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UCC – Pennsylvania Changes Coming in 2013

Extensive changes were last made to Article 9 of the Uniform Commercial Code (“UCC”) in 2001.  Since the enactment of the 2001 revisions, several questions and issues have arisen as to the implementation of certain provisions of Article 9.  As a result, the National Conference of Commissioners of Uniform State Laws has suggested further revisions to the UCC, and the Pennsylvania Board of Commissioners on Uniform State Laws voted in 2010 to approve these amendments to Article 9.  It is expected that the legislation will be enacted prior to the end of the 2012 legislative session with a contemplated effective date of July 1, 2013 (the “Effective Date”).

In a nutshell, there are four areas of change which anyone who prepares and files UCC financing statements needs to know about:

1. Name of the Debtor

Whether the debtor is an individual, a registered organization or a trust, it is important that the debtor be correctly described for purposes of effectively securing the secured party’s interest in the debtor’s collateral.  The “New Amendments” propose the following changes with respect to the name of the debtor:

a.  For Individual Debtors.  Individuals may be known by different names.  Some are known by nicknames and others may use a middle name rather than a first name.  Issues arise in the business loan context in which creditors make secured commercial loans to small businesses that operate as sole proprietorships.  In consumer loans there is (i) a purchase money security interest, which may be automatically perfected or (ii) a security interest in a motor vehicle which may be perfected through a notation on the title to the motor vehicle.  Under the New Amendments, a financing statement is sufficient only if it provides the individual name of the debtor as indicated on the individual’s current (and unexpired) Pennsylvania driver’s license or a non-driver’s license identification card issued by the Pennsylvania Department of Transportation. If the debtor does not have a driver’s license, the debtor’s first personal name and surname are to be used by the secured party.

b.  For Registered Organizations.  A “registered organization” is an organization formed or organized by the filing of a “public organic record”, with the issuance of a “public organic record”, or by the enactment of legislation by a state or the United States.  A “public organic record” is defined as a record that is available to the public and consists of the record initially filed with or issued by a state to form or organize an organization.  A corporate charter, business trust filing, legislation that creates an organization, or a government-issued charter would all be considered public organic filings.  The New Amendments introduce greater certainty into the determination of the name of a registered organization by stating that a financing statement filed against a registered organization sufficiently indicates the debtor’s name only if it uses the name that is stated on the public organic record most recently filed with, or issued or enacted by the registered organization’s jurisdiction of organization which purports to state, amend, or restate the registered organization’s name.  If a state’s records include multiple documents related to a corporation, only the name on the public organic record (the corporate charter versus, for example, a good standing certificate) will be considered the debtor’s correct name for purposes of correctly filing a UCC financing statement.

c.  For Trusts.  The name of a trust that is a registered organization is the name as found on the public organic record filed with the state.  If the collateral is held in a trust that is not a registered organization, the name of the settlor is to be used, along with additional information required in order to distinguish the debtor trust from other trusts having one or more of the same settlors.   If the name of the settlor is used, the financing statement will need to indicate that the collateral is held in trust.

d.  For a Decedent’s Estate.  In general, the New Amendments do not change existing law for the debtor name, but they do provide a safe harbor for the name of the decedent as debtor.  The New Amendments do propose to change the focus from whether the debtor is a decedent’s estate to whether the collateral is being administered by the personal representative of the decedent.  The New Amendments require the indication that the debtor is a decedent’s estate to state that the collateral is being administered by a personal representative.  This indication is to be made in a part of the financing statement seperate from the debtor name field, which will help filers avoid the common error of including the indication within the name.  The name of the decedent appears on the order of court appointing the personal representative of the decedent.

2. Changes and Continuing Perfection

 a.  In the event the debtor relocates to a different jurisdiction, there is a four (4) month grace period (that is, four (4) months after the move) for a secured party to perfect in the new jurisdiction.  This also provides protection to a secured party whose debtor acquires new property within the four (4) month grace period.

b.  In the event a new debtor becomes bound by an existing security agreement and is located in a different jurisdiction than the original debtor, there is a four (4) month grace period for a secured party to perfect its lien against the new debtor.  This often arises as the result of a merger in which the successor entity is located in a different jurisdiction than the original debtor.

c.  After a change in the debtor’s name, a financing statement showing the debtor’s old name remains effective against collateral that the debtor owns at the time it changed its name and against the collateral that it acquires within four (4) months after the name change.

3. Changes to UCC Forms

 a.  Under the New Amendments, the required components of the financing statement are the name and address of the debtor, the name of the secured party, the collateral description, and whether the debtor is an individual or an organization.  The debtor’s organizational identification number, the type of organization, or the jurisdiction of the organization will no longer be required.

b.  Under the New Amendments, a secured party whose financing statement was the subject of an unauthorized termination is allowed to file a statement disputing the accuracy of the public record.  The name of this statement of dispute has been changed from a “correction statement” to an “information statement”.

c.  The new financing statement form includes: a check box for when the collateral is held in a trust, a check box for when the collateral is being administered by a decedent’s personal representative, and a check box for extended effectiveness, such as when the debtor is a transmitting utility.  In order to make the financing statement form more user-friendly, there are also a few minor changes to the layout and field labels.

4. Changes Related to Electronic Transactions

Existing Article 9 recognizes that a secured party that takes possession of chattel paper in the ordinary course of its business has priority over a secured party that perfected its interest in the chattel paper by filing.  The New Amendments clarify that compliance with the current requirements for control is sufficient, but that control may also arise “if a system employed for evidencing the transfer of interests in the chattel paper reliably establishes the secured party as the person to whom the chattel paper was assigned.”  This provision recognizes that secured parties need more leeway to develop up-to-date systems for tracking electronic chattel paper.

Financing Statements filed before the Effective Date, that are effective under existing Article 9 and that comply with the New Amendments, will remain effective for five (5) years from the date of filing.  Security interests that were perfected before the Effective Date but are not perfected security interests under the New Amendments will remain effective, but they must satisfy any new requirements for perfection within one (1) year of the Effective Date.

© 2012 McNees Wallace & Nurick LLC

McNees Client Alert is presented with the understanding that the publisher does not render specific legal, accounting or other professional service to the reader. Due to the rapidly changing nature of the law, information contained in this publication may become outdated. Anyone using this material must always research original sources of authority and update this information to ensure accuracy and applicability to specific legal matters. In no event will the authors, the reviewers or the publisher be liable for any damage, whether direct, indirect or consequential, claimed to result from the use of this material.