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Changes in the Wind:
Revised UCC Article 9

For the past 30 years, Minnesota lawyers have been blessed with the remarkably durable law of secured transactions embodied in Article 9 of the Uniform Commercial Code.1 As business lawyers know well, the law of secured transactions governs virtually the entire domain of taking liens in personal property to secure obligations. Whether we are talking about large bank credit facilities or much smaller consumer loan transactions, the personal property liens, known as "security interests," created to secure repayment of these obligations are almost always governed by the provisions of Article 9.

But change is now very much in the wind. In 1998, the Permanent Editorial Board for the UCC completed substantial revisions to Article 9 and submitted these revisions to the 50 states for adoption. Earlier this year, on April 14, Minnesota became the 13th state to adopt revised Article 9,2 with an effective date of July 1, 2001 -- now less than one year away.3

There are many reasons why revision to Article 9 was necessary, starting with the obvious fact that our business and consumer world has changed dramatically over the course of the past three decades. The use of credit, especially consumer credit, has mushroomed since the time the UCC was first adopted during the mid-1960s by most American states. Changing notions of consumer fairness and an expanded body of consumer law have also, undoubtedly, contributed to a need for revision. Further, the advent of the computer age, which has brought us vastly increased electronic data storage and communication possibilities, has made many of the paper-based filing systems and procedures now in use obsolete. Not to be overlooked, too, is the significant increase in bankruptcy filings that has occurred nationwide since the adoption of the Bankruptcy Reform Act of 1978. Thirty years of case law, especially emerging from the bankruptcy courts, has perhaps as much as anything else, made revision and clarification of Article 9 necessary.

Minnesota fortunately adopted revised Article 9 in much the same form as the official text promulgated by the Permanent Editorial Board; that is, there are few nonconforming amendments to the official text.4 A major shock to the system, however, awaits Code "junkies" who have committed to memory the section numbers of existing Article 9. Revised Article 9 has renumbered most of the old familiar section numbers as an editorial "improvement." This author remains unimpressed by this development, which is guaranteed to confuse lawyers and courts for years to come.

It is important to recognize at the outset that, despite significant increase in the sheer size of revised Article 9, (new Article 9, together with Comments, is now over 450 pages long!), the basic structure of a secured transaction remains much the same. Security interests in the future will still (1) be created consensually by security agreements, (2) be perfected in most instances by financing statements, (3) follow priority rules that are familiar (the general rule is still "first to file is first in right"), and (4) be enforceable through repossession and liquidation of the collateral. The "devil" with revised Article 9 is, as it commonly is, in all the new details.

A complete survey of all the revisions to the law of secured transactions made by revised Article 9 is, quite obviously, beyond the scope of this article.5 There follows instead a summary of some of the changes that likely will be of greatest interest to the general business practitioner.

Gene H. Hennig is a partner in the law firm of Rider, Bennett Egan & Arundel LLP in Minneapolis. He chaired the MSBA Business Law Section in 1999-2000 and was instrumental, along with others, in promoting legislative adoption of revised UCC Article 9.

"Revised Article 9 has renumbered most of the old familiar section numbers as an editorial ‘improvement.’"

The filing system in many respects lies at the heart of Article 9. This being the case, it is not surprising that a number of significant changes are now contained in Part 5 (formerly Part 4) of revised Article 9 where the new rules governing the filing of financing statements are found.

Perhaps the most significant change relates to the centralized filing of financing statements. UCC financing statements are presently filed in Minnesota either centrally with the secretary of state or locally with the county recorder. The proper place to file is generally dependent upon the type of collateral involved; as a general rule, security interests against consumer goods and farm products are filed locally with the county recorder, while most other security interests against business-related collateral are filed centrally with the secretary of state.

Unfortunately, the law across the United States is not uniform. Some states favor more centralized filing with the secretary of state, and some favor more localized filing. The majority of American states, like Minnesota, have adopted a hybrid system where some security interests are filed centrally with the secretary of state and others with the local county recorders.

The problem with this dual filing system is that mistakes can be made, and often in fact are made. Bankruptcy courts have never been particularly forgiving of secured creditors who make the wrong choice in determining the proper place to file UCC financing statements.6

Newly revised §9-501(a) will require virtually all security interests to be perfected by filing in a centralized office, which in Minnesota will be the Office of the Secretary of State. The one major exception relates to fixture filings that will continue to be filed in the real estate records maintained by the county recorders. In revising §9-501 to provide for centralized filing, the drafters recognized that the historic reasons for more localized filing (e.g., theoretically, easier access to the local filing office) simply were no longer compelling.

Notwithstanding the fact that the official version of revised Article 9 provides for centralized filing of financing statements in a centralized office, Minnesota has made it possible for county recorders to establish satellite offices where local filings can still be made.7 This deviation from the uniform act was part of a compromise largely engineered by the secretary of state to obtain the county recorders’ support for adoption of Article 9 by the Legislature this past year.

The satellite offices may continue to provide a certain amount of filing fee revenue to the county recorders and may augment customer service to users of the system.8 Filings made at a satellite office will be electronically stored in the same centralized information management system at the Secretary of State's Office where all other filings in Minnesota will be stored. What this will mean in the future is that even though financing statements may be filed at a satellite office, they will be centrally stored. The benefits of centralized filing that revised Article 9 is designed to provide should therefore still be largely achieved.

It should finally be noted that the filing fee for an initial financing statement will be increased modestly in Minnesota from $15 to $20, in part to cover the anticipated cost associated with the centralized computer data base.9

Sweeping changes have also been proposed to the way in which financing statements will actually be filed in the future. Very soon, we can expect that most financing statements will be filed electronically by computer and that the old "paper-based" filing system we have relied on in the past will diminish in importance. Here in Minnesota, the staff at the Secretary of State's Office is already working on the development of a computerized information management system that will be able to accept electronic filings. To file a financing statement in the future, new §9-516(a) will require that a "record" be communicated to the filing office. The definition of "record" now includes any information stored in electronic form; thus, the new Code has provided for both electronic filing and storage of financing statements.10

Not only may financing statements be filed electronically in the future, but it will also no longer be necessary to obtain the debtor's actual signature on a financing statement. It will, of course, remain necessary for the debtor to authorize the filing of any initial financing statement or amendment against collateral owned by the debtor. But the debtor's actual physical signature on a financing statement will not be required. To prevent possible abuse by a secured creditor who wrongfully files a financing statement in violation of the rules just stated, the new revisions to the Code will impose statutory penalties on the secured party ($500 plus any additional loss incurred by the debtor).11

Revised Article 9 also provides for a new national form of financing statement that is likely to be very beneficial if adopted throughout the United States. This new form may be found in §9-521(a).

Newly revised §§9-301 through 9-307 represent a major shift in current law governing the proper jurisdiction to file Article 9 security interests. Today, the proper place to file, and the law otherwise governing the attachment and enforceability of a security interest is generally determined by the location of the collateral. (The major exceptions to this rule, you may recall, pertain to accounts, general intangibles and mobile goods.) What this means under current law is that a secured creditor wishing to perfect a security interest in a debtor’s goods, such as inventory and equipment located in a number of different states, has to file financing statements in all of the different states where the collateral is physically located.

All of this will substantially change once the revisions to Article 9 take effect. New §9-301(1) states that "while a debtor is located in a jurisdiction, the local law of that jurisdiction governs perfection, the effect of perfection or non-perfection, and the priority of a security interest in collateral." So, it is the law of the debtor's location and not the law of the collateral that in the future will control. The good news in all of this is that in the future one normally will be required to file only one financing statement (i.e., in the state where the debtor is located) instead of making multiple filings in all the states where the collateral is located.

One section of Article 9 that has not changed significantly is existing §9-503, which currently allows a secured party to retake possession, after default, by self-help. Currently, the only major restriction placed on secured creditors is that any self-help repossession must occur "without breach of the peace." For years, courts have struggled with developing acceptable standards that must be followed by secured creditors to insure that they do not "breach the peace." It is somewhat surprising, therefore, that the drafters of revised Article 9 have not seen fit to set forth with more specificity exactly what is meant by the rather vague "breach of the peace" concept.

Without further legislative clarification, creditors in the future must continue to rely upon judicially created standards regarding self-help repossession. Of particular importance in this regard is the two-pronged judicial test first developed by professors White and Summers, and since widely adopted by many American courts,12 which evaluates a repossessing creditor's conduct by asking these questions: (1) Was there an entry by the creditor upon the debtor's premises? and (2) Did the debtor consent to the repossession? Applying this test, courts will generally hold that a creditor has "breached the peace" if there has been entry, without consent, into the debtor's home or business or if the debtor has otherwise objected to an impeding repossession. Again, these concepts have not been officially adopted by either existing §9-503 or new §9-609 as such; however, they will undoubtedly remain part of the judicially created standards that have been developed to regulate secured creditor conduct when retaking possession of collateral by self-help.

In contrast to §9-609 (former §9-503), which, as just mentioned, largely escaped revision, the existing rules governing the disposition of collateral after default and repossession have been very extensively revised. Some, but by no means all, of the new rules that lawyers will need to be aware of in the future include the following:

• Revised Article 9 preserves the "commercially reasonable" standard imposed on secured creditors who are disposing of collateral after default. New §9-610(b) continues to provide that "every aspect of a disposition of collateral, including the method, manner, time, place and terms must be commercially reasonable."
• New §9-611 contains significantly expanded notification obligations that must be satisfied by a secured creditor. In addition to properly notifying the debtor of an impending liquidation sale, a secured creditor in the future must also notify any other secured creditor who has a financing statement on file.
• New forms of statutory notice for liquidation sales are now found in §§9-613 and 9-614. Presumably, if secured creditors use these forms of notice, they can avail themselves of a "safe harbor" from challenge that the notice was ineffective.
• New §9-620 would, for the first time, permit a secured creditor to accept collateral in non-consumer secured transactions in either full or partial satisfaction of the debt. Keeping collateral in satisfaction of a secured debt, sometimes referred to as a "strict foreclosure," is often a quick and easy way to deal with the collateral; however, in the past it was possible only to retain collateral in full satisfaction of the obligation.<V>13<P> Revised Article 9 will now allow a secured creditor to keep collateral in only partial satisfaction of the obligation, assuming consent by the debtor and no objection from other creditors holding subordinate liens against the collateral.
• New §9-625 preserves the notion that a secured party will be held liable either for money damages or be exposed to restraint in an equitable proceeding for failure to comply with the foreclosure rules found in Article 9. Moreover, in any action by a secured creditor to recover a deficiency judgment after a repossession and sale of the collateral has occurred, new §9-626(a)(2) will require the secured party to carry the burden of establishing compliance with Article 9 if the secured party's compliance is placed in issue by the debtor. In non-consumer transactions, new §9-626(a)(3) will further create a rebuttable presumption that the value of the collateral equaled the debt; thus, if a secured creditor is unable to rebut this presumption, the recovery of a deficiency judgment will be denied.14

"the perfection, priority, and enforcement of agricultural liens are to a large extent going to be governed in the future by the provisions of Article 9."

Revised §9-109 expands the scope of Article 9 in a number of respects. Most importantly, the perfection, priority, and enforcement of agricultural liens are to a large extent going to be governed in the future by the provisions of Article 9. Although agricultural liens will still not be treated as "security interests" as such, the future interplay between agricultural liens and security interests that are both attached to the same collateral is going to be much more specifically governed by provisions of Article 9 than is now the case.

Like many agricultural states, Minnesota has a number of statutory liens, largely found in Minn. Stat. c. 514, that are intended to give special lien rights to those who provide goods and services to farmers engaged in farming operations.15 The drafters of revised Article 9 have now attempted to integrate the agricultural lien laws with the law of secured transactions. Sprinkled throughout new Article 9 are found sections governing the perfection and priority of agricultural liens (§9-302), filing requirements (§9-310), resolution of priority conflicts between security interests and agricultural liens (§9-322), and the enforcement of these liens when default occurs (§9-606).

In recent months, a specially created Agricultural Lien Task Force16 has done important work here in Minnesota to consolidate our state's agricultural lien statutes into a more modern and manageable form. The task force has taken care not to expand the scope or relative priorities of any existing agricultural liens; rather, the goal has been to make these lien statutes more compatible with the overall structure of revised Article 9. Proposed revisions to Minnesota's agricultural lien statutes are now expected be introduced to the Legislature for adoption in 2001.

Apart from agricultural liens, the scope of revised Article 9 has also been expanded to include "payment intangibles" (§9-109(a)(3)) and "consignments" (§9-109(a)(4)).

The transition rules, which appear in new Part 7, are without question some of the most impenetrable provisions to be found anywhere in new Article 9. Most of these rules, as one might suspect, relate to continuity of perfection and priority issues.

Although a complete survey of the transition rules is beyond the scope of this article, it would be useful to make a couple of introductory observations. First, §9-701 contemplates that new Article 9 will take effect in all jurisdictions that have adopted it on July 1, 2001. Given the very substantial revisions to the existing law of secured transactions, it certainly must be hoped that all jurisdictions, especially New York,17 will come "on board" with new Article 9 at or near the same time -- or the resulting confusion will be too horrendous to imagine.

A second important observation is that an effective financing statement which is on file before new Article 9 takes effect will, as a general rule, remain perfected with its same priority date until "the time the financing statement would have ceased to be effective under the law of the jurisdiction in which it is filed" (generally not longer than five years).18 Assume, for example, that a bank has loaned money to a Delaware corporation and secured the loan with inventory located in several states. Under existing §9-103, the bank would need to perfect its security interest by filing financing statements in each of the jurisdictions where the collateral is located. Once new Article 9 takes effect, all of these filings would remain effective notwithstanding the fact that under new §9-301(1), the proper place to file would be with the Delaware Secretary of State. However, to continue the effectiveness of these filings beyond their normally occurring expiration date, a new initial financing statement (i.e., not a continuation statement) would need to be filed in Delaware.19

The foregoing discussion, as mentioned at the outset, is intended merely to acquaint the reader with a "sampler" of the more significant changes found in new Article 9. There is no substitute for reading the actual text of revised Article 9 -- a task to which you are now commended!

1 Existing Article 9 is codified in Minn. Stat. §§336.9-101, et seq.

2 As of August 1, 2000, the following 26 states, in addition to Minnesota, have adopted revised Article 9: Alaska, Arizona, California, Delaware, Hawaii, Illinois, Indiana, Iowa, Kansas, Kentucky, Maine, Maryland, Montana, Nebraska, Nevada, North Carolina, Oklahoma, Rhode Island, South Dakota, Tennessee, Texas, Utah, Vermont, Virginia, Washington and West Virginia. Legislation is also pending to adopt revised Article 9 in 12 other states.

3 The text of revised Article 9, as adopted in Minnesota, can now be found in Minnesota Laws 2000, Chapter 399.

4 The official text of revised Article 9, including Comments, as promulgated by the National Conference of Commissioners on Uniform State Laws and the American Law Institute may be found on the Internet at http://www.law.upenn.edu/bll/archives/ulc/ulc.htm.

5 For a more complete discussion of the changes made by revised Article 9, see the author's materials entitled "Twenty-Five Things Every Minnesota Lawyer Should Know About Revised Article 9 of the UCC," which may be found at www.riderlaw.com. An excellent comparison of current Article 9 and revised Article 9 may be obtained from Steven O. Wiese, who served as the ABA Advisor to the Drafting Committee. Mr. Wiese may be contacted at swiese@hewm.com.

6 See e.g. In Re Pirsig Farms, Inc., 46 B.R. 237 (D. Minn. 1985).

7 See new Minn. St. §§336.9-527 to 336.9-530.

8 For further information concerning the satellite office option developed by the Secretary of State, see www.sos.state.mn.us/office/ra9.html.

9 See new §336.9-525(a).

10 See new §9-102(a)(69).

11 See new §§9-509(a)(1) and 9-625(e).

12 The White and Summers' test was first adopted by a Minnesota court in Bloomquist v. First National Bank of Elk River>, 385 N.W.2d 81 (Minn. App. 1985).

13 See existing §9-505(2).

14 The rebuttable presumption rule has previously been adopted judicially in the state of Minnesota. See Chemlease Worldwide, Inc. v. Brace, Inc., 338 N.W.2d 428 (Minn. 1983).

15 Perhaps the best known of these liens is the "agricultural production input lien" codified in §§514.950, et seq.

16 The Agricultural Lien Task Force was established by the Business Law Section of the MSBA.

17 Revised Article 9 has been introduced in the state of New York and as of this writing is under consideration by that state's Senate Judiciary Committee.

18 See new §9-705(c).

19 See new §9-706.