First Modifications Since 2001 Considered for UCC Article 9

Part One of a Two-Part Article

I Love You, You're Perfect, Now Change” is the name of a long-running off-Broadway musical. It also describes what may be on the horizon for Article 9 of the Uniform Commercial Code, which was last revised in 2001. The experiences and case law since then, as well as an increase in non-uniform provisions, prompted the UCC's permanent editorial board to establish an Article 9 Review Committee that highlighted issues of concern in a June 2008 report (see, Article 9 Review Committee, Statutory Modification Issues List (June 24, 2008), http://extranet.ali.org/directory/files/UCC9_IssuesList.pdf). Notably, Nebraska, Tennessee and Texas recently enacted legislation with significant non-uniform amendments to Article 9's debtor name provisions. Several other states have either proposed or already enacted other non-uniform amendments that would impair Article 9's uniformity.

Those issues will now be addressed by a drafting committee, called the Article 9 Joint Review Committee (“JRC”), appointed by the National Conference of Commissioners on Uniform State Laws and the American Law Institute. Interestingly, “[d]espite the Joint Review Committee's name, it is a drafting committee. It was not labeled as a drafting committee because this project is not intended to be a major rewrite.” Joint Review Committee for Article 9 of the UCC Meeting Notes for Oct. 3-5, 2008, Prepared by Professor Stephen L. Sepinuck, at 2, available at www.ali.org/index.cfm?fuseaction=projects.proj_ip&projectid=21. The JRC held its first meeting in Chicago in October 2008 and will reconvene early next year. In this article, we discuss several items on the JRC's agenda that could result in amendments to Article 9, certain secured transactions provisions of UCC Article 8 and the official comments.

Naming Issues

Section 9-502 provides that a financing statement is sufficient only if it lists “the name of the debtor.” For corporations and other registered organizations, the UCC supplies further gloss, stating that the appropriate name is the name of the organization indicated on the public record. For individual debtors, however, should one use the name on their birth certificate, driver's license, passport or other official identification? May a commonly used name or nickname suffice? Filers and searchers alike are left to guess what qualifies as an individual debtor's correct name, as Article 9 currently offers no guidance.

Individual debtors. Since financing statements are indexed by the debtor's name, listing the debtor correctly on them is critical. If financing statements are “seriously misleading,” they are ineffective. Currently, Article 9 provides little relief for filers who do not identify the debtor's name correctly. Section 9-506 provides that a financing statement is not seriously misleading if a search under the correct name, using the filing office's standard search logic, discloses the filing. Most states, however, employ very rigid and unforgiving search logic. Consequently, financing statements using, for example, the name Mike instead of Michael, Chris instead of Christopher and Roger instead of Rodger have been deemed seriously misleading, and thus ineffective, because searches under the full or correctly spelled name did not reveal them. See, e.g., In re Berry, 2006 WL 2795507 (Bankr.D.Kan. 2006); In re Borden, 353 B.R. 886 (D. Neb. 2006); In re Jones, 2006 WL 3590097 (Bankr.D.Kan. 2006); Pankratz Implement Company v. Citizens National Bank, 130 P.3d 57 (Ks. 2006). For further discussion of Article 9's naming issues, see A. Christenfeld & S. Melzer, “Naming Issues in Filings Under Revised Article 9,” 237 NYLJ, No. 65 at 5 (April 5, 2007).

Three states have sought to address the issue of individual debtor names through non-uniform amendments to Article 9. Nebraska recently enacted legislation providing that a financing statement containing the debtor's correct last name is effective. (See NE L 2007, LB 851 '28. The Nebraska legislation was enacted on March 28, 2008 with a one-year delayed effective date.) Although this solution eliminates the problems caused by nicknames, middle names and common variations of first names, it appears excessively broad. Under it, a filing with a correctly spelled last name would not be “seriously misleading” even if the debtor's first name were wholly incorrect or omitted altogether. With first names being ignored in determining whether filings refer to the individuals in question, distinguishing among financing statements listing the same last name could be exceedingly difficult ' one can but wonder how many individuals with common last names (such as Smith or Brown) are on file in New York or California alone. The Nebraska legislation consequently obliges searchers to review and evaluate a potentially huge number of financing statements bearing that last name, an undertaking that contradicts the 2001 revision's aim to reduce the diligence burden on searchers. Finally, the reference to the “last name” of the individual is itself potentially confusing given different cultural naming norms. For example, in most Asian countries, the sequence of names is generally family name first and given name second. In many Spanish-speaking countries, individuals generally have two surnames, with the father's preceding the mother's. Other examples abound. Of course, this is a problem even under the current Section 9-502.

A 2007 Texas amendment makes the use of the name on an individual's driver's license or state identification card sufficient for Article 9 purposes. See Tex. Bus. & Com. Code Ann. '9.503(a). The Texas legislation, however, does not state whether this is the exclusive method of determining an individual debtor's name or merely a non-exclusive safe harbor. If it were intended to be the latter, most of the problems that currently confront searchers would remain. Although by using the safe harbor filers could ensure their statements would be effective, searchers would still have to act as if the current rule were unchanged because conflicting filings made using other naming methods might nevertheless be effective.

Tennessee amended Section 9-502 in 2007 so that financing statements can identify a debtor's name sufficiently only if they use the name shown on one of the following: a driver's license or state identification card, a birth certificate, a passport, a social security card, or a military identification card. (See State of Tennessee Senate Bill 3732. Enacted on March 25, 2008; Tennessee Acts 2007, ch 648.) Unlike Texas' approach, Tennessee's revision is expressly intended to be the exclusive means to name individual debtors. However, it provides five potentially conflicting sources for determining a debtor's name. Although filers could be safe using the name shown on only one such source, searchers would have to ascertain and conduct searches under the exact name shown on each source. Moreover, the use of the debtor's “driver's license” is unrestricted by state of residence or otherwise. Thus, searchers could never be absolutely sure they have checked every possible name that would be sufficient.

These examples illustrate the complexities and subtleties that the JRC must consider as it seeks to refine the provisions of Article 9. Given the problems with the safe harbor solutions described above, the drafting committee might consider revisions that would describe the exclusive means of identifying an individual debtor's name but would simultaneously limit those means more judiciously than Tennessee's non-uniform amendment. Such a revision could strike the proper balance between the respective burdens on filers and searchers.

Registered Organizations. Pursuant to Section 9-503(a)(1), financing statements identify the name of debtors that are “registered organizations” sufficiently only if they provide the name indicated “on the public record of the debtor's jurisdiction of organization.” This mechanism gives secured parties a clear standard to identify the name of registered organizations. Since the UCC does not define the term “public record,” however, issues nevertheless arise in states that maintain more than one public record showing a registered organization's name. States often have online searchable databases containing the charter documents or names of registered organizations. The names in these databases can differ from those in the actual charter documents for various reasons, including errors in data entry, names being shortened for ease of use or entry, or the inclusion of trade names. Consequently, the International Association of Commercial Administrators (“IACA”) has proposed that Article 9 be amended to provide that the name of the debtor in its charter document be determinative. Because this is the most reliable source and its use would lead to uniform results in all states while reducing burdens on both filers and searchers, such an amendment to Article 9, or further explanation to that effect in the official comments, would be welcome. (Note, according to the home page on its Web site, IACA is “a professional association for government administrators of business organization and secured transaction record systems at the state, provincial, territorial, and national level in any jurisdiction which has or anticipates development of such systems.” www.iaca.org/.)

Business Trusts. Confusion over certain trust names under Article 9 arises because a “business trust” can in certain cases be a “registered organization” as defined in Section 9-102, while the rules for determining the name of debtors that are trusts differ from those governing the name of registered organizations. (Compare UCC ”9-503(a)(1) and 9-503(a)(3)). The review committee believes that the debtor's name for these registered business trusts should be determined under the registered organization rules. (Note also that Delaware has already instituted a non-uniform amendment that mandates this result in its Section 9-503.) Because the registered organization rules provide a simpler and more reliable method of determining the name of business trusts, the JRC seems likely to support such an approach.

Transmitting Utilities

Section 9-515 permits financing statements to designate a debtor as a “transmitting utility.” This is defined as a person primarily engaged in the business of: A) operating a railroad, subway, street railway, or trolley bus; B) transmitting communications electrically, electromagnetically, or by light; C) transmitting goods by pipeline or sewer; or D) transmitting or producing and transmitting electricity, steam, gas, or water. UCC '9-102(a)(80).

Financing statements in which debtors are so designated have no lapse date and, instead, remain effective until a termination statement is filed. Uncertainty has emerged as to how filers can indicate that debtors are transmitting utilities. The difficulty arises because Section 9-102 defines “financing statement” to include all amendments to the initial filing. Debtors thus can be designated as a transmitting utility in an amendment, not just the original filing. There is no issue, of course, if the initial financing statement has checked the transmitting utility box, but making such a designation initially in an amendment filing is problematic for two reasons. First, at the time of an amendment, the filing office has already given the original statement a specific lapse date and, according to the review committee, may not be “operationally capable, without undue cost or expense, of eliminating the lapse date.” (See review committee, supra, at 3.) Second, amendment forms have no place to indicate that the debtor is a transmitting utility, and, since filing offices typically do not read the contents of amendment filings, any indication of a change in the debtor's status will likely be overlooked. Accordingly, IACA has proposed amending Article 9 to provide that debtors can be designated as transmitting utilities only on initial financing statements. The review committee has expressed no objection to this approach, so it seems likely to be recommended.

Next month's installment will discuss forms of initial financing statements and amendments, correction statements, control of deposit accounts, intangibles, and the Commercial Money Center and Highland Capital cases.

This article originally appeared in the New York Law Journal, a sister publication of this newsletter.

Part One of a Two-Part Article

I Love You, You're Perfect, Now Change” is the name of a long-running off-Broadway musical. It also describes what may be on the horizon for Article 9 of the Uniform Commercial Code, which was last revised in 2001. The experiences and case law since then, as well as an increase in non-uniform provisions, prompted the UCC's permanent editorial board to establish an Article 9 Review Committee that highlighted issues of concern in a June 2008 report (see, Article 9 Review Committee, Statutory Modification Issues List (June 24, 2008), http://extranet.ali.org/directory/files/UCC9_IssuesList.pdf). Notably, Nebraska, Tennessee and Texas recently enacted legislation with significant non-uniform amendments to Article 9's debtor name provisions. Several other states have either proposed or already enacted other non-uniform amendments that would impair Article 9's uniformity.

Those issues will now be addressed by a drafting committee, called the Article 9 Joint Review Committee (“JRC”), appointed by the National Conference of Commissioners on Uniform State Laws and the American Law Institute. Interestingly, “[d]espite the Joint Review Committee's name, it is a drafting committee. It was not labeled as a drafting committee because this project is not intended to be a major rewrite.” Joint Review Committee for Article 9 of the UCC Meeting Notes for Oct. 3-5, 2008, Prepared by Professor Stephen L. Sepinuck, at 2, available at www.ali.org/index.cfm?fuseaction=projects.proj_ip&projectid=21. The JRC held its first meeting in Chicago in October 2008 and will reconvene early next year. In this article, we discuss several items on the JRC's agenda that could result in amendments to Article 9, certain secured transactions provisions of UCC Article 8 and the official comments.

Naming Issues

Section 9-502 provides that a financing statement is sufficient only if it lists “the name of the debtor.” For corporations and other registered organizations, the UCC supplies further gloss, stating that the appropriate name is the name of the organization indicated on the public record. For individual debtors, however, should one use the name on their birth certificate, driver's license, passport or other official identification? May a commonly used name or nickname suffice? Filers and searchers alike are left to guess what qualifies as an individual debtor's correct name, as Article 9 currently offers no guidance.

Individual debtors. Since financing statements are indexed by the debtor's name, listing the debtor correctly on them is critical. If financing statements are “seriously misleading,” they are ineffective. Currently, Article 9 provides little relief for filers who do not identify the debtor's name correctly. Section 9-506 provides that a financing statement is not seriously misleading if a search under the correct name, using the filing office's standard search logic, discloses the filing. Most states, however, employ very rigid and unforgiving search logic. Consequently, financing statements using, for example, the name Mike instead of Michael, Chris instead of Christopher and Roger instead of Rodger have been deemed seriously misleading, and thus ineffective, because searches under the full or correctly spelled name did not reveal them. See, e.g., In re Berry, 2006 WL 2795507 (Bankr.D.Kan. 2006); In re Borden, 353 B.R. 886 (D. Neb. 2006); In re Jones, 2006 WL 3590097 (Bankr.D.Kan. 2006); Pankratz Implement Company v. Citizens National Bank , 130 P.3d 57 (Ks. 2006). For further discussion of Article 9's naming issues, see A. Christenfeld & S. Melzer, “Naming Issues in Filings Under Revised Article 9,” 237 NYLJ, No. 65 at 5 (April 5, 2007).

Three states have sought to address the issue of individual debtor names through non-uniform amendments to Article 9. Nebraska recently enacted legislation providing that a financing statement containing the debtor's correct last name is effective. (See NE L 2007, LB 851 '28. The Nebraska legislation was enacted on March 28, 2008 with a one-year delayed effective date.) Although this solution eliminates the problems caused by nicknames, middle names and common variations of first names, it appears excessively broad. Under it, a filing with a correctly spelled last name would not be “seriously misleading” even if the debtor's first name were wholly incorrect or omitted altogether. With first names being ignored in determining whether filings refer to the individuals in question, distinguishing among financing statements listing the same last name could be exceedingly difficult ' one can but wonder how many individuals with common last names (such as Smith or Brown) are on file in New York or California alone. The Nebraska legislation consequently obliges searchers to review and evaluate a potentially huge number of financing statements bearing that last name, an undertaking that contradicts the 2001 revision's aim to reduce the diligence burden on searchers. Finally, the reference to the “last name” of the individual is itself potentially confusing given different cultural naming norms. For example, in most Asian countries, the sequence of names is generally family name first and given name second. In many Spanish-speaking countries, individuals generally have two surnames, with the father's preceding the mother's. Other examples abound. Of course, this is a problem even under the current Section 9-502.

A 2007 Texas amendment makes the use of the name on an individual's driver's license or state identification card sufficient for Article 9 purposes. See Tex. Bus. & Com. Code Ann. '9.503(a). The Texas legislation, however, does not state whether this is the exclusive method of determining an individual debtor's name or merely a non-exclusive safe harbor. If it were intended to be the latter, most of the problems that currently confront searchers would remain. Although by using the safe harbor filers could ensure their statements would be effective, searchers would still have to act as if the current rule were unchanged because conflicting filings made using other naming methods might nevertheless be effective.

Tennessee amended Section 9-502 in 2007 so that financing statements can identify a debtor's name sufficiently only if they use the name shown on one of the following: a driver's license or state identification card, a birth certificate, a passport, a social security card, or a military identification card. (See State of Tennessee Senate Bill 3732. Enacted on March 25, 2008; Tennessee Acts 2007, ch 648.) Unlike Texas' approach, Tennessee's revision is expressly intended to be the exclusive means to name individual debtors. However, it provides five potentially conflicting sources for determining a debtor's name. Although filers could be safe using the name shown on only one such source, searchers would have to ascertain and conduct searches under the exact name shown on each source. Moreover, the use of the debtor's “driver's license” is unrestricted by state of residence or otherwise. Thus, searchers could never be absolutely sure they have checked every possible name that would be sufficient.

These examples illustrate the complexities and subtleties that the JRC must consider as it seeks to refine the provisions of Article 9. Given the problems with the safe harbor solutions described above, the drafting committee might consider revisions that would describe the exclusive means of identifying an individual debtor's name but would simultaneously limit those means more judiciously than Tennessee's non-uniform amendment. Such a revision could strike the proper balance between the respective burdens on filers and searchers.

Registered Organizations. Pursuant to Section 9-503(a)(1), financing statements identify the name of debtors that are “registered organizations” sufficiently only if they provide the name indicated “on the public record of the debtor's jurisdiction of organization.” This mechanism gives secured parties a clear standard to identify the name of registered organizations. Since the UCC does not define the term “public record,” however, issues nevertheless arise in states that maintain more than one public record showing a registered organization's name. States often have online searchable databases containing the charter documents or names of registered organizations. The names in these databases can differ from those in the actual charter documents for various reasons, including errors in data entry, names being shortened for ease of use or entry, or the inclusion of trade names. Consequently, the International Association of Commercial Administrators (“IACA”) has proposed that Article 9 be amended to provide that the name of the debtor in its charter document be determinative. Because this is the most reliable source and its use would lead to uniform results in all states while reducing burdens on both filers and searchers, such an amendment to Article 9, or further explanation to that effect in the official comments, would be welcome. (Note, according to the home page on its Web site, IACA is “a professional association for government administrators of business organization and secured transaction record systems at the state, provincial, territorial, and national level in any jurisdiction which has or anticipates development of such systems.” www.iaca.org/.)

Business Trusts. Confusion over certain trust names under Article 9 arises because a “business trust” can in certain cases be a “registered organization” as defined in Section 9-102, while the rules for determining the name of debtors that are trusts differ from those governing the name of registered organizations. (Compare UCC ”9-503(a)(1) and 9-503(a)(3)). The review committee believes that the debtor's name for these registered business trusts should be determined under the registered organization rules. (Note also that Delaware has already instituted a non-uniform amendment that mandates this result in its Section 9-503.) Because the registered organization rules provide a simpler and more reliable method of determining the name of business trusts, the JRC seems likely to support such an approach.

Transmitting Utilities

Section 9-515 permits financing statements to designate a debtor as a “transmitting utility.” This is defined as a person primarily engaged in the business of: A) operating a railroad, subway, street railway, or trolley bus; B) transmitting communications electrically, electromagnetically, or by light; C) transmitting goods by pipeline or sewer; or D) transmitting or producing and transmitting electricity, steam, gas, or water. UCC '9-102(a)(80).

Financing statements in which debtors are so designated have no lapse date and, instead, remain effective until a termination statement is filed. Uncertainty has emerged as to how filers can indicate that debtors are transmitting utilities. The difficulty arises because Section 9-102 defines “financing statement” to include all amendments to the initial filing. Debtors thus can be designated as a transmitting utility in an amendment, not just the original filing. There is no issue, of course, if the initial financing statement has checked the transmitting utility box, but making such a designation initially in an amendment filing is problematic for two reasons. First, at the time of an amendment, the filing office has already given the original statement a specific lapse date and, according to the review committee, may not be “operationally capable, without undue cost or expense, of eliminating the lapse date.” (See review committee, supra, at 3.) Second, amendment forms have no place to indicate that the debtor is a transmitting utility, and, since filing offices typically do not read the contents of amendment filings, any indication of a change in the debtor's status will likely be overlooked. Accordingly, IACA has proposed amending Article 9 to provide that debtors can be designated as transmitting utilities only on initial financing statements. The review committee has expressed no objection to this approach, so it seems likely to be recommended.

Next month's installment will discuss forms of initial financing statements and amendments, correction statements, control of deposit accounts, intangibles, and the Commercial Money Center and Highland Capital cases.

This article originally appeared in the New York Law Journal, a sister publication of this newsletter.