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ISSUE V.1 |
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INTERVIEW |
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FEATURED ARTICLES |
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Commercial Law |
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BOOK OF THE MONTH |
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TEST YOUR LEGAL KNOWLEDGE |
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Commercial Law |
TRANSITION RULES UNDER REVISED DIVISION 9 OF THE UNIFORM COMMERCIAL CODE
Ellen A. Friedman and Hill Blackett III, Murphy Sheneman Julian & Rogers, San Francisco. Ms. Friedman is author of Secured Transactions in California Commercial Law Practice, Second Edition published by CEB.
Revised Division 9 of the Uniform Commercial Code has been effective in California, and most other states, since July 1, 2001. Revised Division 9 makes several changes to methods of perfection under former Division 9. Revised Division 9 applies to all security interests, even if the lien was created before Division 9 became effective on July 1, 2001. Com C §9702(a). However, there are special transition rules with respect to security interests created before July 1, 2001. The transition rules are found in Part 7 of Revised Division 9. It is essential for all Division 9 practitioners to know and understand the transition rules in order to insure continued perfection of collateral that was perfected prior to July 1, 2001.
I. CHANGES IN METHOD OF PERFECTION
If a security interest was perfected prior to July 1, 2001, and would remain perfected under the new rules established in Revised Division 9, the secured party does not need to take any action, and the security interest will remain valid. Com C §§9702(b), 9703(a).
One Year to Conform
However, if the method of perfection was changed in Revised Article 9 and a security interest was perfected under former Division 9 prior to July 1, 2001, but is not perfected under Revised Division 9, the secured party has one year to conform the perfection requirements to those prescribed under Revised Article 9. Com C §9703(b). For example, under former Division 9, sending a written notice to the bank holding the deposit account perfected a security interest in a deposit account. Perfection in a deposit account is achieved by control under Revised Division 9. Com C §9314. A secured party must obtain "control" of the deposit account before July 1, 2002, to continue having a perfected security interest in the collateral. Com C §9703(b). An exception to this one-year general rule relates to collateral perfected by the filing of a financing statement. This exception is discussed below.
II. CHANGES IN FILING REQUIREMENTS
There are significant changes under Revised Division 9 with respect to where financing statements are to be filed and where registered organizations are deemed to be located. Com C §§9301, 9307(e). However, a transitional filing rule permits financing statements, filed in the correct filing office to perfect a security interest under former Division 9, to remain effective to maintain that perfection and priority if a new financing statement is filed in the correct jurisdiction under Revised Division 9 before the existing financing statement would ordinarily lapse or June 30, 2006, whichever is earlier. Com C §§9703, 9705(c)(d).
"In-lieu"
Financing Statement
In order to maintain the existing perfection and priority, the new financing
statement must (i) identify the original financing statement by listing its
place of filing, filing date (and the date of any continuation statements),
and filing number, (ii) confirm that the original financing statement remains
effective, and (iii) satisfy the requirements of Part 5 of Revised Division
9 for financing statements. Com C §9706(c). This type of financing statement
is called an "in lieu" financing statement. The following is suggested
language for an "in lieu" financing statement:
This financing statement constitutes an "initial financing statement
in lieu of continuation statement" pursuant to UCC §706. The pre-effective-date
financing statement was filed with the [name of state] Secretary of State
on [date] with file number [___]. Such pre-effective-date financing statement
remains effective.
We also recommend that the collateral description from the original financing
statement be included in the "in lieu" financing statement to assure
satisfaction of the requirements of Part 5.
Debtor Incorporated in Delaware
For example, under former Division 9, the filing of a financing statement
in the filing office of the California Secretary of State perfected a security
interest in the accounts and general intangibles of a debtor incorporated
under the laws of Delaware, but whose chief executive office is located in
California. Under Revised Division 9, perfection of a security interest in
the accounts and general intangibles of a debtor incorporated under the laws
of Delaware is achieved by filing a financing statement in the filing office
of the Delaware Secretary of State (based on Delaware’s adoption of Revised
Article 9). Com C §§9301 and 9307 (and the Delaware equivalents).
If the original financing statement will lapse under California law on February
4, 2004, then the secured party must file an "in lieu" financing
statement in Delaware before February 4, 2004. Com C §§9703, 9706.
An "in lieu" financing statement will be effective for five years
and acts as a continuation statement. Com C §9705(d).
Amending a Financing Statement
If an "in lieu" financing statement has not already been filed,
a secured party must file an "in lieu" statement in order to amend
a financing statement. For example, if a California corporation with its principal
place of business in Nevada had granted to a secured party a security interest
in accounts under former Division 9, and the secured party had correctly filed
a financing statement with the Nevada Secretary of State’s office on
May 2, 1999, the secured party would have until May 2, 2004 to file an "in
lieu" financing statement with the California Secretary of State’s
office. However, if the debtor changes its name in August of 2001, the secured
party must amend the financing statement. The amendment must be filed in the
California Secretary of State’s office. An "in lieu" statement
must be filed prior to filing any amendment. It may be possible to combine
the amendment with the "in lieu" statement, but it is easier to
first file the "in lieu" statement and obtain the correct filing
number and then file further amendments.
Jurisdiction for Filing
One of the major changes in Revised Division 9 is that the secured party does
not have to file multiple financing statements in many jurisdictions in which
a debtor may have inventory. Former Division 9 required filing in each jurisdiction
where inventory was located. Now, filing is only required in the jurisdiction
in which the debtor is incorporated. "In lieu" financing statements
will have to be filed for each of these financing statements in the proper
jurisdiction. It is, however, possible for one "in lieu" financing
statement to cover many filings, if the "in lieu" statement lists
all of the original financing statements that it is covering. A practitioner
should balance whether the ease of having one "in lieu" statement
will be complicated by the listing of several different original statements.
If the collateral description is substantially different among the original
financing statements, we do not recommend combining those statements within
a single "in lieu" financing statement.
Termination Statement
If a financing statement had been properly filed in a jurisdiction under former
Division 9, but the jurisdiction under Revised Division 9 would be different,
the termination statement may be filed in the jurisdiction in which the financing
statement was filed. There is no need to first file an "in lieu"
statement, and then file a termination statement.
III. DEFINITIONAL CHANGES
It is also important to note that there are several changes to definitions
of collateral under Revised Division 9. Generally, the old definitions will
apply to security agreements executed prior to July 1, 2001. Practitioners
should review security agreements to insure that collateral is properly covered.
This may require amendments to the security agreement. In addition, in certain
instances, such as commercial tort claims, it is no longer possible to obtain
a blanket lien on all such claims. They must be specifically mentioned. Com
C §9108(e)(1). The transition rules should permit secured creditors to
continue to have a perfected security interest in the collateral without specifically
identifying the commercial tort claims for a period of one year. See Com C
§9703.
For a detailed discussion of the transition rules, we suggest reviewing Sigman
& Smith, The Transition Rules of Revised Article 9 of the Uniform Commercial
Code (CCH Legal Information System 2001). In addition, for a detailed analysis
of the many changes under Revised Division 9, see Secured Transactions
in California Commercial Law Practice (2d ed Cal CEB 2001).
FEATURED BOOK
Secured
Transactions in California Commercial Law Practice
2d edition, approx. 500 pages, looseleaf, 2001, BU-33390, $159