Uniform Commercial Code Committee

NOTE:  These materials are based on Professor Warner’s article published in the Commercial Law League of America’s Commercial Law Bulletin at 16 Com. L. Bull. 10 (March/April 2001).

I. Introduction

Between July 1, 2001, and January 1, 2002, the revised 1999 version of Article 9 of the Uniform Commercial Code became effective in all fifty (50) states and the District of Columbia.  The many changes in the law provide both opportunities and some risks for secured creditors.

The new Act includes a detailed set of transition rules that will phase in various aspects of the revised Article 9 over time.  Although for most purposes revised Article 9 became immediately effective and applies to pre-existing transactions, the transition rules continue the effectiveness of pre-effective date financing statement for up to five (5) years in most jurisdictions.

Although the revised Act resolves many issues that arose under the prior law and provides clearer and more detailed rules for certain types of transactions, the cost of these improvements is that the act is far more complicated than the old Article 9.  The relative simplicity of the prior version of Article 9 results from the fact that it is built around general principles that govern all types of secured transactions, subject to a limited number of exceptions for special types of security interests.  While the revised Act does not completely reject that approach, it moves much closer to the pre-UCC world where different types of secured transactions were subject to different rules.  This change is beneficial to the parties who regularly engage in those specific types of secured transactions, because the clearer, more detailed rules reduce the uncertainty that results from applying a general principle to a unique transaction.  However, for the generalist, the result is a much more confusing law with new traps for the unwary.

A simple numerical comparison of the two versions of Article 9 provides a good indication of the increased complexity of the revised Act.  The prior version of Article 9 contains only fifty-five (55) substantive sections.   In contrast, the revised Article 9 contains one hundred twenty-six (126) substantive sections (not counting the transitional rules and conforming amendments).  Further, many of the provisions of the revised Act are exceedingly complex and must be read and reread in order to be understood.

Notwithstanding the added complexity and new rules, in many respects the revised Act is similar to the former law.  The revised Act resolves some of the troubling problems and conflicting case law under the prior act.  In addition, it gives greater latitude to secured creditors and offers greater protection from bankruptcy attack.

The revised Act's most significant failure is its treatment of consumer transactions.  Despite adding seventy-one (71) more sections to the law, the revision does not resolve significant consumer issues.  Since the drafters were unable to reach a consensus, they chose to say nothing at all about many of the contentious consumer issues.  Instead those issues are left to the courts with little or no guidance.  For example, although the "absolute bar" rule for deficiencies is rejected for non-consumer transactions, new section 9-262(b)[1] leaves it to the courts to determine the proper rule in consumer transactions.  As a result, it is likely that many states will adopt non-uniform amendments covering consumer transactions.  Even many of the consumer provisions that are included in the revised Act, such as the new section 9-616 surplus/deficiency calculation disclosure requirements, may be modified by non-uniform amendments.  Such a process and the absence of clear guidelines within the Act will negate the uniformity and clarity intended to be achieved through the adoption of the revised Act.

II. Effective Date

Unlike prior revisions of Article 9, which were slowly adopted by the states and became effective in different states over a period of years, the July 1, 2001, effective date for revised Article 9 is part of the uniform act approved by the American Law Institute (ALI) and the National Conference of Commissioners on Uniform State Laws (NCCUSL).  Thus, the revised Act was designed to become effective simultaneously in all U.S. jurisdictions, and that goal was almost achieved.  Only four states missed the July 1 effective date.  Thus, in Connecticut, the act did not become effective until October 1, 2001, and it did not become effective until January 1, 2002, in Alabama, Florida, and Mississippi.  Unfortunately, the revised Act does not address the conflicts that arise when both new and old Article 9 are simultaneously in effect in different states.  The only discussion of this possibility is the prophetic statement in the Official Comment to new section 9-701.  That comment states that "horrendous complications may arise" if any states fail to adopt the revised Act.  Fortunately, those complications have been minimized by the brevity of the delay in the late-enacting states.

III. Documenting a Secured Transaction Under the New Rules

For most personal property secured transactions the two most important documents are the security agreement and the financing statement.  Under former law, a written security agreement signed by the debtor was necessary in order to create an enforceable security interest in cases where the creditor did not retain possession of the collateral.[2]  See former 9-203(1).  In addition, a properly completed UCC-1 financing statement signed by the debtor had to be filed in the proper public offices in order to perfect the security interest.  Former 9-302  & 9-402.  Former law set out a number of content requirements that these two documents must satisfy in order to be effective.  Failure to satisfy these requirements could result in either a loss of perfection or a loss of secured status.

Although revised Article 9 retains the basic framework for the security agreement and financing statement, it significantly relaxes the minimum standards that these documents must meet.  These changes will make it easier for secured creditors to create and perfect enforceable liens.  As a consequence, from a bankruptcy perspective, these changes will reduce the likelihood that a secured lender will have committed an error that can be used to avoid its lien under the "strong arm" power of section 544 of the Bankruptcy Code.

A. Medium Neutrality

Technological advances and the related move towards paperless business transactions provided a major impetus for the revision of Article 9.  Thus, throughout the revision, the drafters attempted to make the Code "medium neutral" so that the law would work regardless of whether the parties used paper documents, computerized records, or some future method beyond the contemplation of the drafters.

Under the revised Act, neither the security agreement nor the financing statement need be reduced to a tangible written form.  All that is required is a "record," which is a defined term that includes both paper documents and information "stored in an electronic or other medium" that is "retrievable in perceivable form."  9-102(69).  The storage method need not be permanent or indestructible, and the only clear limitation is that storage in human memory is not sufficient.  See 9-102, comment 9(a).  While oral statements standing alone cannot constitute a record, an audio tape recording or an oral message left on a digital voice messaging system will qualify. Id.  Of course, with respect to the financing statement, the filing office can require use of a particular medium of communication.  9-516(b)(1).

B. Signatures Unnecessary

Consistent with the "paperless transaction" theme, the revised Act eliminates the requirement of a debtor's signature for both the security agreement and financing statement.  See 9-203(b)(3)(A) & 9-502(a).  This is consistent with the trend towards recognition of paperless transactions in UCITA and the recently enacted federal e-sign legislation.  Since the e-sign legislation specifically excludes Article 9 from its coverage, only the Article 9 provisions for authentication need be considered.

For the security agreement, the signature requirement has been replaced with a requirement that the debtor "authenticate" the record of the agreement.  9-203(b)(3)(A).  The term "authenticate" includes all of the currently permissible methods of "signing" a document -- a signature, or the execution or adoption of a symbol.  Compare 9-102(a)(7) with Former § 1-201(39).  In addition, the authentication requirement can be satisfied if the debtor "encrypts or similarly processes a record" with the present intent to identify himself/herself and adopt or accept the record.  9-102(a)(7)(B).

While the "authentication" definition is drafted to cover digital signatures, unfortunately neither the text nor the comments provide any guidance as to what other types of actions will qualify as an authentication of a non-paper record.  For example, in light of the comment's explicit reference to voice messaging systems, one would have expected some indication whether such a record could be authenticated by way of a statement made in the recording (e.g. "This is John Smith and I'm leaving this message to confirm the details of my security agreement …").  Does the use of the term "similar" require that the processing be similar to encryption or that it be similarly effective in confirming the identity of the record's author and authenticity of its contents?

The revision goes even farther with respect to financing statements and entirely eliminates the requirement of the debtor's signature.  See  9-502, comment 3.  That requirement is replaced by a requirement that the debtor authorize the filing in an authenticated record.  9-509(a)(1).  Further, the debtor's authentication of the security agreement ipso facto constitutes authorization to file a financing statement covering the collateral described in the security agreement and proceeds of that collateral.  9-509(b)(1 & 2).  However, if the creditor wishes to file a financing statement worded more broadly than the security agreement (e.g. "all assets"), an explicit authenticated authorization should be obtained from the debtor.  In addition, a separate authorization will be necessary if the creditor wishes to “pre-file” the financing statement in order to establish its priority before the security agreement is executed.  See 9-502(d) (permits pre-filing).  Finally, by obtaining from the debtor a separate authorization that specifically approves of the form and contents of the financing statement, the creditor can avoid the argument that it has filed an unauthorized financing statement.[3]

C. Contents of Security Agreement

Although parties will wish to include many additional provisions in a well-drafted security agreement, the minimum requirements for effectiveness are very similar to those under former law.  As noted above, the "writing" and "signature" requirements have been replaced with an "authentication" requirement.  However, like former law, a security agreement must "create or provide for" a security interest.  See 9-102(73) & 9-203(b)(3)(A).  In addition, like former law, the security agreement must provide a "description of the collateral."  9-203(b)(3)(A).  While old Article 9 also requires a land description for crops growing or to be grown and for timber to be cut, the revision retains that requirement only for timber to be cut.  Compare 9-203(b)(3)(A) with Former 9-203(1)(a).

The revision continues the old law's reasonable identification standard for measuring the sufficiency of a description, but rejects the more restrictive case law by validating descriptions by category, UCC type (e.g. "accounts"), quantity, and by a computational or allocational formula or procedure.  9-108(b).  However, since the revision redefines some of the UCC types, the new definitions should be reviewed carefully before using a description by UCC type.  For example, the "accounts" definition now includes license fees and some other payment rights that previously were included in the "general intangible" definition.  Compare 9-102(2) with former 9-106.

A supergeneric description such as "all the debtor's assets" is not a sufficient description for the purposes of a security agreement.  9-108(c).  In addition, in a consumer transaction, a description only by the UCC types "consumer goods," "security entitlement," "security account," or "commodity account" is not sufficient.  9-108(e)(2).  A more specific description would be required, such as "television" or "General Motors stock."  Finally, since an after-acquired property clause will not reach a future commercial tort claim (9-204(b)(2)), commercial tort claims cannot be described by UCC type (i.e. "commercial tort claims").  9-108(e)(1).  A general description such as "all tort claims arising out of the explosion of debtor's factory" would be sufficient.  9-108, comment 5.

D. Contents of Financing Statement

The revision's treatment of the financing statement's content requirements is more complex.  Essentially it sets up two classes of "required" information: (1) information that is required in order for the financing statement to be valid; and (2) information that does not affect validity, but that the filing office must require as a pre-condition to accepting the statement for filing.  The obvious purpose of this hierarchy is to protect security interests from avoidance in bankruptcy.

The only three items of information that must be included in the financing statement in order for it to be "sufficient" are: (1) the debtor's name; (2) the name of the secured party or its representative; and (3) an indication of the collateral.[4]  9-502(a).

The revision generally continues the former law’s "name" rules that require use of the individual name for individuals[5] and the organization's name for an organization that has a name.  9-503(a).  For example, if the debtor is a partnership, the partnership name should be used and not the names of the partners.[6]  However, for a "registered organization" like a corporation, a limited liability company, or a limited partnership, the financing statement must use the official name that is shown on the public records of the debtor's jurisdiction of organization.  9-503(a).  The revision expressly rejects the view that use of a trade name is either necessary or sufficient.  9-503(b)(1) & (c).

The most significant change is in the collateral description requirement.  As noted above, section 9-108 slightly relaxes the standard for measuring the adequacy of descriptions.  However, section 9-504(2) goes much further and expressly validates a supergeneric "all assets" or "all personal property" indication of collateral in the financing statement.  Since there is no prohibition against including an over-broad collateral indication in the financing statement (as long as it is authorized by the debtor)[7] and since an "all assets" financing statement will provide maximum protection, lenders likely will file "all assets" financing statements even when the transaction is more limited in scope.  Note that while the “all assets” filing will perfect any security interest that can be perfected by filing, the indication of collateral in the financing statement does not expand the security interest granted by the security agreement.

A financing statement is not rendered ineffective by minor errors or omissions in either the debtor's name or the collateral indication unless they make the financing statement "seriously misleading."  9-506(a).  Although this standard is similar to the test under prior law, the revision specifies that a name error is seriously misleading unless a search under the correct name using the filing office's search logic would disclose the defective financing statement.  9-506(c).  Since the search logic adopted in many jurisdictions has no margin of error for the critical characters, a minor typo in the name will likely be fatal (e.g. “Walmert, Inc.” instead of “Walmart, Inc.”).  Finally, although there is no statement in the text of the Act, the comments assert that "an error in the name of the secured party or its representative will not be seriously misleading."  9-506, comment 2.  This comment, if followed by the courts, effectively eliminates the secured party's name from the list of required contents.

Although only a few items are required for sufficiency, the revised Act requires that the filing office refuse to accept a financing statement that does not also include other information such as the mailing addresses of the debtor and secured party, and information about the debtor's organizational status.  9-516(b) & 9-520(a).  For example, if the debtor is an organization, the financing statement must indicate the type of organization, the debtor's jurisdiction of organization, and its organizational identification number.[8] 9-516(b)(5)(C).  While a financing statement that fails to include all required information should not be accepted for filing, if it is accepted, the omissions will not invalidate the financing statement.  9-520(c).  However, an error in the additional information can result in subordination of the lien in favor of a secured party or purchaser who reasonably relies on the incorrect information.[9]  9-338.

One significant effect of these changes in the bankruptcy context is that it will be very difficult for the trustee or debtor in possession to avoid a security interest based on defects in the financing statement.  If "all assets" filings become common, only serious errors in the debtor's name will provide grounds for avoidance under the section 544 "strong arm" power.

IV. New Place of Filing Rules for Financing Statements

One of the most significant changes introduced by Article 9 is the new choice of law rule governing perfection by filing.  For many transactions, especially those involving tangible and quasi-tangible items of collateral, revised Article 9 will change both the state and the places within a state where financing statements must be filed.  These changes will centralize almost all financing statements relating to a particular debtor in a single office in a single state.  As a result it should be much easier for a secured creditor to perfect its security interest, especially in transactions involving debtors with multi-state operations.

However, these revisions also carry a downside for secured creditors and their attorneys.  No longer can counsel expect to be able to document and perfect a local transaction under the local state's law.  Instead, even if the tangible asset that serves as collateral is located in a particular state, it may be necessary to obtain local counsel in a different state, or even a foreign country, to ensure that the security interest is perfected properly.  Further, by concentrating all filings for a particular debtor in a single state's records, these rules may result in UCC searches that produce an overwhelming number of filings that must be investigated in order to determine whether the collateral is subject to a prior perfected security interest.

A. New Types of Collateral and Liens

The revised Act expands the types of collateral and liens that can be perfected by filing a financing statement.  First, the revision extends the scope of Article 9 to reach additional types of property and liens.  For example, consensual liens on commercial tort claims and health care receivables are now expressly within the scope of Article 9 and can be perfected by filing.  See 9-109(d)(8 & 12); 9-310(a).  In addition, Article 9 now covers one type of non-consensual statutory lien -- "agricultural liens" -- and provides for their perfection through the filing of a financing statement.  See 9-109(a)(2) & 9-310(a).

Further, unlike prior law, a security interest in instruments (e.g., promissory notes) can be perfected by filing a financing statement.  See 9-312(a).  However, the "perfection" achieved by such a filing is not as complete as perfection by possession of the instrument.  While filing will give priority over a later secured creditor who perfects by filing and over a lien creditor, it will not give the secured creditor protection against purchasers and competing security interests that are perfected by possession.  Compare 9-317(a)(2) & 9-322(a)(1) with 9-330(d).  As a result, since the bankruptcy trustee's power to avoid security interests under the section 544(a) "strong arm" power is based on the rights of a hypothetical lien creditor, the filing of a financing statement covering instruments will protect the security interest from avoidance in a subsequent bankruptcy of the debtor.  This is similar to the treatment of security interests in investment property (e.g., securities) under former law, which treatment is continued under revised Article 9.  See 9-328.

B. Local Filing Eliminated

One significant change in the rules governing the place of filing is the elimination of the need to file a financing statement in a local (county) office for collateral that is not related to real estate.  See §9-501(a)(2).  Under old Article 9, many states require county-based filing for consumer goods, farm-related collateral, and collateral owned by a strictly local business.  In addition, in some cases it is necessary to file both in a county office and with the Secretary of State, or, in the case of crops, in the farmer's county of residence and the county where the crops are growing.  Under revised Article 9, the local filing requirement is eliminated for these types of collateral.  Instead most financing statements will be filed in a single state-wide office, such as the Secretary of State's Office.  Special rules apply if the debtor is a transmitting utility.  See 9-501(b).

The primary exceptions to this rule are fixture filings and financing statements covering "as extracted" collateral and "timber to be cut."  In these cases, the financing statement must be filed in the office where a mortgage on the related real estate would be filed.  See 9-501(a)(1).  "As extracted" collateral covers oil, gas, and minerals if the security interest attaches upon extraction, and also covers accounts arising out of their sale at the wellhead or minehead.  See 9-102(a)(6).  The analysis for timber is more complex and holds a trap for the unwary.  During the time that the timber is standing, the financing statement must be filed in the local real estate records.  However, once the timber is cut, it becomes ordinary goods and must be perfected by a filing in the appropriate state-wide office.  That office may even be in a different state, depending on the location of the debtor.

C. The Proper State for Filing

The more significant change is in the choice of law rules that determine the proper jurisdiction in which to file a financing statement.  Former Article 9 generally looks to the location of the debtor for intangible collateral (e.g., accounts and general intangibles), but looks to the location of the collateral for tangible collateral (e.g., ordinary goods) and quasi-tangible collateral (e.g.,instruments).  Revised Article 9 rejects the "location of the collateral" test and adopts the location of the debtor as the proper jurisdiction for filing financing statements for both tangible and intangible collateral.  See 9-301(1).

Thus, virtually all financing statements relating to a particular debtor will be filed in the same office, regardless of the type of collateral involved or of its location.  This change will make it much cheaper and simpler to perfect security interests in the assets of multi-state business operations.  For example, if a lender wishes to perfect a security interest in all of the inventory and accounts of a debtor with store locations in multiple states, it can do so by filing a single financing statement in the state where the debtor is located.  Under prior law, the lender would have been required to file its "accounts" financing statement in the state where the debtor's chief executive office was located, and file "inventory" financing statements in each state where a store was located.

Note that while revised Article 9 changes the choice of law rules for perfection by filing for tangible and quasi-tangible items of collateral, it does not change the choice of law rules for determining the effect of perfection and priority.  See 9-301(3)(C).  For example, if the debtor is located in Delaware, but the collateral is equipment that is located in Alaska, the financing statement must be filed in Delaware and must comply with the Delaware version of Article 9 in order to perfect the security interest.  However, since the collateral is located in Alaska, the Alaska version of Article 9 will determine the effect of the Delaware filing, and Alaska law will determine the relative priority of competing claimants in the collateral.

Although most financing statements must be filed in the jurisdiction where the debtor is located, this rule does not apply to real estate related collateral.  Fixture filings, and filings for "as extracted" collateral and timber to be cut must be filed in the state where the related real estate is located.  See 9-301(3)(A & B) & 9-301(4).

Another major exception is agricultural liens.  In order to perfect a statutory agricultural lien, the financing statement must be filed in the jurisdiction where the farm products are located.  See 9-302.  Thus, farm products lenders may have to be concerned about multiple filing locations.  Financing statements for security interests must be filed in the UCC records of the state where the debtor is located, financing statements for agricultural liens in the same farm products must be filed in the UCC records of the state where the farm products are located, and an "effective financing statement" may have to be filed in the Food Security Act system to protect the lien against buyers of those farm products.

Finally, the above rules apply only where perfection is accomplished by filing a financing statement.  Thus, for example, the "location of the debtor" rule does not apply where the security interest is perfected by possession, or where the collateral is covered by a certificate of title (e.g., automobiles that are not held as inventory).  See 9-301(2) & 9-303.

D. Location of the Debtor

Along with its increased emphasis on the location of the debtor, revised Article 9 partially clarifies the rules for determining the debtor's location.  The old act’s location rules for individuals are carried forward.  Thus, an individual is located at his/her principal residence and financing statements must be filed in that jurisdiction in order to perfect most security interests. See 9-307(b)(1).  Since the revised Act does not define principal residence, a careful creditor will file in multiple states if the debtor has more than one residence.

However, the rule for organizations has been changed dramatically.  If the organization is a registered organization that is organized under the laws of a United States state, territory, Puerto Rico, or the District of Columbia, then its location is deemed to be in that state.  See 9-307(e).  Thus a Delaware corporation is deemed to be located in Delaware, even if it has no operations or assets located in that state.  The new rule has the benefit of easy application, since it will be relatively simple to determine the proper state in which to file.  While this will benefit national lenders, it may impose increased costs and risks on local lenders.  For example, if the debtor is incorporated in a distant state, even a purely local transaction will have to be perfected under that distant state's law, and that may require the assistance of counsel in the distant state.  Since many corporations are incorporated in Delaware, that state likely will become the center of the corporate secured transactions universe, just as it has become the center of the corporate bankruptcy universe.

For organizations that are not registered organizations, the new location rules are virtually identical to former law.  If the organization has only one place of business, then that is its location.  Otherwise it is located at its chief executive office.  See 9-307(b)(2 & 3).  As with individuals, it may be difficult to determine the location of the chief executive office and that location may change over time.  Special rules apply to foreign banks, foreign air carriers, and organizations registered under federal law.  See 9-307(f, h, i, & j).

The new filing rules reflect a trend towards globalization and produce some surprising, but intended, results in international transactions.  Since the registered organization rules do not apply to organizations registered under foreign law, the location of such a debtor would be its chief executive office.  Thus, even if the collateral owned by a foreign company is inventory that is located in New York, it may be necessary to perfect in a foreign country under foreign law.  The same would be true for an individual debtor (U.S. citizen or otherwise) whose principal residence was located in a foreign country.  This result applies, however, only if the foreign jurisdiction generally requires public recordation as a condition or result of the security interest's obtaining priority over the rights of a lien creditor.  If the relevant foreign jurisdiction does not have such a system, then the debtor is deemed to be located in the District of Columbia.  See 9-307(c).  Thus, the nature of the foreign country's law determines whether the filing must be in the District of Columbia or in the foreign country.

V. Default And Foreclosure Under Revised Article 9

The default,repossession and foreclosure rules of revised Article 9 carry forward many of the principles of prior law.  Although the revision incorporates numerous minor changes, the repossession rules are virtually identical to prior law and the foreclosure rules still rely primarily on the "commercial reasonableness" standard.  Most of the duties imposed on secured parties by the default and foreclosure rules cannot be waived.[10]  However, the parties may by agreement set the standards for measuring fulfillment of most of those duties as long as the standards are not “manifestly unreasonable.”[11]  The “manifestly unreasonable” test gives the parties substantial leeway to modify and define the precise scope of the duties that would otherwise be imposed by the commercial reasonableness standard.

There are, however, several significant changes in the law.[12]  Possibly the most important such change is the revision of the "strict foreclosure" rules to permit secured parties to retain collateral in partial, rather than full, satisfaction of the indebtedness.  Another major change is the adoption of the "rebuttable presumption" rule for dealing with non-complying foreclosure sales in non-consumer transactions.  This will be a major change for practitioners in those states that bar the collection of deficiencies in cases where the secured party violates the Article 9 rules.

Under the Act's transition rules, the new default rules will become effective immediately on the Act’s effective date and will apply even to transactions that were entered into under prior law.  See 9-702(a).  (The revision does not apply to an action, case or proceeding commenced before the Act's effective date.  See 9-702(c)).

A. Consumer Transactions

Although many of the new rules do apply to consumer transactions, some of the most important changes only affect non-consumer transactions.  For example, the new partial strict foreclosure rules only apply to non-consumer transactions.  See 9-620(g). The drafters of the revision were unable to reach a consensus on many other difficult consumer issues posed by the revision.  A last minute compromise left many of these issues for later court resolution.  For example, although the revision adopts the "rebuttable presumption" rule for determining the deficiency in non-complying non-consumer foreclosure sales, it gives no guidance as to the proper rule for consumer cases.  This effect is incorporated in the following, truly unusual, bit of statutory language:

The limitation of the rules in subsection (a) to transactions other than consumer transactions is intended to leave to the court the determination of the proper rules in consumer transactions.  The court may not infer from that limitation the nature of the proper rule in consumer transactions and may continue to apply established approaches.

9-626(b).  As noted above, this is one area where states are likely to adopt non-uniform amendments that may resolve some of these questions.

B. Default and Repossession

The rules governing default, repossession, and redemption are almost identical to prior law.  Although most of the enforcement rights depend upon a "default" before they are triggered, the revision continues the former law’s practice of not defining "default."  Thus, the parties must take care to define the elements of default in the security agreement. 

After default, a secured party may take possession of the collateral, and without removal may render "equipment" unusable and dispose of collateral on the debtor's premises.  See 9-609(a).  Like prior law, the secured party may either proceed through judicial process or use self-help remedies like repossession.  However, non-judicial enforcement is available only if the secured party proceeds "without breach of the peace."  See 9-609(b)(2).  Also like prior law, the revision makes no attempt to define or explain what conduct might constitute a breach of the peace.  See 9-609, comment 3.  The revision continues the right of the debtor, a secondary obligor, or a lien holder to redeem the collateral prior to disposition.  See 9-623.

C. Collection and Enforcement Rights

Under prior law, after default a secured creditor could exercise collection rights against an account debtor or the obligor on an instrument.  See former 9-502(1).  These rights are expanded under the revised Act to include other types of collateral and the enforcement of non-monetary obligations.  See 9-607.  The definition of "account debtor" is expanded to include the person obligated on an account, chattel paper, or a general intangible.  See 9-102(3).  Thus, monetary payment obligations under licenses and other contract rights are now subject to the secured party's collection rights.

In addition, the secured party is given new enforcement rights with respect to non-monetary obligations.  For example, if the debtor is a franchisee and has pledged its rights under the franchise agreement to the secured party, the revised Act gives the secured party enforcement rights against the franchisor.  In addition, the secured party has collection and enforcement rights against other persons obligated on the collateral or persons liable on a supporting obligation.  For example, the secured party would have enforcement rights against the bank on a pledged deposit account.

Although section 9-607 gives broad enforcement rights to the secured party, the revised Act does not impose a correlative duty on the obligor to render performance to the secured party.  See 9-607(e).  The revised Act does not alter any otherwise applicable law that may excuse the franchisor, licensor, or other obligated person from rendering performance to the secured party.  As a result, the secured party will need to careful consider the value of such assets as collateral and may wish to obtain an agreement from the obligated third party that it will render performance to the secured party or its assignee in the event of default.

D. Notice of Sale

The revision makes a number of changes to the Article 9 notice requirements for collateral dispositions.  First, the list of required contents of a pre-sale notice is longer than under prior law.  The Act continues the requirement that the notice state the time and place of a public sale or the time after which any other disposition is to be made.  Compare former 9-504(3) with 9-613(1)(E).[13]  However, for both consumer and non-consumer transactions, the notice of sale must also describe the debtor, the secured party, and the collateral; must state the method of disposition; and must state that the debtor is entitled to an accounting of the unpaid indebtedness and list the charge, if any, for the accounting.  See 9-613(1).  In consumer transactions, the notice must include a description of any liability for a deficiency, a phone number for obtaining a redemption payoff balance, and a phone number or mailing address for obtaining additional information concerning the disposition or the debt.  See 9-614(1).  However, the risk of error is reduced because the revision contains sample "safe harbor" notice forms and a defense for certain minor or non-misleading errors.  See 9-613(3 & 5) & 9-614(3 & 5).  In addition to the pre-sale notice, a post-sale notice may be required in consumer transactions.  If the debtor is entitled to a surplus or liable for a deficiency in a consumer goods transaction, the secured party may be required to provide a detailed explanation of the surplus or deficiency calculation.  See 9-616.

Absent an appropriate post-default waiver, the notice of disposition must be sent to the debtor and any secondary obligors.  See 9-611.  In addition, in non-consumer transactions, notice must be sent to certain other parties claiming an interest in the collateral.  The revision retains the prior law’s rule requiring that notice be sent to any person from whom the secured party has received a notice of a claim of interest in the collateral.  See 9-611(c)(3)(A).  However, it also imposes on the foreclosing secured party a duty to search the UCC records and send notice to any party who has properly perfected its security interest in the collateral by filing a financing statement.  See 9-611(c)(3)(B).  Although this should insure that holders of both junior and senior perfected security interests receive notice, the foreclosing secured party has no duty to send such notice if the filing office fails to respond in a timely fashion or if the search result does not list a particular secured creditor.

E. Sale Process

The revised Act carries forward the prior law's policy of flexible collateral disposition rules.  The revision expressly adds licensing as an appropriate method of disposition.  However, while the secured party is authorized to sell, lease, license, or otherwise dispose of the collateral, every aspect of the disposition must be commercially reasonable.  See 9-610(a & b).  In a significant change from prior law, the contract for sale, lease, license or other disposition carries with it all warranties which by operation of law would accompany a voluntary disposition of similar property.  See 9-610(d).  Thus, for example, warranties of title, possession and quiet enjoyment might arise.  Further, if the secured creditor was a dealer in goods of the kind involved, an implied warranty of merchantability might arise.  See UCC § 2-314.  While the secured party may disclaim or modify these warranties, the ability to do so is limited by the commercial reasonableness standard.  See 9-610(b & e).

F. Related Party Sales

The revised Act addresses the problem of low price dispositions by applying a special rule in cases where the transferee is the secured party, a person related to the secured party, or a secondary obligor.  If the sale price is "significantly below" the price that would have resulted from a hypothetical sale to a third party, then the deficiency or surplus is calculated based on the amount that would have been realized in such a third party sale.  This rule applies even though every aspect of the sale was conducted in a commercially reasonable manner.

G. Strict Foreclosure

As a practical matter, the changes in the strict foreclosure rules may prove to be the most important revisions of the Article 9 enforcement rules.  Under the old rules, the secured party can propose to keep tangible collateral that is in its possession in full satisfaction of the indebtedness.  See former 9-505(2).  The revision expands this option in several ways.  First, the possession requirement is eliminated in non-consumer transactions.  See 9-620(a).  Thus, strict foreclosure is now available as an option for intangible collateral and for tangible collateral that has not been repossessed.

The debtor can "agree" to the secured party's acceptance of the collateral in full satisfaction of the debt either by affirmatively consenting after default, or by failing to object within 20 days after the secured party sends its proposal to the debtor.[14]  In addition, the secured party must send notice of its proposal to those parties who would be entitled to notice of disposition (discussed above).  See 9-621.  In general, those parties can block the strict foreclosure by objecting within the 20-day period.

The more important expansion of the strict foreclosure right is the secured party's option in non-consumer cases to propose to keep the collateral in partial satisfaction of the indebtedness.  See 9-620(a).  Here the debtor must affirmatively agree to the terms of the partial strict foreclosure after default.  See 9-620(c)(1).  Failure to object will not constitute consent.  Partial strict foreclosure gives the secured party the option to both keep the collateral and pursue the debtor for a deficiency.  This may become the preferred method of disposition since it is cheap and quick and since there is no advantage to forcing a sale if the secured party offers a fair credit for the collateral value.

Effect of Violation

Under old Article 9, the courts were split on the question of the effect of a secured party's failure to comply with the Article 9 enforcement rules.  Some courts barred the collection of a deficiency, while others applied a rebuttable presumption that the sale would have satisfied the indebtedness had it been conducted properly.  For non-consumer transactions, the revised Act adopts the rebuttable presumption approach. See 9-626(a)(3).  Thus, for example, if the secured party fails to give proper notice of sale, it can still collect a deficiency from the debtor.  However, the deficiency will be based on the amount of proceeds that would have been realized in a hypothetical complying sale if that exceeds the actual proceeds of the non-complying sale.  For consumer transactions, the Act is silent, leaving it to the courts to fashion an appropriate rule.  See 9-626(b).

Non-compliance with the Article 9 requirements, including the enforcement rules, can also result in liability for statutory damages.  Like prior law, the secured party is liable for any loss caused by its failure to comply with Article 9.  Compare former 9-507(1) with 9-625(b).  The revision also carries forward the minimum damage provision for consumer transactions.  In such cases, the debtor or secondary obligor is entitled to a minimum recovery of not less than the credit service charge plus 10 percent of the principal amount of the obligation, or the time-price differential plus 10 percent of the cash price.  See 9-625(c)(2).

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