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Revised Article 9 ("Revised Article 9") of the Uniform Commercial Code (the "UCC") has been approved by the National Conference of Commissioners on Uniform State Laws. In order to avoid the legal nightmare that resulted from the piecemeal enactment of the recent revisions to Article 8 of the UCC ("Revised Article 8"), Revised Article 9 has a uniform effective date in all 50 states and the District of Columbia of July 1, 2001.

Although the effective date of Revised Article 9 may seem too remote to warrant present consideration, deferring the task would be a mistake. As discussed further below, there are steps that secured creditors should consider taking now to prepare for the enactment of Revised Article 9. This article is the first in a series that will discuss different aspects of Revised Article 9, and that we hope will ease the transition into the new law.

Overview

Although Revised Article 9 will not fundamentally alter the law of secured transactions, it will introduce numerous significant changes designed to clarify and modernize the current version of Article 9 ("Current Article 9"). First, Revised Article 9 will have a substantially expanded scope. Among other things, "deposit accounts," "credit card receivables," "payment intangibles," "electronic chattel paper" and "supporting obligations"( i.e., obligations, such as guaranties and letters of credit, that support the payment of an obligation in which a security interest has been granted) will be covered. In addition, Revised Article 9 will codify the "mortgage-follows-the-note" doctrine, by providing that perfection of a security interest in a payment obligation automatically perfects a security interest in property that secures the performance of such obligation. This significantly broader scope is designed primarily to simplify legal issues arising under securitizations, although its ramifications will also be felt in secured lending and other areas.

Second, Revised Article 9 will include expanded and more flexible methods of perfecting security interests. Specifically, the statute will provide for perfection by "control" and for automatic perfection of security interests in certain types of collateral. Security interests in deposit accounts, letter-of-credit rights and electronic chattel paper will be subject to perfection by control. Readers familiar with Revised Article 8 are already acquainted with the concept of control in the context of perfecting security interests in securities and other "investment property." The steps required to obtain control under Revised Article 9 will, however, vary depending on the type of property involved. As under Revised Article 8, security interests perfected by control under Revised Article 9 generally will have priority over security interests perfected thereunder by other means.

Third, Revised Article 9 will simplify certain rules regarding the filing of financing statements. For example, a supergeneric description of collateral, e.g., "all property of the debtor," will be sufficient for filing purposes (although not in a security agreement). In addition, Revised Article 9 will require that the filing merely be "authorized," rather than signed, by the debtor. Finally, for almost all types of collateral, only a filing in the central office of the applicable jurisdiction will be required.

Fourth, Revised Article 9 will simplify choice-of-law rules regarding security interests perfected though filing. Under Current Article 9, the perfection of security interests in goods (except "mobile" goods) is accomplished through filing in the jurisdiction in which the goods are located, while perfection in intangible collateral, such as "accounts" and "general intangibles" is accomplished through filing in the jurisdiction in which the debtor is located. Revised Article 9 will unify these rules by providing, in nearly all cases, for filing in the jurisdiction in which the debtor -- not the collateral -- is located.

Revised Article 9 will also introduce a less burdensome rule for determining the "location" of most types of debtor. Under Current Article 9, a debtor other than a natural person is deemed located at its "place of business," if it has one, or at its "chief executive office," if it has more than one. In a corporate world characterized by large multinationals and frequent mergers and restructurings, determining which office is the "chief executive office" can be nearly impossible -- but the penalty for an incorrect judgment in this regard can be a worthless security interest.

In contrast, under Revised Article 9, the "location" of a corporate, LLC or limited partnership debtor will be its jurisdiction of organization, thereby substituting an objective, readily-determinable standard for one that is subjective and elusive.

Transitional Issues

Because many current secured transactions will still be outstanding when Revised Article 9 takes effect, creditors should consider now what steps are advisable to ensure the uninterrupted perfection and priority of their security interests. Fortunately, Revised Article 9 will include several safe harbors. Under the general safe harbor, perfected security interests will remain perfected for one year after the enactment of Revised Article 9, even if the new statute requires different or additional action for perfection.

Additionally, security interests perfected by filing in the appropriate jurisdiction under Current Article 9 will remain perfected until the earlier to occur of their expiration pursuant to Current Article 9 or the fifth anniversary of the effective date of Revised Article 9, even if Revised Article 9 mandates a different filing jurisdiction, e.g., the jurisdiction of organization rather than the location of chief executive office.

Nevertheless, if the appropriate filing jurisdiction has changed under Revised Article 9, the continuation thereunder of filings that have expired under the rules of Current Article 9 will not be achieved by filing a continuation statement in the jurisdiction in which the original filing was made. Instead, perfection in such cases will be maintained only by filing an original financing statement in the appropriate jurisdiction under Revised Article 9.

Accordingly, secured creditors must ensure that their "tickler" systems for reminding personnel when to continue UCC filings are programmed to take into account the jurisdiction of the debtor's organization, as well as its chief executive office. Moreover, both for current transactions and transactions that will be entered into prior to July 1, 2001, a creditor whose debtor's jurisdiction of organization differs from the location of its chief executive office should file in both jurisdictions.

Upcoming articles will discuss in greater detail the topics highlighted above, including the following: (1) deposit accounts; (2) payment intangibles and accounts; (3) electronic chattel paper; (4) letter-of-credit rights; (5) supporting obligations and underlying collateral; (6) choice of law; (7) simplified filing rules; and (8) transitional issues.

In the meantime, please feel free to contact the authors if you have any questions regarding Revised Article 9.