Presenting a live 90-minute webinar with interactive Q&A UCC Article 9 Amendments: Operating Under the New Rules Navigating New Secured Lending Rules, Filing and Search Procedures, and Due Diligence Practices for Lenders TUESDAY, DECEMBER 17, 2013 1pm Eastern 12pm Central 11am Mountain 10am Pacific Today s faculty features: Kevin Caiaccio, The Caiaccio Law Firm, Atlanta Richard R. Gleissner, Partner, Gleissner Law Firm, Columbia, S.C. Neil B. Cohen, Professor, Brooklyn Law School, Brooklyn, N.Y. Edwin E. Smith, Partner, Bingham McCutchen, New York The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions emailed to registrants for additional information. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 10.
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2010 AMENDMENTS TO ARTICLE 9 OF THE UNIFORM COMMERCIAL CODE Selected Problems: Statutory Amendments and Official Comment Changes Kevin Caiaccio The Caiaccio Law Firm, Atlanta, Georgia Richard Gleissner Gleissner Law Firm, Columbia, South Carolina Edwin E. Smith Bingham McCutchen LLP, New York City, NY and Boston, MA Professor Neil B. Cohen Jeffrey D. Forchelli Professor of Law, Brooklyn, N.Y. 5
Introduction Article 9 is the secured transaction article of the Uniform Commercial Code Article 9 was most recently revised, extensively, in 1998, with a uniform effective date of July 1, 2001. The revised Article 9 is now in effect in all states The revised Article 9 was a total re-write of the Article The 2010 amendments are not They are surgical strikes at a few statutory changes and changes to the Official Comments 6
Introduction Rationale for the amendments Different approaches as to when to consider revisions to a UCC Article One approach is that the UCC must be perfect The other is the percolate approach Here the sponsoring organizations - the American Law Institute and the Uniform Law Commission - had to respond to two initiatives Individual debtor name amendments IACA proposals 7
Introduction Standards No alteration of policy decisions made in the 1998 revisions unless significant problems have arisen in practice The amendments should focus on ambiguities in the existing statutory text that are causing either substantial problems in practice, or addressing the promulgation of non-uniform statutory amendments A change to the Official Comments would be preferred where the statutory language is clear and produces the desired result, but judicial experience or experience in practice indicates that some clarification may be desirable 8
Introduction Enactment Process Uniform effective date of July 1, 2013 Transition provisions The 2010 amendments have been enacted in all states, except Alabama, Arizona, New York, Oklahoma and Vermont The 2010 amendments have been enacted in the District of Columbia but not in the U.S. Virgin Islands The effective date of the 2010 amendments in California is July 1, 2014 9-503 Alternative A vs. Alternative B; California non-uniform approach 9
Characterization Problem 1 Lender 1 has extended credit to Debtor and has taken a security interest in all of Debtor s investment property. The security interest has been perfected by Lender 1 filing a financing statement against Debtor covering investment property. Debtor wants to borrow funds from Lender 2 and offers to Lender 2 as collateral a promissory note issued by Issuer to Debtor. The promissory note is one of several issued by Issuer to Debtor and Debtor s family members in connection with an acquisition several years earlier. Is the promissory note considered investment property? Revision: Highland Capital Management LP v. Schneider, 8 N.Y. 3d 406 (2007). Official Comment 13 to UCC 8-102 (2010). 10
9-102(a)(49) Defines Investment Property 11
Comment 13 to 8-102 (2010) 12
Characterization Problem 2 Lender is extending credit to Debtor, a Massachusetts business trust. Under Massachusetts law a business trust is formed by a declaration of trust. Massachusetts law then requires the declaration of trust to be filed with the Massachusetts Secretary of State s office in order for Debtor to have the attributes of a Massachusetts business trust, such as limited liability for the trustees. Is Debtor a registered organization or a common law trust? Revision: UCC 9-102(a)(71) (2010). 13
9-102(a)(71) (2010) 14
Comment 11 to 9-102 (2010) 15
Comment 11 continued 16
Comment 11 continued 17
Characterization Problem 3 Buyer purchased an automobile from Dealer and granted to Dealer a security interest in the automobile to secure payment of the purchase price. The state Department of Motor Vehicles (DMV) issued a certificate of title, but the certificate of title did not indicate a security interest in favor of Dealer. However, the security interest is indicated on the electronic records maintained by the DMV. The electronic records are publicly searchable. Is Dealer s security interest perfected? Revision: UCC 9-102(a)(10) and 9-311(a)(2) and (3) (2010). 18
9-102(a)(10) (2010) 19
9-311(a)(2) and (3) (2010) 20
Characterization Problem 4 Dealer leases motor vehicles to end-users. Buyer buys from Dealer all rights to payment arising from [certain identified leases]. What is the characterization under Article 9 of the rights to payment arising from the identified leases? Would the characterization be different if Buyer had expressly disclaimed any recourse to the motor vehicles when it bought the rights to payment? Revision: In re Commercial Money Center, Inc., 350 B.R. 465 (B.A.P. 9th Cir. 2006). Official Comment 5.d to UCC 9-102 (2010) 21
Comment 5(d) to 9-102 (2010) 22
Comment 5(d) continued 23
Comment 5(d) continued 24
Commend 5(d) continued 25
Perfection and Priority Problem 5 Bank lends funds to ABC Corporation, an Illinois corporation ( ABC Illinois ), and takes a security interest in ABC Illinois existing and future accounts. Bank files a financing statement against ABC Illinois with the Secretary of State of Illinois covering accounts. ABC Illinois, without Bank s knowledge or consent, reincorporates in Delaware on January 4, 2011, by forming a Delaware corporation ( ABC Delaware ) into which ABC Illinois is merged. Does Bank have a perfected security in ABC Delaware s accounts arising after January 4, 2011? Revision: UCC 9-316(i) (2010). Bank does not file a financing statement against ABC Delaware in Delaware before the end of January of 2011. Finance Company lends funds to ABC Delaware on January 25, 2011, and takes a security interest in ABC Delaware s existing and future accounts. On January 25, 2011, Finance Company files a financing statement with the Secretary of State of Delaware covering ABC Delaware s accounts. Whose security interest in the post-january 4, 2011, accounts has priority - Bank s or Finance Company s? Revision: UCC 9-326 (2010). 26
9-316(i) (2010) 27
9-316(i) continued 28
9-326 (2010) 29
9-326 (2010) 30
Perfection and Priority Problem 6 Finance Company lends funds to Debtor and takes a security interest in Debtor s assets including a commercial tort claim that is described in the security agreement. Finance Company files a financing statement against Debtor. The collateral indication on the financing statement refers to all commercial tort claims but does not describe more specifically the commercial tort claim identified in the security agreement or indicate that the collateral is all assets. Debtor sells the commercial tort claim for cash to Securitization Asset Trust. Does Securitization Asset Trust take the commercial tort claim subject to Finance Company s security interest? Revision: UCC 9-317(d) (2010). 31
9-317(d) (2010) 32
Perfection and Priority Problem 7 Creditor obtains a judgment against Debtor. Debtor is unable to post an appeal bond but deposits funds in a special deposit account maintained with Bank in lieu of posting an appeal bond. Bank s customer on the deposit account is the clerk of court. Debtor grants to Creditor a security interest in the deposit account in order to secure Debtor s liability under the judgment if Debtor does not prevail on appeal. Debtor, Creditor and the clerk of the court enter into an agreement by which the clerk of court acknowledges that it has control of the deposit account on behalf of Creditor. Bank is not a party to the agreement. Under what provision of Article 9 does Creditor have control of the deposit account? Revision: Official Comment 3 to UCC 9-104 (2010). Cf. UCC 8-106(d)(3). 33
Comments to 9-104 (2010) 34
Comments 9-104 continued 35
Comments 9-104 continued 36
Perfection and Priority Problem 8 Lenders A, B and C extend credit to Debtor in a syndicated loan for which A acts as agent. A is also a depositary bank, and Debtor maintains a deposit account with A. Debtor grants to A, for the benefit of A, B and C, a security interest in the deposit account. Is the security interest perfected by control for the benefit of all three lenders? Revision: Official Comment 3 to UCC 9-104 (2010). 37
Comments to 9-104 (2010) 38
Perfection and Priority Problem 9 Debtor has been negotiating for a loan from Finance Company secured by Debtor s existing and future accounts. After Finance Company has agreed to make the loan, but before a security agreement is executed, Finance Company, without authorization from Debtor, files a financing statement against Debtor covering Debtor s accounts. Subsequently, Bank extends credit to Debtor secured by a security interest in Debtor s existing and future accounts. Bank perfects by filing a financing statement against Debtor covering accounts. Still later, Finance Company extends credit to Debtor and obtains a security interest in Debtor s existing and future accounts under a security agreement then executed by Debtor. In the security agreement Debtor ratifies the filing of Finance Company s financing statement. Whose security interest in the accounts has priority - Finance Company s or Bank s? Revision: Official Comment 4 to UCC 9-322 (2010). 39
Comment 4 to 9-322 (2010) 40
Comment 4 continued Copyright 2010 by The American Law Institute and the National Conference of Commissioners on Uniform State Laws. Reproduced with the permission of the Permanent Editorial Board for the Uniform Commercial 41
Comment 4 continued 42
Comment 4 continued 43
Perfection and Priority Problem 10 Secured Party buys chattel paper from Debtor. The chattel paper is tangible chattel paper, but some provisions of the chattel paper have been amended electronically. Secured Party takes possession of the tangible chattel paper and obtains control of the electronic amendments. Has Secured Party perfected its purchase? Would it matter if Secured Party had not obtained control of the electronic amendment? Revision: Official Comment 4 to UCC 9-330 (2010). 44
4. Possession and Control. The priority afforded by this section turns in part on whether a purchaser takes possession of tangible chattel paper. Similarly, the governing law provisions in Section 9-301 address both possessory and nonpossessory security interests. To qualify for priority under subsection (a) or (b), a purchaser must take[ ] possession of the chattel paper or obtain[ ] control of the chattel paper under Section 9-105. When chattel paper comprises one or more tangible records and one or more electronic records, a purchaser may satisfy the possession-orcontrol requirement by taking possession of the tangible records under Section 9-313 and having control of the electronic records under Section 9-105. In determining which of several related records constitutes chattel paper and thus is relevant to possession or control, the form of the records is irrelevant. Comment 4 to 9-330 (2010) 45
Rather, the touchstone is whether possession or control of the record would afford the public notice contemplated by the possession and control requirements. For example, because possession or control of an amendment extending the term of a lease would not afford the contemplated public notice, the amendment would not constitute chattel paper regardless of whether the amendment is in tangible form and the lease is in electronic form, the amendment is electronic and the lease is tangible, the amendment and lease are both tangible, or the amendment and lease are both electronic.... Comment 4 continued 46
A secured party may wish to convert tangible chattel paper to electronic chattel paper and vice versa. The priority of a security interest in chattel paper under subsection (a) or (b) may be preserved, even if the form of the chattel paper changes. The principle implied in the preceding paragraph, i.e., that not every copy of chattel paper is relevant, applies to control as well as to possession. When there are multiple copies of chattel paper, a secured party may take possession or obtain control of the chattel paper if it acts with respect to the copy or copies that are reliably identified as the copy or copies that are relevant for purposes of possession or control. This principle applies as well to chattel paper that has been converted from one form to another, even if the relevant copies are not the original chattel paper. Comment 4 continued 47
Third Party Rights Problem 11 Secured Party lends funds to Debtor and takes a security interest in a promissory note issued by Maker and payable to Debtor. The promissory note states conspicuously on its face This promissory note may not be transferred by [Debtor] without [Maker s] prior written consent. Debtor defaults and Secured Party sells the promissory note to Buyer in a private sale. May Buyer enforce the promissory note against Maker? Revision: UCC 9-406(e) and 9-408(b) (2010). 48
9-406(e) and 408(b) (2010) 49
Proposed 9-408(a) 50
Filing - Debtor s Name Problem 12 Secured Party is about to extend credit to Debtor secured by a security interest in Debtor s existing and after-acquired inventory and accounts. Debtor is a corporation. In its charter, the title line shows the name as Inn of the 6th Happiness, Article One of the charter states the name of the corporation to be Inn of the Sixth Happiness, Inc., and the signature block on the charter shows the name as Inn of 6th Happiness Corp. The name on the Secretary of State s web site listing corporations organized in the state is IN OF 6TH HAPPINESS What name should be provided on the financing statement as Debtor s name? Revision: UCC 9-503(a)(1) (2010). 51
9-503(a)(1) (2010) 52
(68) Public organic record means a record that is available to the public for inspection and is: (A) a record consisting of the record initially filed with or issued by a State or the United States to form or organize an organization and any record filed with or issued by the State or the United States which amends or restates the initial record;... 9-102(a)(68) (2010) 53
Filing - Debtor s Name Problem 13 Secured Party is about to extend credit to Debtor, an individual doing business as a sole proprietor. The credit will be secured by a security interest in Debtor s existing and after-acquired inventory and accounts. The name on Debtor s birth certificate is Lester Henry Smith. The name shown on his passport is Lester H. Smith. The name shown on his driver s license is L. Henry Smith. His friends, customers and suppliers call him L.H.. What name should be provided on the financing statement as Debtor s name? Revision: UCC 9-503, 9-506 and 9-507 (2010). 54
9-503 (2010) Alternative A Copyright 2010 by The American Law Institute and the National Conference of Commissioners on Uniform State Laws. Reproduced with the permission of the Permanent Editorial Board for the Uniform Commercial 55
Alternative B Copyright 2010 by The American Law Institute and the National Conference of Commissioners on Uniform State Laws. Reproduced with the permission of the Permanent Editorial Board for the Uniform Commercial 56
Filing - Other Problem 14 Secured Party extends credit to Debtor secured by a security interest in Debtor s equipment. Secured Party prepares a financing statement to be filed against Debtor covering the equipment but neglects to provide on the financing statement Debtor s jurisdiction of organization, type of organization or organizational identification number. Will the filing office accept the financing statement? Revision: UCC 9-516 (2010). 57
9-516 (2010) 58
9-516 continued 59
9-516 continued 60
9-516 continued 61
9-516 continued 62
9-516 continued 63
Filing - Other Problem 15 Secured Party extends credit to Debtor, a radio station. To secure the credit, Secured Party takes a security interest in Debtor s existing and after-acquired inventory and accounts and perfects the security interest by filing a normal initial financing statement. After the closing, Secured Party determines that, since Debtor is a radio station, Debtor qualifies as a transmitting utility. May Secured Party amend the initial financing statement to designate Debtor as a transmitting utility in order to have the benefit of UCC 9-515(f) s anti-lapse provision? Revision: UCC 9-515(f) (2010). 64
9-515(f) (2010) 65
Filing - Other Problem 16 Finance Company has extended credit to Debtor secured by a security interest in Debtor s existing and after-acquired inventory and accounts. Finance Company filed a financing statement against Debtor covering inventory and accounts. Bank had previously filed a financing statement against a different debtor. Later, intending to terminate the effectiveness of its financing statement, the Bank filed a termination statement that inadvertently transposed two digits of the file number to which Bank had intended to refer. As a result, Bank s termination statement was linked to Finance Company s financing statement. A search of the filing office s records against Debtor would now suggest that Financing Company s financing statement had been terminated. What action should Finance Company take, if any? Revision: UCC 9-518 (2010). 66
9-518(c) (2010) 67
Alternative A 68
Alternative B 69
Filing - Other Problem 17 Judge sentenced Defendant to time in prison. In prison Defendant managed, without Judge s authorization or consent, to file a financing statement against Judge covering all of Judge s assets. Judge discovers and wants to remove the financing statement from the public record. What can Judge do? Revision: UCC 9-518 (2010). See also UCC 9-509(d)(2). 70
9-518(a) (2010) 71
Alternative A 72
Alternative B 73
Enforcement Problem 18 Lender holds a promissory note issued by Maker secured by a real estate mortgage granted by Maker in favor of Lender. The mortgage has been recorded in the local real estate recording office. Under the law of the state in which the real estate is located, only the mortgagee of record may foreclose non-judicially on the mortgaged property. Lender sells the promissory note to Buyer. No assignment of the mortgage from Lender to Buyer is recorded in the real estate office. Later, Maker defaults, and Buyer seeks to foreclose on the mortgage non-judicially. May Buyer do so without obtaining an assignment of the mortgage from Lender and recording the assignment? Revision: UCC 9-607(b) (2010). 74
9-607(b) (2010) 75
Enforcement Problem 19 Lender extended credit to Debtor secured by a security interest in Debtor s equipment. Following Debtor s default, Lender, in reliance upon a waiver by Debtor in the security agreement of UCC 9-610(c), purchased the equipment at its own private sale. Is the waiver enforceable? Revision: Official Comment 3 to UCC 9-602 (2010) and Official Comment 7 to UCC 9-610 (2010) and Official Comment 2 to UCC 9-624; see UCC 9-602(10). 76
Comment to 9-602 (2010) 77
Comment 3 continued 78
Enforcement Problem 20 Lender extended credit to Debtor secured by a security interest in Debtor s equipment. Following Debtor s default, Lender proposes to sell the equipment in an auction over the Internet. Bids will be accepted at the Internet site for a period of 72 hours after which bidding will be closed and the winning bidder will be determined. How can Lender satisfy the requirement of UCC 9-613(1)(E) to state in its notification of disposition the time and place of a public disposition or the time after which a private disposition will be made? Revision: Official Comment 2 to UCC 9-610 (2010) and Official Comment 2 to UCC 9-613 (2010). 79
Comment 2 to 9-610 (2010) 80
Comment 2 to 9-613 (2010) 81
Transition Uniform effective date of July 1, 2013 Debtor name on a financing statement registered organization or individual debtor Effective pre-effective date Not effective post-effective date Debtor location Massachusetts-type business trust Financing statement filed in the correct location pre-effective date Financing statement not filed in the correct location post-effective date 82
Contact Kevin Caiaccio The Caiaccio Law Firm, Atlanta, Georgia 404.846.4990, ktc@clf-attorneys.com Richard Gleissner Gleissner Law Firm, Columbia, South Carolina 803.787.0505, rick@gleissnerlaw.com Professor Neil B. Cohen Brooklyn Law School, Brooklyn, N.Y. 718.780.7940, neil.cohen@brooklaw.edu Edwin E. Smith Bingham McCutchen LLP, New York City, NY and Boston, MA 617.951.8615, edwin.smith@bingham.com 83