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Electronic Chattel Paper
Traditional or tangible chattel paper has long been used to finance equipment purchases. One of the significant benefits bestowed upon chattel paper financers is the ability to perfect a security interest via possession, and in so doing potentially achieve priority over pre-existing secured lenders who perfected by filing a UCC Financing Statement. This system generally worked well, and trillions of dollars have been financed in this manner.
In 1999, provisions of Article 9 of the UCC relating to secured lending were updated to permit the creation of “electronic chattel paper.” Electronic chattel paper is essentially chattel paper evidenced by records existing electronically (i.e., a file on a computer). It is distinguished from tangible chattel paper in that electronic chattel paper is not actually paper at all. Electronic chattel paper also is not tangible chattel paper merely executed via electronic signatures or tangible chattel paper converted to electronic form via a facsimile machine or scanner. Instead, and as explained in more detail below, electronic chattel paper is data that memorializes the original record of a financing transaction and that exists and is stored in a secure electronic medium.
Due to the inherent difficulties in “possessing” electronic data, the UCC revisions, in part, defined a new form of control over electronic chattel paper that would be treated as equivalent to possession of tangible chattel paper. In concept, this would permit chattel paper financiers to retain their priority with electronic documents.
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The Article 8 Opt In
The Article 8 opt-in election adds an additional layer of complexity to the already labyrinthine rules governing perfection of security interests under the UCC. A lender that is unaware of the nuances created by the opt in (may find its security interest vulnerable to being primed by another party that has taken steps to perfect in a superior manner under the circumstances.
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