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ComplianceJanuary 06, 2023

2022: A year in review for UCC law

Keeping track of the changes to state UCC laws is important for businesses that borrow, for lenders, and for the lawyers who advise both debtors and creditors. But it can be hard to do for busy individuals with so much else on their plates.

To help all interested parties keep up, CT has compiled some of the significant UCC legislative and case law developments we have tracked and reported for you in Legislative and Regulatory Updates during 2022.

Arizona

House Bill 2645, effective September 23, 2022, increases from a class 1 misdemeanor to a class 3 felony, the penalty for a person who causes an unauthorized UCC secured transaction record to be filed and who knows that the record is unauthorized or contains a material misstatement or false claim. 

California

Carmel Financing, LLC v. Schoenmann, CA No. 3:21-cv-07387, decided August 23, 2022. The U.S. District Court, Northern District of California held that the debtor’s bankruptcy trustee could avoid the lender’s security interest in insurance proceeds paid to the debtor. The court noted that California law requires that a security interest in insurance proceeds can be perfected only by giving written notice of the security interest to the insurer. In this case there was a written communication asking that the lender be added to the policy but there was no explicit notice that the lender had a security interest in the proceeds.

Connecticut

In re Brainard, 2022 Bankr. LEXIS 2232, decided August 12, 2022. The U.S. Bankruptcy Court, District of Connecticut, held that the plaintiff law firm did not have a perfected security interest in the collateral described in its UCC-1 as a distribution from a pension plan to the alleged debtor, a former client. The court noted that when a creditor presents a UCC-1 to establish a valid and enforceable security interest, there must be some further documentation corroborative of the debtor's intent to pledge collateral. Here there was a lack of evidence that the former client authorized the filing of the UCC-1 identifying the pension funds as collateral. Therefore, no security agreement was created. Furthermore, even if the court had concluded a security interest attached, it was unperfected. At the time of the UCC-1 filing, the collateral as described no longer existed, the funds had already been distributed, transferred to two different financial institutions, and, in part, spent.

Florida

1944 Beach Boulevard, LLC v. Live Oak Banking Company, No. SC21-1717, decided August 25, 2022. The Florida Supreme Court addressed the following question regarding the filing of financing statements with the Florida Secured Transaction Registry (Registry) — “is the filing office’s use of a standard search logic necessary to trigger the safe harbor protection of Sec. 679.5061(3)”. The court held that it is necessary. The court also held that the Registry does not employ a standard search logic. Therefore, the safe harbor does not apply and any financing statement that fails to correctly name the debtor is misleading and therefore ineffective.

In this case, the debtor LLC’s correct name includes the word “Boulevard”. However, the bank’s financing statements used the abbreviation “Blvd.” instead. A search of the Registry did not bring up the bank’s financing statements on the initial page of 20 results generated by the Registry. However, it did appear on the preceding page, which could be accessed by navigating backward using the “Previous” tab. The Bankruptcy Court held that the financing statements fell within the safe harbor and were effective. The District Court affirmed. The Eleventh Circuit certified questions to the Florida Supreme Court concerning the proper scope of the search under the safe harbor provision. However, the court found it unnecessary to answer those questions because the safe harbor does not apply.

The court noted that Sec. 679.5061(3) provides for a safe harbor that applies when a financing statement that fails to correctly name the debtor is disclosed by a search of records under the debtor’s correct name “using the filing office’s standard search logic, if any”. The court noted that within the industry the filing office’s “standard search logic” means a procedure that identifies a set of financing statements on file that constitutes a hit for the search. It must identify which financing statements are a hit and which are not a hit. However, the Registry does not do that. It returns a list of the 20 names that most closely fit and also allows the user to navigate backward and forward, thereby giving the user access to every name in the Registry.

According to the court, the definition of standard search logic requires the search to identify specific hits. The search offered by the Registry, returning the entire index, is not standard search logic. Furthermore, Sec. 679.5061 conditions the safe harbor’s application on the ability to search using a standard search logic. Therefore, the filers are left with the zero-tolerance rule of 679.5061(2), which requires the filer to correctly name the debtor.

Idaho

House Bill 583, effective July 1, 2022, enacts the Digital Assets Act, which among other things, classifies digital assets as general intangibles and digital securities as investment property and provides for perfection by control and possession. 

Indiana

House Bill 1092, effective July 1, 2022, deletes a provision of Article 9 of the state’s UCC law that required the secured party to send a copy of a financing statement to the debtor within 30 days of filing. 

Senate Bill 351, effective July 1, 2022, adds a new chapter to the state UCC law governing transactions in controllable electronic records and amends the chapter concerning secured transactions to provide for perfection of security interests in controllable electronic records by control or filing a financing statement. 

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Iowa

House Bill 2445, effective July 1, 2022, amends the state’s UCC law to adopt provisions regarding controllable electronic records, including amending Article 9 to address the perfection of a security interest in electronic money, controllable accounts, controllable payment intangibles, and controllable electronic records.

Massachusetts

F.H. Cann & Assoc., Inc. v. Moorman, CA 20-11251, decided May 24, 2022. The U.S. District Court, District of Massachusetts granted the defendant’s motion for preliminary injunctive relief which, among other things, required the defendant to remove a UCC-1 filed against the defendant to secure what the defendant claimed was $500,000 the plaintiffs owed for violating the copyright he filed on his name. The court noted that a person cannot copyright his name and therefore there was no consideration for the purported security agreement and no valid contract underlying the UCC-1.

Minnesota

House Bill 3400, effective August 1, 2022, makes changes to the financing statement filing system in regards to unauthorized financing statements filed with the intent to harass or defraud the person named as the debtor. Among other things the bill provides a procedure whereby a person named as a debtor in a financing statement may file an affidavit with Secretary of State stating that the financing statement was unauthorized and filed with intent to harass or defraud and directing the Secretary of State to file a termination statement if the Secretary of State does not reject the affidavit. 

Nebraska

Legislative Bill 649, (Laws of 2021), operative July 1, 2022, amends the state’s UCC law to add a new chapter addressing controllable electronic records and to amend existing law to address the perfection of a security interest in controllable electronic records.

New Mexico

Jacobs v. Taylor, Civ. No. 22-135, decided October 24, 2022. The U.S. District Court, District of New Mexico held that the alleged tort — a Colorado lawyer’s legal malpractice in failing to timely file a UCC-1 financing statement to secure a $2.1 million promissory note for the plaintiff, a New Mexico resident, occurred in New Mexico, and that therefore New Mexico substantive law applied to the case.

The plaintiff retained the lawyer to represent him in the sale of his New Mexico corporation. The buyers became obligated to the plaintiff on the promissory note. According to the plaintiff, the lawyer was supposed to file a financing statement to perfect his security interest. However, he failed to do so until approximately 18 months later when the plaintiff asked whether it had been filed. The corporation later filed for bankruptcy in New Mexico and the plaintiff alleged he received less money than he would have had the financing statement been timely filed. In holding that the tort occurred in New Mexico, the court noted that the alleged malpractice stemmed from the failure to timely file the financing statement in New Mexico and the alleged harm occurred from the fact that the plaintiff received less money from a New Mexico bankruptcy court. The court rejected the lawyer’s argument that Colorado law should apply because the promissory note was drafted in Colorado and the UCC-1 that was eventually filed in New Mexico was filed from his Colorado office.

New York

Worthy Lending LLC v. New Style Contractors, Inc., 2022 NY Slip Op 06631, decided November 22, 2022. The New York Court of Appeals held that UCC Sec. 9-607 does not prevent a secured creditor and its borrower from deciding that the secured creditor can enforce the borrower’s rights against the borrower’s account debtors. And furthermore, pursuant to Sec. 9-406, an assignee includes a holder of a presently exercisable security interest in an assignor’s receivables and thus, that holder can bring a suit pursuant to UCC Sec. 9-607. The court reversed the Appellate Division, which had affirmed the trial court’s dismissal of a suit brought by a secured creditor against its borrower’s account debtor to recover payments due the borrower, even though their security agreement gave the secured creditor the right to require the borrower’s account debtors to pay it directly. The Appellate Division had held that a secured creditor could not bring an action under UCC 9-607 because it was not an assignee.

Oklahoma

House Bill 3811, effective November 1, 2022, allows the master list of financing statements of the farm products central filing system to be downloaded via Internet without a fee. 

Texas

Senate Bill 1523 (Laws of 2021), effective June 1, 2022, amends Texas’ UCC law to amend the definition of “person” in Article 1 to include protected series or registered series of a for-profit entity and amends the definition of “registered organization” in Article 9 to include a series of a registered organization if the series is formed or organized under the laws of a single state and the statute of the state governing the series requires that the public organic record of the series be filed with the state.

Utah

Senate Bill 182, effective May 4, 2022, establishes a framework for the ownership of digital assets. Among other things, the bill states that digital securities are intangible personal property and shall be considered securities and investment property for the purposes of Chapter 9a, UCC-Secured Transactions.

UCC emerging technology amendments

In 2022, the sponsoring organizations of the UCC (the American Law Institute and Uniform Law Commission) approved amendments to the UCC to address various issues related to digital assets, including the rights of third parties in transactions involving digital assets and the perfection of security interests in digital assets. We provided information about these amendments in Uniform Commercial Code (UCC) is amended to address emerging technologies

Sandra Feldman
Publications Attorney
Sandra (Sandy) Feldman has been with CT Corporation since 1985 and has been the Publications Attorney since 1988. Sandy stays on top of the most pressing and pertinent business entity law issues that impact CT customers of all sizes and segments.
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