Since 2008, the Article 9 Joint Review Committee (“JRC”) has been drafting amendments to address a limited number of issues with Article 9.  The drafting process is now nearing completion.  Several of the proposed changes, if enacted, will have an impact on filing and search best practices. 

The most recent draft of the amendments (“draft”) proposes a uniform effective date of July 1, 2013, so there is plenty of time for lenders and legal counsel to prepare for the changes.  However, some states could enact portions of the draft with an earlier effective date.  Therefore, both UCC filers and searchers should be aware of how the draft could affect the filing process.  This article will provide an overview of the implications the current draft has for UCC filing practices.

Individual Debtor Names

Current Article 9 offers no guidance for how a secured party should provide the name of an individual debtor on a financing statement.   UCC filers have asked that UCC Section 9-503(a) be amended to provide more certainty for secured parties by establishing clear rules for what name of an individual is sufficient for filing purposes.  Since 2007, three states, Texas, Tennessee and Virginia, enacted a non-uniform safe harbor if the financing statement provides the name of an individual debtor indicated on the individual’s driver’s license.

The JRC decided to create a uniform rule for individual debtor names so states would not feel compelled to address the issue through more non-uniform legislation.  Several options were considered, including leaving the statute alone, creating a safe harbor and other more complicated approaches.  The individual debtor name issue has consumed more JRC meeting time than any other topic. 

After extensive discussions with stakeholders, the JRC arrived at two viable solutions.  The first is a safe harbor based on the individual debtor’s driver’s license.  Under the safe harbor approach, the name on the driver’s license would be sufficient for filing purposes, but other names could also be correct.  The other solution became known as the “Only If” approach.  The Only If rules require the filer to provide the name shown on the debtor’s driver’s license.  Any other name would make the financing statement seriously misleading unless it would be disclosed on a Section 9-506(c) search.    

The JRC and various stakeholders could not agree on whether to adopt the safe harbor or the Only If approach.  To resolve the impasse, the current draft leaves the choice to local option.  Each state legislature will select the option that it deems appropriate.  While offering both options almost certainly means states will enact different individual name standards, at least it will be controlled non-uniformity.  Moreover, the best practice under both the safe harbor and Only If approach is the same – file using the name indicated on the individual’s driver’s license.

One important consideration for the JRC was that not all individuals have driver’s licenses.  However, most states issue an identification card for non-drivers.  In many of these states a person may hold a driver’s license or official identification card, but not both at the same time.  Consequently, the final draft may treat the state-issued identification card as the equivalent of the driver’s license.  If the debtor has no driver’s license or equivalent state-issued identification card, the draft provides that a financing statement sufficiently states the individual debtor name if it provides the debtor’s surname and first personal name.

Most states will probably enact either the safe harbor or Only If option. UCC filers can get a head start on compliance with just a small modification to current filing procedures.  Filers should continue to determine the correct individual debtor name under current Section 9-503(a)(4)(A).  However, the filer should take one more step and compare the result to the debtor’s driver’s license.  If the name on the driver’s license is different, the filer should provide both names on the financing statement.  In most cases, filing on both names will put the financing statement in compliance with whatever option a particular state enacts.

Secured parties that choose to file on the driver’s license name before the amendments take effect need to be aware that expiration or other changes to the drivers’ license may cause a name change event for purposes of Section 9-507.  Ongoing due diligence will be necessary to ensure the secured party remains perfected in the debtor’s after acquired property.

Registered Organization Debtor Names

Under current Section 9-503(a)(1), the name of a registered organization is sufficient only if the financing statement provides the name of the debtor indicated on the public record.  However, the UCC does not define “public record.” Some filers have interpreted “public record” to include a state’s business entity database or a certificate of good standing.  The draft changes the term to “public organic record” in Section 9-503(a)(1).  Added Section 9-102(67A) defines “public organic record” to mean the records initially filed or issued by a state government or the United States to organize the debtor.  Consequently, the new text clarifies that other government records are not an acceptable source of registered organization names for UCC filing purposes.

The definition of “registered organization” will also change to include some additional entity types.  For example, the new definition will include a business trust, if the governing state law requires that the business trust’s organic records be filed with the state.    Entities created by government charter or legislation enacted by a state legislature or Congress will also fall within the new definition.    

Correction Statements

Section 9-518 provides that a party may file a correction statement to indicate the record indexed under the party’s name is inaccurate or was wrongfully filed.  The provision was originally intended as a method for the debtor to deal with unauthorized filings.  In practice, secured parties have filed the vast majority of correction statements.  Secured parties often use correction statements to place notice in the record following an unauthorized termination.

The draft includes two significant changes to Section 9-518.  The first changes the potentially misleading term “correction statement” to “information statement.”  The second change expressly permits the secured party to file an information statement if it believes the record was filed by a person that was not entitled to do so under Section 9-509(d).  The amendments to Section 9-518 allow the statutory text to reflect actual industry practices. 

As with current law, neither the amendment to Section 9-518 nor the forms safe harbor in Section 9-521 specifies a particular form for the information statement.  The International Association of Commercial Administrators (“IACA”) has approved a form in anticipation of the amendments to Section 9-518.  The UCC5 Statement of Claim is already in use and accepted by all filing offices.  It is available through the IACA website at www.iaca.org.

Forms

Some filing offices have expressed concern because the current Section 9-521 safe harbor forms contain a field for the debtor’s “TAX ID #: SSN or EIN.”   UCC filers still occasionally provide an individual’s social security number when it is not required.  To keep social security numbers out of the public record, many states have had to implement costly redaction programs.  Some states went so far as to eliminate the statutory form safe harbor, although all of them still accept the statutory forms. 

To reduce the threat of a return to the bad old days of state-specific forms, the JRC decided to replace the Section 9-521 forms with updated versions.  The draft versions of the new forms eliminate the tax number field entirely, but the changes don’t stop there.  Some information was consolidated or moved to new locations.  For example, the most commonly-used check boxes from the UCC1AD Addendum form were moved to the face of the financing statement.  On the amendment form, the “Continuation” check box has been moved away from the “Termination” check box to reduce the risk of inadvertent errors.  The draft forms also eliminate the fields for organization type, jurisdiction and organizational identification number.

Organization Information

Today, most filing offices must refuse to accept a record that omits the type, jurisdiction and organizational identification number for an organization debtor as required by Section 9-516(b)(5)(C).  The organization information was originally intended to help a searcher distinguish between financing statements with similar debtor names that were filed in the same jurisdiction.  That requirement made sense under former Article 9, when financing statements had to be filed in the location of the collateral.  However, when Revised Article 9 changed filing to the location of the debtor it largely eliminated the utility of organization information for searchers.  States generally prohibit unrelated entities formed in the jurisdiction from using closely similar names.  Nevertheless, the drafters of Revised Article 9 retained the requirements as an added incentive for secured parties to conduct thorough due diligence.   

The draft eliminates the organization information requirements from Section 9-516(b)(5)(C).  In addition, the draft removes the potential priority penalty in Section 9-338 for providing incorrect organization information.  After the new amendments take effect, UCC filers will no longer need to provide this information when filing on an organization debtor. 

Transition

Just as in 2001, a transition period will be necessary for secured parties to bring existing UCC filings into compliance with the new amendments.  Fortunately, the transition rules will apply to a limited number of active UCC records.  The transition rules currently under consideration are very similar to those currently found in Part 7 of Article 9.  And yes, the “In Lieu” financing statement may be back, but it will rarely be required.  Unlike the 2001 revision, only a tiny number of filed records will need to change jurisdiction through an In Lieu filing.

Conclusion

The amendments to Article 9 are not yet ready for submission to the states for consideration.  As the drafting process nears its conclusion, the JRC may still make minor changes to the proposed text.  Then the draft must be approved by the American Law Institute and Uniform Law Commission at their respective annual meetings later this year.  Nevertheless, the final version will likely be ready for the states in time for the 2011 legislative session. 

While the proposed 2013 effective date may seem a ways off, it is never too early to prepare.  That is especially true when filing UCC records that provide individual debtor names.  Secured parties and legal counsel also need to be aware that the amendments to Article 9 also address a number of other issues unrelated to search and filing.  CSC will provide more information on all the Article 9 amendments in coming months.    

Please feel free to contact the author with any questions or comments at phodnefi@cscinfo.com, or 800.423.7398.