Surviving the Transition to Revised Article 9 Maintaining Perfection

Journal Issue

Jun 2001

Column Name

Journal HTML Content

As discussed in last month's column, the transition rules for revised Article 9 mean
that most existing security interests that have been properly created and perfected under
current Article 9 will remain valid and perfected after the July 1, 2001,
effective date of the revision.<a href="#2" name="2a">2</a>

This is particularly true of security interests that have been perfected by filing a
financing statement. Under the transition rules, a financing statement properly filed
under current law (an "old-act financing statement") remains effective until the
earlier of its normal lapse date or June 30, 2006. See §9-705(c).<a href="#3" name="3a">3</a>
Under current law, most financing statements lapse at the end of five years, unless
they are continued by the filing of a continuation statement before they lapse. See
current §9-403(2). The continuation statement is valid only if it is filed during
the last six months prior to lapse—between four and five years after the initial filing.
See current §9-403(3). Thus, the effect of the transition rule is that most
old-act financing statements will remain effective for five years after their initial
filing. The June 30, 2006, "drop-dead" date will reduce the life-span of an
old-act financing statement in those states that fail to adopt the uniform July 1,
2001, effective date.<a href="#4" name="4a">4</a>

<h3>Perfection in After-acquired Property</h3>

Although the rule clearly preserves the perfected status of an existing pre-effective
date security interest that was perfected by an old-act financing statement, its effect
is much broader. The old-act financing statement is not merely effective with respect
to pre-revision transactions, it is fully effective for all purposes.

Thus, for example, an old-act financing statement covering "inventory" and filed
in the proper state under current law (i.e., the state where the inventory is
located) will remain fully effective to perfect a security interest in inventory
acquired in that state by the debtor after July 1, 2001. This is true even
though the proper state in which to file an inventory financing statement under the
revised act may be a different state (e.g., the state of the debtor's
incorporation). As a result, even in a transaction involving only newly acquired
post-effective date assets, it will be necessary to search the UCC filing records
under both the current law and the revised act until the June 30, 2006,
"drop-dead" date.

The issue is complicated further by the revision's recharacterization of certain types
of collateral. For example, rental and license fees are "general intangibles" under
current law, but are "accounts" under the revised act. Compare current §9-106
with §9-102(a)(2)(i), cmt. 5a. Thus, between July 1, 2001, and
June 30, 2006, a security interest in license fees could be perfected either
by an old-act financing statement listing the collateral as "general intangibles" or by
a revised-act financing statement listing the collateral as "accounts."

<h3>Continuing the Old-act Financing Statement</h3>

As noted above, the old-act financing statement will remain effective for up to
five years. How do you continue the old-act financing statement if you wish to
remain perfected beyond that point? Here, there are two possibilities—either the proper
place to file under revised Article 9 is the same office where the old-act financing
statement is on file, or it is not.

As discussed in the March 2000 column, the revision requires that most financing
statements be filed in the state of the debtor's location, which is the state of
registration for a registered organization.<a href="#5" name="5a">5</a> In contrast, current law requires that
financing statements for tangible collateral be filed in the state where the collateral
is located and that intangible collateral be filed in the state where the business has
its chief executive office. See current §9-103(1) and (3). In addition,
in some states, financing statements for consumer goods, farm-related collateral and
certain local businesses must be filed locally at the county level, rather than in
a statewide office. See current §9-401(1) (Second Alternative and Third
Alternative). The revision dispenses with the local filing requirement for non-real
estate-related collateral.

Under the first possibility, the proper state for filing and the proper office in
that state is the same under both current law and the revision. In such a case,
the old-act financing statement may be continued only<a href="#6" name="6a">6</a> under the normal rules by
filing an ordinary "continuation statement" in that office within the normal four- to
five-year time frame. See §9-705(d).

Note, however, that the revised act's requirements for debtor's name, secured
party's name and collateral description will apply to the continuation statement. See
§9-705(f), cmt. 6. Thus, for example, an old-act financing statement that
describes the collateral as "general intangibles" will perfect a security interest in
license fees until it is continued. However, if it is continued without amending the
collateral description to list "accounts" or "license fees," perfection will lapse after
the fifth year. Similarly, if the financing statement lists only a trade name for
the debtor (and if that is sufficient in the relevant jurisdiction under current
law), perfection will lapse when the old-act financing statement expires unless the
continuation statement amends the debtor's name to conform to the requirements of
revised Article 9.

The other possibility is that the old-act financing statement is on file in a
state, or in an office in a state, that would not be the proper place to file a
financing statement under the revised act. In this case, the old-act financing
statement may be continued only by filing in the proper new state or office a new
"initial financing statement in lieu of a continuation statement" (IFSILOACS). The
filing of an ordinary continuation statement in either state will not continue the
old-act financing statement.<a href="#7" name="7a">7</a> The filing of a new regular initial financing statement in the new state
or office will not continue the old-act financing statement.<a href="#8" name="8a">8</a>

In order for the new initial financing statement to qualify as an IFSILOACS,
it must meet several conditions. See §9-706(c). First, it obviously must
satisfy all of the revision's requirements for a valid and effective financing
statement. Second, in order to serve the goal of translating the old-act financing
statement into the new state's filing system, it must identify the old-act financing
statement or statements that it is designed to continue. The IFSILOACS must
identify the old-act financing statement by (1) indicating the office in which it
was filed, and (2) providing the dates of filing. This must be done for the
old-act financing statement and for the most recent continuation statement, if any.
Finally, the IFSILOACS must indicate that the old-act financing statement remains
effective.

Multiple old-act financing statements may be continued in a single IFSILOACS.
Indeed, in the case of inventory financing for a debtor with stores in many states,
current law may have required multiple filings in several different states and counties.
A single IFSILOACS in the new proper state will continue all of the old-act
filings.

It is not necessary to attach copies of the old-act financing statements and
continuation statements to the IFSILOACS. However, since the old-act filings
will be discarded by the original filing office after six years, the secured party
would be well-advised to preserve some evidence of its pre-revision filings in case
a priority dispute arises after the old-act files have been purged.

Unlike an ordinary continuation statement, an IFSILOACS can be filed at any time
before the old-act financing statement lapses. See §9-706, cmt. 1. Thus, a
cautious secured party could file an IFSILOACS immediately after July 1, 2001,
instead of waiting until the normal four- to five-year continuation window. For
example, if the old-act financing statement was filed on March 15, 1999, its
lapse date would be in March of 2004. By filing the IFSILOACS on July 2,
2001, the secured party preserves the March 15, 1999, priority date
established by its old-act financing statement and obtains a new lapse date of July
2006. In the six-month window before the July 2006 lapse date, the
IFSILOACS could be continued for an additional five years by filing an ordinary
continuation statement. See §9-515(d).

<h3>Enactment Update</h3>

Three new states have adopted revised Article 9 since the last issue: Arkansas,
Georgia and North Dakota. Thus, as of early May, a total of 35 states plus the
District of Columbia have adopted revised Article 9. In addition, revision bills
are pending in 15 states plus the U.S. Virgin Islands.

<hr>
<h3>Footnotes</h3>

<a name="1">1</a> The views expressed herein are Prof. Warner's and do not necessarily reflect the views of the University of Missouri, St. John's
University or the law firm of Greenberg Traurig LLP. <a href="#1a">Return to article</a>

<a name="2">2</a> See Warner, G. Ray, "Surviving the Transition to Revised Article 9—The Basics," 20 Am. Bankr. Inst. J. __ (May
2001). <a href="#2a">Return to article</a>

<a name="3">3</a> All citations are to the revised 1999 version of Article 9 of the Uniform Commercial Code, unless otherwise indicated.
Citations to the currently applicable 1972 version of Article 9 are indicated by the term "current." <a href="#3a">Return to article</a>

<a name="4">4</a> Although §9-701 attempts to establish a uniform national effective date of July 1, 2001, not all states will have adopted
the revision by that deadline, and in addition, at least one of the adopting states has set a later effective date. Thus, the revision
will not become effective in all U.S. jurisdictions on July 1. This will create a number of conflict-of-law problems, most of which are
beyond the scope of this column. <a href="#4a">Return to article</a>

<a name="5">5</a> See <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=…, G. Ray, "Secured Transactions: New Filing Rules Follow the Debtor," 19 Am. Bankr. Inst. J. 16 (March
2000)</a>. <a href="#2a">Return to article</a>

<a name="6">6</a> This is a very technical point. Although the statute does not expressly prohibit filing an IFSILOACS (discussed below) in
such cases, a close reading of §9-706(a)(2) indicates that an IFSILOACS only works where the old-act financing statement is on
file in an office that would not be appropriate under the revised act. The improper IFSILOACS would, however, qualify as an initial
financing statement and would perfect the security interest, albeit with a new, less-advantageous priority date. <a href="#6a">Return to article</a>

<a name="7">7</a> However, since not all states will adopt the revision in time, the secured creditor would be well advised to continue old-act
financing statements in the old-act state until all relevant states have converted to revised Article 9. <a href="#7a">Return to article</a>

<a name="8">8</a> The filing of a new initial financing statement would, however, perfect the security interest. The problem is that it will establish
a new priority date as of the date it is effective; it will not preserve the priority date established by the old-act financing statement. <a href="#8a">Return to article</a>

Journal Authors

G. Ray Warner

Journal Date

Friday, June 1, 2001 - 12:00

Bankruptcy Rule

2001