June 2001

Revised Article 9 is scheduled to take effect July 1, 2001.  Revised Article 9 contains a series of rules which describe how and when the transition from existing Article 9 to revised Article 9 will occur.  For many transactions, where lenders have properly documented their secured loans prior to July 1, 2001, nothing will be necessary to maintain the effectiveness of their liens on existing collateral.  There are exceptions:

REVISED ARTICLE 9 TRANSITION RULES

            1.            Continued Perfection:

As a general rule, the transition rules provide that a pre-existing security interest will remain perfected after the effective date of revised Article 9 if:

A. The security interest was properly perfected under prior law, and

B. If the acts which perfected the security interest under prior law (e.g., filing a financing statement, taking possession of property, etc.) would also properly perfect the security interest under revised Article 9.

EXAMPLE:  A Pennsylvania Lender lends to a corporation incorporated in Pennsylvania.  Many UCC-1’s are filed, one with the Pennsylvania Corporation Bureau.  Lender only need worry about the five (5) year expiration.

2.         A security interest which was properly perfected by filing under existing Article 9 gets great latitude under the transition rules.  Any such security interest which, though filed properly at the time, will not be proper under the revisions will continue to be perfected until the earlier of the normal expiration of its original financing statement (typically five years) or July 1, 2006, even if the financing statement was filed in a filing office which would not have been the proper filing office under revised Article 9.

EXAMPLE:            Pennsylvania lender lends to a corporation incorporated in Delaware.  Statements properly filed at the time but no filings in Delaware.  Lender has until the earlier of the five (5) year expiration or July 1, 2006 to properly filed in Delaware.

3.         A security interest, perfected other than by filing under current Article 9, (prior to July 1, 2001) will remain continuously perfected under Revised Article 9 if:

· the secured party had perfected the security interest under current Article 9, and

· the secured party satisfies the creation and perfection requirements under Revised Article 9 within one year after its effective date.

Prior to the termination of the security interest, a lender can continue the perfection and priority of its original lien perfected under existing Article 9 by filing an initial financing statement in the location which revised Article 9 would have required had the lien originally attached after July 1, 2001. 

4.         Some collateral, i.e., deposit accounts, health care receivables, letters of credit and others are to be covered by Article 9 but were excluded before the revisions.  Existing security interests in these types of collateral will fall outside transition rules providing for automatic continuation under revised Article 9.  These security interests are those which have been perfected by acts (other than filing a financing statement) which were proper under existing, but non-Article 9 law, but which would not create perfection under revised Article 9.  Revised Article 9 gives lenders one year after its effective date to re-perfect such problems security interests in a manner which would be proper under revised Article 9.  Lenders may re-perfect at any time before or after the effective date of revised Article 9.

Secured Creditors need to be diligent in examining their existing secured transactions and in insuring that any collateral taken in transactions closing prior to July 1, 2001, will properly make the transition.  The transactions needing action should be identified by June 20, 2001, if possible.

5.         Security interests perfected by third party possession are one type of problem security interest which may need to be re-perfected under revised Article 9.  Section 9-305 of existing Article 9 permits secured parties to perfect security interests in goods, instruments, money, negotiable documents, letter of credit proceeds and chattel paper by taking possession of the collateral.  Security interests in money, instruments and letter of credit proceeds can, in fact, only be perfected under existing Article 9 by possession (9-304(a)).  Old Section 9-305 permits a secured party to take possession either by itself or through a third party bailee from the time the bailee receives notification of the secured party’s interest.

Revised Article 9 will require an additional step for perfection by third party possession to be effective:  the third party must acknowledge that it holds the collateral for the secured party’s benefit.  (Rev. 9-313(c)).  If a lender fails to re-perfect its interest in such collateral before July 1, 2002, the lender will lose its priority.

6.         After revised Article 9 becomes effective, filing a financing statement will become the exclusive means of perfecting a security interest in a commercial tort claim.  Common law liens and non-UCC liens will no longer be effective.  Under the revised Article 9 transition rules, security interests in commercial tort claim perfected outside of the Uniform Commercial Code will need to be re-perfected within one year.  Any such liens which have not been re-perfected under revised Article 9 will terminate and become void on July 1, 2002.

7.         Things to Consider:  Is your collateral description in consumer goods and consumer security accounts.  If so, is it sufficient?  A new stricter description standard will apply in consumer transactions and others.  Description even by type will no longer be sufficient and security agreements will have to describe specifically the property in which the lender takes a security interest.  (Rev. 9-108(e)(2)).  The same specific description requirement will apply to grants of security interests in commercial tort claims by all debtors.  (Rev. 9-108(e)(I)).

Is your collateral description affected by changes in definitions under Rev. Article 9?  If you used a term in a pre-revision security agreement to describe collateral and the revisions change the definition, most of the time that will mean the pre-revision definition only will apply.  This could be good or bad but must be reviewed for affect.

Can you file a continuation statement?  A financing statement filed before July 1, 2001 may only be continued by filing in the state and office designated by the revisions.  You may need to file an “initial financing statement” under Rev. 9-706.

Some other specific areas need be identified:

A.        Do you have current non-Article 9 interests which under Rev. Article 9 are to be perfected by filing?

B.        Do you need acknowledgements from anyone holding collateral on your behalf?

C.        Is your debtor a registered organization, i.e., a corporation, LLC, etc.?  If so, do you need to do something?

D.        Do the revisions possibly permit someone else to perfect an interest in your collateral by a method not previously permitted?