Dear Associates:
Adoption
Revised Article 9 of the Uniform Commercial Code (UCC) has been adopted in all states and Washington, D.C. It was effective July 1, 2001, in all states except:
Alabama-effective January 1, 2002
Connecticut-effective October 1, 2001
Florida-effective January 1, 2002
Mississippi-effective January 1, 2002.
Comment: On January 1, 2002, Revised Article 9 will be effective in all states and the District of Columbia.
Collateral
Article 9, UCC, relates to secured transactions. A lender may have a security interest in personal property, such as goods, manufactured housing (if not considered real estate and not evidenced by a certificate of title), promissory notes, payment intangibles (e.g. loan agreements without a note), and equipment. A lender also may have a security interest in fixtures, timber to be cut, and as-extracted collateral (e.g. minerals produced). Article 9 does not apply to the creation or transfer of an interest in or lien on real property, including rents or leases (but does apply to timber and fixtures). 9-109(d)(11).
Comment: A security interest in promissory notes now may be subject to a UCC filing. Fixture filings have not changed.
Terms
The following are common terms used in UCC transactions:
"Attachment"occurs when a security interest becomes enforceable because value has been given, the debtor has rights in the collateral or power to transfer rights, and the debtor has authenticated a security agreement (although attachment also may occur in other cases). 9-203.
"Authenticate"means to sign or to execute or otherwise adopt a symbol or encrypt or similarly process a record with intent to adopt or accept a record. 9-102(a)(7). By authenticating a security agreement, a debtor authorizes filing of a financing statement. 9-509(b).
"Debtor"includes a person who has an interest other than a security interest or lien in the collateral. 9-102(a)(28).
"Obligor"includes a person who owes payment or other performance of the obligation secured by the security interest. 9-102(a)(59).
"Perfection"occurs when the requirements, such as filing a financing statement in some circumstances, for protecting the validity and priority of the security interest occur (although the security interest may, nevertheless, be ineffective against certain protected parties). 9-308.
"Secondary obligor"includes an obligor to the extent the obligation is secondary. 9-102(a)(71).
"Secured party"includes a person in whose favor a security interest is created. 9-102(a)(72).
Place of Filing
Financing statements covering fixtures, as-extracted collateral, and timber to be cut must be filed in the real property records in the location for filing of mortgages. 9-501.
Other financing statements must be filed in the central office of the state of location of the debtor. 9-301.
The state of location of a debtor is (1) the state of organization for a registered organization, such as a corporation, limited partnership or limited liability company; (2) the state of the debtor's principal residence if the debtor is an individual; (3) the state of the chief executive office of a debtor that is an organization that is not a registered organization. 9-307. If the debtor is located in a foreign jurisdiction that does not have similar filing requirements, the debtor is deemed to be located in the District of Columbia for filing purposes.
Comment: The state for filing a UCC may be a state other than the state in which the collateral is located.
UCC Form Revision
The UCC Financing Statement is not required to have the signature (or other authentication) of the debtor or secured party. This change in the law (which formerly required signature of the debtor) facilitates electronic production and transmission of financing statements. See form available through the references section at the end of this bulletin (and also at http://www.sos.state.tx.us/ucc/forms/ucc1.pdf ).
The UCC Financing Statement must contain the accurate name of the debtor, and may not simply provide an assumed name. If the debtor is a registered organization, such as a corporation or limited liability company, the Financing Statement must provide the name of the debtor indicated on the public record of the debtor's jurisdiction of organization. 9-503, 9-506(b).
The Financing Statement may sufficiently describe collateral (with certain exceptions such as commercial tort claims and consumer goods) if it provides a description of the collateral by (1) a specific listing, category, quantity, computational or allocational formula or procedure, or other means by which the collateral is objectively determinable, or (2) an indication that the Financing Statement covers all assets or all personal property. 9-504. The Security Agreement may not contain a general description of collateral, such as all assets.
Comment: The UCC 1 does not need a signature. It must have the exact legal name of the debtor. It may have a broad reference to collateral.
Place of Search
If a security interest is perfected before the effective date of Revised Article 9, but would not be effective under Revised Article 9, it shall remain effective no longer than one year after Revised Article 9. 9-703. A Financing Statement effective before Revised Article 9 and complying with the requirements of the jurisdiction where filed remains effective for the period of effectiveness under former law, but no longer than July 1, 2006 (or December 31, 2006 in Alabama). 9-705.
A financing statement may be filed in the place of location of the Debtor in order to perfect a security interest in a promissory note. A "purchaser" (such as a secured party or buyer) of a promissory note may take free and clear of the security interest if the purchaser does not know of any limits on authority of the debtor to dispose of the promissory note and if the purchaser takes possession of the promissory note.
Comment: The cautious secured party (and some purchasers of the collateral) will conduct a nationwide UCC search of the name of the existing owner of the collateral for prior UCC filings made before the adoption of the Revised Article 9.
Time Limit for UCC Filing
Except as otherwise provided a financing statement is effective for five years.
A Financing Statement effective before Revised Article 9 and complying with the requirements of the jurisdiction where filed remains effective for the period of effectiveness under former law, but no longer than July 1, 2006 (or December 31, 2006 in Alabama). 9-705.
An initial filing for a public-finance transaction or manufactured-home transaction is effective for 30 years if it indicates it is filed in connection with a public-finance or manufactured-home transaction.
A continuation statement may be filed within six months before expiration of the period of effectiveness of the financing statement. The continuation statement extends the financing statement by five years.
A filed financing statement against a transmitting utility is effective until the termination statement is filed.
A mortgage effective as a fixture filing remains effective until the mortgage is released or satisfied of record or the effectiveness of the mortgage terminates as to the real property. 9-515.
Other liens, such as federal tax liens, are governed by the law applicable to those separate liens.
A security interest remains perfected for four months after the change of a debtor's location to another jurisdiction. 9-316.
A security interest remains perfected for one year after transfer of collateral to a person that becomes a debtor and that is located in another jurisdiction. 9-316.
If a debtor changes its name so that the financing statement becomes seriously misleading, the financing statement remains effective as to collateral acquired before, or within four months after, the name change. 9-507.
Priority
Although the general priority of security interests is governed by priority in filing, purchase-money security interests in goods other than inventory and livestock may be perfected within 20 days after the debtor receives possession of the collateral and attain priority over other financing statements. 9-324.
Generally, a filed financing statement remains effective with respect to collateral that is sold, exchanged, leased or disposed of (with certain exceptions, such as some ordinary course of business sales) 9-507.
If a debtor changes its name so that the financing statement becomes seriously misleading, the financing statement remains effective as to collateral acquired before, or within four months after, the name change. 9-507.
A perfected security interest in fixtures has priority over a conflicting interest of an owner or encumbrancer of real property if the debtor has an interest of record in or is in possession of the real property, and (1) the security interest is a purchase-money security interest; (2) the interest of the owner or encumbrancer arises before the goods becomes fixtures; and (3) the security interest is perfected by a fixture filing before the goods become fixtures or within 20 days thereafter. A construction mortgage (which indicates that it is a construction mortgage) has priority over a security interest in fixtures if the fixtures become fixtures during construction and after recordation of the mortgage. 9-334.
A perfected security interest in crops growing on the real property has priority over a conflicting interest of an encumbrancer or owner of the real property if the debtor has an interest of record or is in possession of the real property. 9-334.
Comment: Do not waive an outstanding Financing Statement solely because of the foreclosure of a mortgage recorded before the Financing Statement. You may generally assume a Financing Statement filed after the effective date of Revised Article 9 is effective for five years (unless continued).
Real Property Filings
If necessary to record a mortgage nonjudicially, the secured party may record in the location in which a record of the mortgage is recorded a copy of the security agreement that provides for a security interest in the obligation secured by the mortgage, and the secured party's sworn affidavit in recordable form that a default occurred and the secured party is entitled to enforce the mortgage nonjudicially. 9-607(b).
Crop filings are not required to contain a legal description, and are not required to be filed in the real property records. Crops are "farm products." 9-102(34). Local law where the crops are located will govern agricultural liens, such as statutory liens. 9-302.
A filing for fixtures, timber or as-extracted collateral must contain a description of the land sufficient to provide constructive notice for a mortgage. 9-502(b). A mortgage may be effective as a Financing Statement that covers fixtures, timber or as-extracted collateral if the record indicates the goods and the record satisfies the requirements for a financing statement other than the indication that it is to be filed in the real property records. 9-502(c).
Comment: When we are asked to show a Financing Statement naming the insured under a Loan Policy as the secured party, we prefer to show the Financing Statement in Schedule B, Part II (or otherwise insure as a subordinate matter). You may show the UCC in Schedule A if the insured insists and if you are satisfied as to the recording of the UCC in the state of location of the debtor (or place of location of the land for a fixture filing).
Promissory Notes
A security interest may be perfected in an instrument by filing (in the central office of state of location of the debtor). 9-312(a). A promissory note is an instrument. 9-102(65).
A "purchaser" (including a secured party) of an instrument, such as a promissory note, has priority over a security interest (such as a filed UCC) perfected by a method other than possession if the purchaser gives value and takes possession of the instrument in good faith and without knowledge that the purchaser violates the rights of the prior secured party. 9-330.
Comment: Do not insure an assignment of a mortgage (and note) on residential property to individual assignees unless you are satisfied that they obtain possession of the promissory note. Do not insure an assignment of a mortgage (and note) to multiple individuals unless you secure underwriter approval.
Search Services
A number of UCC service providers are available. They include ctadvantage.com, UCC Direct Services, and LexisNexis." They may provide searches or search tools for your office.
Indemnity and Security for STGC
A security interest in a deposit account may be perfected only by control. 9-312(b), 9-314(a).
A deposit account is a demand, time, savings, passbook, or similar account maintained with a bank. 9-102(29).
A secured party has control of a deposit account if (1) the secured party is the bank at which the account is located; or (2) the debtor, secured party, and bank have agreed in an authenticated record that the bank will comply with instructions originated by the secured party directing disposition of the funds without further consent of the debtor; or (3) the secured party becomes the bank's customer with respect to the deposit account. 9-104.
Comment: Secure underwriter approval before accepting a secured indemnity to provide title insurance coverage of a lien or other matter. In some cases, we may require that funds provided as security be placed in an account in the name of Stewart Title Guaranty Company.