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While much attention has been focused recently on the challenges faced by financial institutions in connection with "Year 2000" conversions, perhaps an even greater challenge looms ahead in 2001. In 2001, substantial and material modifications to the Uniform Commercial Code (UCC) will take effect. These modifications modernize the UCC so that it better comports with current and evolving business practices. Readers will recall that our Summer 1998 issue highlighted certain changes to Article 8 of the UCC, relating to security interests in certificated and uncertificated securities, and which changes are now law in almost every state. This article will summarize some of the new filing requirements that will be imposed under revised Article 9 of the UCC (relating to the perfection and maintenance of security interests in collateral other than real estate) that will become effective in most jurisdictions in the United States on July 1, 2001.

Preparation Is Key

Although July 1, 2001 may still seem a long way off -- as January 1, 2000 once did -- it is important to begin planning today for the transitional rules regarding the perfection and maintenance of security interests that will take effect in 2001, especially in the case of secured credits that will remain outstanding after July 1, 2001. Processes and procedures will have to be developed and implemented in time for the changeover in order to ensure a seamless transition and to prevent any lapses in perfection. For example, new UCC filing "tickler" systems, and/or the revamping of existing systems may need to be undertaken. Similarly, in-house training programs and/or handbooks explaining the new rules for filing and searching for filings against debtors must be prepared in a timely fashion to insure complete familiarity by all relevant personnel with the new procedures, as an improper filing (costing only a few dollars to prepare and file) can doom instantly hundreds of millions of dollars of collateral.

The Old vs. The New Rules: Improvement or Impediment?

To fully appreciate the breadth of the changes contemplated under revised Article 9, it is helpful to remind ourselves of the current filing requirements. By contrasting the existing filing requirements with the new filing requirements, attorneys and credit officers alike will quickly appreciate how some of the existing filing conventions are being radically restructured. In the long run this radical restructuring will, in all likelihood, reduce compliance costs and increase filing certainty. However, in the short run and particularly through the upcoming transition period, compliance costs may actually increase as prudent practitioners may want to file financing statements under both the old and new filing regimes, to lessen any chance of mistake.

One of the goals of the new Article 9 is to streamline and consolidate the wide variety of filing rules which shift from asset class to asset class. As a general guideline, most of the filing requirements under existing Article 9 turn on the nature of the collateral involved, as the requirements for tangible property differ from that for intangible property. Currently, tangible collateral (such as equipment) typically requires filings in the jurisdiction where the collateral is located. An exception, however, is made for so-called "mobile goods," which (as the category name implies) are not thought to have a single constant location. Filing requirements for intangible collateral (such as contracts rights and other forms of general intangibles, and accounts) depend instead on the jurisdiction in which the borrower is "located." The "location" of the borrower, for purposes of existing Article 9, in turn depends on whether the borrower has one or more offices located within the United States and, if so, the relative importance of various offices. For example, under current guidelines, a borrower is located at its "place of business" if it has only one such location, but at its "chief executive office" if it has more than one such "place of business." Not surprisingly, in a world of huge multinationals and ethereal internet companies, it can be difficult to determine precisely which office qualifies -- and thus which filing jurisdiction is correct. Moreover, in today's climate of lightning-fast corporate mergers, consolidations, and rapid internal restructurings and reorganizations, what was once clearly a company's chief executive office may no longer enjoy that status -- triggering a need to update filings.

The authors of Article 9's new filing provisions sought to simplify the sometimes complex analysis required to determine the appropriate filing location, and to concurrently add more certainty as to which jurisdictions require searching to determine the status and scope of prior filings. The drafters developed new filing guidelines that focus on the location of the debtor, rather than the collateral. In doing so, the drafters minimize, as much as possible, the need for multiple filings at the state and local level, in favor of a single filing office in each state.

Thus, under revised Article 9, the distinction between tangible and intangible collateral, as a filing location determinant, is less important, with the overall concept moving towards requiring filing where the debtor, not the collateral, is located. Besides this simplification, the drafters also simplified the analysis for determining a debtor's "location". Under revised Article 9, in most cases the proper jurisdiction for filing will be in a single office in the home state where the borrower is "located. " If a borrower is a "registered organization" (defined as an "organization organized solely under the law of a single state or the United States and as to which the state or the United States must maintain a public record showing the organization to have been organized"), its location is deemed to be the state of its organization. In the case of domestic corporations, limited liability companies and limited partnerships, determining a borrower's "location" should be as simple as determining where the entity in question was organized.

Looking forward, in most cases it will therefore be important to know, with certainty, where a borrower was organized in order to determine where to file and where to search for existing filings. Most credit documents already establish this information. However, not all "tickler" systems have been set up to track this information, which will be equally important in the context of continuation filings -- as discussed later in this article. Companies engaged in large volumes of secured lending may want to start reviewing their outstanding loan portfolios and "tickler" systems now, to determine if this information is being tracked for existing credits as well as future credits that will be outstanding after 2001. If it is not, "tickler" systems should be revised to require this information on a going forward basis, and a task force may be desirable to enter this information for existing loans.

Before turning to some of the transitional issues raised by new Article 9, lenders should note that in the case of certain foreign companies (i.e., companies not registered under the laws of a state of the United States), the proper place to file will be in the District of Columbia. The exception to this general rule relates to companies organized in a foreign jurisdiction which does not provide for a central filing office for non-possessory liens.

Transitional Concerns

The discussion above underscores how the filing rules under existing Article 9 differ significantly from the rules applicable under revised Article 9. For nonmobile equipment, in particular, the proper place to file will no longer be the location of the equipment, but the location of the debtor. Likewise, the location of the debtor, in most cases, will no longer depend on a determination of where its chief executive office is, but rather where it was organized. With such significant modifications to the "old way of doing things," transitional concerns are manifold.

One concern that comes quickly to mind is the treatment of filings made prior to July 1, 2001. Not surprisingly, revised Article 9 provides for transitional rules that safeharbor filings properly perfected under existing Article 9 when revised Article 9 takes effect. A one year post-transition period will apply, giving lenders at least 12 months to undertake new filings -- without the requirements of a debtor's signature on the new filings (to ease the burden on debtors and their financiers alike). This one year period will, in many cases, be extended even further, as the new Article 9 stipulates that old filings properly made under old Article 9 will remain effective until the first to occur of that filing's lapse under the old rules or June 30, 2006. Coupled with this are revised Article 9's priority rules, which essentially preserve the "first to file, first to perfect, first in priority" concept -- even in the context of a dual filing regime during the transition period. Thus, for new loans, conservative lenders may want to perform searches in accordance with the old and new filing requirements -- even before 2001 -- because secured lenders will be allowed to follow certain of the new rules even before July 1, 2001 (as discussed below). Fortunately, in most cases this should only require a precautionary search of the records in the debtor's state of organization.

If a lender has previously made a secured loan that will be outstanding after July 1, 2001, or a lender intends to make a secured loan between now and that date, the lender will need to concern itself with Article 9's new rules relating to continuation statements. The dilemma here is where to file the continuation statements -- in the office where the original filing was made (under the existing rules) or in the office where the revised rules require -- and where, in all likelihood, there will be no filing statement to "continue."

Revised Article 9 provides a simple fix to the problem. In cases where the original filing office is still the correct filing office under revised Article 9, a continuation statement filing in that office is all that is needed. In cases where the original filing office is no longer the correct filing office under revised Article 9, a new UCC financing statement (i.e., a UCC Form 1 -- not a continuation statement) must be filed in the new office. This new UCC financing statement should identify the collateral in question, as well as identifying information as to the state and office in which the original filing was made, the filing number and official filing date of the original UCC, and if applicable, the same information for prior continuation statements in respect of that original filing. The new filing should also indicate that it is being filed to continue the perfection of the original filing. These new continuation statements (including new UCC financing statements filed to continue prior financing statements) need not be signed by the debtor, and may be filed even before revised Article 9 is effective.

As the discussion above indicates, institutions with a substantial portfolio of secured loans may wish to take steps even now to update their "tickler" systems to track the relevant information required to properly continue their filings. Likewise, agent banks, collateral agents, trustees and other entities with legal or administrative responsibility for updating such filings may wish to start the process of notifying their principals of the new filing requirements and determining which parties will be tracking and undertaking compliance measures.

Summary of Important Concepts

To summarize some of the more important concepts noted above:

1. Revised Article 9's mandatory filing requirements take effect in most jurisdictions on July 1, 2001 but some filing provisions (particularly in the context of continuation statements) may be applicable well in advance of that date.
2. In most cases, under revised Article 9, the proper place to file new UCC statements will be determined by the "location" of the debtor -- not the collateral.
3. In most cases, under revised Article 9, the "location" of the debtor for filing purposes will be determined by its jurisdiction of organization -- not the location of its chief executive office.
4. The transitional rules between the old and new filing requirements will likely result in a need to search filing offices applicable under both the old and new rules.
5. In certain situations, the proper filing to continue an existing UCC filing will not be a continuation statement filing in a previous office, but a new UCC filing in a different office.
6. Many institutions' "tickler" systems, and personnel, will need updating as to the mechanics of the new rules; the larger the portfolio of secured credits involved, the earlier the updating task should commence.

Conclusion

This article was intended to highlight the major changes in Article 9 regarding the perfection and maintenance of security interests in collateral. The changes in Article 9 (and their implications), however, are much more extensive than this article's limited scope, and as such they require substantial and individualized analysis. Cadwalader's banking, UCC and secured finance experts stand ready to assist clients and colleagues in understanding in greater detail the new filing requirements and ways in which to best organize and implement their transition efforts -- including the development of customized UCC filing handbooks and the making of in-house presentations to relevant departments. For further information regarding these services please contact any of the authors through CWT's New York office.

• Global Project Finance and Privatization
• Global Project Finance and Privatization is published quarterly by Cadwalader, Wickersham & Taft. Its purpose is to provide general information about significant legal developments in the areas of infrastructure development, project finance, and privatization. Because the facts in each situation vary, the legal discussions contained herein may not be applicable to individual circumstances. For further information on the articles contained in Global Project Finance and Privatization or matters related to Cadwalader, Wickersham & Taft's practice, please contact Robert L. Vitale (rvitale@cwt.com) or Dean Colucci, (dcolucci@cwt.com). Copyright © 1999.