Spring 2001
Spring 2002
-Special Report & Legal Bulletin
This bulletin covers legislative developments
-Uniform Commercial Code Revisions
REVISED UNIFORM COMMERCIAL CODE ARTICLE NINE
Effective July 1, 2001, the State of Missouri along with all of the other states, enacted Revised Article 9 to the Uniform Commercial Code. This is the first major revision since 1972. The changes brought by Revised Article 9 require new procedures and new documentation in any secured transaction.
The Uniform Commercial Code governs most commercial transactions. Included within the Commercial Code are contracts for sale of goods, bills and notes and other negotiable instruments, bulk sales and certain security transactions.
Article 9 is the revised portion of the UCC. It allows personal property to be taken as collateral against a loan or other financing. The 2001 revision changes the scope, rules, and procedures in secured transactions. While the intention was to create certainty in financing transactions, only time will tell if this goal is met. Finally, the revision seeks to recognize that commerce is no longer accomplished simply with pieces of paper and carbon forms, but rather through electronic means, as well as the internet.
Please consider the following highlights of this revision.
- As a general proposition, transactions that were secured and perfected July 1, 2001 will remain valid until the prior UCC financing statement lapses or June 30, 2006, whichever is the earlier.
- Currently filed UCC-1 financing statements may be amended but not continued after July 1, 2001. Old UCC filings must be replaced by revised filings. A new UCC continuation filing may be made which identifies prior filing, the most recent continuation statement and an indication that the pre-effective date filing remains in place.
- For the next five years, when you must determine whether there are other secured creditors, searches must be under the prior as well as the new Article 9 of the Uniform Commercial Code. In other words, you must search under the old law as well as the revised code.
- UCC financing statements are now filed in the debtor's location. For corporations or other fictitious entities, that means in the state of the debtor's formation. For individuals it means the place of the person's principal residence.
- UCC-1 financing statements must include the debtor's correct name, no fictitious names. Any mistakes in the debtor's name renders the financing statement ineffective if the name is not picked up by a standard computer search.
- The revisers of the Code have substituted the court's discretion to determine when a name is incorrect with search logic by as yet identified computer engines.
- UCC financing statements no longer have signatures but rather authorized authentications. Generally, the authorization will come through the signing of a security agreement.
- A security agreement need not be specific but can use UCC categories such as "equipment" or "goods."
- A UCC-1 financing statement needs to be not at all specific even as to categories, simply stating "all assets" is perfectly acceptable.
- The definition of "accounts" now includes payment obligations from sales or leases, credit card receivables, or virtually any sort of requirement to pay.
- Under the prior UCC, deposit accounts, letters of credit and electronic chattel could not be taken as collateral. That is no longer the case. Now deposit accounts can be taken as collateral as long as the creditor "controls" the account. This will essentially mean the debtor's bank can control the account and may thus take bank accounts as collateral. The bank will be able to effectively use this tool to maintain priority over other creditors, particularly judgment creditors who try to garnish or execute an account.
- Upon default, the secured party must give written notice of the repossession sale to other secured lenders as well as to the debtors. Guarantors must also receive the same notice.
- Failure to provide notice of a repossession sale no longer voids a deficiency in its entirety. Rather, failure to meet the notice or commercial reasonableness test for repossession sales simply reduces the amount of the deficiency to the extent the price obtained was affected by the lender's failure to meet the mandates of the UCC.
The Uniform Commercial Code is the lifeblood of all business financing. These recent changes should simplify life for the asset-based lender. However, until all lenders become fully conversant with the revisions, there are a great many pitfalls for the unwary.
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