BILL ANALYSIS Ó
AB 502
Page 1
Date of Hearing: April 30, 2013
ASSEMBLY COMMITTEE ON JUDICIARY
Bob Wieckowski, Chair
AB 502 (Wagner) - As Amended: April 1, 2013
As Proposed to be Amended
SUBJECT : COMMERCIAL LAW: SECURED TRANSACTIONS
KEY ISSUES :
1)MIGHT THIS BILL POTENTIALLY HAVE THE INADVERTENT EFFECT OF
DENYING CREDIT TO INDIVIDUALS WHO DO NOT HAVE A DRIVER'S
LICENSE OR STATE IDENTIFICATION CARD, SUCH THAT IT IS PRUDENT
TO INCLUDE LANGUAGE PROHIBITING DISCRIMINATION ON THAT BASIS?
2)SHOULD THE REMAINING AND OTHERWISE NON-CONTROVERSIAL
PROVISIONS OF THIS BILL AMENDING UCC ARTICLE 9, GOVERNING
SECURED TRANSACTIONS IN PERSONAL PROPERTY, BE ADOPTED IN
CALIFORNIA AT THE RECOMMENDATION OF THE UNIFORM LAW
COMMISSION?
FISCAL EFFECT : As currently in print this bill is keyed fiscal.
SYNOPSIS
This bill is sponsored by the Uniform Law Commission (ULC) and
seeks to adopt numerous amendments to Division 9 of the
Commercial Code (also known as Article 9 of the Uniform
Commercial Code), governing secured transactions in personal
property, as recommended by the drafters of the amendments, the
American Law Institute and the National Conference of
Commissioners on Uniform State Laws. Other than adoption of a
provision known as Alternative A (described below), these
amendments are noncontroversial and will help address practical
concerns that have arisen since Division 9 was last
significantly revised in 1999.
Division 9 provides rules that govern any transaction, other
than a finance lease, that involves the granting of credit
coupled with a creditor's interest in a debtor's personal
property. The creditor's interest is called a security
interest, the perfection of which establishes the creditor's
priority over other creditors and is accomplished by filing a
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financing statement with the Secretary of State that identifies,
among other things, the "individual name" of the debtor.
According to the ULC, some courts around the country have
struggled with the question of what name a financing statement
must provide in order for the debtor's name on the financing
statement to be sufficient to establish perfection and priority.
The problem arises because the individual's name on his or her
birth certificate, driver's license, passport, tax return or
bankruptcy petition may all be different. It is not known to
what extent, if any, this problem has arisen in California
courts. But the bill is not premised on addressing problems in
California; it seeks to establish a uniform national standard in
the interest of ease and convenience for national creditors.
According to lenders and business groups that support this bill,
uncertainty about what constitutes a sufficient name requires
secured parties to search and file financing statements under
multiple names.
To address this problem, this bill seeks to establish that the
name on the financing statement filed against an individual
debtor is deemed sufficient only if it provides the name that
appears on the debtor's unexpired driver's license or DMV-issued
state identification card (hereafter, "Alternative A.")
Proponents of the bill contend that Alternative A is the best
solution because most individual borrowers have either a
driver's license or state identification card readily available,
and these two cards are commonly used means of identification
familiar to most people. In addition, proponents contend that
because Alternative A has been adopted by 30 states so far, its
adoption in California will further the goal of uniformity of
state laws shared by the ULC and by lenders that operate in
multiple states. The bill is opposed by a group of
California-based law professors, who provide various reasons why
they have concluded that Alternative A is "particularly not
needed in California and its enactment would be uniquely harmful
in California."
Independently of the law professors' concerns, it should be
noted that Alternative A may increase the risk that lenders will
disfavor applicants who lack a driver's license or state ID. By
elevating the importance of these documents in the interest of
lender ease, certainty and national uniformity, Alternative A
highly incentivizes lenders to demand presentation of a driver's
license or state ID in order to determine the name of the
prospective borrower that shall be recorded on the financing
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statement. As a result, lenders may deny credit to non-license
holders in order to avoid the extra risk and work associated
with searching and filing for more than one name per borrower.
Indeed, the avoidance of these steps is precisely the motivation
for changing the law. While it is true that many credit
applicants have a driver's license or state ID, it is also true
that a significant number of otherwise qualified applicants may
not have these documents, including those who are ineligible for
them. Committee staff engaged in extensive discussions with the
author, sponsor, and bankers to add a non-discrimination clause
to avoid the potential adverse effects of Alternative A.
Although the bankers association abjures any interest in
discrimination, it has not been amenable to making the point
explicit in the bill. The Committee may wish to consider
whether the amendment specified below should be adopted to
protect against the potential inadvertent discriminatory effect
in order for this legislation to move forward.
SUMMARY : Adopts amendments to Division 9 of the Uniform
Commercial Code, governing secured transactions in personal
property. Specifically, this bill, among other things:
1)Revises the requirements for a financing statement to
sufficiently provide the name of a registered organization, a
decedent's estate, or an individual. Among other things,
requires a filer to provide on the financing statement the
name on the debtor's driver's license or identification card
if the debtor is an individual to whom the Department of Motor
Vehicles has issued a driver's license or identification card
that has not expired.
2)Further provides that if the debtor does not have a driver's
license or identification card, the filer must provide on the
financing statement either the individual name of the debtor,
or the debtor's surname and first personal name.
3)Specifies rules that apply to collateral to which a security
interest attaches within 4 months after the debtor changes its
location to another jurisdiction, or where there is a new
debtor that is a successor by merger. Specifically, provides
the filer with perfection for four months in collateral
acquired post-move, and provides for temporary perfection in
collateral owned by the successor before the merger or
collateral acquired by the successor within four months after
the merger.
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4)Replaces references to "correction statement" with the term
"information statement," and authorizes the secured party of
record to also file an information statement if the secured
party believes that an amendment to its financing statement
was not authorized.
5)States that these provisions become operative on July 1, 2014.
EXISTING LAW :
1)Provides that a financing statement is sufficient only if it
provides the name of the debtor and the name of the secured
party or a representative of the secured party, and indicates
the collateral covered by the financing statement. (Section
9502.)
2)With respect to debtors that are not registered organizations
or trustees, provides that a financing statement sufficiently
provides the name of a debtor only if the statement provides
the individual or organizational name of the debtor. (Section
9503.)
3)Provides that perfection by filing continues for four months
after the jurisdiction in which the debtor is located changes,
but only with respect to collateral owned by the debtor at the
time of the change. Does not allow perfection with respect to
after-acquired collateral unless and until the secured party
perfects pursuant to the law of the new jurisdiction, even if
the security interest attaches to such new collateral.
(Section 9316.)
4)Authorizes the debtor to file a correction statement to
establish a claim that a financing statement filed against the
debtor was in fact unauthorized. (Section 9518.)
COMMENTS : On behalf of the sponsor, the California Commission
on Uniform State Laws, the author introduced this bill to adopt
revisions to Article 9 of the Uniform Commercial Code (UCC) set
forth in 2010 by the American Law Institute and the National
Conference of Commissioners on Uniform State Laws (hereafter,
"Uniform Law Commission" or ULC). Collectively, these revisions
are referred to as the "2010 Amendments."
The last major revision of Article 9 was in 1999 which was
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adopted in all fifty states. It is the stated goal of the ULC
to enact the 2010 Amendments in all 50 states with an effective
date of July 1, 2013. This revision is current law in over 30
states, and has been introduced this year in the legislatures of
another sixteen states. This bill would enact the 2010
Amendments in this state, which uses the nomenclature "Division
9" rather than "Article 9" when referring to the California
Commercial Code.
Background on UCC Article 9. According to the Uniform Law
Commission, Article 9 of the UCC governs secured transactions in
personal property-that is, the granting of credit secured by
personal property. Hundreds of millions of dollars of
commercial and consumer credit are granted every year in secured
transactions under UCC Article 9. Article 9 rules apply, for
example, when a manufacturer finances the acquisition of
machinery, a retailer finances inventory, or a consumer finances
home furnishings. (Uniform Law Commission, "UCC Article 9
Amendments Enacted in 26 States", May 22, 2012.)
Article 9 provides rules that govern any transaction, other than
a finance lease, that involves the granting of credit coupled
with a creditor's interest in a debtor's personal property. If
the debtor defaults, the creditor may possess and sell the
property to satisfy the debt. The creditor's interest is called
a security interest, and perfection of the creditor's security
interest establishes the creditor's priority over other
creditors. Article 9 specifies who has the first rights in the
collateral when two or more competing creditors have legally
enforceable interests in the collateral. (Id.)
Clarifying the name of the individual debtor to be provided on a
financing statement. According to the ULC, some courts have
struggled with the question of what name a financing statement
must provide for an individual debtor in order for the debtor's
name on the financing statement to be sufficient. The problem
arises because an individual does not typically have a single
name. The individual's name on his or her birth certificate,
driver's license, passport, tax return or bankruptcy petition
may all be different. Moreover, the debtor may be known in his
or her community by a name that is not reflected on any official
document. The cases have created a level of uncertainty that has
led secured parties to search and file financing statements
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under multiple names. ("Summary of the 2010 Amendments to
Article 9 of the UCC", 42 Uniform Commercial Code Law Journal ,
Number 4 (2010), p.5; hereafter "UCCLJ Summary.")
In response to this problem, the ULC developed not one, but two
proposed solutions. The first, Alternative A, is also referred
to as the "only if" approach because under this alternative, the
name on the financing statement filed with the Secretary of
State against an individual debtor is deemed sufficient only if
it provides the name that appears on the debtor's unexpired
driver's license or DMV-issued state identification card. If,
however, the debtor has not been issued a driver's license or
state ID card, then either (a) the individual name of the debtor
(i.e. as under current Article 9), or (b) the debtor's surname
and first personal name would be sufficient. (Although
Alternative A equates a California driver's license with a
DMV-issued identification card, for purposes of discussing
Alternative A, this analysis will simply refer to a "driver's
license" to mean both forms of identification issued by the
DMV.) By contrast, Alternative B, also known as the "safe
harbor rule", would instead allow (a) the driver's license as
specified by Alternative A, in addition to: (b) the individual
name of the debtor, as under current Article 9, and (c) the
debtor's surname and first personal name.
According to ULC, the sponsor of this bill, the choice of which
alternative, A or B, to incorporate in legislation to enact the
2010 Amendments is made by the author of the legislation in each
particular state. The author has chosen to adopt Alternative A
as the sufficiency standard for financing statements for
California.
Arguments in support of Alternative A . Alternative A is
strongly supported by the California Bankers Association, the
California Chamber of Commerce, and other business and lender
groups, who state that it "is the most effective, simple and
certain method for lenders to identify the name of an individual
commercial borrower and provides a preferred method for the
secured lending community to follow when filing and conducting
searches." Proponents contend that Alternative A is needed to
address difficulties lenders face when they must (1) search
under many different names with no certainty that they have
discovered all financing statements covering the debtor, and (2)
list many different names to ensure that they are listing all
names that the debtor is using. These proponents explain:
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Secured parties do not want to "win a lawsuit" about
priority with another secured party; they want to
avoid disputes with other secured parties by making
sure that everyone's security interest with respect to
a particular debtor can easily be ascertained so that
no one will extend credit based on a lack of knowledge
about another secured party's position.
According to proponents, this bill will primarily affect
financing statements in commercial loan transactions, and not
typical consumer transactions (such as a person buying a washing
machine on credit from a department store) in which the security
interest attaches upon signing of the purchase contract without
the need to file a financing statement. These commercial loan
transactions, according to proponents, are typically loans to
small businesses owned by an individual or sole proprietorship
and secured by the account receivable of the business.
Proponents assert that Alternative A is the best solution
because most individual borrowers have either a driver's license
or state identification card readily available, and these two
cards are commonly used means of identification familiar to most
people. In addition, they contend that the correct name for the
financing statement will be easily ascertainable from the
license and can be readily verified by reference to public DMV
records.
Proponents also note that under Alternative A, even if a person
has not been issued a driver's license or state ID card, either
the individual name of the debtor (i.e. the current Article 9
standard) or the debtor's surname and first personal name would
be sufficient to be entered on the financing statement. This
latter option, proponents contend, is still an improvement over
existing law because the surname and first personal name (e.g.
"Adams, John") of the debtor does not allow for middle names,
middle initials, or additional family names ("Adams, John Q.",
"Adams, John Quincy", etc.) and thus is by definition narrower
and more precise.
In addition, proponents contend that because Alternative A has
been adopted by 30 states so far, its adoption in California
will further the goal of uniformity of state laws shared by the
ULC and by lenders that operate in multiple states.
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Arguments in opposition to Alternative A. The Committee has
received a joint letter signed by ten professors who teach
commercial law in California law schools, which expresses their
opposition to Alternative A. These opponents, who reportedly
comprise the majority of law professors teaching commercial law
in the state, contend that Alternative A is "particularly not
needed in California and its enactment would be uniquely harmful
in California." Opponents contend that the near unanimity in
opposition to Alternative A among these academics should carry
special weight because unlike lenders who presumably support the
bill out of economic self-interest, the law professors have no
private economic interest at stake.
Among other things, the law professors dispute that Alternative
A will not necessarily decrease the need for lenders to search
under more than one name because, notwithstanding the proposed
new Article 9 name rule for financing statements, the current
name rule for tax lien notices (filed by the Franchise Tax Board
and Employment Development Department) and judgment lien notices
(filed by judgment creditors) will continue to require diligent
searchers to search under multiple names to get a complete
picture of the debtor. In addition, opponents contend that,
despite proponents' claims that Alternative A is needed to
reduce the costs of both searching and filing under multiple
name variants, in fact the UCC filing system operated by the
Secretary of State employs a very reasonable fee structure, and
has very generous search logic that yields multiple relevant
results for a single search. The opponents also assert that,
even if a majority of states enact Alternative A, uniformity
across states will not result because the agency that issues
driver's licenses in a particular state does not coordinate its
naming practices with their counterparts in other states, nor
with the UCC filing office in each state.
Finally, these opponents also contend that Alternative A will
likely increase the number of inquiries presented to the DMV
seeking to verify driver license information, resulting in
potentially large but unknown new burdens upon DMV staff.
Proponents, however, contend that the DMV currently has
procedures in place to provide this information, and that
confidentiality concerns are addressed because disclosure of
such information is allowed only if the lender seeking
verification is in compliance with existing privacy laws,
including the Driver's Privacy Protection Act.
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In conclusion, the law professors who oppose Alternative A
write:
Every change in the law imposes a learning curve on
lawyers and judges. It is the Legislature's obligation
to ascertain that a particular change is necessary and
that its benefits exceed its costs. Alternative A
fails this test. It will lead to litigation to answer
questions presented as a consequence of the change,
costing already scarce judicial resources. It will
lead to lawyer errors, as Article 9 is not just the
province of experts, but is used daily throughout the
State by family lawyers seeking to secure settlement
promises being made, lawyers handling the sale of
businesses, ordinary citizens who have made loans to
friends or relatives, and many others. The Legislature
must consider whether a claimed benefit accruing to
large national and regional banks is justified by
shifting costs to other users of the UCC.
The Committee also has received a letter from Harry Sigman, who
states that he was a member of the national Drafting Committee
that prepared the 2010 amendments, as well as a former chair of
the State Bar's UCC Committee and a law professor himself.
Sigman asserts that the State Bar's UCC Committee several years
ago presented a lengthy and careful study to the ULC that
established the UCC Committee's strong opposition to Alternative
A, and preference for Alternative B. In addition to echoing
some of the points made by the law professors, Sigman notes that
opposition to Alternative A is more widespread than it appears,
as evidenced by the fact that, pending signature in two states,
there are between seven to ten other states in which Alternative
A will have been rejected in favor of Alternative B.
Potential inadvertent discriminatory effect in extending credit
to non-license holders under Alternative A . Independently of
the law professors' objections, it should also be noted that
Alternative A, which appears to elevate the driver's license or
DMV-issued ID card above all other forms of identification, may
lead to potential unintended consequences. In particular,
Alternative A may potentially inadvertently discriminate against
individuals who do not or cannot have a driver's license or
state ID. Because Alternative A so highly incentivizes lenders
to demand presentation of a driver's license or state ID in
order to determine the name of the prospective borrower that
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shall be recorded on the financing statement, there is a
significant risk that under Alternative A, lenders may be less
willing to extend credit to non-license holders in order to
avoid the extra risk and work associated with searching and
filing for more than one name per borrower. It is, after all,
one of the premises of this bill that current law, which for
almost 50 years has simply required the individual name of the
debtor without preference for a particular form of ID, is a
burden for lenders because it effectively requires them to
search records of financing statements for multiple variations
of names used by the debtor, instead of just a single name.
Committee staff engaged in extensive discussions with the
author, the ULC, and the bankers to develop a potential
amendment to address these concerns. At the time of this
analysis, consensus on an amendment had yet to be achieved. To
address concerns relating to the potential discriminatory effect
that Alternative A may have upon extension of credit, the
Committee may wish to insert the addition of the following
amendment to Section 9503(a)(5) in order for this legislation to
move forward:
On page 34, line 2, after the period, insert:
"Except to the extent prohibited by federal law, a secured
party or proposed secured party may not decline to provide
credit to a debtor or proposed debtor, or offer to make the
terms and conditions of such credit less favorable to the
debtor or proposed debtor, for the reason that the debtor's
name to be included on the financing statement is or would
be that provided under this paragraph rather than under
paragraph (4). A person who violates this section is liable
for damages pursuant to Section 9625(b) plus an award of
reasonable attorneys' fees."
The proposed Committee amendment would appropriately allow
lenders to use driver's license information for any other lawful
purpose, but at the same time would prohibit the type of
discrimination at issue, to the extent not prohibited by federal
law.
This bill enacts a range of other positive and noncontroversial
changes to the UCC. Other than the proposed enactment of
Alternative A, this bill proposes a number of otherwise
noncontroversial changes to Division 9 of the Commercial Code.
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Among other things, this bill seeks to enact several changes
with respect to perfection issues arising on after-acquired
property when a debtor moves to a new jurisdiction. Current
law provides that perfection by filing continues for four months
after the jurisdiction in which the debtor is located changes.
However, this temporary period of perfection applies only with
respect to collateral owned by the debtor at the time of the
change. Even if the security interest attaches to
after-acquired collateral, there is currently no perfection with
respect to such new collateral unless and until the secured
party perfects pursuant to the law of the new jurisdiction.
This bill seeks to change this by giving the filer perfection
for four months in collateral acquired post-move. A similar
change would be made with respect to a new debtor that is a
successor by merger. This bill would provide for temporary
perfection in collateral owned by the successor before the
merger or collateral acquired by the successor within four
months after the merger.
Under Section 9518, the debtor is permitted to file a correction
statement, which is a claim that a financing statement filed
against the debtor was in fact unauthorized. While this filing
has no legal effect on the underlying claim, it does put in the
public record the debtor's claim that the financing statement
was wrongfully filed. This bill would rename the "correction
statement" as an "information statement" and more importantly,
authorize the secured party of record to also file an
information statement if the secured party believes that an
amendment to its financing statement was not authorized. The
change addresses concerns of secured parties that an amendment
to a different financing statement may be inadvertently filed on
the secured party's financing statement because the amendment
contains an error when referring to the file number of the
financing statement to be amended.
The 2010 amendments proposed by this bill make a number of
additional technical changes, including: (1) Deleting some
extraneous information currently provided on financing
statements; (2) establishing a safe harbor for the transfer of
chattel paper in conformance with the Uniform Electronic
Transactions Act , as specified; (3) clarifying requirements for
certificates of title for title goods where the certificates of
title are, in whole or in part, in electronic form; and (4)
clarifying notice requirements applicable to electronic
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dispositions of collateral when a security interest is enforced
by sale or other disposition of the collateral.
Proposed amendments to address implementation concerns raised by
the Secretary of State. The Secretary of State supports this
bill if amended to move the effective date from July 1, 2013, to
Jul 1, 2014, and to include an appropriation of $240,000 for
necessary regulatory updates and computer application
modifications.
In order to address the Secretary of State's concerns, the
author proposes the following amendments:
On page 57, line 14, strike "2013" and insert "2014".
On page 57, delete lines 15 to 24, and insert the following:
"SEC. 30 There is hereby appropriated two hundred forty
thousand dollars ($240,000) from the Secretary of State's
Business Fees Fund, established pursuant to Section 12176 of
the Government Code, to the Secretary of State for
expenditures in the 2013-2014 fiscal year to implement this
act, including, but not limited to, promulgating appropriate
regulations, modifying automated filing systems and
programming, and updating filing forms."
On pages 46 to 57, strike numerous references to "2013" and
replace with "2014" to reflect a one-year delay in operative
date.
Proposed technical amendment: This amendment is necessary to
update necessary UCC forms to reflect policy and procedural
changes made by this bill. The amendment is:
On pages 40-41 and 43-44, replace the statutory forms shown
with revised UCC forms, as specified. (These will be provided
to Legislative Counsel by the author's office, but cannot be
visually depicted here.)
REGISTERED SUPPORT / OPPOSITION :
Support
Uniform Law Commission (sponsor)
California Bankers Association
California Business Roundtable
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California Chamber of Commerce
California Mortgage Bankers Association
National Federation of Independent Business
Opposition
Joint letter signed by 10 commercial law professors in 8
California law schools.
Harry Sigman
Analysis Prepared by : Anthony Lew / JUD. / (916) 319-2334