BILL ANALYSIS Ó AB 502 Page 1 Date of Hearing: May 15, 2013 ASSEMBLY COMMITTEE ON APPROPRIATIONS Mike Gatto, Chair AB 502 (Wagner) - As Amended: May 7, 2013 Policy Committee: JudiciaryVote:6-4 Urgency: Yes State Mandated Local Program: No Reimbursable: SUMMARY This bill: 1)Adopts amendments, to be effective July 1, 2014, to Division 9 of the Uniform Commercial Code, which governs secured transactions in personal property. 2)Appropriates $240,000 to the Secretary of State (SOS) to implement the UCC changes. FISCAL EFFECT One-time special fund appropriation of $240,000 to the SOS to promulgate regulations, update forms, and modify an automated filing system. [Business Fees Fund] COMMENTS 1)Background and Purpose . This bill is sponsored by the California Commission on Uniform State Laws to adopt the 2010 revisions to Article 9 of the Uniform Commercial Code (UCC) as set forth by the American Law Institute and the National Conference of Commissioners on Uniform State Laws. The last major revision of Article 9, in 1999, was adopted in all 50 states. The ULC's goal is to enact the 2010 Amendments in every state, 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. According to the Uniform Law Commission, Article 9 of the UCC governs secured transactions in personal property-the granting AB 502 Page 2 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. These rules apply, for example, when a manufacturer finances the acquisition of machinery, a retailer finances inventory, or a consumer finances home furnishings. 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. 2)Amendment A . The provisions of AB 502 are non-controversial with one exception, as described briefly below, and in more depth in the Assembly Judiciary Committee's analysis of the bill. 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. 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. By contrast, Alternative B, also AB 502 Page 3 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. AB 502 includes Alternative A, which is 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." Due to several concerns expressed with this approach, including that it could be discriminatory in extending credit to non-license holders, the policy committee adopted, over the author's objection, an amendment prohibiting such discriminatory credit practices. As a result, the author voted against his own bill. Analysis Prepared by : Chuck Nicol / APPR. / (916) 319-2081