The UCC Revised Article 9 Transition Period - Corporation Service ...

The UCC Revised Article 9 Transition Period:
Implications for 2011
By Paul Hodnefield, Associate General Counsel, Corporation Service Company
Almost five years ago, lenders and their legal counsel had to deal with the end of the UCC Revised Article 9
(“RA9”) five-year transition period. Many readers will recall that there were concerns throughout the industry
over a drafting ambiguity in UCC Section 9-705(c). That ambiguity left the section open to multiple
interpretations, one of which was that some financing statements filed under former Article 9 would cease to
be effective at the end of the transition, not the scheduled lapse date.
Fortunately, an effective solution to the issue was recommended by The Permanent Editorial Board for the
Uniform Commercial Code (“PEB”). Still, uncertainty remained for any of the affected financing statements
that would need to be continued five years later.
In 2011, any of the financing statements affected in 2006 that are still effective will be approaching their new
lapse dates. Secured parties that plan to continue any of the affected financing statements may want to
exercise extra caution due to the uncertainty surrounding the interpretive issue. This article provides a
review of the Section 9-705(c) transition issue that occurred in 2006, explains what impact it will have in
2011, and offers best practice suggestions to help secured parties avoid the risk of uncertainty.
A Short Review of the Section 9-705(c) Transition Issue
When Revised Article 9 (“RA9”) took effect in 2001, it changed the designated financing statement filing
location from the location of the collateral to the location of the debtor. That statutory change simplified the
filing process, but many financing statements that were filed under old law would not be in compliance with
RA9. The drafters had to devise a method for protecting secured parties perfected under the former law.
To ensure that financing statements initially filed under former Article 9 remained effective after RA9 took
effect, the drafters created special transition rules. The transition rules provided secured parties with a
mechanism, commonly known as the “In Lieu” filing, to move existing financing statements to the correct
RA9 filing location. However, Section 9-705(c) imposed a time limit. Secured parties had until June 30,
2006, the Section 9-705(c) cutoff date, to bring the filed financing statements into compliance.
Section 9-705(c) provides in relevant part:
(c) This act does not render ineffective an effective financing statement that, before July 1, 2001, is filed and
satisfies the applicable requirements for perfection under the law of the jurisdiction governing perfection as
provided in former Section 9-103. However, except as otherwise provided in subsections (d) and (e) and
Section 9-706, the financing statement ceases to be effective at the earlier of:
(1) The time the financing statement would have ceased to be effective under the law of the jurisdiction in
which it is filed; or
(2) June 30, 2006.
Under this section, if a pre-effective date financing statement was properly filed in a jurisdiction that was not
correct for RA9, the secured party had until the lapse date in the old jurisdiction or June 30, 2006, whichever
came first, to file an In Lieu financing statement in the correct jurisdiction.
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The UCC Revised Article 9 Transition Period:
Implications for 2011
A different section addressed the situation where a pre-effective date financing statement was filed in the
correct office for both former Article 9 and RA9. Section 9-705(d) provides that a secured party could
continue the effectiveness of a pre-effective date financing statement that was filed in the correct filing office
under both former Article 9 and RA9 simply by filing a continuation statement.
It might appear from reading Section 9-705 as a whole that subsection (c) applied only to pre-effective date
financing statements filed in incorrect filing office for RA9. However, the statutory text does not make that
clear, resulting in the potential for multiple interpretations of Section 9-705(c).
The PEB recognized that there was an interpretive issue with Section 9-705(c) in a 2005 report. One
possible interpretation was that Section 9-705(c) applied only to financing statements filed in a filing office
that was correct under old law, but incorrect under RA9. Another reasonable interpretation was that Section
9-705(c) meant exactly what it said –that all pre-effective date financing statements would cease to be
effective on June 30, 2006, unless first brought into compliance with RA9. The PEB took no position on
which interpretation was correct.
The interpretive issue left secured parties uncertain over what lapse date would apply to a specific category
of financing statements. Those were the financing statements due to lapse between July 1 and December
31, 2001, that were continued during the pre-RA9 portion of the six-month continuation window. Secured
parties could not be certain whether these affected financing statements would cease to be effective on
June 30, 2006, or lapse at the end of the full five-year effective period. It all depended on what interpretation
of Section 9-705(c) applied.
Revised Article 9 took effect on July 1, 2001. It was a common practice for secured parties to continue
financing statements that were due to lapse between July 1 and December 31, 2001, during the pre-RA9
effective date portion of the six-month continuation window. This practice enabled secured parties to file
under the law they were most comfortable with instead of the new and unknown RA9. Filing continuations
before RA9 took effect made sense at the time, but was to have significant implications for the end of the
transition period.
For example, a financing statement originally filed on October 1, 1996, and continued before the effective
date of RA9 would have received a new lapse date of October 1, 2006. Depending on how a court might
interpret Section 9-705(c), the financing statement might have ceased to be effective on June 30, 2006, not
the lapse date reflected in the filing office records or secured party’s tracking system.
The PEB observed that there was a “safe harbor window” during which a secured party could file its
continuation for an affected financing statement and remain perfected regardless of how the courts might
later interpret Section 9-705(c). That safe harbor ran from the opening of the six month continuation window
through June 30, 2006. The PEB report advised secured parties to file during that window to avoid the risk
created by different interpretations of Section 9-705(c).
Implications for 2011
Many secured parties followed the PEB recommendations in 2006, but that left another area of uncertainty
for secured parties that will want to continue the affected financing statements again in 2011. Under Section
9-515(e) a continuation statement continues the effectiveness of the initial financing statement for five years
commencing on the day in which the financing statement would have become ineffective in the absence of
the filing.
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The UCC Revised Article 9 Transition Period:
Implications for 2011
The potential for different interpretations of Section 9-705(c) still creates uncertainty regarding whether the
affected financing statements will next lapse on June 30, 2011 or the fifth anniversary of the original lapse
date. Assuming Section 9-705(c) applied to all financing statements filed under former Article 9, the affected
records could inadvertently lapse on June 30, 2011, instead of the lapse date reflected in the filing office
records or secured parties’ expiration tracking systems
Best Practices
Secured parties that are concerned about the Section 9-705(c) interpretive issue can take action in 2011 to
minimize the risk and eliminate uncertainty. The first step is to identify the records subject to the interpretive
issue. Those records consist of financing statements that were:
Originally filed on or before December 31, 1996.
Due to lapse between July 1 and December 31, 2001.
Continued on or before June 30, 2001.
Continued again on or before June 30, 2006.
If an active financing statement meets all these criteria, the secured party simply needs to file its next
continuation statement prior to June 30, 2011. Secured parties should be aware that the filing window may
be less than six months. Filing offices will calculate the beginning of the six-month continuation window
based on the indexed lapse date, not the fifth anniversary of the Section 9-705(c) cutoff date.
Conclusion
The good news is that there are very few financing statements still at risk from the Section 9-705(c)
interpretive issue in 2011. Most of the records continued in 2006 have since been terminated or will be
intentionally allowed to lapse. Even those records that the secured party plans to continue in 2011 may not
be at risk. The correct interpretation of Section 9-705(c) is still an open question. Nevertheless, secured
parties that want to approach the issue from an abundance of caution should file their continuations for
affected financing statements no later than June 30, 2011.
Secured parties must also be aware that several states enacted legislation to address the issue in 2006, or
had other special circumstances that will require extra diligence. Those states include Arizona, Florida,
Maryland, Texas, and a few others. It is important for any secured party that wants to continue an affected
financing statement to check the applicable state law to determine the best course of action.
Additional Resources on the 2006 Transition Issue
2005 PEB Report: http://extranet.ali.org/directory/files/DEC2005PEB-report.pdf
2005 Article Remaining Perfected Through the Revised Article 9 Transition Period:
http://www.iaca.org/downloads/9-705/REMAININGPERFECTED_042105.pdf
Please feel free to contact Paul Hodnefield, Associate General Counsel for Corporation Service Company,
with any questions or comments at phodnefi@cscinfo.com, or 800-423-7398.
www.cscglobal.com | © 2010 - Corporation Service Company® 800.858.5294

The UCC Revised Article 9 Transition Period:
Implications for 2011
www.cscglobal.com | © 2010 - Corporation Service Company® 800.858.5294