A Practical Guide to Filing UCCs Under Revised Article 9

Alan J. Mogol
410-347-7332
ajmogol@ober.com

Edward K. Gross

This article was reprinted in The Monitor, 2001

Article 9 of the Uniform Commercial Code is the law governing the creation and perfection of security interests in equipment and certain other types of collateral. Article 9 has been substantially revised and the changes become effective on July 1, 2001 (Effective Date), in those states which have adopted Revised UCC Article 9 (R9). As of April 3, 2001, R9 has been adopted in thirty-one states and the District of Columbia and has been introduced in the remaining states.

Certain Significant Changes
Place of Filing
From the perspective of leasing companies, the most significant change under R9 is the place of filing of financing statements. Under the old law, to perfect a security interest in equipment, a leasing company would file the financing statement in the jurisdiction where the equipment was located. Under R9, financing statements are filed in the jurisdiction of the debtor/lessee’s location. With respect to a debtor/lessee which is a registered organization (that is, as to which there is a required public record of organization; such as a corporation, limited partnership or limited liability entity) which is organized under the laws of a state, financing statements are filed in the jurisdiction where the debtor/lessee is organized for business. If the debtor/lessee is an unregistered organization (for example, a general partnership), financing statements are filed in the jurisdiction of its place of business or, if it has more than one place of business, in the jurisdiction of its chief executive office. This will greatly simplify the filing process for secured parties/lessors involved in a transaction where the equipment is located in many different states. Under the old law, a secured party/lessor would file financing statements in each state in which the equipment was located and most likely would also file in the state in which the debtor/lessee maintained its chief executive office out of an excess of caution. For a new transaction under R9, only one financing statement must be filed and that must be filed in the state of the debtor/lessee’s location.

Identifying the Debtor/Lessee
One of the other significant changes under R9 is that the financing statement must specify exactly the true name of the debtor/lessee. Also, to the extent that it is available, the financing statement must specify the "organizational number" of the debtor/lessee. This is intended to be the identification number assigned to the debtor/lessee upon its registration by the state agency where the organizational documents were filed. This is different than the Federal employer identification number.

No Need for Debtor/Lessee’s Signature
Another change which will be helpful to secured parties/lessors is that the signature of the debtor/lessee is not required on the UCC financing statement. The secured party/lessor is automatically deemed authorized to file UCC financing statements without the debtor/lessee’s signature upon execution of the lease or security agreement by the debtor/lessee.

Governmental Agencies
It should also be noted that transactions involving governmental agencies (of particular concern in the context of governmental lease financing) will now be covered under R9. Previously, most (if not all) governmental finance transactions were exempt from the UCC filing requirements.

Transitional Rules
These changes in the law become effective on the Effective Date, with respect to financing statements filed on or after that date. However, there are also transitional rules with respect to R9 which will apply to transactions where financing statements were filed before the Effective Date, and these rules are very complicated.

Continuation of Financing Statements
Under both the old law and R9, financing statements are only effective for a specified period of time. They must be continued prior to the expiration of that period of time in order to remain effective. Under R9, the general rule is that financing statements filed before the Effective Date will cease to be effective on the earlier of June 30, 2006, or the date on which that financing statement would normally lapse (in most states, five years after the filing date, but six years in Arizona and twelve years in Maryland). In order to continue after the Effective Date financing statements which were filed before the Effective Date, the secured party/lessor must determine whether the original filing would be perfected under R9 (that is, whether the filing would be made in the same office under R9 as the office in which the financing statement was actually filed under the old law). If so, then the secured party/lessor would file what is referred to as a "true" continuation statement, using the uniform continuation form. The "true" continuation statement must be filed within the six month period prior to the date on which the financing statement would lapse. When filing a "true" continuation statement, be sure to include the information required for new filings under R9 (for example, specifying the true name of the debtor/lessee and the organizational number of a registered entity). Care must also be taken to review the collateral description to determine whether the R9 changes in terminology must be reflected in the description of collateral under the existing filing. The filing of a "true" continuation statement will continue the effectiveness of the original financing statement for five years after the date of the current lapse of that financing statement. Note that the new five year period does not start from the date of filing of the "true" continuation statement, but rather starts from the date of the current lapse of the original financing statement.

If the secured party/lessor determines that R9 would require filing of a financing statement in a different office than the original financing statement was filed in, then the secured party/lessor would file what is referred to as an "in lieu" filing. To make an "in lieu" filing, the secured party/lessor would file a new financing statement in the office required under R9, specifying the true name of the debtor/lessee, the organizational number of a registered entity, and using the new R9 collateral description. This new financing statement is being filed in lieu of a continuation statement. The "in lieu" statement must describe the collateral using the new terminology of R9. In addition, the "in lieu" statement must refer to the filing information with respect to the old financing statement to be continued (including the most recent previous continuation of that original financing statement, if any), including the identification number, the jurisdiction of filing, and the date of filing. The "in lieu" statement must specify that the referenced original filing remains effective. One "in lieu" statement can be used to continue all previous UCC filings with respect to the debtor/lessee, regardless of where those original financing statements were recorded. The secured party/lessor will want to continue all previously filed financing statements since its priority with respect to other secured creditors relates back to the date on which the original financing statements were recorded. An "in lieu" filing can be done at any time prior to the lapse of the original financing statement and the filing of the "in lieu" statement starts a new five year effective period with respect to the original financing statements, starting on the date the "in lieu" statement is filed. This is different than the rule with respect to "true" continuation statements.

There is no advantage to filing both in the office required under the old law as well as the office required under R9 (assuming they are different) prior to the Effective Date, because the filing made in the office required under R9 will not become effective for priority purposes until the Effective Date, so it will be necessary to make an "in lieu" filing with respect to the financing statement filed in the office required under old law in any event in order to preserve the priority date.

Amendment of Financing Statements
Since the terminology used to describe collateral under R9 is different in some instances than the terminology used under old law, it will be necessary to review each financing statement which has been filed for existing transactions to determine whether it must be amended to reflect the new terminology. If an amendment is required, the secured party/lessor must again determine whether the original filing would be perfected under R9 (that is, whether the filing would be made in the same office under R9 as the office in which the financing statement was actually filed under the old law). If so, then that original financing statement is amended using the uniform amendment form. However, if the secured party/lessor determines that R9 would require filing of a financing statement in a different office than the original financing statement was filed in, then the original filing is amended by an "in lieu" filing of a new financing statement. The procedures described above with respect to "in lieu" continuations would apply.

UCC Searches
In order to be on the safe side, during the entire transition period (that is, through June 30, 2006), searches of UCC records should be done both in the offices in which filings are required under the old law as well as the offices required under R9. This is because financing statements correctly filed under the old law may remain effective through June 30, 2006.

Steps To Be Taken
In order to cope with the changes which will become effective under R9, a secured party/lessor should take the following steps:

Prepare a master list of all debtors/lessees under existing transactions.
Determine the state of organization of each existing debtor/lessee.
Determine the exact name of the debtor/lessee and, if available, the organizational number assigned to it by the state agency. Approximately 90% of the states have some type of on-line search system that allows one to search registered entities by name. Most state’s sites will provide the name of the registered entity, the organizational number, the formation date, the principal office and the resident agent. If the information is not available on-line, a telephone call to the state’s charter division will provide the required information.
Determine where existing financing statements were filed, the date on which the filing was made and the date on which the filing will lapse under old law.
Determine whether the office in which existing financing statements were filed would be the same as the office in which financing statements would be required to be filed under R9. With respect to those existing transactions in which the filing office is the same, follow the procedure with respect to "true" continuation statements. With respect to those existing transactions for which the filing office would be different, follow the procedure with respect to "in lieu" continuation filings.
Review the description of collateral on existing financing statements to determine whether terminology changes under R9 are required. If so, it will be necessary to amend those financing statements to reflect the terminology of R9. The amendments should be prepared and filed on or before the Effective Date. Follow the procedure described above with respect to amendments, depending upon whether the filing office under the old law is the same as the filing office under R9.
With respect to new transactions entered into on or after the Effective Date, file financing statements only in the required office of the jurisdiction in which the debtor/lessee is located, using the debtor/lessee’s exact name and specifying its organizational number if it is a registered entity, and using the correct terminology under R9.
With respect to new transactions entered into on or after the Effective Date, search the UCC records with respect to the office(s) in which filings would be required under the old law as well as the office in which filings would be required under R9.

The foregoing is intended only as a working summary of the most significant changes with respect to UCC filings under R9. It is not intended to be a comprehensive or exhaustive discussion of all of the changes. In addition to these changes affecting the filing of UCC financing statements, other changes under R9 may affect provisions typically included in leases and security agreements, the manner in which a secured party/lessor may perfect a security interest in certain types of collateral and the manner in which a secured party/lessor may syndicate a transaction. We would be pleased to discuss with you these additional requirements.