I. CREATION AND PERFECTION OF SECURITY INTERESTS
A. Introduction
A security interest is an interest in personal property or fixtures to secure payment or performance of an obligation. For a security interest to exist, it must attach to the collateral. A security interest cannot be perfected until it has attached. Perfection at a minimum means the security interest will have priority over a subsequent lien creditor, including a trustee in bankruptcy. There are four ways to perfect a security interest under Revised Article 9, depending upon the type of collateral, including: (1) by automatic perfection upon attachment; (2) by taking possession of the collateral; (3) by taking control of the collateral; and (4) by filing a financing statement.
Revised Article 9 makes several changes in perfection, especially with respect to filing rules. These changes should make filing and searching much simpler and should result in fewer mistakes, which in turn likely means fewer opportunities for bankruptcy trustees and debtors in possession to trump security interests under the Bankruptcy Code’s § 541(a) strong-arm power.
Security interests (but not agricultural liens) in many (but not all) types of collateral may be perfected by more than one method. Appendix A reflects the available methods of perfecting security interests in most kinds of collateral.
B. Creation of Security Interests – Security Agreements
1. Attachment
The rules for attachment of a security interest remain essentially the same under Revised Article 9. A security interest attaches to collateral when it becomes enforceable against the debtor with respect to the collateral. A security interest attaches when (1) value has been given; (2) the debtor has rights in the collateral or the power to transfer rights in the collateral to a third party; and (3) the debtor has “authenticated” a security agreement that describes the collateral.
2. Authentication Debtor’s Signature Requirement
The big change in attachment rules under Revised Article 9 is the elimination of the signed writing requirement. Under former Article 9, the debtor must either have signed a written security agreement containing a description of the collateral or the secured party was required to have possession of the collateral. Under Revised Article 9, the debtor need not sign a written security agreement and the security interest will attach if the debtor has “authenticated” the security agreement. “Authenticate” means the debtor has in some fashion adopted a record reflecting the security interest. The debtor may do this by signing a tangible record or by adopting an electronic record, e.g., e-mail or computer file that has the debtor’s symbol or password attached to it.
3. Description of Collateral
A security agreement must reasonably identify the collateral. Reasonable identification may be satisfied by (1) specific listing (describe every item of collateral); (2) category (grouping or classifying collateral,e.g., “all of debtor’s personal property”); (3) Article 9 types, (e.g., “inventory”, “equipment”, “general intangibles”, “accounts”); (4) quantity; (5) computational or allocational formula or procedure; or (6) any other method if the identity of the collateral is “objectively determinable.”
Super-generic descriptions such as “all assets of the debtor, now owned or hereafter acquired,” while sufficient for a financing statement, are not acceptable for security agreements.
NOTE: To cover all assets owned by a debtor in a security agreement, a secured party should list all collateral types in its security agreement as such types are defined in Revised Article 9.
NOTE EXCEPTION: Under Revised Article 9, description by type is not a sufficient description (1) for a commercial tort claim; and (2) in a consumer transaction for consumer goods, a security entitlement, a securities account or a commodity account.
4. After-Acquired Property
a. General Rule A security agreement may create a security interest in collateral to be acquired in the future. This will attach to the collateral as soon as the bank gives value and the debtor has rights in the collateral or the power to transfer rights in the collateral to a third party.
b. Consumer Goods as Additional Collateral When consumer goods (other than accessions) are given as additional collateral, an after-acquired property clause is ineffective unless the debtor acquires rights in the goods within 10 days after the bank gives value.
c. Commercial Tort Claim as Additional Collateral A security interest does not attach to a commercial tort claim under a term constituting an after-acquired property clause.
d. Formerly, no security interest attached under an after-acquired property clause on crops which became such more than one year after the security interest was given. This is no longer the case, as the law has been changed and growing crops are now subject to after-acquired property clauses in the same manner as other collateral.
5. Future Advances
A security agreement may cover future advances secured by present collateral or future collateral even though the bank has no obligation to make such advances. With future advances, rights under the security agreement are governed by the requirements as to after-acquired property.
6. Expanded Scope
Revised Article 9 of the UCC covers several new types of collateral, allowing lenders to take security interests in collateral not previously covered by former Article 9.
a. Accounts Revised Article 9 expands the definition of “accounts” to include many forms of payment not covered by former Article 9. Under former Article 9, accounts were limited to rights of payment for goods sold or leased and for services rendered.
Under Revised Article 9, “accounts” include many payment rights previously treated as “general intangibles” under former Article 9. “Accounts” in which a lender may now take a security interest also include royalty payments from licenses, patents, copyrights, trademarks, and proprietary information; credit card receivables; health-care-insurance receivables; and even payment rights pursuant to a land sale contract.
b. General Intangibles Since many rights to payment treated as “general intangibles” under former Article 9 are now treated as “accounts” under Revised Article 9, the definition of “general intangibles” under Revised Article 9 has been significantly narrowed. Types of property treated as “general intangibles” under Revised Article 9 for the first time include payment rights that arise as a result of loan agreements which are not evidenced by a promissory note.
In addition, where software remains independent from other “goods”, the software is a “general intangible.” Software embedded in goods is treated as part of the goods in which it is embedded under Revised Article 9, except where the goods consist solely of the medium in which the computer program is embedded. For example, disks containing computer programs are “general intangibles” and not “goods,” however, computer programs installed in a computer or automobile are considered part of the computer or automobile and, therefore, are classified as “goods” and not as “general intangibles.”
c. Proceeds The definition of “proceeds” is also expanded under Revised Article 9. Former Article 9 defined “proceeds” to include whatever was realized from the sale, exchange, collection or disposition or collateral. Under Revised Article 9, the definition of “proceeds” includes rights arising as a result of the lease or license of collateral, claims for damages or defects in collateral, and distributions on stock. Thus, when collateral is damaged or defective, a lender will be perfected in the proceeds which result from the claimed defect or damages. In addition, Revised Article 9 clarifies that a security interest in “proceeds” grants a lender an interest in stock dividends and lease payments delivered to the debtor on account of the collateral.
d. Farm Products The term “farm products” is defined more expansively under Revised Article 9 to mean goods, other than standing timber, where the debtor is engaged in a farming operation (raising, cultivating, propagating, fattening, grazing, or any other farming, livestock, or aquacultural operation). The term “farm products” includes: (1) crops grown, growing, or to be grown, including: (a) crops produced on trees, vines, and bushes; and (b) aquatic goods produced in aquacultural operations; (2) livestock, born or unborn, including aquatic goods produced in aquacultural operations; (3) supplies used or produced in a farming operation; or (4) products of crops or livestock in their unmanufactured states. The terms “crops” and “livestock” are not defined under the UCC and a secured party should utilize the category “farm products” in completing its security agreements and financing statements.
e Agricultural Liens Former Article 9 covered only consensual security interests and not statutory liens. Revised Article 9 now includes “agricultural liens” which are defined as “an interest, other than a security interest, in farm products created by statute in favor of a person who either furnished goods or services in the ordinary course of business to a farm debtor or leased real property to a farm debtor, which is not dependent upon possession of the products” (i.e. a statutory lien). Generally, perfection of an agricultural statutory lien is accomplished by a UCC filing and priority rules applicable to security interests apply unless the statute creating the agricultural statutory lien expressly gives priority to the agricultural lien.
f. Deposit Accounts “Deposit accounts” taken as collateral in non-consumer transactions fall within the scope of Revised Article 9. “Deposit accounts” include demand, time, savings, passbook or similar accounts maintained with an entity engaged in the banking business (i.e., banks and savings and loan associations).
NOTE: The term “deposit account” does not include non-negotiable certificates of deposit (which are treated as “instruments”) negotiable certificates of deposit, collateral that falls within the definition of investment property and accounts evidenced by a negotiable instrument under article 3 of the UCC.
In creating a security interest in a deposit account under Revised Article 9, the lender must determine whether the “transaction” creating the security interest is a “consumer transaction.” If a “consumer transaction” is involved, Revised Article 9 does not apply and the lender may only obtain an interest in the deposit account under common law. A transaction is a “consumer transaction”, if (a) the transaction creating the security interest is primarily for personal, family or household purposes; and (b) the deposit account is primarily used by the debtor for personal, family or household purposes. Unless one or both of these requirements is met, the transaction would be a non-consumer transaction, and a security interest created in the deposit account would fall within the scope of Revised Article 9.
A security interest in a deposit account may only be perfected by obtaining “control” over the deposit account. A secured party obtains control over a deposit account by (a) becoming the depositary bank for the deposit; (b) entering into a written agreement with the depository bank and the debtor; or (c) becoming the depository bank’s customer with respect to the deposit account. Unless the lender obtains control over the deposit account, the depository bank has no obligation to the lender regarding the deposit account.
NOTE: The depository bank has no obligation to enter into an agreement granting the lender control over the deposit agreement.
The lenders rights may be subject to the rights of the depository bank since a security interest in a deposit account is subject to the right of set-off of the depository bank unless the deposit account is held in the name of the secured party.
NOTE: The lien of the depository bank in a deposit account has priority over all other liens except for those perfected by holding the deposit account in the name of the secured party.
g. Commercial Tort Claims A commercial tort claim is a claim arising in tort (e.g., fraud, tortuous interference with a contractual relationship, or negligence) in which the plaintiff is either: (a) an individual, if the claim arose in the course of the individual’s business or profession and does not involve damages due to personal injury or death; or (b) an organization. Under Revised Article 9, an after-acquired property clause is not sufficient to create a security interest in a future commercial tort claim. To create an enforceable security interest in a commercial tort claim, the claim must be in existence at the time the security agreement is authenticated.
To be effective, the security agreement creating the security interest in a commercial tort claim must describe the collateral specifically and not only by type (i.e., the security agreement cannot merely describe the collateral as a commercial tort claim).
h. Health-Care-Insurance Receivables Another new category of collateral subject to Revised Article 9 is “health-care-insurance receivables.” A health-care-insurance receivable is a claim or interest under an insurance policy to payment of a monetary obligation for health care goods or services provided. Under this provision, health care providers and other debtors engaged in the health care field will be able to pledge their right to payment of insurance proceeds as collateral. If a lender takes a security interest in “accounts” owed directly by patients to a health care provider, that lender automatically acquires a security interest in the related “health-care-insurance receivables” that have been assigned by the patients to the medical provider for the purpose of filing claims and collecting the amounts owed.
7. Categories of Collateral
The following constitute the categories of collateral covered under Article 9:
a. Accessions Goods that are physically united with other goods in such a manner that the identity of the original goods is not lost.
b. Accounts Payment obligations arising out of the sale or lease of goods or the provision of services, whether or not earned by performance, including license fees payable for the use of software, credit card receivables and health-care-insurance receivables.
c. Agricultural Lien An interest, other than a security interest, in farm products: (A) which secures payment or performance of an obligation for: (i) goods or services furnished in connection with a debtor’s farming operation; or (ii) rent on real property leased by a debtor in connection with its farming operations; (B) which is created by statute in favor of a person that: (1) in the ordinary course of its business furnished goods or services to a debtor in connection with a debtor’s farming operation; or (i) leased real property to a debtor in connection with the debtor’s farming operation; and (C) whose effectiveness does not depend on the person’s possession of the personal property.
d. As-Extracted Collateral Covers as-extracted oil and gas (or other minerals) and related receivables generated by the sale of the minerals at the wellhead or minehead, where the debtor had an interest in the minerals before extraction.
e. Chattel Paper A monetary obligation together with a security interest in or a lease of specific goods evidenced by a record or records. The definition has been expanded to included software used in the goods.
f. Commercial Tort Claims All claims arising from commission of a business tort. Commercial tort claims are specifically excluded from definition of “general intangible.” Consumer tort claims remain excluded from the scope of Article 9.
g. Commingled Goods Goods that are physically united with other goods in such a manner that their identity is lost in a product or mass. If collateral becomes commingled goods, a security interest attaches to the product or mass. If the security interest is perfected before the collateral becomes commingled goods, the security interest that attaches to the product or mass is perfected. If more than one security interest is perfected before the collateral becomes commingled goods, the security interests rank “equally in proportion to the value of the collateral at the time that it became commingled goods.”
h. Consumer Goods Goods that are used or brought for use primarily for personal, family, or household purposes.
i. Deposit Accounts A demand, time, savings, passbook, or similar account maintained with a bank. Excludes consumer deposit accounts and instruments. An uncertificated certificate of deposit is a deposit account. A non-negotiable certificate of deposit is a deposit account unless it is an “instrument.”
NOTE: Non-uniform Nebraska definition of instrument covers non-negotiable certificates of deposit.
j. Documents of Title A document of title or a receipt of the type described in Section 7-201(2), including warehouse receipts and bills of lading.
k. Equipment Goods other than inventory, farm products or consumer goods.
l. Farm Products Goods, other than standing timber, where the debtor is engaged in farming operations, including: (i) crops grown, growing, or to be grown, including crops produced on trees, vines, and bushes, and aquatic goods produced in aquacultural operations; (ii) livestock, born or unborn, including aquatic goods produced in aquacultural operations; (iii) supplies used or produced in a farming operation; and (iv) products of crops or livestock in their unmanufactured states.
NOTE: Deletion of requirement that a financing statement give a description of the land on which the crops are grown.
m. Fixtures Goods that have become so related to particular real property that an interest in them arises under real property law.
n. General Intangibles Any personal property, including things in action, other than accounts, chattel paper, commercial tort claims, deposit accounts, documents, goods, instruments, investment property, letter-of-credit rights, letters of credit, money, and oil, gas, or other minerals before extraction. The term includes “payment intangibles” and “software.”
o. Health-Care-Insurance Receivables An interest in or claim under a policy of insurance that is a right to payment of a monetary obligation for health care goods or services provided. Other insurance claims remain outside the scope of Article 9 except to the extent that they constitute “proceeds.”
p. Instruments A negotiable instrument or any other writing that evidences a right to the payment of a monetary obligation, is not itself a security agreement or lease, and is of a type that in ordinary course of business is transferred by delivery with any necessary endorsement or assignment including, but not limited to, a writing that would otherwise qualify as a certificate of deposit. (defined in § 3-104(j)) but for the fact that the writing contains a limitation on transfer. The term does not include (i) investment property, (ii) letters of credit, or (iii) writings that evidence a right to payment arising out of the use of a credit or charge card or information contained on or for use with the card.
q. Inventory Goods, other than farm products, which (a) are leased by a person as lessor; (b) are held by a person for sale or lease or to be furnished under a contract of service; (c) are furnished by a person under a contract of service; or (d) consist of raw materials, work in process, or materials used or consumed in a business.
r. Investment Property Includes certificated securities, uncertificated securities, security entitlements, securities accounts, commodity contracts and commodity accounts.
s. Letter-of-Credit Rights A right to payment or performance under a letter of credit, whether or not the beneficiary has demanded or is at the time entitled to demand payment or performance. Does not include the right of a beneficiary to demand payment or performance under a letter of credit.
t. Manufactured Homes A structure, transportable in one or more sections, which, in the traveling mode, is eight body feet or more in width or forty body feet or more in length, or, when erected on site, is three hundred-twenty or more square feet, and which is built on a permanent chassis and designed to be used as a dwelling with or without a permanent foundation when connected to the required utilities, and includes the plumbing, heating, air-conditioning, and electrical systems contained therein.
u. Money Money is currency.
v. Payment Intangibles A general intangible under which the account debtor’s principal obligation is a monetary obligation. An outright sale of payment intangibles is within the scope of Article 9. Perfection of a security interest in a payment intangible carries with it various ancillary covenants such as those requiring insurance on collateral or restricting dividends.
w. Proceeds Broadened under Revised Article 9 to include stock dividends, equipment rental receipts, royalties from the licensing of intellectual property and amounts owing due to the destruction or infringement of the original collateral by third-parties. Property need not be received by the debtor to qualify as proceeds, but the proceeds only need be traceable, directly or indirectly, to the original collateral.
x. Software A computer program and any supporting information provided in connection with a transaction relating to the program. Does not include a computer program that is included in the definition of goods (a computer program embedded in goods and any supporting information if the program is considered part of the goods.
y. Standing Timber Includes standing timber that is to be cut and removed under a conveyance or contract for sale. Requires that a financing statement covering timber to be cut include a description of the relevant real estate.
z. Supporting Obligation A letter-of-credit right or secondary obligation that supports the payment or performance of an account, chattel paper, a document, a general intangible, an instrument, or investment property.
aa. Goods All things that are movable when a security interest attaches. The term includes (i) fixtures, (ii) standing timber that is to be cut and removed under a conveyance or contract for sale, (iii) the unborn young of animals, (iv) crops grown, growing, or to be grown, even if the crops are produced on trees, vines, or bushes, and (v) manufactured homes. The term also includes a computer program embedded in goods and any supporting information provided in connection with a transaction relating to the program if (i) the program is associated with the goods in such a manner that it customarily is considered part of the goods, or (ii) by becoming the owner of the goods, a person acquires a right to use the program in connection with the goods. The term does not include a computer program embedded in goods that consist solely of the medium in which the program is embedded. The term also does not include accounts, chattel paper, commercial tort claims, deposit accounts, documents, general intangibles, instruments, investment property, letter-of-credit rights, letters of credit, money, or oil, gas, or other minerals before extraction.
8. Transactions Excluded From Coverage
Article 9 does not cover the following:
a. a landlord’s lien, other than an agricultural lien;
b. a lien, other than an agricultural lien, given by statute or other rule of law for services or materials, but § 9-333 applies with respect to priority of the lien;
c. an assignment of a claim for wages, salary, or other compensation of an employee;
d. a sale of accounts, chattel paper, payment intangibles, or promissory notes as part of a sale of the business out of which they arose;
e. an assignment of accounts, chattel paper, payment intangibles, or promissory notes which is for the purpose of collection only;
f. an assignment of a right to payment under a contract to an assignee that is also obliged to perform under the contract;
g. an assignment of a single account, payment intangible, or promissory note to an assignee in full or partial satisfaction of a preexisting indebtedness;
h. a transfer of an interest in or an assignment of a claim under a policy of insurance, other than an assignment by or to a health-care provider of a health-care-insurance receivable and any subsequent assignment of the right to payment, but §§ 9-315 and 9-322 apply with respect to proceeds and priorities in proceeds;
i. an assignment of a right represented by a judgment, other than a judgment taken on a right to payment that was collateral;
j. a right of recoupment or set-off, but: (i) section 9-340 applies with respect to the effectiveness of rights of recoupment or set-off against deposit accounts; and (ii) section 9-404 applies with respect to defenses or claims of an account debtor;
k. the creation or transfer of an interest in or lien on real property, including a lease or rents thereunder, except to the extent that provision is made for: (i) liens on real property in §§ 9-203 and 9-308; (ii) fixtures § 9-334; (iii) fixture filings in §§ 9-501, 9-502, 9-512, 9-516, and 9-519; and (iv) security agreements covering personal and real property in § 9-604;
l. an assignment of a claim arising in tort, other than a commercial tort claim, but §§ 9-315 and 9-322 apply with respect to proceeds and priorities in proceeds; or
m. an assignment of a deposit account in a consumer transaction, but §§ 9-315 and 9-322 apply with respect to proceeds and priorities in proceeds.
9. Transactions Excluded From Coverage: Titled Property
a. Filing on Motor Vehicles (§ 9-302(d) and § 60-110) In Nebraska, security interests in motor vehicles which must be titled are perfected in accordance with the provisions of the Nebraska Electronic Lien and Titling System.
(1) A security agreement or other instrument showing the attachment of a lien must be presented to the county clerk. The county clerk must record the lien in accordance with the provisions of the Nebraska Electronic Lien and Titling System. Filing only as described in Article 9 or the Uniform Commercial Code is not effective.
(2) Security interests may be created by dealers in motor vehicles held in inventory and perfected by filing under the Uniform Commercial Code rules even if a Certificate of Title covering the motor vehicle exists.
b. Mobile Homes Mobile homes have aspects of both personal and real property because they are often affixed to real estate. In addition, some mobile homes are covered by certificates of title, and notation of the lien on the certificate may be necessary. In some cases, a “fixture” filing may be necessary in the real estate record.
CAUTION: From July 1, 1992 until April 8, 1993, no certificates of title were issued for mobile homes and the method of perfection of such security interests was in question. The law was amended effective April 8, 1993, and notation of the lien on the certificate of title is now required.
c. Motorboats
(1) Motorboat Certificates of Title - In 1994, the Nebraska Legislature enacted § 37-1276 et. seq. which, commencing January 1, 1997, required all vessels meeting the definition of a motorboat to have a certificate of title. This change in the law modified the manner in which a security interest in a motorboat is perfected. Under § 37-1204, a motorboat is defined as any watercraft propelled in any respect by machinery, including watercraft temporarily equipped with detachable motors, but does not include a vessel which has a valid marine document issued by the Bureau of Customs of the United States Government or any federal agency successor thereto.
Prior to January 1, 1997, lenders obtained perfected security interests in motorboats by completing UCC-1 financing statements and filing then with the appropriate county clerk in the county in which the debtors resided, or if the debtors were not residents of Nebraska, in the appropriate county in which the motorboat is kept.
NOTE: If the motorboat constitutes business inventory, the financing statement is filed with the Secretary of State.
(2) Rules for Perfection - Any motorboat purchased or sold in this State is issued a certificate of title. As a result, perfection of a security interest in a motorboat requires the notation of lien on the motorboat certificate of title. The notation of lien may be made by either the County Clerk or the Department of Motor Vehicles. Note that the statutory provisions for noting a lien on a motorboat certificate of title are virtually identical to the provisions relating to motor vehicle liens under Chapter 60 of the Nebraska Statutes.
Liens taken against motorboats which are inventory held for sale by a person or corporation that is in the business of selling motorboats must continue to be perfected by complying with the UCC filing requirements noted above.
The certificate of title requirement only applies to the motorboat itself. Thus, lenders wishing to take a security interest in unattached personal property, such as an outboard motor, will need to comply with UCC filing requirements, describing such unattached personal property (e.g., as consumer goods, business equipment or inventory) and properly filing a financing statement (e.g., with the Secretary of State).
d. All-terrain Vehicles (ATVs) and Minibikes
(1) ATV and Minibike Certificates of Title - In 2003, the Nebraska Legislature adopted LB 333 which, commencing January 1, 2004, requires any new ATV or minibike sold after January 1, 2004, to have a certificate of title. This change in the law modified the manner in which a security interest in certain ATVs and minibikes is to be perfected.
Prior to January 1, 2004 lenders obtained a perfected security interest in ATVs and minibikes by completing and filing financing statements with the Secretary of State.
(2) Rules for Perfection - Prior to January 1, 2004, lenders will continue to perfect a security interest in an ATV or minibike by filing a financing statement with the Secretary of State pursuant to the requirements of Article 9 of the Uniform Commercial Code (UCC). Security interests under UCC Article 9 have priority based on the time of filing.
Any new ATV or minibike sold in this state after January 1, 2004 will be issued a certificate of title. As a result, perfection of a security interest in such an ATV or minibike requires the notation of lien on the ATV or minibike certificate of title. The notation of lien may be made by either the county clerk, a designated county official or the Department of Motor Vehicles. Note that the statutory provisions for noting a lien on an ATV or minibike certificate of title are virtually identical to the provisions relating to motor vehicle liens under Chapter 60 of the Nebraska Statutes.
NOTE: Liens taken against ATVs or minibikes which are inventory held for sale by a person or corporation that is in the business of selling ATVs or minibikes must continue to be perfected by complying with the UCC filing requirements noted above.
The provisions of LB 333 also allow owners of “older” (pre-January 1, 2004) ATVs and minibikes to obtain a certificate of title, but does not require these ATVs or minibikes to be “titled.” A security interest in an “older” ATV or minibike which is not required to have a certificate of title will be perfected by the filing of a financing statement. This “discretionary” titling procedure for “older” ATVs and minibikes created a “bifurcated” system for perfecting a security interest or lien against ATVs and minibikes, giving rise to the need for the “transition” rules described at Section 9(d)(3), below.
(3) Transition Rules - A security interest in an ATV or minibike which is not required to be issued a certificate of title will be perfected by the filing of a financing statement. The security interest will continue to be perfected until (1) the financing statement is terminated or lapses in the absence of the filing of a Continuation Statement pursuant to the provisions of the UCC; or (2) a lien is noted on the face of the ATV or minibike certificate of title which is subsequently issued.
(4) Priority - Lenders perfecting a security interest in an “older” ATV or minibike by filing a financing statement are provided additional protection by allowing the ultimate notation of lien on the “older” ATV or minibike certificate of title to “relate back,” for purposes of establishing priority, to the date that the original financing statement was filed. For example, a lender which perfects a UCC Article 9 security interest in an “older” ATV or minibike prior to January 1, 2004, for which a certificate of title is subsequently obtained on July 1, 2004, will continue to be perfected until such time as its lien is noted on the certificate of title (in the absence of the termination or lapse of the original UCC Article 9 security interest). Upon notation of the lien on the newly issued certificate of title, the lien relates back to the original filing date, for purposes of priority.
Lenders who perfect a security interest under UCC Article 9 in an ATV or minibike which is not required to have a certificate of title are provided with further assistance in obtaining a notation of lien on the ATV or minibike certificate of title once it is issued. The new law requires the holder of the ATV or minibike certificate of title to, upon request, surrender the certificate of title to the holder of such a security interest to permit notation of a lien on the ATV or minibike certificate of title. In the event the owner of an “older” ATV or minibike fails or refuses to obtain a certificate of title, the holder of a UCC Article 9 security interest is authorized to make application for a certificate of title and have its lien noted thereon. This procedure is similar to that which currently exists for a security interest holder to request the issuance of a certificate of title and lien notation when a motor vehicle or motorboat certificate of title is lost or destroyed.
(5) Record Search - Since a financing statement filed against an ATV or minibike which is not required to have a certificate of title continues to be perfected until it is terminated or lapses, lenders taking a security interest in an “older” ATV or minibike by noting a lien on the newly issued certificate of title will need to check for any prior perfected UCC Article 9 security interests by searching the records of the Secretary of State.
e. Low-Speed Motor Vehicles
(1) Low-speed motor vehicles. In 2011, the Nebraska legislature adopted LB 289 which, commencing January 1, 2012, requires any new low-speed motor vehicle sold on or after January 1, 2012, to have a certificate of title. This change in the law modified the manner in which a certain security interest in certain low-speed motor vehicles is to be perfected. Prior to January 1, 2012, lenders obtained a perfected security interest in low-speed motor vehicles by completing and filing financing statements with the Secretary of State.
A low-speed vehicle is defined as a four-wheeled motor vehicle whose speed obtainable in one mile is more than 20 miles per hour and not more than 25 miles per hour on a paved level surface whose gross vehicle weight rating is less than 3,000 pounds.
(2) Rules for perfection. Prior to January 1, 2012, lenders will continue to perfect a security interest in a low-speed vehicle by filing a financing statement with the Secretary of State pursuant to the requirements of Article 9 of the Uniform Commercial Code (UCC). Security interests under UCC Article 9 have priority based on the time of filing.
Any new low-speed vehicle sold in this state on or after January 1, 2012, will be issued a certificate of title. As a result, perfection of a security interest in such a low-speed vehicle requires the notation of lien on the low-speed vehicle certificate of title or electronic certificate of title record.
NOTE: Liens taken against low-speed vehicles which are inventory held for sale by a person or corporation that is in the business of selling low-speed vehicles must continue to be perfected by complying with the UCC filing requirements noted above.
The provisions of LB 289 also allow owners of “older” (pre-January 1, 2012) low-speed vehicles to obtain a certificate of title, but does not require these low-speed vehicles to be “titled.” A security interest in an “older” low-speed vehicle which is not required to have a certificate of title will be perfected by the filing of a financing statement. This “discretionary” titling procedure for “older” low-speed vehicles created a “bifurcated” system for perfecting a security interest or lien against low-speed vehicles, giving rise to the need for the “transition” rules described below.
(3) Transition rules. A security interest in a low-speed vehicle which is not required to be issued a certificate of title will be perfected by the filing of a financing statement. The security interest will continue to be perfected until (a) the financing statement is terminated or lapses in the absence of the filing of a Continuation Statement pursuant to the provisions of the UCC; or (b) a lien is noted on the face of the low-speed vehicle certificate of title or on the electronic certificate of title record which is subsequently issued.
(4) Priority. Lenders perfecting a security interest in an “older” low-speed vehicle by filing a financing statement are provided additional protection by allowing the ultimate notation of lien on the “older” low-speed vehicle certificate of title or electronic certificate of title record to “relate back,” for purposes of establishing priority, to the date that the original financing statement was filed. For example, a lender which perfects a UCC Article 9 security interest in an “older” low-speed vehicle prior to January 1, 2012, for which a certificate of title or electronic certificate of title record is subsequently obtained on or after July 1, 2012, will continue to be perfected until such time as its lien is noted on the certificate of title or electronic certificate of title record (in the absence of the termination or lapse of the original UCC Article 9 security interest). Upon notation of the lien on the newly issued certificate of title or electronic certificate of title record, the lien relates back to the original filing date, for purposes of priority.
Lenders who perfect a security interest under UCC Article 9 in a low-speed vehicle which is not required to have a certificate of title are provided with further assistance in obtaining a notation of lien on the low-speed vehicle certificate of title or electronic certificate of title record once it is issued. The new law requires the holder of the low-speed vehicle certificate of title to, upon request, surrender the certificate of title to the holder of such a security interest to permit notation of a lien on the low-speed vehicle certificate of title. In the event the owner of an “older” low-speed vehicle fails or refuses to obtain a certificate of title, the holder of a UCC Article 9 security interest is authorized to make application for a certificate of title to have its lien noted thereon.
This procedure is similar to that which currently exists for a security interest holder to request the issuance of a certificate of title and lien notation when a motor vehicle or motorboat certificate of title is lost or destroyed.
(5) Record search. Since a financing statement filed against a low-speed vehicle which is not required to have a certificate of title continues to be perfected until it is terminated or lapses, lenders taking a security interest in an “older” low-speed vehicle by noting a lien on the newly issued certificate of title or on the electronic certificate of title record will need to check for any prior perfected UCC Article 9 security interests by searching the records of the Secretary of State.
f. Special Rules for Property With a Certificate of Title
Revised Article 9 contains choice of law rules for goods covered by a certificate of title. The basic choice of law rule for goods covered by a certificate of title requires a determination of when a certificate “covers” the goods. Revised Article 9 states that goods are “covered” by a certificate of title as soon as a valid application and fee are delivered to the appropriate authority. Goods cease to be “covered” by a certificate of title when they become “covered” by a subsequent certificate, or when the earlier certificate ceases to be effective. Once it has been determined which certificate “covers” the goods, the law of the jurisdiction issuing the certificate governs perfection, effect of perfection, and priority.
When goods covered by a certificate of title are moved to another state, the law of the state to which the goods are removed governs perfection as soon as a certificate of title under its law “covers” the goods. As a result, the new state in which the goods are located governs perfection as soon as a proper application for a new certificate is filed. Until such time as an application is filed to obtain a new certificate in the new state, the law of the original state in which the certificate of title was issued will continue to govern perfection. A security interest perfected under the law of the state in which the goods were originally located remains perfected until it ceases to be perfected under that states law, even if a certificate is issued upon removal of the goods to another to state. However, the continuing perfection of the original creditor will only protect the creditor against a lien creditor unless the security interest in goods is reperfected under the laws of the new state of location.
State certificate of title laws specifies certain types of property for which the state issues a certificate of title to property owners. Certificates of title generally supersede the UCC when perfection of collateral is an issue. Motor vehicles are the most common form of property subject to certificate title laws, but mobile homes and boats may also be covered. A lender claiming a security interest in titled property generally must put a notation about the interest on the title certificate itself.
10. Priority of Certain Liens Arising by Operation of Law
When a person in the ordinary course of his business furnishes services or materials with respect to goods subject to a security interest, a lien upon goods in the possession of such person given by statute or rule of law for such materials or services takes priority over a perfected security interest unless the lien is statutory and the statute expressly provides otherwise.
II. PERFECTION OF THE SECURITY INTEREST
Once the bank takes a security interest, it must be perfected to establish priority against the claims of other (third) parties.
A. Central Filing
Former Article 9 afforded states with three filing alternatives: central filing; local filing; or a combination of both. Revised Article 9 provides for central filing (a concept adopted by Nebraska in 1998) for most situations, but retains local filing for real-estate-related collateral and special filing provisions for transmitting utilities.
B. Place of Filing (Central Filing System)
When the collateral is timber to be cut, minerals or the like (including oil and gas), or goods that are or are to become fixtures, the filing should occur in the office where a mortgage on the real estate would be filed or recorded.
In all other cases, filings are in the Office of the Secretary of State. The address of the proper filing office of the Secretary of State is: Department of State, Uniform Commercial Code Division, P.O. Box 75104, Lincoln, Nebraska 68509. The phone number is (402) 471-4080.
NOTE: Security interests in domestic aircraft and rolling stock are perfected by filing with appropriate federal agencies. For domestic aircraft, the appropriate agency is the Federal Aviation Agency (Regular mailing address: FAA Aircraft Registration Branch, P.O. Box 25504, Oklahoma City, OK 73125; Overnight Delivery: FAA Aircraft Registration Branch, AFS-750, 6425 S. Denning Rm 118, Oklahoma City, OK 73169; telephone (405) 954-3116).
NOTE: Consumer goods are goods used or purchased for household purposes. A financing statement is filed in the office of the Secretary of State to perfect a security interest in consumer goods.
CAUTION: Federal Reserve Board Regulation AA prohibits certain security interests in “household goods.”
C. Perfection by Filing
A security interest may be perfected by filing as to all types of tangible collateral or goods (and in some cases, intangible collateral may be secured by filing in addition to or as an alternative to taking possession or control, e.g., instruments, investment property, etc.).
1. Financing Statement
The debtor’s signature is not required on a financing statement, the elimination of which is designed to facilitate electronic filing, however the debtor’s authorization is required to file an initial financing statement, an amendment that adds collateral or an amendment that adds a debtor.
A financing statement may be filed before a security agreement is made or a security interest otherwise attaches. If a financing statement is ever “pre-filed,” (i.e., filed before the execution of the security agreement), the secured party must obtain a separate express authorization or a subsequent ratification of the filing from the debtor.
“Authentication” of a security agreement by the debtor automatically authorizes the filing of a financing statement covering the collateral described in the security agreement.
2. Contents of the Financing Statement
A financing statement is sufficient only if it:
a. provides the name of the debtor;
b. provides the name of the secured party or a representative of the secured party; and
c. indicates the collateral covered by the financing statement.
While a financing statement containing only these three items is effective if accepted by the filing office, the filing office could rightfully reject so minimal a filing. Revised Article 9 allows the filling office to reject financing statements unless they also include: (a) a mailing address for the secured party; (b) a mailing address for the debtor; (c) an indication whether the debtor is an individual or an organization; and (d) and if the debtor is an organization: (i) the type of organization; (ii) the jurisdiction of the organization; or (iii) the organizational identification number for the debtor or indicate that the debtor has none. A secured party should ensure that these items are addressed in all financing statements filed under Revised Article 9.
3. Real Estate Descriptions
The requirement to provide a real estate description for financing statements covering growing crops or crops to be grown has been eliminated. Real estate descriptions are needed under Revised Article 9 only for three types of collateral for which local filings in real estate records will be made: timber to be cut, as-extracted collateral, e.g., oil and gas, and fixtures in fixture filings.
4. Agriculture-Related Collateral
a. Security Interests In “Farm Products” Effective July 1, 2001, any new financing statement covering “farm products” must be filed in the central filing office in the state where the debtor is located. (Loans to a debtor located in Nebraska which are secured by “farm products” require the filing of a financing statement with the Nebraska Secretary of State).
“Farm products” are defined as goods, other than standing timber, with respect to which the debtor is engaged in a farming operation and which are: (i) crops grown, growing, or to be grown, including: (a) crops produced on trees, vines, and bushes; and (b) aquatic goods produced in aquacultural operations; (ii) livestock, born or unborn, including aquatic goods produced in aquacultural operations; (iii) supplies used or produced in a farming operation; or (iv) products of crops or livestock in their unmanufactured states.
As of July 1, 2001, Revised Article 9 allows a security agreement to describe collateral by the use of broad collateral categories, such as “farm products” (thereby eliminating the need to describe “crops” and “livestock,” although the use of such terms remains permissible). It should become standard practice to describe “farm products” as the collateral description in a security agreement for loans to be secured by either crops or livestock or both crops and livestock.
CAVEAT: The new rules relating to security interests in farm products may cause some heartburn for borrowers dealing with multiple lenders. Lenders in such situations will need to be diligent in coordinating with other lenders to accommodate the coverage of their competing security interests. For example, if two lenders are financing a Nebraska debtor with a multi-state farming operation (Kansas, Nebraska, Iowa, Missouri) and both lenders obtain a security agreement and file a financing statement covering “farm products”, the first lender to file its financing statement with the Nebraska Secretary of State after July 1, 2001, (filing location determined by the state of the debtor’s residence) will have a priority lien on all crops and livestock, regardless of their location.
Under the facts described above, if a lender is lending against crops as security and not livestock, it may want to limit its security interest to crops only, thereby allowing the lender who finances the livestock operation of the borrower to maintain a priority security interest in the livestock. Similarly, it might be advisable for a lender financing its borrower’s Nebraska farming operations to take a security interest in the debtor’s crops grown, growing or to be grown “in Nebraska” leaving other lenders of the debtor’s farming operations in other states with the flexibility to obtain a priority security interest in the debtor’s crops in the other states.
The forgoing example highlights the need for lenders wishing to accommodate the desires of one another in dealing with a multi-state farming operation, to consider describing their collateral more narrowly than otherwise allowed by the use of the newly permissible broad collateral categories. If faced with a prior financing statement filed against a broader range of collateral than required by the first lender, a subsequent lender may need to seek a subordination agreement or a partial release of collateral from the first lender in order to obtain the security interest required to support the loan.
b. Elimination Of Real Estate Description For Crops A significant change under Revised Article 9 is the elimination of the requirement that a security agreement and financing statement relating to “crops” contain a description of the real estate on which the crops are growing or to be grown. The former requirement was a “trap for the unwary” as court decisions held that minor defects in real estate descriptions could render the attachment or perfection of a security interest ineffective. Also, a lender financing a borrower leasing different parcels of real estate from time-to-time may have overlooked the need to update the security agreement and amend its financing statement to reflect the new real estate descriptions as new parcels of real estate were leased.
Under former Article 9, a financing statement relating to “crops” was required to describe the real estate involved and, the security agreement was required to contain a description of the real estate on which the crops are growing or to be grown. As a result, pre July 1, 2001, security agreements and financing statements covering “crops” which contain language “limiting” their coverage to crops growing or to be grown on specifically-described real estate are only effective to “attach” and “perfect” a security interest in the crops growing or to be grown on that specifically-described real estate.
On or after July 1, 2001, unless the borrower wishes to restrict the scope of its lender’s security interest in “farm products,” a lender will utilize the broad collateral category “farm products” in its security agreement and make no reference to a real estate description in either its security agreement or financing statement. Proceeding in this fashion will effectively provide the lender with a security interest in all crops and livestock now owned or subsequently acquired, regardless of their location. Under such conditions, as a borrower acquires or leases new parcels of real estate, the security interest automatically attaches and is perfected as to future crops and livestock without any need to amend the security agreement or financing statement to describe the new real estate.
COMPLIANCE NOTE: Security agreements and financing statements executed on or after July 1, 2001, need not contain any description of real estate in connection with the granting or perfecting of a security interest in farm products.
c. Pre-July 1, 2001 Security Agreements Covering Crops The most frequent question fielded at the NBA following adoption of Revised Article 9, was “What do I need to do with my existing security agreements in light of the elimination of the real estate description requirement for growing crops?
For purposes of our discussion of this issue, let’s assume a lender has an existing security interest (pre-July 1, 2001) in a borrower’s “crops,” restricted to specifically-described real estate by the terms of the security agreement, with such real estate description also referred to in the financing statement as required by former Article 9. In order to “broaden” the scope of your security interest to cover “farm products” without being limited by the real estate description contained in the security agreement, specific steps will need to be taken after July 1, 2001.
Whether a lender has a perfected security interest in a particular type of collateral (such as “farm products”) is dependent upon (1) the collateral described in the financing statement (which gives notice to third parties of the extent of the security interest claimed by the lender); and (2) the collateral described in the security agreement (which defines the collateral in which the borrower has granted a security interest to the lender.)
COMPLIANCE NOTE: Remember, a perfected security interest is only as broad as the collateral described in the security agreement, even if the collateral described in the financing statement is all-encompassing.
The comment to Revised 9-703 indicates that security agreements entered into prior to July 1, 2001, will be interpreted by presuming that the “bargain of the parties” contemplated the use of terms and provisions as defined under former Article 9. As a result, if a pre-July 1, 2001, security agreement granted a security interest in “crops grown, growing, or to be grown” on Whiteacre and Blackacre, the “bargain of the parties” was to only grant a security interest in crops relating to the two specifically described parcels of real estate. The security interest granted by the borrower does not become broader automatically by changes in definitions, categories of collateral or by the elimination of the real estate description for “crops,” as provided under Revised Article 9. Rather, what the borrower has granted in the pre-July 1, 2001, security agreement (an interest in crops only located on Whiteacre and Blackacre) is all that continues to be covered by the security interest.
In order to expand the “attachment” of the security interest to cover all crops of the borrower, wherever located, the borrower must, on or after July 1, 2001, (1) sign a new or amended security agreement to cover “farm products” as collateral (which would include both crops and livestock) and/or (2) eliminate or delete any reference in the security agreement to the “limiting” real estate description of Whiteacre and Blackacre.
COMPLIANCE NOTE: On or after July 1, 2001, depending on each borrower’s situation, lenders may want to start amending pre-July 1, 2001, security agreements to include the broad collateral description “farm products” and/or remove any reference to the specific real estate on which crops will be grown.
The need to amend your security agreements covering “crops” which contain a “limiting” real estate description would be avoided if your security agreement contained the following language or language of similar import:
all crops, now or hereafter acquired, including, but not limited to, crops growing, grown, or to be grown on the following described real estate
We anticipate that very few security agreements have been drafted this precisely and consideration will generally need to be given to amending your security agreement in the manner described above.
For many basic agricultural loans you may have no immediate or urgent need to make these changes. For example, if your existing security agreement covers “crops” and contains the legal description of all real estate being farmed by the borrower in 2001-2002, you could wait until the time of financing the next crop year to amend the security agreement. Similarly, if your borrower has growing crops (with no livestock) on only one tract of real estate or has farmed the same tracts of real estate for many years with no anticipated change or expansion, you could wait to amend the security agreement until the borrower decides to expand his or her farming operations to include additional real estate. For borrowers (particularly tenant farmers) who are subject to continuing rollover of real estate leased or owned, the existing lender should promptly obtain a security interest in crops by amending the security agreement to cover “farm products” before another lender does so.
d. Pre-July 1, 2001, Financing Statement Covering Crops After dealing with the questions regarding the need to change the security agreement due to the elimination of the real estate description for growing crops, the next logical inquiry is “What do I need to do with my financing statements in light of the elimination of the real estate description requirement for growing crops?”
In many instances, lenders have “checked the box” indicating “crops” as collateral to be covered by their financing statement. On the same financing statement, a real estate description has generally been included to satisfy the requirement of former Article 9 that a description of real estate be included on any financing statement pertaining to “crops.” Since the real estate description is not “limiting” in effect, nor directly tied to the reference to “crops” as collateral covered by the financing statement, elimination of the real estate description requirement for “crops” under Revised Article 9 should allow the security interest to be perfected as to all “crops,” now owned or hereafter acquired, without the necessity of amending the financing statement to remove the real estate description.
Assuming that your existing pre-July 1, 2001, financing statement does not use the following language, or language of similar import:
“Crops or farm products raised or grown only on the following described real estate”,
we do not believe that an amendment to the pre-July 1, 2001 financing statement is required.
COMPLIANCE NOTE: While we do not believe that pre-July 1, 2001 financing statements covering “crops” which contain a real estate description need to be amended in light of the elimination of the real estate description for “crops,” many banks have filed combination security agreement/financing statements covering “crops” which contain a real estate description. These combination security agreement/financing statements will need to be amended and signed by the debtor in order to expand the attachment of the security interest beyond the “crops” located on real estate described therein.
5. Description of Collateral
Collateral descriptions in a financing statement serve a different purpose than descriptions contained within a security agreement. In a financing statement, the description is intended to put subsequent lenders on notice that a prior interest may exist in items of the debtor’s property. Accordingly, a description in a financing statement may be less specific and still be effective even if it fails to unambiguously identify the specific collateral. For example, where a security agreement describes collateral as “debtor’s 2001 combine, serial number 153750,” then a sufficient description in the financing statement might directly repeat the description in the security agreement or list “combines” or even “equipment.”
Under Revised Article 9, a financing statement description may use any of the same methods that are acceptable for security agreements (e.g., specific listing; category; type of collateral; quantity; computation or allocational formula or procedure; or any other method, if the identity of the collateral is objectively determined). The financing statement may also use super-generic descriptions (an indication that the financing statement covers all assets or all personal property of the debtor). In contrast to a security agreement, a valid financing statement may list collateral as “all of debtor’s assets”, “all of debtor’s personal property” or a description using words of similar import.
Super-generic descriptions should be used only if the creditor is certain that the collateral descriptions in the security agreement really do comprise all assets of the debtor. These super-generic descriptions may be a convenience and a time saver for creditors, but they should be used with great care, because they potentially expose creditors to new sanctions under Revised Article 9.
Under Revised Article 9, sanctions apply to a creditor for filing a financing statement that is unauthorized in whole or in part by the debtor. In such a case, a debtor may be awarded actual damages, plus reasonable attorney fees and court costs. A debtor may recover if the financing statement includes collateral that was not authorized to be listed. An unauthorized filing might be as simple as a financing statement listing “accounts and inventory” if the security agreement listed only “inventory.” A super-generic description would also be an unauthorized filing if the debtor owned any type or category of personal property that was not listed in the security agreement.
To avoid unauthorized filings, creditors should correlate descriptions in financing statements with descriptions in security agreements to ensure that both descriptions are correct under the revised collateral-type definitions found in Revised Article 9.
6. Standard UCC Forms
Revised Article 9 provides for uniform forms consisting of:
Copies of these UCC forms and their instructions are found at the Nebraska Secretary of State’s website: http://www.sos.state.ne.us/business/ucc/ra9_forms.html. The filing offices in every state adopting Revised Article 9 accept the model forms.
The National UCC-3 is a multi-purpose form that requires the filer to “check the box” depending on whether the form is intended to serve as a termination statement, continuation statement, assignment or amendment (including an amendment to add or delete a debtor or secured party, to amend the debtor’s name, to add collateral or to delete collateral). New features on the forms include: (1) no line for a signature of the debtor or secured party; (2) separate boxes to fill in (a) the organizational name of the debtor or (b) the individual name of the debtor, whichever applies; and (3) separate boxes (on the UCC-1, UCC-1Ad and UCC-3) for the (a) type of organization, (b) “jurisdiction” of organization and (c) organization’s ID number.
7. Determining Where the Debtor is Located
Revised Article 9 retains existing rules regarding the debtor’s “location” by providing that: (1) a debtor who is an individual is located at the individual’s principal residence; (2) a debtor that is an organization and has only one place of business is located at its place of business; and (3) a debtor that is an organization and has more than one place of business is located at its chief executive office. “Chief executive office” means “the place from which the debtor manages the main part of its business operations or other affairs.”
There are important exceptions to this general rule. A registered organization organized under the laws of a state is located in that state. The place to file for a corporation, limited partnership or limited liability company is in the entity’s “birthplace” (i.e., in its state of incorporation). For example, a corporation incorporated in Nebraska would be deemed to be located in Nebraska. If a debtor reincorporates in another state, perfection will lapse after four months. Location of the debtor does not change in spite of suspension of the company’s status or its dissolution. A foreign debtor that would otherwise be located in a foreign jurisdiction without a public filing system is deemed to be located in the District of Columbia. If the “United States” is a debtor, it is deemed to be located in the District of Columbia.
8. Where to File UCC Financing Statements
With the exception of filings related to fixtures, timber or minerals, in which case the financing statement is to be filed in the state where the fixtures, timber or minerals are located, the following chart sets forth the location for filing UCC financing statements:
Type of Debtor
Where to File
Individual Debtor
State of debtor’s residence
General Partnership Debtor
State of debtor’s place of business or its Chief Executive Office if it has more than one place of business
Registered Organization Debtor (e.g., corporations, limited liability companies, limited partnerships, limited liability partnerships, professional corporations, etc.)
State where such entity was incorporated or formed
9. Name of Debtor
Revisions to UCC 9-503 make significant changes to the manner in whcih the debtor's name is to be determined.
a. Registered Organizations - The amendments clarify that the name of a registered organization is that which is reflected on the “public organic record” most recently filed with or issued by or enacted by the registered organization’s jurisdiction of organization which purports to state, amend, or restate the registered organization’s name. (UCC Section 9-503(a)(1)).
b. Decedents and Their Estates - The name of the debtor, if the collateral is being administered by the personal representative of a decedent, is sufficient only if the financing statement provides, as the name of the debtor the name of the decedent and, in a separate part of the financing statement, indicates that the collateral is being administered by a personal representative. (UCC Section 9-503(a)(2))
c. Collateral Held in Trust - The name of the debtor, if the collateral is held in a trust that is not a registered organization, is sufficient only if the financing statement provides, as the name of the debtor, (1) if the organic record of the trust specifies a name for the trust, the name specified; or (2) if the organic record of the trust does not specify a name for the trust, the name of the settlor or testator; and in a separate part of the financing statement, if the name of the trust is utilized, indicates that the collateral is held in a trust or if the name provided is the name of the settlor or testator, provides additional information sufficient to distinguish the trust from other trusts having one or more of the same settlors or the same testator and indicates that the collateral is held in a trust. (UCC Section 9-503(a)(3))
d. Individual’s Debtors Name - “Only If” Approach - Under current law, a lender perfecting a security interest against an individual debtor must use the “correct” name of the debtor. Failure to do so, renders the financing statement “seriously misleading” and thus ineffective, unless a search under the “correct” debtor’s name utilizing the primary search logic of the Secretary of State happens to uncover the financing statement. UCC 9-503(4) provides that a creditor’s security interest, in cases involving an individual debtor, is perfected “only if” the financing statement reflects the debtor’s name as it appears on his or her current driver’s license or state identification card. Under the “only if” approach, if the debtor is an individual to whom the state has issued an unexpired driver’s license or state identification card, a financing statement sufficiently provides the name of the debtor only if it provides the name of the individual as shown on the license or state identification card. If the debtor does not hold an unexpired driver’s license or state identification card issued by the state of his or her principal residence, the financing statement is sufficient if (1) it provides the “individual name” of the debtor (i.e., the standard under current law), or (2) the debtor’s surname and the first personal name. (UCC Section 9-503(a)(4))
e. Trade Names - Revised Article 9 addresses the troublesome issue of trade names by providing that filing under a debtor’s trade name alone is neither necessary nor sufficient.
f. Effect Of Errors And Omissions - A financing statement may be effective despite minor errors or omissions, however a financing statement containing errors or omissions that make the record “seriously misleading” is ineffective. A financing statement that fails sufficiently to provide the name of the debtor is “seriously misleading.”
Under former Article 9, the debtor’s name did not have to be exact. Minor errors were acceptable and a financing statement was not invalidated unless the error was seriously misleading. Revised Article 9 provides for a “bright line” test and the secured party is required to get the debtor’s name exactly right.
An improvement under Revised Article 9 is its method for determining when an error in a debtor’s name renders the financing statement “seriously misleading.” If an erroneous filing would be retrieved by a correct-name search (using the filing office’s standard search logic), the financing statement remains valid. If a search of the filing office under the debtor’s correct name, using the filing office’s standard search logic, if any, would disclose a financing statement that fails to sufficiently provide the name of the debtor as required under Revised Article 9, the name provided does not make the financing statement seriously misleading. Conversely, a financing statement is “seriously misleading” due to the failure to sufficiently provide the name of the debtor and is ineffective even if it would be discovered by: (a) using a search logic other than that of the filing office to search the official records or (b) using the filing office’s standard search logic to search a data base other than that of the filing office.
For example, suppose the debtor’s legal name is Acme Inc., but a filed financing statement names the debtor “Acme Ltd.” Revised Article 9 directs that a search be run under the debtor’s correct name (Acme Inc.). If that search, using the standard search logic of the filing office in question, turns up the “Acme Ltd” filing, then the notice purpose of the filing has been served and the error in the debtor’s name is not deemed to be “seriously misleading.” On the other hand, if the search logic of the filing office meant that a search under “Acme Inc.” would not find the “Acme Ltd” filing, then the financing statement is “seriously misleading” and ineffective and the security interest is unperfected.
g. UCC Financing Statements – Use of Debtor’s Name - The United States Bankruptcy Appellate Panel of the Tenth Circuit has held that a financing statement to be sufficient under revised UCC Article 9, must list an individual debtor by his or her legal name, not a nickname.
In the case of In Re Kinderknecht (Clark vs. Deere and Company), 53 UCC Rep. Serv. 2d 167, the creditor filed financing statements identifying a debtor with the legal name of “Terrance Joseph Kinderknecht” as “Terry J. Kinderknecht.” Under the facts of this case, the court found that the financing statement reflecting the name of “Terry J. Kinderknecht” was seriously misleading” under UCC § 9-506 (b). The “safe harbor” contained within UCC § 9-506 (c) was of no comfort to the secured creditor as the filing office’s standard search logic did not reflect the financing statements containing the name “Terry J. Kinderknecht” when searching under the name “Terrance.”
In support of its holding, in Kinderknecht the court referred to language in the financing statement form set forth in UCC § 9-521 expressly stating that the preparer should include the “DEBTOR’S EXACT FULL LEGAL NAME.” While UCC § 9-503 provides specific guidance for listing a debtor’s name in a financing statement when the debtor is an entity, it simply states that the name of the “debtor” should be utilized when dealing with an individual debtor.
The Kinderknecht decision was rendered by a Tenth Circuit Bankruptcy Court. As such, it does not have direct application to Nebraska cases. However, the provisions of the UCC in Kansas upon which the Kinderknecht decision was based are identical to those that exist in Nebraska. As a result, prudent secured creditors completing the standard UCC-1 financing statement should take steps to ascertain the debtor’s legal name by reviewing official records such as birth certificates, driver’s licenses, passports and tax returns. It is also helpful for secured creditors searching filing records to conduct a “broad” search of the filing records to determine prior perfected security interests.
A similar ruling finding that a financing statement was “seriously misleading” was handed down by the United States District of Kansas Bankruptcy Court in the case of Pankratz Implement Company vs. Citizens National Bank, No. 91721, 2004 WL 262471 (Kan. Court Appellate Nov. 19, 2004) which involved a financing statement reflecting the debtor’s first name as “Roger” rather than as “Rodger.” (Legal name)
In an interesting twist in the Pankratz case, the creditor with the prior filed financing statement argued that an alternative searching system offered by the Kansas Secretary of State’s filing office that produces wider searches and employs more flexible search logic would have uncovered the financing statement with the misspelled first name of the debtor. Unfortunately, the temporary system contained an express disclaimer that the search results produced were not official and were not to determine whether a name is “seriously misleading.” In addition, the court noted that as required under revised Article 9, the test for determining whether or not the financing statement is effective is based upon an official search using the standard search logic, and as such, the alternative searching system was of no benefit to the holder of the prior perfected security interest that had not properly reflected the debtor’s exact legal name in its financing statement.
The United States Bankruptcy Court for the District of Nebraska (In the Matter of Michael and Rhonda Borden, Case No. BK05-41272) also highlights the need to utilize the “exact debtor’s legal name” in financing statements.
In an adversary proceeding brought in the aforementioned bankruptcy by the Genoa National Bank (bank) against Southwest Implement, Inc. (Southwest), the bank sought a determination of the validity, extent, and priority of the respective lien interests of the parties in certain farm equipment owned by the debtors. The bank held a perfected blanket security interest in the debtors’ personal property, while Southwest held security agreements on two pieces of farm equipment originally financed through Deere & Company. The UCC financing statements filed by Southwest on the two items of equipment identified the debtor as “Mike Borden,” rather than by his legal name of “Michael Borden.” The bank, in seeking a ruling that its “blanket lien” on the personal property was superior to Southwest’s interest in the two pieces of farm equipment maintained that the manner in which the debtor was identified on the financing statements caused them to be seriously misleading under UCC § 9-506 and therefore ineffective.
Under the facts of the case, in 2002, the bank filed its UCC financing statement to reflect its lien on all of the debtors’ personal property, including all machinery and equipment then owned and thereafter acquired. The financing statement was recorded under the name “Michael R. Borden.”
In making its determination, the court noted that Mr. Borden’s legal name was Michael Ray Borden, and that he is identified by that name or by “Michael R. Borden” on many legal documents, (i.e., birth certificate, driver’s license, real estate deeds, bank accounts, tax returns, and the bankruptcy petition), although he often signs legal documents, such as some tax returns, Farm Service Agency forms, security documents, and financial statements as “Mike Borden.
In ruling for the bank, the court employed the following test: Whether an error in a debtor’s name on a financing statement is a fatal defect iswhether a search of the filing office’s records under the debtor’s correct name, using the filing office’s standard search logic, would disclose the financing statement.
The Court further noted that the official Nebraska UCC 1 form requires the “debtor’s exact full legal name,” with the instructions further directing that the debtor’s “first given name” be entered in the forms “First Name” box. An instruction to use the debtor’s “first given name” presumably serves to exclude the use of a nickname or short form of a given name.
The Court held that “when the standard search logic of the filing office does not allow for expanded searches using wildcard functionality to cover all forms of a name, the searcher should not be required to separately search each possible name to ensure that all possibilities have been exhausted.” The statute requires the debtor’s “correct name,” which the official forms and the Nebraska Secretary of State interpret as the debtor’s “exact legal name.” It is not much of a burden on a party taking a security interest from an individual known as “Mike” or “Bill” to ask if the individual’s “correct name” is “Michael” or “William.” The same thinking would apply to a debtor known popularly by a nickname such as “Jr.” or “Shorty,”. . . a creditor could certainly assume that the debtor may be legally known by another name.
Although the holdings of the Kinderknecht, Pankratz, and Borden cases are clear – secured creditors must utilize the debtor’s exact legal name - UCC Article 9 does not define what constitutes an “exact full legal name” and no other state law defines this term. Accordingly, while there is no fool-proof solution, some commentators have concluded that the name to utilize on a financing statement is an individual’s birth-given first name, middle initial and last name.
The concept of “getting the debtors name right” applies equally to registered organizations. A recent Nebraska Bankruptcy Court decision, In re EDM Corp., 2009 WL 367773, 68 UCC Rep.2d 139 (BankrD.Neb.2009) concluded that a secured creditor’s financing statement that included the correct legal name of a corporate debtor, but also added a trade name rendered the security interest unperfected.
In this case, the Hastings State Bank (Hastings) made loans to EDM, retaining a blanket security interest in all of the debtor’s assets, including its inventory. The financing statement filed by the bank with the Nebraska Secretary of State identified the debtor as “EDM Corporation D/B/A EDM Equipment.” Subsequently, Huntington National Bank (Huntington) entered into a revolving credit arrangement with EDM and filed a financing statement with the Nebraska Secretary of State identifying the debtor as “EDM Corporation” and describing a broad range of collateral, including accounts, inventory, equipment and fixtures.
Prior to advancing funds pursuant to the line of credit, Huntington searched the records of the Nebraska Secretary of State under the debtor’s legal name “EDM Corporation” and found no record of the Hastings financing statement utilizing the Nebraska Secretary of State UCC Division search engine.
In determining whether Hastings’ filing was sufficient, the Nebraska bankruptcy court reviewed UCC 9-503(a)(1), which provides that, if the debtor is a “registered organization” (such as a corporation), a financing statement sufficiently provides the name of the debtor “only if the financing statement provides the name of the debtor indicated on the public record of the debtor’s jurisdiction of organization which shows the debtor to have been organized.” The provisions of 9-503(b) further provide that a financing statement that provides the correct name of the debtor is not rendered ineffective by the absence of a trade name, and 9-503(c) provides that a financing statement is not sufficient if it provides the debtors trade name only.
The bankruptcy court also relied upon the provisions of UCC 9-506(c) which state that even if a financing statement fails to comply with the rules of 9-503 it is considered not “seriously misleading” if a third party searching the records of the filing office under the debtors “correct name” and using the filing office’s “standard search logic” would discover the financing statement.
The fact that Huntington conducted a proper search using the debtor’s correct corporate name without discovering the Hastings’ financing statement, led the court to conclude that Hastings’ filing was “seriously misleading.” In this case, had Hastings simply omitted the reference to the debtor’s trade name following its official corporate name, it would have been protected because the financing statement would have been discovered by the Huntington search.
h. IRS Exception to “Exact Legal Name”. - Creditors should be aware of an exception to the UCC rules regarding determination of the debtor’s name. in the case of In Re: Spearing Tool and Manufacturing Co., the U.S. Court of Appeals – 6th Circuit determined that the IRS does not have to perfectly identify the taxpayer when filing an IRS lien because the IRS is not required to comply with the Uniform Commercial Code, Article 9 financing statement requirements. In this case, the IRS had filed its two notices of federal tax lien with the Michigan Secretary of State. The IRS filing appeared under the name “Spearing Tool and Mfg. Company Inc.” rather than the legal name of “Spearing Tool and Manufacturing Co.” The court found that it would be unduly burdensome to the IRS’s tax collection efforts to require compliance with the requirements of the UCC.
10. Post-Filing Events That May Require Refiling
Even if the secured party manages to file in the right location and to initially name the right debtor, subsequent events may require follow-up action to maintain perfection.
a. A Change in the Debtor’s Location - A debtor may change his or her place of residence, place of business or chief executive office. If the debtor’s move causes him or her to become located for Article 9 filing purposes in a new state after a financing statement has been properly filed, the secured creditor will need to take action to maintain perfection. Revised Article 9 requires perfecting in the new jurisdiction within four months after a change in the debtor’s location, similar to the rules under former Article 9. If the secured creditor fails to act by the end of the four-month period, the security interest not only becomes unperfected, but also is “deemed never to have been perfected as against a purchaser of the collateral for value.”
b. A Transfer of the Collateral to Another Person Subject to the Security Interest - The four-month rule stated above applies when the original debtor relocates to another state, but remains the owner of the collateral. Different rules apply, however, if the original debtor transfers the collateral, subject to the security interest, to another entity. As under former Article 9, the mere fact of a transfer of collateral to a different owner does not trigger a need to reperfect. Reperfection will be required to maintain perfection if the transferee is located in a different state than the original debtor. In such cases, Revised Article 9 allows a full year of continued perfection for the secured party to allow time to discover the transfer and reperfect in the new transferee’s state.
This “refile-within-one-year” rule would also apply when a registered organization debtor “reincorporates” in a new state. A registered organization by definition is organized under the law of a single state and that state cannot change. “Reincorporation” refers to a transfer of property to a different entity, perhaps by merger, rather than change of state of registration for the original debtor. In such a case, reperfection within one year in the new transferee’s state of registration would be required for continued perfection.
c. Change of Debtor’s Name - Revised Article 9 generally follows former Article 9 rules regarding changes in the debtor’s name. No action to maintain perfection is required unless the change is sufficient to make the existing filing “seriously misleading.” In such a case, the security interest will remain perfected without action as to all collateral acquired by the debtor before or within four months after the change of name. To maintain perfection in property acquired by the debtor more than four months after a name change that makes the old filing seriously misleading, the secured party must correct the record by filing an amendment to the existing financing statement.
11. Period for Which Filing is Effective
The original filing of a financing statement is effective for five years from the date of filing. After the effective period expires, the security interest lapses and becomes unperfected unless a continuation statement is filed prior to its lapse.
12. Continuation Statements
Continuation statements may be filed during the last six months of the effective period of a prior filing and will continue the effectiveness of the original statement for five years after the last date on which the filing was effective unless another continuation statement is filed. Successive continuation statements may be filed. A continuation statement continues a financing statement for five years after the last date on which the filing was effective. Therefore, always look to the anniversary date of the original filing in determining the grace period for filing continuation statements.
13. Amendments
Changes to financing statements, including the addition and deletion of collateral, assignments, continuations, and terminations of financing statements are all called “amendments.” An amendment must identify the initial financing statement by its file number and does not extend the period of effectiveness of the financing statement. The secured party of record may make changes in the public record without the need to obtain the debtor’s signature, however the filing of an amendment that adds collateral or adds a debtor must be authorized by the debtor in order to be effective.
14. Termination Statements (§ 9-513, UCC)
a. Secured Party - A secured party must send the debtor a termination statement within 20 days after receiving an authenticated demand from the debtor if: (1) there is no obligation secured by the collateral covered by the financing statement and no commitment to make an advance, incur an obligation, or otherwise give value; or (2) the debtor did not authorize the filing of the initial financing statement. Failure of the secured party to send a termination statement to the debtor within 20 days after a proper demand makes it liable to the debtor for any loss caused to the debtor as a result and for reasonable attorney fees and court costs.
The bank is not required to file the termination statement itself and need not take any action if the borrower does not request a termination. If the bank does not receive a written request from the borrower, it may simply let its filing lapse.
b. Debtor Terminations. - If a debtor makes a proper and timely demand for the secured party to send a termination statement to the debtor, and the secured party fails to timely comply, § 9-509 of Revised Article 9 allows the debtor to file a termination statement without the secured party’s consent. Such a termination statement must indicate “that the debtor authorized it to be filed.” The intent of the law is to protect a debtor who pays off a loan and the secured party refuses to terminate its financing statement or send a termination statement to the debtor. Essentially these provisions are designed to prevent filing offices from exercising legal judgment as to what should or should not be filed. This creates something of an “open drawer” filing system, allowing almost anyone to file almost anything.
The victim of a bogus filing may use this section by first sending a demand to the filer at whatever address the filer put on the bogus filing, and the filer will be deemed to have received it.
What if a debtor files a termination statement without authorization (i.e., before the loan is paid off)? The filing would be unauthorized since a debtor is only authorized to file a termination statement when the secured party refuses to file or fails to send a termination statement to the debtor within 20 days of a request. The UCC provides that an unauthorized filing is not effective. Therefore, the financing statement would not be terminated. The bank making that loan continues to be perfected and protected.
What if the debtor files an unauthorized termination statement and then gets a second loan on the same collateral? Initially, this looks like a problem. Bankers are concerned that when they do a lien search on the collateral it would come up empty because a termination statement has been filed. Fortunately, under the “open drawer” filing system, this should not be a problem since lenders will be able to see both the termination statement and the related financing statement.
In cases where the debtor claims to be entitled to file a termination statement, this additional information should provoke further inquiry by a prudent searcher. Unless circumstances suggest a contrary course, a prudent searcher will, in all events, likely investigate all filed financing statements, even those whose effectiveness appears to be terminated by a filed termination statement.
Unfortunately, there will always be debtors who commit fraud. Under former Article 9, the opportunity existed for a debtor to forge a termination statement and remove the related financing statement from the system. While there is still opportunity for fraud with debtor-filed termination statements, Revised Article 9 protects lenders whose financing statements are terminated by a debtor without authorization, and the new open drawer filing system will allow subsequent lenders conducting a lien search to protect themselves from fraud.
Title searchers thus may receive false information from improper filings, and the burden will fall upon the searcher to inquire further to validate or invalidate filings of interest to that searcher. But the searcher will be in a better position to make these judgments on the basis of further inquiry, in the context of more complete information, rather than having the filing officer make random and ad hoc decisions about the validity of filings.
A filing is effective only if the person filing it is entitled to do so. As a result, an improper termination statement would simply be filed, for view along with all other filings, and would not result in deletion of the terminated financing statement as under former Article 9.
15. Assignments
An initial financing statement may reflect an assignment of all of the secured party’s power to authorize an amendment, by providing the name and mailing address of the assignee as the name and address of the secured party. A secured party of record may assign all or part of its power to authorize an amendment to a financing statement by filing in the filing office an amendment of the financing statement which: (1) identifies, by its file number, the initial financing statement to which it relates; (2) provides the name of the assignor; and (3) provides the name and mailing address of the assignee.
No filing of an assignment is required as a condition of continuing the perfected status of the security interest against creditors and transferees of the original debtor. However, if an assignment is not filed, the assignor remains the secured party of record, with power to authorize the filing of effective amendments.
An assignment is used to assign a financing statement from one secured party to another. An assignment is often used when a borrower changes or moves a banking relationship from one bank to another or when a dealer originates a loan and assigns it to another funding source (chattel paper). An assignment must include the file number and date of filing of the UCC-1, state the name and address of the assignee and contain a description of collateral being assigned.
16. Information Statements - (UCC 9-518)
Under current Article 9, a debtor may file a correction statement to express the belief that a UCC filing statement is inaccurate or unauthorized. The filing of a correction statement, however, does not affect the effectiveness of the filing of the financing statement or amendment. The correction statement must provide the basis for the debtor’s belief that the public record should be corrected.
The revisions to UCC Article 9 add new provisions (UCC Section 9-518) that give an aggrieved secured party of record the same right, in the form of an information statement. These amendments address situations in which a third party may file a termination statement without being authorized to do so. Termination statements may be filed fraudulently by a debtor, or pursuant to error by a competing secured creditor who mistakenly believes that the other creditor has been paid off or transposes the filing number on the original financing statement.
A secured party is not required to file an information statement to dispute the record, but it may do so to provide public notice that it disputes the effectiveness of the termination statement. In this respect, the general rule is that “if the person filing the record was not entitled to do so, the filed record is ineffective, regardless of whether the secured party of record files an information statement. Likewise, if the person filing the record was entitled to do so, the filed record is effective, even if the secured party of record files an information statement. Searchers bear the burden of determining whether a filed initial financing statement is authorized.”
D. Perfection by Pledge – Taking Possession
A lender’s possession of certain types of collateral is a method for perfecting a security interest. Perfection by possession is permitted when taking a security interest in certificated securities, negotiable documents, goods, instruments, money, and tangible chattel paper. Revised Article 9 creates new rules governing when a secured party has “possession” of collateral held by a non-agent third party. Under these rules, a secured party obtains possession of collateral held by a third party by obtaining an authenticated record from the third party acknowledging that the third party holds - or will hold - the property for the benefit of the secured party. Under former Article 9, simple notice to the third party was sufficient.
E. Temporary Perfection
In the case of instruments, certificated securities or negotiable documents where there has been no perfection by filing or taking of possession, perfection exists for 20 days after attachment, so long as new value is given under an authenticated security agreement. If the bank has a security interest arising by virtue of possession of instruments, negotiable documents or goods which are in the possession of a bailee, and if the bank makes them temporarily available to the debtor for purposes of sale or exchange, perfection will continue for 20 days. After 20 days, the bank may re-perfect by filing or taking possession.
F. Automatic Perfection
Automatic perfection occurs in the case of Purchase Money Security Interests (PMSIs) in consumer goods. See, below. Automatic perfection also occurs for a security interest under Articles 2, 2a, or 4, and a security interest in financial assets, commodities contracts and investment property in favor of parties and intermediaries.
Revised Article 9 expands the list of automatically-perfected security interests to include: (1) the sale of payment intangibles and promissory notes; (2) the security assignment of accounts or payment intangibles that do not amount to a significant part of the accounts or payment intangibles or the assignor; (3) the assignment of health-care-insurance receivables to the health care provider; and (4) a security interest of the issuer of a letter of credit in documents presented pursuant to a draw.
A security interest is automatically attached to, and perfected in, proceeds of the original collateral as a result of an attachment and perfection in the original collateral. This grace period is limited to 20 days for most non-cash proceeds. Thereafter, the secured party must perfect in such non-cash proceeds.
G. Purchase Money Security Interests
Purchase money security interests (PMSI) create a major exception to the first-to-file rule. In order to defeat the “first-to-file or perfect” rule, the secured party must (1) obtain a subordination agreement; or (2) obtain a purchase-money security interest.
A secured party may only obtain a PMSI in goods and not in intangible collateral, other than software. The PMSI is permitted in software if the debtor acquired its interest in the software: (1) for the principle purpose of running the software on hardware in which the secured party also has a PMSI; or (2) in an integrated transaction with the acquisition of the related hardware.
1. PMSI in Inventory
Revised Article 9 provides a means by which a purchase-money security interest in inventory can achieve priority over an earlier-filed security interest in the same collateral. To achieve priority: (1) the PMSI must be perfected when the debtor receives possession of the inventory; (2) the purchase money secured party must send an authenticated notification to every holder of a conflicting security interest; (3) the holders of the conflicting security interests must receive the notification within five years before the debtor receives possession of the inventory; and (4) the notification must state that the person sending the notification has or expects to acquire a PMSI in inventory of the debtor and describe the inventory.
2. PMSI in Livestock
A perfected PMSI in livestock that are farm products has priority over a conflicting security interest in the same livestock if: (a) the purchase-money security interest is perfected when the debtor receives possession of the livestock; (b) the purchase-money secured party sends an authenticated notification to every holder of a conflicting security interest; (c) the holder of the conflicting security interest receives the notification within six months before the debtor receives possession of the livestock; and (d) the notification states that the person sending the notification has or expects to acquire a PMSI in livestock of the debtor and describes the livestock. For purposes of these provisions, possession means (a) possession by the debtor or (b) possession by a third party on behalf of or at the direction of the debtor, including , but not limited to, possession by a bailee or an agent of the debtor. A PMSI in livestock: (a) extends to all proceeds of the livestock including accounts; and (b) carries over to certain products of livestock, not just the proceeds.
3. PMSI in Goods Other Than Inventory and Livestock
A purchase money security interest in goods other than inventory and livestock has priority over a conflicting security interest in the same goods if it is perfected when the debtor receives possession of the collateral or within twenty days thereafter. The PMSI qualifies for priority even if the purchase money secured party knows that a conflicting security interest has been created and/or that the holder of the conflicting interest has filed a financing statement covering the collateral.
4. Dual Status Rule
A security interest in collateral may be both a PMSI and a non-PMSI, often referred to as the “dual status rule.” The revisions to Article 9 reject the transformation rule under which a PMSI could be transformed into a non-PMSI where a transaction is refinanced or where cross-collateralization has occurred. As a result, a PMSI will not lose its status even if: (1) the purchase money collateral also secures an obligation that is not a purchase-money obligation; or (2) collateral that is not purchase-money collateral also secures the purchase-money obligation.
5. Priority of Competing PMSI
The PMSI for the purchase price will have priority over an enabling loan and multiple enabling loans will rank in order of filing. A PMSI in inventory will extend not only to cash proceeds received upon delivery of the inventory to a buyer, but also to chattel paper and instruments generated by the sale of inventory. A secured party that holds a possessory PMSI in inventory that has not been delivered to the debtor need not give notice to earlier filers in order to achieve priority.
6. Application of Payments on PMSI
If the extent to which a security interest in a PMSI depends on the application of payments to a particular obligation, the payment must be applied in accordance with any reasonable method of application to which the parties agree. In the absence of agreement, the payments are applied to obligations that are not secured; if more than one obligation is secured, they are applied to obligations secured by purchase-money interests in the order in which those obligations were incurred.
H. Perfection by Control
Revised Article 9 substantially broadens the types of collateral that can be perfected by control. Perfection by control is mandatory for deposit accounts and letter-of-credit rights. Control is a permissive means of perfecting against electronic chattel paper and investment property (i.e., perfection in these types of collateral may be obtained by filing, but is inferior to perfection by control). Control generally requires that a person with custody of collateral agrees to follow the instructions of a secured party without any further consent by the debtor. Until the secured party gives its instruction, however, the debtor may continue to use the property in accordance with other applicable agreements or provisions of law.
Collateral
Filing
Possession
Other
Authority
Accounts A. Accounts which are not a significant part of outstanding accounts or payment intangibles
B. Health-care-insurance receivables assigned to the provider of health care goods or services
C. Other accounts
X
Automatic
9-309(2)
9-309(5)
9-310(a)
Agricultural Liens
Chattel Paper
A. Tangible B. Electronic
X X
Control
9-312(a) 9-313(a)
9-312(a) 9-314(a)
Commercial Tort Claims
9-310
Consumer Goods
A. Purchase Money Interests and assets not subject to certificate of title laws, federal law or treaties
B. Assets subject to certificate of title laws
C. Assets subject to federal law or treaties
D. Other interests in consumer goods
In cases covered by § 9-313(b) and 9-316(d)
Compliance with applicable law or treaty
Compliance with certificate of title requirements;
9-309(1)
9-311(b) 9-316(d)
9-311(b)
9-310(a) 9-313(a)
Deposit Accounts
9-312(b) 9-314(a)
Documents
A. Negotiable
B. Non-Negotiable (Goods in possession of bailee)
issuance of document in name of secured party; bailee's receipt of notification; or filing as to goods
9-312(d)
Equipment
x
9-313(a)
Farm Products
Fixtures
x (fixture filings is real estate records)
9-334
9-502
General Tangibles
A. Sales of payment intangibles
B. Payment intangible which is not a significant part of payment intangibles
C. Other general intangibles
automatic
9-309(3)
Instruments
9-312(a)
Inventory
Investment Property:
A. Interest in investment property created by debtor other than broker or intermediary
B. Interests in investment property created by broker or intermediary
x (if certificated)
control
9-314
9-309(10)
Letters of Credit
9310
9-312
Money
9-312(b)(3)
9-313
Motor Vehicles
x (only if debtor is dealer
only if debtor retitles in new state
notation on title
I. Priorities on Default
Priorities establish the position that the secured party has in relation to other lenders. Secured creditors who seek to take possession of collateral can find themselves competing for the property with other parties, such as the defaulting debtor, other secured creditors, unsecured creditors, bankruptcy trustees, and purchasers of the collateral.
1. The Debtor
Attachment alone is all the lender needs to enforce the security interest against a debtor.
2. Other Secured Creditors
Attachment alone does not protect the lender who is competing with another secured creditor for the same collateral. A secured lender must perfect the security interest to have priority over another secured lender. Only one perfected lender (the one with priority) will have the right of foreclosure over other creditors.
Many factors influence the priority of claims to collateral. Generally, the secured lender who first perfected its security interest has priority in the collateral, even if another party was first to obtain a signed security agreement and disburse funds. This is known as the first-to-file rule. In some circumstances, a purchase money security interest on property other than inventory will have a priority over a conflicting security interest in the same collateral.
3. Unsecured Creditors
An unsecured creditor is one who loans money or extends credit to a borrower without obtaining an interest in any property as security for payment. A secured lender with a defaulting borrower generally does not need to worry about competing with unsecured creditors for collateral.
4. Purchasers of Collateral
The UCC permits a person to purchase goods free from claims of third parties (including secured creditors), as long as the purchase is made from a person in the business of selling such goods (1) in good faith and (2) without knowledge that the sale violates any third party’s ownership rights or security interest in the goods. A buyer who buys in this manner is considered a buyer in the ordinary course of business, meaning that he or she purchases goods free and clear from the claims of third parties. Customers who buy products at a store generally meet the criteria for being buyers in the ordinary course of business.
5. Bankruptcy Trustees
A bankruptcy trustee may challenge the secured creditor’s interest and try to keep as much collateral as possible for the bankruptcy estate. Bankruptcy trustees are considered hypothetical lien creditors and have the ability to set-aside as preferences some transfers of property made by the debtor. A bankruptcy trustee has power to set aside preferential property transfers that the debtor has made to any creditors.
III. DEFAULT AND ENFORCEMENT
Part 6 of Revised Article 9 of the Uniform Commercial Code (UCC) deals with default, enforcement of security interests, and remedies for secured party noncompliance during foreclosure. Most of the litigation under former Article 9 arose in connection with the enforcement of security interests. Revised Article 9 resolves many of the disputes that have arisen in prior litigation.
The primary enforcement options available to a secured party under Revised Article 9 continue to be: (1) direct collection of receivables; (2) public or private foreclosure sales; and (3) strict foreclosure. Part 6 of Revised Article 9 significantly enhances the remedies of collection and strict foreclosure and provides much needed procedural certainty to nonjudicial foreclosures.
B. Nonjudicial Foreclosure
1. Repossession After Default
As allowed under former Article 9, tangible collateral may be repossessed by creditor “self-help” as long as there is no “breach of the peace.” Revised Article 9 makes it clear that a secured party may not delegate away its duty to repossess collateral without a “breach of the peace” by having independent contractors repossess property on its behalf.
2. Preparation of Collateral for Sale
The oft-litigated issue of whether a secured party has an affirmative duty to prepare collateral for sale is addressed by Revised Article 9. A secured party does not have the right to dispose of collateral “in its then condition” under all circumstances. A secured party may not dispose of collateral “in its then condition” when, taking into account the costs and probable benefits of preparation or processing and the fact that the secured party would be advancing the costs at its risk, it would be commercially unreasonable to dispose of the collateral in that condition. Accordingly, even though the secured party is not always under a duty to incur the expense of preparing collateral for sale, there may be factual circumstances where the failure to do so would be commercially unreasonable.
3. Commercial Reasonableness
A secured party that conducts a foreclosure sale is required to conduct every aspect of a disposition of collateral, including the method, manner, time, place and other terms, in a commercially reasonable fashion.
4. Warranties
Revised Article 9 provides that the contract for sale on foreclosure includes the warranties that relate to title, possession, quiet enjoyment, and the like which by operation of law accompany a voluntary disposition of property of the kind subject to the contract. These warranties may be expressly disclaimed by language indicating that “There is no warranty related to title, possession, quiet enjoyment, or the like in this disposition” or words of similar import.
5. “Low Price” Sale or Disposition
Under former Article 9 it was unclear whether the reference to “terms” in the requirement for commercial reasonableness included the “price” realized at a foreclosure sale, particularly where the debtor asserted that the price was too low.
Under Revised Article 9, the fact that a greater amount could have been obtained by a collection, enforcement, disposition, or acceptance at a different time or in a different method from that selected by the secured party is not of itself sufficient to preclude the secured party from establishing that the collection, enforcement, disposition, or acceptance was made in a commercially reasonable manner. While a “low price” is not itself an aspect of “commercial reasonableness,” it may be relevant to the determination of whether the statutory aspects of “commercial reasonableness” have been met. A “low price” does suggest that a court will scrutinize carefully all aspects of the disposition to ensure that each aspect was commercially reasonable.
Revised Article 9 provides a special method for calculating a deficiency in connection with sales which may be most susceptible to abuse – when the secured party, a person related to the secured party or a secondary obligor acquires collateral at a collateral disposition. In such sales, if the proceeds are significantly below what would have been obtained had the sale been made to a third party, the deficiency is not calculated on the basis of what was actually received, but on what would have been received if the sale had been made to an independent third party. The debtor has the burden of establishing that the foreclosure sale price “is significantly below the range of prices that a complying disposition to a person other than the secured party, a person related to the secured party, or a secondary obligor would have brought” (i.e., what an independent third party would have bid at a commercially reasonable sale).
6. Explanation of Calculation of Surplus or Deficiency
a. Explanation A new protection under Revised Article 9 is granted to debtors and obligors in “consumer-goods transactions” in which the debtor is entitled to a surplus or a consumer obligor is liable for any deficiency. The secured party is required to send the debtor and any consumer obligor an explanation of how the secured party calculated the surplus or deficiency. “Explanation” means a writing that:
(1) States the amount of the surplus or deficiency;
(2) Provides an explanation of how the secured party calculated the surplus or deficiency;
(3) States, if applicable, that future debits, credits, charges, including additional credit service charges or interest rebates, and expenses may affect the amount of this surplus or deficiency; and
(4) Provides a telephone number or mailing address from which additional information concerning the transaction is available.
To comply with the requirement to provide an explanation of how the secured party calculated the surplus or deficiency, the explanation must provide the following information in the following order:
(1) The aggregate amount of obligations secured by the security interest under which the disposition was made and, if the amount reflects a rebate of unearned interest or credit service charge, an indication of that fact, calculated as of a specified date:
(a) If the secured party takes or receives possession of the collateral after default, not more than 35 days before the secured party takes or receives possession; or
(b) If the secured party takes or receives possession of the collateral before default or does not take possession of the collateral, not more than 35 days before the disposition.
(2) The amount of proceeds of the disposition;
(3) The aggregate amount of the obligations after deducting the amount of proceeds;
(4) The amount, in the aggregate or by type, and types of expenses, including expenses of retaking, holding, preparing for disposition, processing, and disposing of the collateral, and attorney’s fees secured by the collateral which are known to the secured party and relate to the current disposition;
(5) The amount, in the aggregate or by type, and types of credits, including rebates of interest or credit service charges, to which the obligor is known to be entitled and which are not reflected in the amount in paragraph (1); and
(6) The amount of the surplus or deficiency.
An explanation complying substantially with the statutory requirements is sufficient, even if it contains minor errors that are not seriously misleading.
b. Timing of Explanation In a consumer-goods transaction, the secured party must send the explanation either (a) before or when the secured party accounts to the debtor and pays any surplus or first makes written demand on the consumer obligor after the disposition for payment of the deficiency or (b) within 14 days of receiving a request for an explanation. This means that a consumer debtor or secondary obligor, by making a specific request, can receive an explanation of how a deficiency is calculated without having to wait until the secured party commences written collection efforts. If, however, the secured party does not receive such a request and makes no attempt to collect a deficiency in writing or account for and pay a surplus, it has no obligation to send an explanation.
C. Notice of Sale After Repossession
1. Important Terms
Since the procedural requirements of Part 6 of Revised Article 9 differentiate between commercial transactions and consumer-goods transactions, a working knowledge of the definitions of the following terms is important in ensuring that you comply with the Default and Enforcement provisions of Revised Article 9:
a. debtor The person who owns the collateral (grantor of the security interest).
b. Obligor Person who owes the payment obligation.
c. Secondary Obligor Person who stands as guarantor or other surety with the right of recourse.
d. Consumer Goods Goods used or bought for use primarily for personal, family or household purposes.
e. Consumer Goods Transaction A transaction in which: (a) an individual incurs an obligation primarily for personal, family or household purposes; and (b) a security interest in consumer goods secures the obligation.
f. Consumer Transaction A transaction in which: (a) an individual incurs an obligation primarily for personal, family or household purposes; (b) a security interest secures the obligation; and (c) the collateral is held or acquired primarily for personal, family or household purposes.
2. Who is Entitled to Notice
A secured party is required to send an “authenticated notification of disposition” to the debtor and any secondary obligor. Notice is not required to be given to an “obligor” if it is neither a “debtor” nor a “secondary obligor.” Notice must also be given to (a) any other person from whom the secured party has received, before the notification date, an “authenticated notification of the claim of an interest in the collateral”; and (b) all secured parties (i.e., senior as well as junior) who at least 10 days before the notification date, have perfected their security interest by filing a financing statement or by complying with any applicable law (this places a new search and notification requirement on the foreclosing secured party). “Notification date” means the earlier of the date on which (a) a secured party sends to the debtor and any secondary obligor an authenticated notification of disposition; or (b) the debtor and any secondary obligor waive the right to notification.
The notification burden on the secured party is minimized by a “safe-harbor” provision under Revised Article 9, which provides that if “not later than 20 days or earlier than 30 days before the notification date,” the secured party requests in a commercially reasonable manner a search of UCC financing statements from the correct filing office and either receives; (a) no response; or (b) a response containing information about other secured parties, but not all other secured parties because the search is not current/complete. If the foreclosing secured party sends notices to all parties reflected on the search report, it has satisfied the notification requirements. (i.e., a secured party not revealed by the search report may have its security interest discharged by the foreclosure, but has no remedy against the foreclosing secured party even though no notification was sent.)
3. Contents of Notification
a. Commercial Transactions In a non-consumer-goods transaction, the notification must:
(1) Describe the debtor and the secured party;
(2) Describe the collateral that is the subject of the intended disposition;
(3) State the method of intended disposition;
(4) State that the debtor is entitled to an accounting of the unpaid indebtedness and state the charge, if any, for an accounting; and
(5) State the time and place of a public sale or the time after which any other disposition is to be made.
Whether a notification lacking any of the information described above is sufficient is a question of fact. If the contents of the notification provide substantially the information described above, the notification is sufficient even if it includes; (a) information not specified; or (b) minor errors that are not seriously misleading.
A statutory “safe-harbor” form of notification for commercial transactions is found following this article and is labeled as “Exhibit A”.
b. Consumer-Goods Transactions The notification for a consumer-goods transaction must, in addition to all of the information required in a commercial transaction as set forth above, contain the following:
(1) A description of any liability for a deficiency of the person to which the notification is sent;
(2) A telephone number from which the amount that must be paid to the secured party to redeem the collateral is available;
(3) A telephone number or mailing address from which additional information concerning the disposition and the obligation secured is available.
The requirements for a consumer-goods transaction are more stringent than those for a commercial transaction. While there is an exception for errors, it only applies to errors in additional non-mandatory information in the notification and only if the error is not misleading. In addition, any extra information beyond the mandatory contents of a consumer-goods transaction notification must appear at the end of the form for the notification to be “sufficient.”
A statutory “safe-harbor” form of notification for consumer-goods transactions is found following this article and is labeled as “Exhibit B”.
4. Timing of Notice – “10-Day Rule”
Revised Article 9 requires the secured party to send a “reasonable authenticated notification.” One aspect of a reasonable notification is its timeliness. This generally means that the notification must be sent at a reasonable time in advance of the date (a) of a public disposition or (b) after which a private disposition is to be made. A notification that is sent so near to the disposition date that a notified person could not be expected to act on or take account of the notification would be unreasonable. A “safe harbor” notification provision is contained in Part 6 of Revised Article 9 and provides that notice sent after default and 10 days or more before the earliest time of disposition sent forth in the notification is sufficient to satisfy the “timeliness” aspect of a commercially reasonable notice.
D. Strict Foreclosure
1. Partial or Full Satisfaction
“Strict foreclosure” is yet another method by which a secured party may realize on its collateral. Revised Article 9 expands the provisions regarding strict foreclosure that should result in more extensive use of strict foreclosure than under former Article 9. Former Article 9 only permitted acceptance of collateral in full satisfaction of the debtor’s obligation. Revised Article 9 permits the parties to enter into an agreement for the voluntary relinquishment of the collateral by the debtor (to the secured party) in return for an agreed-upon credit against the outstanding debt, with the debtor acknowledging its liability for the remaining deficiency. Revised Article 9 thus allows for acceptance of collateral both as partial satisfaction and full satisfaction of the indebtedness, except the acceptance of collateral in partial satisfaction is not permitted in a consumer-transaction.
There are specific procedural requirements relating to the acceptance of collateral as partial or full satisfaction with which the secured party must comply. First, the debtor must always consent to the acceptance. The debtor’s consent to a full or partial satisfaction of the obligation can always be evidenced by acceptance of the terms in a record authenticated after default (this is the only method of consent for partial satisfaction). Second, the secured party is required to send notice of the proposal to accept collateral in full or partial satisfaction to (a) any person from which the secured party has received, before the debtor consented to the acceptance, an authenticated notification of a claim of an interest in the collateral; (b) any other secured party or lien holder (including the senior secured party) that, 10 days before the debtor consented to the acceptance, held a security interest in or other lien on the collateral perfected by the filing of the financing statement or perfected by complying with the requirements of other applicable law such as a certificate of title law; and (c) any secondary obligor, if the proposal is to accept collateral in partial satisfaction of the obligation. If the secured party does not receive a notification of objection from any of these parties within 20 days of sending the proposal, the secured party may proceed with the acceptance. A timely objection (one received by the secured party within 20 days after notification of the proposal was sent) prevents an acceptance of collateral from taking effect, necessitating that the secured party resort to either collection or nonjudicial foreclosure as the means of enforcement. An additional method of consent permitted for full satisfaction may result from inaction by the debtor. If a secured party sends the debtor a proposal for acceptance of the collateral in full satisfaction after default and does not receive a notification of objection authenticated by the debtor within 20 days after the proposal is sent, the debtor’s failure to object constitutes consent.
2. Constructive Strict Foreclosure
A line of cases under former Article 9 held that a “constructive” strict foreclosure could occur because of the secured party’s delay or inaction in disposing of collateral after repossession. Revised Article 9 rejects the notion of “constructive” strict foreclosure by providing that there cannot be an effective acceptance of the collateral without consent by the secured party. However, delay in disposing of collateral is a factor relating to whether the secured party acted in a commercially reasonable manner in exercising its remedies under the collection or nonjudicial provisions of Article 9.
E. Rebuttable Presumption Rule
Revised Article 9 resolves an issue which had been treated in a variety of ways by court’s concerning the effect of noncompliance with requirements for collection, enforcement, disposition, or acceptance of collateral. The resolution adopted by Revised Article 9, commonly referred to as the “rebuttable presumption” rule, impacts the ability of a noncomplying secured party to enforce a deficiency claim.
Under the “rebuttable presumption” rule, if the debtor or secondary obligor places the secured party’s compliance with the provisions of Part 6 in issue, the secured party has the burden of establishing that the collection, enforcement, disposition, or acceptance was conducted in compliance with Part 6.
If challenged, the amount that a complying collection, enforcement or disposition would have yielded is deemed to be equal to the amount of the secured obligation, together with expenses and attorney’s fees. Unless the secured party proves that compliance with the relevant provisions would have yielded a smaller amount, the secured party may not recover any deficiency.
EXHIBIT A
COMMERCIAL TRANSACTIONS “SAFE-HARBOR” NOTIFICATION FORM
In a non-consumer goods transaction, the following notification provides sufficient information:
NOTIFICATION OF DISPOSITION OF COLLATERAL
To: (Name of debtor, obligor, or other person to which the notification is sent)
From: (Name, address, and telephone number of secured party)
Name of Debtor(s): (Include only if debtor(s) are not an addressee)
(For a public disposition:)
We will sell (or lease or license, as applicable) the (describe collateral) (to the highest qualified bidder) in public as follows:
Day and Date:
Time:
Place:
(For a private disposition:)
We will sell (or lease or license, as applicable) the (describe collateral) privately sometime after (day and date).
You are entitled to an accounting of the unpaid indebtedness secured by the property that we intend to sell (or lease or license, as applicable) (for a charge of $ ). You may request an accounting by calling us at (telephone number).
NOTE: Please note that the form set forth above has an option for a public or private disposition. You must choose one of these alternatives, but cannot select both.
EXHIBIT B
CONSUMER-GOODS TRANSACTIONS “SAFE-HARBOR” NOTIFICATION FORM
In a consumer goods transaction, the following notification provides sufficient information:
(Name and address of secured party) (Date)
NOTICE OF OUR PLAN TO SELL PROPERTY
(Name and address of any obligor who is also a debtor) Subject: (Identification of Transaction) We have your (describe collateral), because you broke promises in our agreement.
We will sell (describe collateral) at public sale. A sale could include a lease or license. The sale will be held as follows:
Date:
Place: You may attend the sale and bring bidders if you want.
(For a private disposition:) We will sell (describe collateral) at private sale sometime after (date). A sale could include a lease or license.
The money that we get from the sale (after paying our costs) will reduce the amount you owe. If we get less money than you owe, you (will or will not, as applicable) still owe us the difference. If we get more money than you owe, you will get the extra money, unless we must pay it to someone else.
You can get the property back at any time before we sell it by paying us the full amount you owe (not just the past due payments), including our expenses. To learn the exact amount you must pay, call us at (telephone number).
If you want us to explain to you in writing how we have figured the amount that you owe us, you may call us at (telephone number) (or write us at (secured party’s address)) and request a written explanation. (We will charge you $ for the explanation if we sent you another written explanation of the amount you owe us within the last six months.)
If you need more information about the sale call us at (telephone number) (or write us at (secured party’s address)).
We are sending this notice to the following other people who have an interest in (describe collateral) or who owe money under your agreement:
(Names of all other debtors and obligors, if any)
IV. 2010 UCC ARTICLE 9 REVISIONS UPDATE
The Nebraska Legislature enacted LB 90 during the 2011 legislative session which adopts revisions to the Uniform Commercial Code (UCC) Article 9, approved and recommended for adoption by a Joint Review Committee of the Uniform Law Commissioners and the American Law Institute. The Legislature subsequently adopted LB 1031 which made additional clarifications to the provisions of UCC Article 9 regarding the manner in which a debtor’s name is to be determined. Located after VI, subection G, no. 10 are procedures or steps that should be considered in ensuring perfection/priority for individual debtor UCC filings. The key changes to UCC Article 9 contained within LB 90 and LB 1031, are as follows:
B. Amendments to Definitions
1. “Authenticate.” The definition of “authenticate” is clarified to achieve consistency with the provisions of the UCC, the Uniform Electronic Transactions Act (UETA) and the Federal Electronic Signatures in Global and National Commerce law. (UCC Section 9-102(a)(7))
2. “Certificate of Title.” The definition of “certificate of title” is broadened to accommodate electronic lien notation systems and to make it clear that a security interest in a titled vehicle is perfected upon delivery of the application and fee. (UCC 9-102(a)(10))
3. “Public Organic Record.” A new definition of “public organic record” is added to clarify which public record is relevant to determine the name of a debtor that is a “registered organization,” which is important for filing purposes. (UCC Section 9-102(a)(68))
4. “Registered Organization.” The term “registered organization” is amended to clarify that the term includes organizations (1) formed or organized, (2) by (a) the filing or issuance of a public organic record, or (b) by legislative enactment, even if such organizations are created without the need for public organic record. The term would also include “business trusts.” (UCC Section 9-102(a)(71))
C. Control of Electronic Chattel Paper (UCC 9-105)
UCC Section 9-105 was revised to establish a general rule for determining control of electronic chattel paper. These provisions should facilitate financing of electronic chattel paper – a growing type of secured transaction. (Electronic chattel paper is chattel paper evidenced by a record or records consisting of information stored in electronic medium.)
D. Expand Rights of the Secured Parties Based on Post-Filing Changes (UCC 9-316)
The rights of secured parties when a debtor (individual or organization) moves to a new jurisdiction under UCC Article 9-316(h) currently provides that perfection by filing continues for a period of four months after the jurisdiction in which the debtor is located changes. However, the temporary period of perfection applies only with respect to collateral owned by the debtor at the time of the change in location. Even if the security interest attached is to after-acquired collateral, there is currently no perfection with respect to such new collateral unless and until the secured party perfects pursuant to the law of the new jurisdiction. The addition of a new subsection (h) to UCC 9-316 revises this rule by giving the filer perfection for a period of four months in collateral acquired after moving to a new jurisdiction. A similar change is made under UCC 9-316(i) with respect to a new debtor that is a successor by merger. The new rule provides for temporary perfection in collateral owned by the successor before the merger or collateral acquired by the successor within four months after the merger.
E. Name of Debtor (UCC 9-503)
Revisions to UCC 9-503 make significant changes to the manner in which the debtor’s name is to be determined.
1. Registered Organizations - The amendments clarify that the name of a registered organization is that which is reflected on the “public organic record” most recently filed with or issued by or enacted by the registered organization’s jurisdiction of organization which purports to state, amend, or restate the registered organization’s name. (UCC Section 9-503(a)(1))
2. Decedents and Their Estates - The name of the debtor, if the collateral is being administered by the personal representative of a decedent, is sufficient only if the financing statement provides, as the name of the debtor the name of the decedent and, in a separate part of the financing statement, indicates that the collateral is being administered by a personal representative. (UCC Section 9-503(a)(2))
3. Collateral Held in Trust - The name of the debtor, if the collateral is held in a trust that is not a registered organization, is sufficient only if the financing statement provides, as the name of the debtor, (1) if the organic record of the trust specifies a name for the trust, the name specified; or (2) if the organic record of the trust does not specify a name for the trust, the name of the settlor or testator; and in a separate part of the financing statement, if the name of the trust is utilized, indicates that the collateral is held in a trust or if the name provided is the name of the settlor or testator, provides additional information sufficient to distinguish the trust from other trusts having one or more of the same settlors or the same testator and indicates that the collateral is held in a trust. (UCC Section 9-503(a)(3))
4. Individual’s Debtors Name - “Only If” Approach- Under current law, a lender perfecting a security interest against an individual debtor must use the “correct” name of the debtor. Failure to do so, renders the financing statement “seriously misleading” and thus ineffective, unless a search under the “correct” debtor’s name utilizing the primary search logic of the Secretary of State happens to uncover the financing statement. UCC 9-503(4) provides that a creditor’s security interest, in cases involving an individual debtor, is perfected “only if” the financing statement reflects the debtor’s name as it appears on his or her current driver’s license or state identification card. Under the “only if” approach, if the debtor is an individual to whom the state has issued an unexpired driver’s license or state identification card, a financing statement sufficiently provides the name of the debtor only if it provides the name of the individual as shown on the license or state identification card. If the debtor does not hold an unexpired driver’s license or state identification card issued by the state of his or her principal residence, the financing statement is sufficient if (1) it provides the “individual name” of the debtor (i.e., the standard under current law), or (2) the debtor’s surname and the first personal name. (UCC Section 9-503(a)(4))
F. Information Statements - (UCC 9-518)
The revisions to UCC Article 9 add new provisions (UCC Section 9-518) that give an aggrieved secured party of record the same right. These amendments address situations in which a third party may file a termination statement without being authorized to do so. Termination statements may be filed fraudulently by a debtor, or pursuant to error by a competing secured creditor who mistakenly believes that the other creditor has been paid off or transposes the filing number on the original financing statement.
G. Transition Rules (UCC Sections 9-801 - UCC 9-809)
1. Background
The major issues addressed by the “transition rules” arise from (1) changes in the location of filing for some organizations and (2) changes concerning the name of the debtor that must be used in a financing statement to perfect a security interest.
Because certain debtor entities that are not currently classified as “registered organizations” will be classified as that within this category by the revised definition of “registered organization,” the place of filing could be changed from the state where the organization’s chief executive office is located (the current rule for nonregistered organizations), to the state where the entity was organized (the rule for registered organizations). Pursuant to the transition rules, the secured creditor under these circumstances would have five years from the effective date of the Act (July 1, 2013) to change the place of filing. With respect to the new rules regarding the name of individual debtors, a financing statement perfected under the name of an individual prior to the effective date of the Act that is different from the name on his or her unexpired driver’s license or state identification card (under the “only-if” rule), would require an amendment to be made, reflecting the debtor’s name as it appears on his or her driver’s license or state identification card, prior to the time that the financing statement would otherwise lapse or on or before June 30, 2018, whichever is earlier.
Mirroring current law, the transition rules contemplate the use of in-lieu financing statements to be filed when a place of filing changes because of the expanded definition of “registered organization.”
2. Effective Date (UCC 9-801)
Revised Article 9 took effect on July 1, 2013.
3. Savings Clause (UCC 9-802)
a. Pre-Effective-Date Transactions or Liens (UCC 9-802)
(a) Revised Article 9 applies to a transaction or lien within its scope, even if the transaction or lien was entered into or created before the effective date of the revision.
b. Judicial Proceeding Commenced Before July 1, 2013
The provisions of Revised Article 9 do not affect an action, case, or proceeding commenced before the effective date of the revision.
4. Security Interest Perfected Prior to July 1, 2013 (UCC 9-803)
a. Continuing Perfection – Perfection Requirements Satisfied
A security interest which was perfected under former Article 9 remains perfected (i.e. no further action required) if the acts that operated to perfect the security interest under former Article 9 would also perfect the security interest under Revised Article 9.
b. Continuing Perfection - Perfection Requirements Not Satisfied
Except as otherwise provided in Section 9-805, (relating to perfection by filing) a security interest which was perfected under former Article 9 maintains its perfected status for only one year after July 1, 2013, if the requirements for perfection under Revised Article 9 are not satisfied on the effective date of the revision.
5. Security Interest Unperfected Before July 1, 2013 (UCC 9-804)
A security interest that is unperfected on the effective date of the revision becomes perfected under Revised Article 9: (a) when Revised Article 9 took effect (July 1, 2013), if the secured party took appropriate steps to perfect under Revised Article 9 before July 1, 2013; or (b) when the secured party takes appropriate steps under Revised Article 9, if the secured party takes those steps after the effective date of the revisions.
6. Effectiveness of Action Taken Before July 1, 2013 (UCC 9-805)
a. Pre-Effective Date Filing – Ineffective Filings Made Effective (UCC 9-805(a))
The filing of a financing statement prior to the effective date of the revision is effective to perfect a security interest after the effective date to the extent the financing statement would be effective under Revised Article 9.
b. Pre-Effective Date – Perfection by Filing (Period of Effectiveness) (UCC 9-805(b))
A financing statement that was effective to perfect a security interest under former Article 9 remains effective until the normal lapse date (generally five years after filing of the original financing statement), if the financing statement was filed in this state, or until the earlier of: (a) the normal lapse date (generally five years after filing of the original financing statement); or (b) June 30, 2018, if the financing statement is filed in another jurisdiction.
c. Continuation Statements (UCC 9-805(c))
UCC 9-805(c) provides that a continuation statement filed after the effective date of Revised Article 9 does not continue the effectiveness of a financing statement filed under former Article 9. However, an exception to the general rule allows a timely filed continuation statement to be effective to continue a financing statement filed prior to the effective date of Revised Article 9 if Revised Article 9 prescribes the same filing office and state for filing a financing statement. Accordingly, a secured party may file a “traditional” continuation statement under Revised Article 9 to continue a financing statement filed under former Article 9 prior to July 1, 2013, if the continuation statement is filed in the same office and state where the financing statement was filed under former Article 9. Such a continuation statement must be filed during the six-month window prior to the lapse of the original financing statement.
7. Initial Financing Statement to Continue Effectiveness of Financing Statement (UCC 9-806)
a. Unless the effectiveness of the financing statement filed before July 1, 2013, under former Article 9 may be extended by the filing of a “traditional” continuation statement under UCC 9-805, the financing statement must be “continued” by the filing of an initial financing statement. The initial financing statement must be filed in the proper state under Revised Article 9 and: (a) must satisfy the requirements of Part 5 for an initial financing statement; (b) identify the pre-effective date financing statement by indicating the office in which the financing statement was filed and providing the dates of filing and file numbers, if any, of the financing statement and of the most recent continuation statement filed with respect to the financing statement; and (c) indicate that the pre-effective-date financing statement remains effective.
8. Amending or Terminating a Financing Statement Filed Under Former Article 9 (UCC 9-807)
a. A financing statement filed under former Article 9 may be terminated (but not otherwise amended) after the effective date of Revised Article 9 by a filing in the state where it was filed, even if that would not be the correct state under Revised Article 9. Once an initial financing statement has been filed as a continuation statement under UCC 9-806, the old financing statement may be terminated only by a filing in the correct state under Revised Article 9.
b. A financing statement filed under former Article 9 may also be terminated (or otherwise amended) after the effective date of Revised Article 9 by a filing in the state indicated under Revised Article 9 by: (a) filing an initial financing statement in the correct state under Revised Article 9 that meets the requirements of UCC 9-806(c); and (b) filing the amendment in the correct state under Revised Article 9.
9. Persons Entitled to File Initial Financing Statements or Continuation Statements (UCC 9-808)
A person may file an initial financing statement or continuation statement if: (a) the secured party of record authorizes the filing; and (b) the filing is necessary (i) to continue the effectiveness of the financing statement filed under former Article 9 or (ii) to perfect or continue the perfection of a security interest.
10. Effect of Transition Rules on Priority (UCC 9-809)
a. Former Article 9 governs priorities if: (a) the relative priorities were “established” before Revised Article 9 came into effect. Otherwise, new Article 9 governs priorities.
H. New UCC Revised Article 9 Forms
The Nebraska Secretary of State has announced that new UCC forms to be used in connection with implementation of UCC Revised Article 9 will be available for use starting July 1, 2013, on the Secretary of State’s website at: http://www.sos.state.ne.us/business/ucc/index.html. The previously prescribed forms will be accepted during a 30-day “grace period.” However, beginning August 1, 2013, all of the previously used forms will be rejected and will need to be resubmitted on the new forms.
Appendix A
2010 REVISED UCC ARTICLE 9
Ensuring Perfection/Priority for Individual Debtor UCC Filings
In light of the new rules regarding the determination of an individual debtor’s name under UCC Article 9, banks should consider the following steps on all loans made after July 1, 2013, and may want to consider these steps in renewing loans in advance of July 1, 2013:
Do not ignore searching for other liens such as IRS liens and make sure to search for the IRS lien under alternative names as the IRS, under current case law, is not bound by Revised Article 9 filing and individual debtor name rules.
Appendix B
2010 Revised UCC Article 9 Amendments Questions and Answers
1. Q. What if “this State” has not issued a driver’s license to the debtor?
A. Under the “only if” rule adopted by Nebraska under UCC Section 9-503(a)(4), if “this State” (the state governing perfection of the UCC filing) has issued a driver’s license to an individual debtor, the bank should file the financing statement that provides the name as reflected on the driver’s license. If no driver’s license has been issued, the bank should determine if a state identification card has been issued, and if so, the financing statement must reflect the name on the state identification card. If neither a driver’s license or state identification card has been issued, the financing statement is sufficient “only if” it provides the individual name of the debtor or the last name (surname) and first personal name of the debtor.
2. Q. What if an individual debtor has been issued both a driver’s license and state identification card by “this State”?
A. The Department of Motor Vehicles has indicated that state law does not allow an individual to maintain a valid driver’s license and state identification card at the same time. However, if the rules of another state govern perfection, a bank could encounter a situation in which an individual debtor is in possession of a driver’s license and state identification card, neither of which has expired. In such a case, if the state governing perfection has issued more than one unexpired driver’s license or identification card, the financing statement must provide the name on the document issued most recently.
The same rule (financing statement must reflect the name from the most recently issued document) would apply if a debtor had been issued multiple, unexpired driver’s licenses by the state governing perfection.
3. Q. What if an individual debtor maintains unexpired driver’s licenses issued by multiple states.
A. Banks may encounter situations in which their loan customers travel south for the winter for an extended period of time. In such cases, the “snow birds” may maintain the driver’s license issued by the state of Nebraska and obtain a driver’s license in the state in which they spend the winter months. Such a situation raises an issue regarding which state’s Article 9 provisions govern perfection of the security interest. This determination is important since the answer determines the name that must appear on a financing statement for purposes of perfection. Since perfection of a non-possessory security interest in goods is governed by the jurisdiction “in which the debtor is located,” the bank might determine that the debtor’s principal residence is Nebraska because the borrower spends the majority of his or her time in this state. As a result, the financing statement would need to be filed with the Secretary of State in Nebraska and reflect the name appearing on the unexpired Nebraska driver’s license. While an alternative filing under the law of the state in which the individual debtor spends the winter months would not be required, it may be prudent to also file in that state under the name reflected on the unexpired driver’s license issued by that state.
4. Q. What if “this State” has not issued a driver’s license or state identification card to an individual debtor, but the debtor maintains a driver’s license issued by another state?
A. The bank may encounter situations in which its borrower has recently moved from another state, but has established his or her principal residence in Nebraska. If the customer has been issued an unexpired driver’s license by the state from which he has moved but has not obtained a Nebraska’s driver’s license, the bank should disregard the fact that the borrower is in possession of an unexpired license issued by the other state.
Since Nebraska law governs perfection of the financing statement, under these circumstances, the financing statement is sufficient “only if” it provides the individual name of the debtor or the last name (surname) and first personal name of the debtor. While the driver’s license issued by the other state or additional sources of the name, such as a birth certificate, passport, military id, and/or social security card may evidence the debtor’s name, the bank must still utilize the debtors individual name or last name (surname) and first personal name on its financing statement, since no unexpired driver’s license or state identification card has been issued by the state of Nebraska.
5. Q. What if the name on the debtor’s unexpired driver’s license or state identification card is misspelled or differs from his or her “individual” name?
A. In any state in which the debtor has an unexpired driver’s license or state identification card, the fact that the borrower suggests that their individual name differs from that reflected on the document or that the name on the document is misspelled, is irrelevant. Under the “only if” rule, only the name reflected on the debtor’s unexpired driver’s license or state identification card is sufficient, even if the borrower suggests that it is not his or her correct individual name. The same result would apply (i.e., the name as it appears on the driver’s license must be utilized) in cases in which the name on the unexpired driver’s license or state identification card has been misspelled. While a secured party exercising caution might file a financing statement reflecting additional names on its financing statement reflecting the “individual name” and/or the properly spelled name, the financing statement must contain the name exactly as it appears on the unexpired driver’s license or state identification card.
6. Q. What is the effect of the use of a suffix in the debtor’s name on a driver’s license or state identification card?
A. The individual debtors name may include a suffix, such as “Jr.” or “Sr.” as part of their name. If the suffix is included on the debtor’s unexpired driver’s license or state identification card, it must be reflected in the financing statement. Both the current and draft form UCC-1 include a space to provide such a suffix. A bank may encounter a driver’s license which incurs a professional “suffix” as part of the name of the debtor, such as “MD or JD.” In such cases, again inclusion of the “suffix” is necessary for perfection of the financing statement. In any situation in which a “suffix” is part of the debtor’s name reflected on the unexpired driver’s license or state identification card, the bank may provide the debtor’s name (absent the suffix), as an “additional debtor” on the financing statement.
7. Q. How is the debtor’s last name (surname) determined?
A. Irrespective of the order in which the debtor's name appears on a driver's license or state identification card, the last name (surname) and first personal name of the debtor must be placed in the appropriate space on the financing statement. Another issue that can arise involves the use of individuals of some nationalities to include two “last names,” perhaps utilizing the maiden name of a married woman. In such a case, if the debtor maintains an unexpired driver’s license or state identification card, the name reflected on the document must appear, in its entirety, on the financing statement. If such an individual has not been issued an unexpired driver’s license or state identification card, the secured party must use the debtor’s individual surname and first personal name. In such a case, the secured party would be required to ascertain which of the “last names” is the surname and which is the debtor’s maiden name. In such a situation, precautionary filings using each last name on additional debtor filings may be warranted to provide additional protection.
8. Q. What if the number of characters contained within the debtor’s name exceeds the maximum number of characters allowed on the driver’s license?
A. Under this scenario, the complete name of the debtor will not be reflected on the driver’s license. Nonetheless, for both filing and searching purposes, the name is to be utilized exactly as it appears on the driver’s license.
9. Q. How should “searches” be conducted under the “only if” rule?
A. Having adopted the “only if” rule, which requires a financing statement to reflect the name appearing on an unexpired driver’s license or state identification card, a financing statement that provides a different name is seriously misleading unless disclosed pursuant to a search employing the standard search logic of the Secretary of State. Thus, third parties searching the record for competing filings against an individual debtor with an unexpired driver’s license or state identification card need not search under any names other than that which appears on the driver’s license or state identification card. The only exception to this rule would involve the manner in which lenders will conduct searches during the five year “transition period” during which filings made under the proper name under the pre-July 1, 2013, UCC Article 9 rules remain effective until they would otherwise lapse, or in any event, not longer than June 30, 2018. Since filings under a name other than that reflected on an unexpired driver’s license or state identification card that were made prior to July 1, 2013, may remain effective for a period of time, searches under additional debtor names may be warranted until June 30, 2018.
10. Q. What steps should a secured creditor take if the debtor’s drivers license or state identification card expires?
A. The secured party may encounter situations in which the debtor’s drivers license or state identification card expires and the debtor fails to renew the license or card. Expiration of the driver’s license or state identification card creates no problem if the name of the debtor as reflected on such document is the same as the individual name or surname and first personal name of the debtor. If so, the financing statement continues to sufficiently indicate the name of the debtor and the security interest remains perfected, until it otherwise lapses. In the event that the individual name or surname and first personal name of the debtor differs significantly from the name of the debtor appearing on the driver’s license or state identification card following its expiration, the financing statement becomes seriously misleading, rendering the security interest unperfected. UCC Section 9-507(c) provides limited protection for the security interest in such cases. The financing statement remains effective for collateral acquired by the debtor prior to and within four months of the filed financing statement becoming seriously misleading (four months from the expiration of the driver’s license or state identification card). In order to maintain continuous perfection of the security interest in collateral acquired by the debtor more than four months after the financing statement becomes seriously misleading, the financing statement must be amended by the secured party to provide the proper name of the individual debtor (individual name or surname and first personal name) within the four-month period.
11. Q. What if the debtor’s drivers license or state identification card expires or is renewed and the new license or card reflects a different name for the debtor?
A. When a driver’s license or state identification card expires or is renewed and reflects a name different than that which appeared on the previous license or card, the debtors name, is most likely to become seriously misleading. Once again, under such circumstances, the financing statement continues to be effective and the security interest remains perfected for all collateral acquired by the debtor prior to and within four months of the financing statement becoming seriously misleading. In order to perfect the security interest in collateral acquired by the debtor more than four months after the financing statement became seriously misleading, the secured party must amend the financing statement to provide the proper name of the debtor within the four month period.
12. Q. What if the debtor has his or her name changed through legal proceedings?
A. If the debtor takes legal action to have his or her name legally changed, and a secured creditor has previously perfected a financing statement utilizing the name that appears on an unexpired driver’s license or state identification card, no action is required as long as the individual debtor does not apply for a new driver’s license or state identification card and change the name reflected therein. Only if the license expires or a new license is issued reflecting a name that renders the original financing statement “seriously misleading,” would the secured party be required to take any action.
13. Q. What is the effect of marriage by an individual debtor who takes the name of her spouse?
A. If an individual debtor marries and takes the name of her spouse, and does not obtain a new driver’s license, a secured party who had perfected its security interest utilizing the name reflected on an unexpired driver’s license or state identification card need take no action. Notwithstanding the new “married” name of the individual debtor, the name on the driver’s license has not changed and remains sufficient for perfection of the bank’s security interest. However, upon obtaining a new driver’s license reflecting the married name, the name change makes the financing statement seriously misleading, and the bank’s security interest remains perfected for existing collateral and after-acquired collateral for a period of four months. Only by amending the financing statement to reflect the new name, may the secured party remain continuously perfected in collateral acquired more than four months after the financing statement becomes seriously misleading.
14. Q. What steps must a bank take if an individual debtor moves to another jurisdiction?
A. If a bank has perfected a security interest by utilizing the name of the individual debtor that appears on an unexpired driver’s license or state identification card, and the debtor moves from Nebraska to another state, the new state of “residence” will thereafter govern perfection of the Bank’s security interest, since perfection of the security interest is governed by the law of the state in which the debtor maintains his or her principal residence.
Notwithstanding the move by the individual debtor to another state, the security interest of the bank remains perfected in the new state until the earlier of four months after the change of residence or the time that perfection would have ceased under Nebraska law. Continuing perfection for the four month period is not conditional upon the filing of a financing statement in the new state of jurisdiction. The applicable grace period for perfection is a maximum of four months, but could be less than four months if perfection of the security interest in Nebraska would lapse prior to the expiration of four months after the change of residence of the debtor.
Since the move to another state will involve a filing in a new “office,” even if the debtor’s name has not changed or the manner in which the debtor’s name is determined under the new state of residence (could be different depending upon whether the new state of jurisdiction has adopted the “only if” rule or the Alternative A “safe harbor” rule) perfection of the security interest after the four-month grace period will require a filing in the new state of residence.
15. Q. Does a security interest perfected under pre-UCC Article 9 Revisions remain perfected under the 2010 UCC Article 9 amendments?
A. A financing statement filed by a secured party that sufficiently provides the individual debtor’s name under pre-amendment Article 9 rules remains affective even if the name reflected on the financing statement does not match the name appearing on an unexpired driver’s license or state identification card subsequent to July 1, 2013. Under UCC Section 9-805(b), a filed financing statement that perfected a security interest under pre-amendment Article 9 is not rendered ineffective. This means that a financing statement effective under pre-amendment Article 9 remains effective regardless of whether it satisfies the perfection requirements of amended Article 9. If the financing statement was filed prior to July 1, 2013, in the same jurisdiction that governs perfection of the security interest under amended Article 9, the effectiveness of the financing statement ceases when its effectiveness would have ceased under pre-amendment Article 9 (i.e., when the financing statement lapses). If the filed financing statement was filed prior to July 1, 2013, in a jurisdiction other than the governing jurisdiction under amended article 9, the effectiveness of the financing statement ceases at the earlier of when its effectiveness would have ceased under pre-amendment Article 9 or June 30, 2018. As a result of the continued perfection of a pre July 1, 2013, security interest, notwithstanding the fact that the name appearing on the financing statement may not match the name that appears on an unexpired driver’s license or state identification card subsequent to July 1, 2013, searchers must be diligent in utilizing all potential names of the debtor to maximize potential that a prior perfected security interest will be discovered by a diligent search.
V. UCC SEARCH RULES
The Secretary of State maintains for public inspection a searchable index for all Active Records in the UCC Information Management System. Active Records are retrievable by the name of the debtor or by the file number of the related initial financing statement. Each Active Record related to an initial financing statement is retrieved with the initial financing statement using either retrieval method.
B. Search Requests
1. Required Information
A search request must contain the following: (1) the name searched; (2) the name and address of the person to whom the search report is to be sent; and (3) the appropriate fee.
The search request must set forth the name of the debtor to be searched using designated fields for organization or individual surname, first personal name, and additional name(s)/initial(s). A search request will be processed using the data and designated fields exactly as submitted, including the submission of no data in a given field, without regard to the nature or character of the debtor that is the subject of the search.
2. Optional Information
Search requests may limit the number of UCC records that would normally be provided with a search report by requesting that no copies be provided or that copies be limited to those UCC records that: (1) include a particular city in the debtor address; (2) were filed on a particular date or within a particular range of dates; or (3) include a particular secured party name.
3. Scope of Search
A search request may ask for a search that reports all Active Records retrieved by the search rather than only Unlapsed Records retrieved by the search.
4. Mode of Delivery
A search request may specify a mode of delivery for search results and that request will be honored if the requested mode is then made available by the filing office, and all requisite fees are tendered.
5. Search Request With Filing
If a filer requests a search at the time an initial financing statement is filed by submitting a search request with the initial financing statement at the time it is tendered for filing, the search request shall be deemed to request a search to be conducted as soon as practicable such that it would include all UCC records filed, against the debtor name(s) provided on the initial financing statement, on or prior to the date [time] the initial financing statement is filed.
C. Standard Search Logic
The following rules describe the filing office’s standard search logic and apply to all searches except as provided under the non-standard (wild-card) search logic.
D. Non-Standard (Wild-Card) Search Logic
A non-standard (wild-card) search methodology is used to check against non-UCC liens or miscellaneous liens that may exist in the UCC information management database including Federal Tax Liens, Mechanics Liens, liens in favor of a governmental body (including Abstract of Judgment, Criminal Fine Enforcement and Notice of Lien for Fine or Penalty for Sentencing). Statutory (Agricultural) Liens prior to July 1, 2001, and Farm Product Security Interests (EFS Statements).
E. Search Responses
Responses to a search request shall include the following:
1. Copies
Copies of all UCC records retrieved by the search unless only limited copies are requested by the searcher. Copies will reflect any redaction of personal identifying information required by law.
2. Introductory Information
A filing officer shall include the following information with a UCC search response:
a. Filing officer. Identification of the filing officer and the certification of the filing officer required by the UCC.
b. Unique search report identification number. Unique number which identifies the search report.
c. Report date and time. The date and time the report was generated.
d. Through date and time. The date and time at or prior to which a UCC record must have been filed with the filing office in order for it to be reflected on the search.
e. Certification language. THE UNDERSIGNED FILING OFFICER HEREBY CERTIFIES THAT THE ENCLOSED LISTING IS A RECORD OF ALL PRESENTLY EFFECTIVE FINANCING STATEMENTS AND RELATED SUBSEQUENT DOCUMENTATION WHICH NAME THE REQUESTED DEBTORS, AND WHICH ARE ON FILE IN THE SECRETARY OF STATE’S OFFICE, UNIFORM COMMERCIAL CODE DIVISION, AS OF DATE INDICATED ON THE SEARCH. Secretary of State Seal placed on letter as well.
f. Search logic disclaimer language. DISCLAIMER INFORMATION RELATIVE TO SECURITY INTERESTS AND STATUTORY LIENS OBTAINED FROM THE COMPUTER INDEX IS FOR INFORMATION PURPOSES ONLY. SUCH INFORMATION DOES NOT RELIEVE ANY PERSON OR BUSINESS FROM LIABILITY, ALTER PRIORITIES OF SECURITY INTEREST OR LIENS, OR AFFECT ANY OTHER LEGAL RIGHTS OR RESPONSIBILITIES. THE COMPUTER INDEX PRIMARILY CONTAINS INFORMATION RELATIVE TO SECURITY INTERESTS AND STATUTORY LIENS WHICH HAVE BEEN FILED FOR RECORD AFTER SEPTEMBER 1, 1981. THERE ARE SECURITY INTERESTS AND STATUTORY LIENS FILED BEFORE THAT TIME WHICH MAY BE VALID. A SEARCH LIMITED TO A PARTICULAR CITY MAY NOT REVEAL ALL FILINGS AGAINST THE DEBTOR SEARCHED AND THE SEARCHER BEARS THE RISK OF RELYING ON SUCH A SEARCH.
g. Name provided. Name as provided by searcher.
h. Search string. Normalized name as provided by rule 503.
i. Lien type searched. UCC Statutory liens and tax liens.
j. Copies. Copies of all UCC documents revealed by the search and requested by the searcher.
F. Search Report
The search report shall contain the following:
1. Identification
Identification of the filing officer responsible for the search report.
2. Search Report Identification Mumber
Unique number assigned under rule 505.3.2.19.
3. Identification of Financing Statement
Identification of each initial financing statement, including a listing of all related amendments, correction statements, or filing officer notices, filed on or prior to the through date corresponding to the search criteria (including whether the searcher has requested Active Records or only Unlapsed Records). Financing statement information shall include, but is not limited to the following:
a. Initial financing statement file number. The initial financing statement file number.
b. Initial financing statement filing date and time. The date and time it was filed.
c. Lapse date. Provide lapse date.
d. Debtor name. The debtor name(s) that appear(s) of record.
e. Debtor address. The debtor address(s) that appear(s) of record.
f. Secured party name. The secured party name(s) that appear(s) of record.
g. Secured party address. The secured party address(es) that appear(s) of record.
h. Amendment type. An indication of type of each amendment, if any.
i. Amendment filing date and time. The date and time each amendment, if any, was filed.
j. Amendment file number. The amendment file number of each amendment, if any.
k. Correction statement filing date and time. The date and time a correction statement, if any, was filed.
l. Filing officer statement filing date and time. The date and time a filing officer statement, if any, was filed.
VI. SPECIAL MENTION: FARM ASSETS TAKEN AS COLLATERAL
A. Security Interest in Crops
It is no longer necessary to take a new security agreement on crops every year since § 9-204, amended in 1980, eliminated that requirement. You will need an “after acquired property clause” in your security agreement under which the new subsequent crop liens will attach.
B. Changing Character of Farm Assets
It is possible for “grain” to have three filing categories: as growing crops; farm products; and farm products which become inventory of a person engaged in farming. For example:
With the implementation of central filing in Nebraska, these distinctions will be rendered insignificant as all filings related to these types of collateral are to be made with the Secretary of State after July 1, 1999.
C. Waiver of a Security Interest: How a Course of Dealing May Constitute an “Authorized” Disposition of Collateral
The Cases. Two Nebraska Supreme Court cases presented serious ramifications on banks and their relationships to secured farm products of their customers (See, State Bank, Palmer, Nebraska v. Scoular-Bishop Grain Co., 217 Neb. 379 (1984) and Five Points Bank v. Scoular-Bishop Grain Co., 217 Neb. 677 (1984). Originally, § 9-306(2), UCC provided that a security interest in collateral continues notwithstanding its sale, exchange, or other disposition unless the disposition was authorized by the secured party in the security agreement or otherwise, and also continues in any identifiable proceeds, including collections received by the debtor. The UCC’s intent was that a security interest would remain as long as lender and borrower want it to last, also recognizing that a lender may authorize disposition of the collateral as a means of paying off the debt. Should the lender “authorize” the disposition of collateral, any problems for the buyer would have disappeared and the lender’s security interest is severed. But suppose that an unauthorized disposition occurred. Does the security interest in the goods continue? The answer lies in another UCC provision. Section 9-307(1) states that a buyer in the ordinary course of business other than a person buying farm products from a person engaged in farming operations takes free of a security interest created by his seller even though the security interest is perfected and even though the buyer knows of its existence. For an inventory lender, disposition of the collateral will sever the security interest in the goods, even though the disposition was not authorized. Such a purchaser will take free and clear of any existing security interest. But for the farm lender, the unauthorized disposition of farm products did not necessarily sever the security interest in the goods, thanks to the protections of § 9-307(1) and §§ 52-1301 - 52-1321. As a result, the buyer of farm products had to look closely to the language of § 9-306(2) to determine whether disposition of the collateral was authorized. Only if authorization for disposition was permitted and given may a purchaser of farm products from a farmer potentially acquire such production “free and clear” of an existing security interest.
In State Bank, Palmer, Nebraska v. Scoular-Bishop Grain Co., the farmer-borrower had not obtained oral or written consent of the bank to dispose of the farm products as required by the security agreement, but the Nebraska Supreme Court ruled that it was wrong for the lower court to exclude evidence that would show the bank’s implied consent, waiver or ratification of a known and existing right by a course of dealing between the bank and borrower. Prior to this case, the general implication of the law in Nebraska had been that there was no waiver of consent to sell unless clearly understood by the holder of the security interest that a waiver was taking place. Simple negative conduct by bank employees had not been construed as a waiver. The real effect of this ruling is that evidence may be offered to prove that although a security agreement provides that sales by the borrower without prior consent are unauthorized, the conduct of the parties shows clearly such sales are authorized in fact. The court would not only to look at the words of the agreement, but on the way the parties acted.
In Five Points Bank v. Scoular-Bishop Grain Co., the Nebraska Supreme Court held that an implied agreement to the disposition of collateral should be found with extreme hesitancy and that the standard of proof must be by clear and convincing evidence. The trial court erred by directing a verdict in favor of the bank since evidence raised a factual question as to whether or not there was authorization to sell. In this case, the farmer-borrower testified that he told the bank president that his fertilizer account would be set off from the grain sales.
Legislative Resolution – UCC Amendments. Following the Scoular-Bishop decisions, the Legislature adopted amendments to the UCC (See, U.C.C. Section 9-315(2)), eliminating the potential for an implied waiver of security interest by providing that “authorization to sell, exchange, or otherwise dispose of farm products shall not be implied or otherwise result, nor shall a security interest in farm products be considered to be waived, modified, released, or terminated, from any course of conduct, course of performance, or course of dealing between the parties or by any trade usage in any case in which: (a) the secured party has filed an effective financing statement pursuant to §§ 52-1301 – 52-1321; or (b) the buyer of farm products has received notice from the secured party or seller of farm products in accordance with the provisions of the Food Security Act of 1985” (pre-notification provisions).
VII. SECURITY INTERESTS IN NEGOTIABLE WAREHOUSE RECEIPTS
The issue of taking a security interest in warehouse receipts may involve lending to a grain company with company owned grain or to a farmer who obtains a receipt for harvested grain placed in a local elevator. For example, a grain company that holds a warehouse license may grant First National Bank a security interest in all company-owned grain. The grain company issues a warehouse receipt to itself and pledges it to Big Red State Bank. The issues that arise are:
How is a warehouse receipt pledged for collateral purposes? Nebraska public grain warehouse licensees (“licensees”) that have a farming operation must identify receipts issued for collateral purposes by stating on the face of the receipt appropriate information, i.e., “ASCS LOAN” (when the receipt is used for this purpose) or “Collateral” (when the receipt is furnished to a lender to borrow money). Licensees using warehouse receipts as collateral to secure parties for loans are required to use the following procedure:
Who has priority – First National Bank or Big Red State Bank? Section 7-503, UCC states that a document of title provides no rights in the goods against a secured party which had a security interest in the goods prior to the issuance of the documents. There are two exceptions to the general rule. The first exception is when the secured party acquiesces in the issuance of the document of title. The second exception is if the debtor had the power of disposition, in which case the interest of the secured party is junior to the rights of the holder of the document of title who took the warehouse receipt by due negotiation.
In a second example, a farmer grants First National Bank a security interest in his wheat crop. Once the wheat is harvested, farmer takes the grain to the elevator obtaining a warehouse receipt. Farmer pledges the warehouse receipt to Big Red State Bank. The issue of priority once again arises and the same analysis contained in item two of the discussion above also applies to this scenario.
VIII. UCC FILINGS FOR REAL ESTATE-RELATED COLLATERAL
Article 9 of the UCC contains the body of state law governing security interests in personal property. Although specific provisions are made for “fixtures,” one of the most notable exclusions from Article 9 is “the creation or transfer of an interest or lien on real estate, including a lease or rents thereunder”. The rule is that a real estate mortgage, trust deed, land contract and other related real estate documents must be recorded under a state’s real estate law in that a UCC financing statement has no effect. However, bankers are cautioned that there remain several transactions which may touch upon real estate and would require the obtaining of security agreements and the filing of financing statements for proper perfection.
A. Option Contracts
A grants to B an option to acquire certain real estate. Assume that either A or B desires to assign their interest in the unexercised option to a Bank. The interest of A or B is probably an interest in personality which would be classified as a general intangible for purposes of Article 9 and would therefore require perfection by filing.
B. Land Contracts
A number of courts outside of Nebraska have held that the interest of parties to a land contract is an interest in personal property. The cases include lenders who took pledges or assignments of land contracts as collateral for loans. Although in a majority of situations the lenders properly recorded such pledges or assignments under real estate law, many failed to consider the interests of the parties as personal property and did not file under the UCC. Generally, the courts appear to agree that the interests of the parties are personal property when taken as security for loans, however, there does not appear to be total agreement as to whether such interests are to be classified as general intangibles or accounts.
Bankers taking an assignment of an interest in a land contract as security should file such assignment or other document demonstrating the bank’s interest with the proper Register of Deeds Office. Bankers should also check that the land contract has been filed in the same office. In light of the cases discussed above, it is recommended that bankers also obtain a security agreement and financing statement from the debtor, covering accounts and general intangibles with a description of the contract. The financing statement should be properly filed. In Nebraska, all accounts and general intangibles are to be filed in the Office of the Secretary of State (§ 9-501).
IX. SECURITY INTERESTS IN SAVINGS BONDS
On occasion, there are questions as to whether a savings bond may be pledged as collateral for a loan. Department of the Treasury regulations make it clear that savings bonds are not transferable and may not be used as security. The regulations state as follows:
§ 353.15 Transfer. Savings bonds are not transferable and are payable only to the owners named on the bonds, except as specifically provided in these regulations and then only in the manner and to the extent so provided.
§ 353.16 Pledge. A savings bond may not be hypothecated, pledged, or used as security for the performance of an obligation.
In regard to transfers, § 353.20 provides that the Department of the Treasury will not recognize a judicial determination that gives effect to an attempted voluntary inter vivos transfer of a bond or a judicial determination impairing the rights of survivorship upon a co-owner or beneficiary. Treasury will recognize a claim against an owner of a savings bond and conflicting claims of ownership of, or interest in, a bond between co-owners or between the registered owner and beneficiary, if established by valid judicial proceedings.
X. SECURITY INTEREST IN IRA’S
Questions are frequently raised as to whether an IRA may be pledged as collateral for a loan. There does not appear to be any statutory or regulatory prohibition against using an IRA as security for a loan. Pledging an IRA will be treated by the IRS as a distribution of the funds pledged. As a result, the pledged funds will be deemed to be ordinary income to the owner of the IRA in the year of the pledge and certain penalties may apply depending on the age of the owner at the time of the pledge and other factors.
XI. PERFECTING SECURITY INTERESTS IN NON-NEGOTIABLE CERTIFICATES OF DEPOSIT
In 1991, the Nebraska Legislature adopted uniform revisions to Articles 3 and 4 of the Uniform Commercial Code (UCC). While these revisions were generally positive in nature, they also created a need to reconsider the traditional method of perfecting a security interest in a non-negotiable certificate of deposit (CD). Prior to adopting the UCC revisions, Nebraska case law held that a non-negotiable CD was an “instrument” and that a security interest in such a CD could be perfected by simple possession of the certificate. The 1991 revisions to UCC Section 3-104 modified the definition of an “instrument” to only include “negotiable” instruments, specifically excluding “non-negotiable” instruments from its coverage.
Since most certificated CDs in Nebraska contain the statement “non-transferable,” the traditional method of perfecting a security interest in these CDs was brought into question. Some commentators suggested that the UCC revisions would require non-transferable (non-negotiable) CDs to be classified as “general intangibles,” for which a security interest may only be perfected by filing.
Based on the uncertainty described above, provisions were adopted in 1997 and also within UCC Revised Article 9 which provide that a security interest in a non-negotiable CD may be perfected by simply taking possession of the CD. These revisions remove the need to file a financing statement in order to perfect a security interest in a non-negotiable CD. However, in cases where a non-negotiable CD has been issued by another bank, the bank wishing to obtain a security interest should take possession of the CD and obtain an acknowledgement of the assignment from the issuing bank.
XII. SECURITY INTERESTS IN SECURITIES AND OTHER INVESTMENT PROPERTY (UCC ARTICLE 8)
With the adoption of LB 97 by the 1995 Legislature, Nebraska has become one of the first states to adopt revised Article 8 of the UCC. The revisions to Article 8 were recommended for adoption by the National Conference of Commissioners of Uniform State Laws. The Nebraska law took effect on January 1, 1996, and added sections to Article 9 of the UCC governing security interests in investment property.
Prior Article 8 governed the attachment and perfection of security interests in both certificated and uncertificated securities, to the general exclusion of UCC Article 9. Revised Article 8 returns the focus to Article 9 with respect to the perfection of a security interest in securities.
Revisions to Article 8 were necessitated by the fact that current law does not adequately address present securities holding practices in which securities are increasingly held indirectly through intermediaries, rather than directly by investors. This article focuses on the differences between direct and indirect securities holding systems, explains the concept of “securities entitlement” on which the rules governing the indirect holding system are based, and describes the rules governing the perfection of security interests in investment property.
A. Direct and Indirect Holding Systems
The original UCC addressed the existence of a “direct holding system” for securities. Under this system, ownership of an investment security was generally evidenced by physical possession of a certificated security which could be transferred by the owner by transferring possession of the certificate.
Over time, an “indirect holding system” for securities has developed which utilizes uncertificated securities (those existing only as book entries on the records of the issuer). Under this system, a jumbo stock certificate is issued to a clearing corporation which holds the securities for the broker or bank with whom an investor maintains an account. When you buy 100 shares of AT&T stock through a broker, you do not ordinarily receive a physical stock certificate. Instead, your broker purchases the shares for you by receiving a “book-entry” credit for 100 shares of AT&T stock from the clearing corporation. Your broker similarly credits you with 100 shares of AT&T stock on your brokerage account.
B. Key Definitions
A key term to understanding the provisions for the creation and perfection of a security interest in securities is “investment property”. Investment property is defined under the UCC as commodity accounts, commodity contracts, securities entitlements, securities accounts and securities, whether certificated or uncertificated. This definition includes publicly traded stocks and bonds, privately held stock, mutual funds shares and other similar interests.
Other important terms under revised Article 8 include, securities, securities account, securities intermediary, financial asset and securities entitlement.
Security – An equity interest in a corporation, whether certificated or uncertificated, is always a security. Shares in a mutual fund are representative of an uncertificated security.
Securities Account – A securities account is an account where securities or other financial assets are carried. Ordinarily, a securities account is maintained by a securities intermediary.
Securities Intermediary – A securities intermediary means either a clearing corporation or an entity such as a bank or broker that in the ordinary course of business maintains security accounts for third parties.
Financial Asset – A financial asset includes a security and any other debt obligation or equity interest recognized as a medium for investment (e.g., a partnership interest that does not fit the definition of a security).
When a securities account is maintained on behalf of a third party, the third party has a security entitlement to the financial assets carried in the securities account. With respect to those financial assets, the third party is an entitlement holder.
When an individual buys 100 shares of AT&T stock through a stock broker who owns the stock on their behalf, the 100 shares constitute a financial asset carried in a securities account maintained by a securities intermediary and the individual is an entitlement holder with a security entitlement to those shares.
C. Creation and Perfection of a Security Interest in Investment Property
There are two ways to create a security interest in investment property. The secured party must either (a) obtain a written security agreement signed by the debtor or (b) the secured party must obtain “control” over the investment property. Similarly, there are two ways in which to perfect a security interest in investment property. The secured party must either (a) file a UCC financing statement or (b) obtain “control” of the investment property.
Filing is not effective if the debtor is a broker or securities intermediary or commodity intermediary. A commodity intermediary is a registered futures commission merchant or a person who in the ordinary course of its business provides clearance or settlement services for a board of trade.
As a general matter, in order to have control over investment property, a secured party must have taken steps to enable it, upon default, to sell the property without any additional cooperation on the part of the debtor. The definition of control is set forth in U.C.C. § 8-106 regarding securities and in § 9-102 regarding commodities. What constitutes control varies depending upon the type of investment property used as collateral, as follows:
1. Certificated Securities
Control exists when (1) the secured party has possession of the security if the security is in bearer form or in a registered form, (2) the security is endorsed to the secured party or in blank by an effective endorsement or (3) the certificate is registered in the name of the secured party on the books of the issuer.
2. Uncertificated Securities
Control exists when (1) the uncertificated security is delivered to the secured party or (2) the issuer has agreed that it will comply with the instructions of the secured party without any further consent of the debtor/registered owner. Delivery in this context means the registration of the uncertificated security in the name of the secured party.
3. Security Entitlement or Securities Account
Control exists when the secured party becomes the registered entitlement holder or the intermediary agrees to comply with the instructions of the secured party without any further consent of the debtor.
4. Commodity Accounts and Contracts
Control exists if pursuant to an agreement with the secured party, the commodity customer and the commodity broker, the commodity broker has agreed that it will apply any value distributed on account of the commodity contract as directed by the secured party without further consent of the debtor/commodity customer.
D. Priority of Security Interests
When a security interest in investment property is perfected by filing, the first secured party to file has priority. A secured party that perfects only by filing will lose priority to a secured party that perfects by control. A secured party whose security interest in investment property has been perfected by taking control always has priority over a secured party who has perfected by filing a financing statement covering the same collateral. Accordingly, it is advisable to perfect by both filing and “control”.
E. Choice of Law
Although Nebraska and a number of other states have adopted revised Article 8, it does not necessarily follow that the provisions of revised Article 8 will always control the transaction. Revised Article 8 contains a series of choice of law provisions. Under these choice of law provisions, for certificated securities, the law of the state where the certificate is located governs the transaction. If the security is uncertificated, then the law of the issuer’s state controls. With respect to a security entitlement or securities account, the law of state of the security intermediary generally controls. With respect to commodity accounts and contracts, the applicable law is the state of the commodity intermediary. However, with respect to commodity accounts and contracts, the agreement between the parties can specify that the law of the particular state will apply, even if it is not the state of the commodity intermediary.
F. Transition Rules
If a security interest in securities has been perfected under existing law before January 1, 1996, and the action by which the security interest was perfected serves to perfect a security interest under revised Article 8, no further action is required to continue perfection. A security interest in a security perfected under existing law prior to January 1, 1996, that does not serve to perfect a security interest under revised Article 8, must be re-perfected within four months after January 1, 1996. If a security interest is perfected on January 1, 1996, and the security interest can be perfected by filing, then a financing statement signed by the secured party instead of the debtor is sufficient to perfect or to continue perfection.
G. Conclusion
Commencing January 1, 1996, you may perfect a security interest in investment property by filing a financing statement, provided the certificated security is located in Nebraska, the uncertificated security was issued in Nebraska or the security entitlement or account is held by a Nebraska intermediary. To perfect by means of a control agreement, you may need to wait until revised Article 8 is adopted in the jurisdiction of the issuer or securities intermediary, if located outside the state of Nebraska. When dealing with securities intermediary, if located outside the state of Nebraska. When dealing with certificated securities, security agreements and financing statements covering intangibles should be expanded to specifically cover investment property, along with accounts and general intangibles.