 Financing Statements filings, and the unauthorized pre-closing filing of UCC-1 Financing Statements, in some instances, may constitute a breach of then existing credit documentation binding on the debtor. Best practice is still to obtain an authorization to file UCC-1 Financing Statements in advance of closing or, if such authorization is not available, to forego with pre-filing altogether, and file concurrent with, or promptly following, closing.

Effect of changes in governing law.

If a debtor changes locations for UCC-1 Financing Statement filing purposes (such as, for example, by way of reincorporation from one State to another), Article 9 currently provides that security interests in collateral acquired prior to the change continue for four months. The 2010 Amendments provide that the security interest remains perfected also in collateral that is acquired after the change and during the four-month window. This rule change conforms with commercial expectations of a uniform "grace period" to re-file UCC-1 Financing Statements without the risk of loss of perfection.

Exercise of Remedies.

1. Strict Foreclosure: The 2010 Amendments clarify that purchases by a secured creditor in a private disposition (in contrast to a public sale) of its own collateral are equivalent to "strict foreclosures" under the Uniform Commercial Code, subject to various non-waivable debtor protections. 

2. Dispositions on the internet: The 2010 Amendments specifically approve of notices of public dispositions of collateral conducted electronically if such notices state the time when the disposition is scheduled and also state the electronic location of sale (such as, under current technologies, publication of the  URL or other Internet address where the site of the public disposition may be accessed).

Click here for a copy of the 2010 Amendments to Article 9 of the Uniform Commercial Code.

Click here for a copy of the Illinois legislation adopting the 2010 Amendments.

January 16, 2013


If you have any questions please contact:

Joel Brown

The material in this client alert is based on information existing at that time. It should not be construed as legal advice or legal opinions based on any specific set of facts. The information in this publication is not intended to create, and the transmission and receipt of it does not constitute, an attorney-client relationship.

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