Commencing as of July 1, 2001, some rather sweeping changes to Article 9 of the Uniform Commercial Code (the “UCC”) will become effective in Arizona. These revisions constitute the first major revisions to Article 9 since 1972, and they will affect alt of us in the real estate industry that deal with consensual security interests in personal property and real estate fixtures. Former Article 9 of the UCC. which was enacted in all 50 states, the District of Columbia and Puerto Rico, has served as the basis of personal property security interests in the United States for over 40 years. However, as technology and business practices have evolved, the use of electronic devices and the internet has vastly increased, and as the reach of transactions has increasingly involved parties in multiple states, the UCC has needed to be revised in order to keep pace with our changing economy and the nature of 21st century transactions.
The purpose of this article is to briefly summarize some of the most important changes in Revised Article 9 of the UCC. The Article will also attempt to highlight the impact of some of these changes upon the real estate industry.
Revisions to Article 9 of the UCC were commenced in 1993 and were not completed until early 1999. The revisions were subsequently presented to the various state legislatures through the American Law Institute and the National Conference of Commissioners on Uniform State Laws. As of approximately March, 2001, Revised Article 9 had been adopted by approximately 28 states, including California, Nevada and Utah. Most other states have introduced the Revised Article 9 into their respective legislatures. It is anticipated that eventually all states will adopt Revised Article 9.
Drafters of Revised Article 9 sought two primary objectives:
(a) to expand the scope of personal property, fixtures and transactions covered by Article 9; and
(b) to simplify, clarify and modernize the rules for the creation, perfection, priority and enforcement of security interests, The drafters also sought to add rules governing consumer transactions in the hops of normalizing consumer secured financing matters across the country.
Some of the most far-reaching changes relate to the expansion of the kinds of personal property and transactions covered by Article 9. Several kinds of transactions not previously covered will now be covered under Article 9. Such transactions include the following, among others:
(1) The definition of “accounts” (a general category of collateral in which an Article 9 security interest may be taken) was expanded. Under former Article 9, the definition of “accounts” was limited to payment obligations arising out of the sale or lease of goods or the provision of services. This definition left out many types of payment obligations and forced them to be handled either outside the scope of Article 9 or as “general intangibles.” Revised Article 9 expands “accounts” to cover: (a) “payment obligations” arising out of the sale, lease or license of tangible and intangible personal property, such as payment obligations arising under software licensing agreements; “credit card receivables;” and “health care insurance receivables.” Licensing agreements, credit card receivables and health care insurance policy receivables have become an important part of financing transactions in today’s increasingly service-oriented economy. Including them within the coverage of Article 9 should standardize, simplify and decrease the cost of such financing transactions.
(2) A corollary to the expansion of “accounts” was the addition of a new subcategory of “payment intangibles” to “general intangibles.” A payment intangible is a right to the payment of money that arises out of such important business arrangements as loan agreements that do not involve accounts or promissory notes. The sale or pledge of payment intangibles can function as important collateral iii many in many financing transactions.
(3) The sale of promissory notes will now also he covered as a collateral transaction under Revised Article 9. Promissory note sales will now he considered as a subset of the collateral Category of “instruments,” thus helping to bring more consistency to promissory note sales transactions which used to the subject to various and differing financing rules among the several states.
(4) Revised Article 9 will also permit the taking of a security interest in ‘deposit accounts’’ as original collateral. Former Article 9 only covered deposit accounts when they were considered as “proceeds’ of other collateral that had been thus converted.
(5) Commercial tort claims can also be collateral for a security interest transaction under Revised Article 9, although the definition of’ "commercial tort claims" will be fairly limited to include only those in which the claimant is an organization, or if an individual, the claim (a) arose in the course of the claimant’s business and (6) does not involve personal injury. Thus this new category will mostly consist of so called ‘‘business torts” in which the nature of the injury is damage to a business operation.
Another important change in Revised Article 9 is the modification allowing most descriptions of collateral to be by “type of collateral” as opposed to by specific and relatively complete description of the particular collateral involved. Thus a reference to ‘‘all of debtor’s instruments. investment property. goods and accounts” would likely be sufficient under Revised Article 9 whereas it would not have been so under former Article 9. Some important exception to the general rule of inure simplified collateral descriptions include commercial tort claims, consumer goods transactions and consumer securities accounts transactions.
The necessary components of a financing statement have been revised and simplified under Revised Article 9. In addition, the place of filing has been generally simplified to require only one filing in a central location in the state of the debtor’s formation, which in Arizona and most other states will be with the Secretary of State. Exceptions to the single place of filing role that are or may be important to the real estate industry including estate fixture filings (which, in most eases will require two filings, one with the Arizona Secretary of State and the other with the county recorder of the county in which the real estate collateral is located), oil, gas and ore to he extracted from lands (which in most cases will also require the same two filings discussed immediately above), and timber to be cut and severed from the land upon which it was growing (which in most cases will require the same two filings discussed immediately above). The requirements of what must be on a financing statement have also been modified arid simplified. A financing statement will be required to have only the Debtors exact name, the name of the Secured Party or a representative of the Secured Party and an “indication” or description of the collateral to be covered the security interest. The new requirement to use the debtor’s exact name will necessitate ascertainment of what is the exact name of debtor and will result in using only those names shown on certificates of formation of business entities and birth and exact married names of individuals.
The many changes found within Revised Article 9 (only some of which have been discussed above) will necessitate some changes in the way real estate lenders do business. One of the most important changes will be that lenders should modify existing security agreements (whether consisting of separate agreements or as located in deeds of trust) to include the new categories of collateral covered by and allowed under Revised Article 9. Another will be that parties to a secured financing transaction will have to he careful to find, verify and use only the exact name of each debtor involved in any given transaction. In addition, for at least a period of five years UCC lien searches will need to he in the exact name of the debtor as well as any names that might have been used under the former Article 9. Further, UCC lien searches will need to be made in filing locations applicable under both the former Article 9 as well as Revised Article 9. Financial statements will have to be converted over to the form and having the content required under the new Revised Article 9. Security interests perfected by means other than filing which would not have qualified as being perfected under Revised Article 9 will have to be properly perfected under Revised Article 9 by not later than June 30, 2001.
As Revised Article 9 of the UCC becomes effective, it is imperative that the business public become acquainted with its new provisions and adopt and conform to its new requirements. Following an initial stage of uncertainty, use of Revised Article should become easier than working within the framework of former Article 9. In addition, the expanded scope of Revised Article 9 should facilitate the many financing transactions now covered which were not covered under former Article 9