Are You Sure Your Security Interest Is Secure?
The New Filing Requirements for Protection of a Security Interest under Revised Article 9
by Dayle L. Wallien, Esq.

Article 9 of the Uniform Commercial Code (“UCC”) covers any transaction intended to create a security interest in personal property (property other than real estate).  It provides a vehicle by which creditors can reduce their risk of debtor non-payment, allowing creditors to “stake a claim” on specific collateral as a potential source of repayment.  The State of Alaska, along with all fifty of the U.S. States, has adopted sweeping revisions to Article 9 of the UCC.  In Alaska, as in most other states, these revisions were effective as of July 1, 2001. How will this affect your secured transactions?  While the principle behind UCC Article 9 remains the same, the process to perfect a security interest by filing is now entirely different.  The highlights of the changes in the perfection process are outlined below:

1.            File in Location of Debtor.  One of the most critical points for creditors to note is that now for perfection purposes, a UCC financing statement must be filed in the central filing office of the state of the debtor.  In the case of an individual debtor, these means that you should file in the central filing office in the state of the debtor’s legal residence.  In the case of a registered organizational debtor, such as a corporation or limited liability company, you must file in the state where the entity was initially organized.  If the organizational debtor is an unregistered entity, then you must file in the state where the chief executive office is sited.  This means that even though the asset that you are filing on may be located in the state of Alaska, in order to perfect, you must file the UCC financing statement in the location of the debtor.  District recording offices will no longer accept UCC financing statements, except for those covering fixtures, minerals and timber.   Unfortunately, while most states have adopted the revisions to UCC Article 9, not all of them have adopted the same transition date.  In some cases, it may be necessary to do dual filings.  See your attorney if you are in doubt!

2.            Signatures No Longer Required.  Another major change to perfection by filing is the fact that signatures are no longer required on UCC filings.  This is due to a desire for “media neutrality.”  In other words, as many states  move towards electronic filings (Alaska’s system for electronic filing should be in place next year), it was desirable to move away from requirements such as signatures, which were tied to paper.  Further, this emphasizes that the UCC filing system is a “notice” system.  The financing statement merely provides notice of an underlying agreement; the statements were never intended to be legally binding agreements by themselves.  

3.            Correct Debtor Name and Type.  Because most states are moving towards electronic filing, it is very important that the full correct debtor name is used on the UCC filings.  Filings must also indicate whether the debtor is an individual or an organization.  Failure to so indicate or use of an incorrect debtor name may mean that the secured party has not properly perfected.  This is again tied to the fact the UCC Filing system is a notice system.  As states begin relying on electronic searches, a statement filed in the incorrect electronic file or a statement containing the incorrect debtor name will not provide effective notice to other creditors.  Therefore, under revised Article 9, a filing that is not revealed by a search using the correct debtor name is “seriously misleading” and legally ineffective as a matter of law, meaning that the creditor who fails to file the correct debtor name may end up in line behind other creditors. 

4.            Forms.  New national standard forms will now be used for filing.  There will be four forms: UCC 1 -Financing statement; UCC 1Ad - Financing statement addendum; UCC 3 - Financing statement amendment; and a UCC 3Ad Financing statement amendment addendum. The State of Alaska is still accepting the old forms for the remainder of 2001, but many states are not accepting anything but the national forms,  making it a good idea to begin using the new forms now.

5.            Transitional Rules. So what does this imply about conducting searches of filings?  And what impact does this have on any existing filings that you now have in place?  First of all, note that there is a five-year transition period.  Therefore, in regards to searches, it is important that during the five-year transition period, searches are conducted under both the old rules and the new rules.

As far as existing filings are concerned, if the filing office under old Article 9 and the filing office under the revised Article 9 are the same, any properly completed filings filed prior to July 1, 2001 continue to be effective and they can be continued by filing continuation statements.  But if the filing office is now different under the new rules, the old filings remain effective until they lapse or July 1, 2006, whichever is earliest, and the filings cannot be continued.  Instead, the secured party needs to file a special new filing in the new filing office prior to the lapse of the previous filing.  The new filing is a regular new filing with the addition of the filing information about the old filing.  The old filing information must include the identity of the old filing’s filing office, the dates of the filing, the file numbers of the original filing and its most recent continuation statement, if any.

6.            Make an Appointment to See Us.  These are just a few of the complex changes that have been made to UCC Article 9.  Even minor typographical errors in your filings may now have serious legal ramifications.  If you want to ensure that your transactional interests are properly secured, please make an appointment to come speak with one of us at Cook Schuhmann & Groseclose, Inc.  We would be happy to assist you with questions or problems. 

NOTE:  This article should not be considered to constitute legal advice.   It is important to note that Revised Article 9 rules are complex and can be difficult to apply.  Accordingly, this article is merely intended to provide general principles applicable to Revised Article 9.  Consult your attorney or call a CS&G attorney for advice on your particular issue.