New Article 9 — Secured Transactions

Major Uniform Commercial Code Revisions to Article 9, Governing Secured Transactions,

Effective July 1, 2001

The State of California enacted a major revision to Article 9 of the Commercial Code, governing secured transactions, which became effective on July 1, 2001. This change is part of a nationwide program to adopt a new, uniform version of Article 9 (“Revised Law”), developed and drafted by the National Conference of Commissioners on Uniform State Laws and the American Law Institute. Nearly every state in the country has now adopted the Revised Uniform Commercial Code Article 9. The entire law has been rewritten to include uniform provisions relating to security interests, which are a critical element of many commercial and banking relationships.

Article 9 is the most important section of the Commercial Code, which governs the methods by which one can obtain a security interest in personal property, rather than real estate, which requires recording of documents with a county office. Under Article 9, one can obtain a security interest in personal property by filing a Financing Statement with a Secretary of State’s central filing office.

The prior law was nearly uniform throughout the country, as it was developed as model legislation, as the Revised Law has been. Like the prior law, the goal of the drafters of the Revised Law is to obtain approval and adoption by the state legislatures of each state in the U.S. The goal has almost been reached. Nearly every state has adopted the Revised Law with the same effective date of July 1^st. The remaining states all have the legislation currently pending with adoption expected very soon. Adoption by all of the states is necessary to make the law uniform across the country. We are almost there.

A number of problems and issues developed with the prior version of Article 9, which the Revised Law tries to fix. jere is a sample.

· DEPOSIT ACCOUNTS. Perfection of a security interest in deposit accounts (i.e. bank accounts) is changed from the prior rule, requiring notice to the depository, to the uniform rule, requiring the secured party to obtain control over it. This will include lock box creditor arrangements, and will eliminate the conflicts that developed when the accounts or the banks w ere located outside California.

· COMMERCIAL TORT CLAIMS. A claim of injury to a business may now be included a collateral, but an individual’s claim for injury or wrongful death.

· LETTERS OF CREDIT. A secured credit may obtain a security interest in a right to payment and performance under a letter of credit (LC). Transfer of physical possession of the LC is no longer required; The creditor does not obtain the rights of a beneficiary to demand payment or performance under the LC.

· LOTTERY WINNINGS . You will feel betting knowing that a creditor can now take a security interest in your future lottery winnings, making sure that you will use your windfall to repay the loan they made to you when you were a regular debtor. This is very unusual because it allows you to grant a security interest in something that doesn’t exist yet. Perhaps some lenders were burned by happy go lucky winners to skipped off to Tahiti without paying their old debts.

· WHERE TO FILE. Under the Revised Law, you need only file in the location of the debtor to perfect a security interest in its personal property, not in each state where the collateral was located, as required by prior law. If you are filing a continuation statement of a UCC originally filed under the prior law, you must file a new financing statement in the correct jurisdiction.

California’s version of the Revised Law are not identical to the uniform law, as several longstanding areas of divergence from the former uniform law , mostly relating to consumer protection, have been carried forward into the new law. The major improvement contained in the Revised Law is the elimination of the need to file financing statements in multiple states, and the clear identification of the proper place to file for any particular collateral, helping to minimize the conflict of laws problems that previously existed. But beware, because there are exceptions to every rule.

Details of the new law can be found at the National Conference of Commissioners on Uniform State Laws at http://www.nccusl.org (choose “UCC Article 9” in the “Select an Act or Title” section) as well as the state in which you are located for current information.

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