Revised Article 9 of the Uniform Commercial Code

The following article, published in the March, 2001 Pittsburgh Leasing Association newsletter, addresses certain issues of Revised Article 9 of the UCC as they relate to the equipment leasing industry.

Revised Article 9 of the Uniform Commercial Code by its terms becomes effective nationwide on July 1, 2001. Having been adopted to date [as of March 6, 2001] in 28 states and the District of Columbia, and with legislation pending in an additional 18 states, Revised Article 9 has the attention of lessors and service providers who need to understand and adapt their practices in light of the pending changes. While this article can not begin to deal with the multitude of issues which arise with the legislative revisions, it highlights certain changes relevant to the equipment leasing industry for consideration in due diligence and documentation practices. In particular, certain of the much discussed financing statement changes are described.

UCC Financing Statements - The "location" of the debtor or lessee will in some instances change as a result in Revised Article 9. This may result in a change in the location of the filing of UCC-1 financing statements for both leases intended as security and true leases when the lessor desires to have notice filings of record. If the debtor/lessee is an organization that must register to come into existence (i.e. corporations, limited liability companies, limited partnerships), its location is its state of registration. If the debtor/lessee is either organized under federal law (rather than state law) or organized under the laws of a foreign (non-US) jurisdiction, then its location is the District of Columbia. In the case of an organization which is not registered (e.g. a general partnership), the location is such organization's principal place of business, or if more than one principal place of business, its chief executive office, similar to current law. In the case of an individual debtor/lessee, the location is such person's principal residence.

Subject to any issues which would result if the relevant jurisdiction has yet adopted Revised Article 9, new filings made July 1, 2001, and thereafter need to be filed in the filing offices provided for under the Article 9 revisions. For example, a secured party/lessor would file with the Delaware Secretary of State to perfect on accounts and general intangibles of a debtor headquartered in Pittsburgh but incorporated in Delaware. The Delaware filing would also be effective to perfect a security interest on equipment located throughout the United States. Under the somewhat involved transitional rules in the statute, filings properly made prior to July 1, 2001, in a jurisdiction other than that prescribed by Revised Article 9 will continue to be effective until the earlier of the date they would otherwise cease to be effective or June 30, 2006. However, UCC filings such as lessor/secured party assignments, partial releases of collateral and other amendments made after July 1, 2001, will tend to cause the filings to "migrate" from a jurisdiction of the debtor/lessee's chief executive office to the debtor/lessee's state of organization, if different from the chief executive office.

The transition rules also provide that although Revised Article 9 is not yet effective, filings made before July 1, 2001, in the appropriate jurisdiction under Revised Article 9 (the State of Delaware, in the above example) will become effective on July 1, 2001. The transition rules also provide for a method to file new financing statements in the new jurisdiction in a manner which continues without lapse the filings in the prior jurisdiction (commonly referred to as a financing statement "in lieu" of a continuation statement).

For secured parties and equipment lessors which conduct diligence on existing liens of the debtor/lessee, the above changes may necessitate conducting UCC searches in more jurisdictions during the transitional period, since filings in one of two jurisdictions could be effective to perfect the security interest of another secured party.

Since a security interest in tangible property such as inventory and equipment is perfected under Revised Article 9 by filing at the location of the debtor/lessee rather than the location of the property, the lessor/secured party does not risk a lapse in perfection based upon the debtor/lessee's inadvertent or fraudulent movement of collateral into a jurisdiction where the lessor/secured party has not filed financing statements.

For a registered organization, the place to find the true exact legal name is on its articles or certificate of incorporation/limited liability company/limited partnership, and under Revised Article 9, the financing statement should use that name. The revisions specify that use of a trade name without also setting forth the legal name is insufficient.

With the exception of fixture filings, which will continue to be filed in the local real estate records, filings made under Revised Article 9 with respect to personalty will be made centrally with the applicable Secretary of State. Under Revised Article 9, no signature of the debtor/lessee is required on the financing statement so long as the debtor/lessee has authorized the filing. The debtor/lessee's execution of a lease or security agreement would constitute such authorization.

Definitional Changes - The definitions of "Account", "Chattel Paper" and "General Intangibles" undergo change in Revised Article 9, and there are newly created definitions for "Deposit Account", "Electronic Chattel Paper", "Payment Intangible", "Letter of Credit Right", "Software" and "Commercial Tort Claim". To the extent that these changes impact on the collateral descriptions and lease schedules of lenders and lessors, they will want to avoid any ambiguity as to which definitional scheme is intended and ascertain that they are accurately describing the property they intend to be subject to the lease or security agreement.

One Year Rule - While a lessor/secured party's perfection of a security interest by filing a financing statement may continue for the original period (usually five years) of the effectiveness of a filing made before July 1, 2001, perfection by other methods may lapse sooner. This results in situations where the manner of perfection under current law is no longer effective under Revised Article 9. Examples may include perfection on promissory notes or chattel paper which under current law may be effected by notice to a bailee holding the notes or chattel paper, but under Revised Article 9 require the bailee to acknowledge that it holds possession for the lessor/secured party's benefit.

Under Revised Article 9, perfection of a deposit account by a lessor/secured party requires the lessor/secured party to obtain "control" of such deposit account. While current law in some states may allow for filing of financing statements or possession of a passbook or other documents, Revised Article 9 necessitates transferring the account into the name of the lessor/secured party or entering into a control agreement with the depositary where the account is located.

Another example occurs with respect to letters of credit. Under Revised Article 9, the lessor/secured party's possession of the letter of credit is not sufficient without the letter of credit issuer's consent to the assignment and payment to the lessor/secured party, rather than the beneficiary.

Since a possible lapse of perfection may occur with respect to the collateral described above and other security subject to the one year rule, its is important to review documentation and practices relating to these types of collateral and take steps to ascertain that perfection will not lapse on July 1, 2002.

Chattel Paper - Section 9-330 of Revised Article 9 attempts to set forth in a more definite and comprehensive fashion the priority of a purchaser of chattel paper, which can also include a secured party. The provisions clarify the requirement that the purchaser or secured party act in good faith, and, as under current law, maintain the requirements of such purchase being for new value and in the ordinary course of the purchaser's business. Unlike current law, Revised Article 9 also addresses the priority in proceeds of such chattel paper.

Many financial institutions, lessors, attorneys and other industry professionals have commenced practicing as if Revised Article 9 is effective, or they are preparing themselves for the changes which will come. To the extent that you have not had the opportunity to address the impact of Revised Article 9, there is still time to consult with the appropriate professionals within your organization or contact appropriate outside advisors.