BILL ANALYSIS Ó
SENATE JUDICIARY COMMITTEE
Senator Noreen Evans, Chair
2013-2014 Regular Session
AB 502 (Wagner)
As Amended June 24, 2013
Hearing Date: July 2, 2013
Fiscal: Yes
Urgency: No
RD
SUBJECT
Commercial Law: Secured Transactions
DESCRIPTION
This bill would incorporate amendments made to the Uniform
Commercial Code Article 9 into California's comparable statute,
Commercial Code Division 9 (governing security interests), to,
among other things:
provide a new definition for "public organic record," and
clarify other definitions;
clarify rules relating to the control of electronic chattel
paper;
clarify rules prescribing the location of debtors for purposes
of financing statements;
specify rules relating to the perfection of a security
interest that is attached to collateral within four months of
the debtor's change in location to another jurisdiction, as
well as temporary perfection rules relating to collateral
owned or acquired by a successor to the original debtor;
modify provisions relating to the priority of competing
security interests;
revise rules relating to the sufficiency of the name of the
debtor provided on financing statements;
modify rules relating to when a change in debtor name on a
filed financing statement becomes seriously misleading;
revise rules relating to ineffective filings;
replace references to "correction statements" with
"information statements";
update statutory forms; and
provide other clarifying and technical amendments.
(more)
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This bill would take effect July 1, 2014 and would apply to a
transaction or lien within its scope, even if entered into or
created prior to July 1, 2014, but would specify that its
changes do not affect any action, case or proceeding commenced
prior to that date. This bill would provide previously
perfected security interests one year to meet the requirements
for perfection under the amended division.
BACKGROUND
A "security interest" is a creditor's interest in property
(usually called "collateral") to satisfy a debt in the event
that the debtor defaults. In other words, a security interest
is the creditor's right to have the secured property sold to
satisfy the debt owed by the debtor. In order to enforce that
security interest in court and potentially against other
creditors, the security interest must have been properly created
and perfected ("perfection" is the process of validating any
legal document or interest by properly executing it and then
filing it with the correct public authority, essentially putting
the world on notice that an enforceable security interest exists
on that property), and have priority against other security
interests.
Article 9 of the Uniform Commercial Code (UCC) generally governs
security interests in personal property. This Article was
vastly rewritten and modernized by the Uniform Law Commission
(ULC, formerly the National Conference of Commissioners on
Uniform State Laws, or NCCUSL) in the late 1990s. As a whole,
the new Article 9 simplified and clarified the rules for
creation, perfection, priority and enforcement of a security
interest. Every state has adopted Article 9 as revised, and
California's revised Article 9 (called "Division 9 of the
Commercial Code") took effect on July 1, 2001. (See AB 45
(Sher, Ch. 991, Stats. 1999).)
Since that the enactment of AB 45 in 1999, the ULC has adopted
additional amendments based upon experiences with respect to
filing issues and other matters that arose in practice following
a decade of experience with the prior version of the Article
("the 2010 amendments"). The ULC's goal is to have every state
and territory adopt the 2010 amendments to Article 9 by July 31,
2013. As of June 14, 2013, the ULC reports that there have been
41 enactments and 10 introductions of legislation to do so,
including in California with this bill, AB 502. This bill,
sponsored by the ULC, seeks to adopt the changes that have been
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made to the UCC Article 9 within California's Division 9, with a
delayed operative date of July 1, 2014.
CHANGES TO EXISTING LAW
1. Existing law , the Uniform Commercial Code-Secured
Transactions division, governs security interests in personal
property. (Com. Code Sec. 9101 et seq. (Division 9).)
This bill would revise and recast various Division 9
provisions and make conforming changes to existing cross
references throughout other code sections.
This bill would revise various definitions for terms used
throughout Division 9, including for the terms "authenticate,"
"certificate of title," "jurisdiction of organization" and
"registered organization."
This bill would add a new definition for the term "public
organic record."
This bill would update specified statutory UCC forms.
This bill would include various transitional provisions that,
among other things:
provide the changes to this Division become operative
July 1, 2014;
provide that, except as otherwise specified in the
transition provisions, the changes to this division apply
to a transaction or lien within its scope, even if the
transaction or lien was entered into or created before July
1, 2014;
prohibit the changes to this division from affecting an
action case, or proceeding commenced before July 1, 2014;
specify rules relating to perfection of security
interests immediately prior to July 1, 2014;
specify rules relating to the filing of financing
statements or initial financing statements before July 1,
2014 and the effectiveness of such filed statements; and
clarify the priority given to competing security
interests in collateral in the event of a conflict with
existing law prior to July 1, 2014.
This bill would, as part of the transition provisions
described above, specify that, except as otherwise provided,
if, immediately prior to July 1, 2014, a security interest is
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a perfected security interest, but the applicable requirements
for perfection under this division as of July 1, 2014 are not
satisfied as of that date, the security interest remains
perfected thereafter only if the applicable requirements for
perfection under this division as amended by this bill are
satisfied by July 1, 2015.
This bill would include an appropriation of $240,000 to the
Secretary of State for necessary regulatory updates and
computer application modifications.
2. Existing law provides that a financing statement
sufficiently provides the name of the debtor only if it does
so in accordance with the following rules, among others:
if the debtor is a registered organization, only if the
financing statement provides the name of the debtor
indicated on the public record of the debtor's jurisdiction
of organization which shows the debtor to have been
organized;
if the debtor is a decedent's estate, only if the
financing statement provides the name of the decedent and
indicates that the debtor is an estate;
if the debtor is a trust or a trustee acting with
respect to property held in trust, only if the financing
statement satisfies both of the following conditions:
o it provides the name specified for the trust in its
organic documents or, if no name is specified, provides
the name of the settlor and additional information
sufficient to distinguish the debtor from other trusts
having one or more of the same settlors; and
o it indicates, in the debtor's name or otherwise,
that the debtor is a trust or is a trustee acting with
respect to property held in trust; or
in other cases, according to the following rules:
o if the debtor has a name, only if it provides the
individual or organizational name of the debtor; or
o if the debtor does not have a name, only if it
provides the names of the partners, members, associates,
or other persons comprising the debtor. (Com. Code Sec.
9503(a).)
This bill would revise and clarify rules relating to the
naming of the debtor on financing statements to sufficiently
provide the name of a debtor that is a registered
organization, or where the collateral is being administered by
the personal representative of a decedent's estate, or is held
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in a trust, as specified. Specifically, in relevant part, a
financing statement would be deemed to sufficiently provide
the name of the debtor only if it does so in accordance with
the following rules:
Except as otherwise specified under the provisions
relating to the naming of the debtor where collateral is
held in a trust that is not a registered organization, if
the debtor is a registered organization or the collateral
is held in a trust that is a registered organization: only
if the financing statement provides the name that is stated
to be the registered organization's name on the public
organic record most recently filed with or issued or
enacted by the registered organization's jurisdiction of
organization which purports to state, amend, or restate the
registered organization's name.
If the collateral is held in a trust that is not a
registered organization, only if the financing statement
satisfies the following:
o provides, as the name of the debtor, either: (i)
the name specified in the organic record of the trust, if
the organic record of the trust specifies a name for the
trust; or (ii) the name of the settlor or testator if the
organic record of the trust does not specify a name for
the trust; and
o in a separate part of the financing statement, the
following information is provided, as applicable: (i) if
the name provided is the name on the organic record of
trust, the financing statement indicates that the
collateral is held in a trust; or (ii) if the name
provided is the name of the settlor or testator, the
financing statement provides additional information
sufficient to distinguish the trust from other trust
having one or more of the same settlors or the same
testator and indicates that the collateral is held in a
trust, unless the additional information so indicates.
If the collateral is being administered by the personal
representative of a decedent: only if the financing
statement provides, as the name of the debtor, the name of
the decedent and, in a separate part of the financing
statement indicates that the collateral is being
administered by a personal representative.
This bill would add that the name of the decedent indicated on
the order appointing the personal representative of the
decedent issued by the court having jurisdiction over the
collateral is sufficient as the "name of the decedent" under
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the rules relating to the proper naming of a debtor where the
collateral is being administered by the personal
representative of a decedent's estate.
This bill would provide a definition for the "name of the
settlor or testator" for the purpose of the provisions
relating to the naming of the debtor.
This bill would make clarifying changes to separate provisions
relating to the effect of seriously misleading financing
statements due to the name of the debtor being insufficient
under the above rules.
3. Existing law provides that a secured party has control of
electronic chattel paper if the record or records comprising
the chattel paper are created, stored, and assigned in such a
manner that specified conditions are satisfied, including
among others:
a single authoritative copy of the record(s) exists
which is unique, identifiable, and except as specified,
unalterable;
copies or revisions that add or change an identified
assignee of the authoritative copy can be made only with
the participation of the secured party; and
any revision of the authoritative copy is readily
identifiable as an authorized or unauthorized version.
(Com. Code Sec. 9105(a).)
This bill would add that a secured party has control of
electronic chattel paper if a system employed for evidencing
the transfer of interests in the chattel paper reliably
establishes the secured party as the person to which the
chattel paper was assigned. This bill would make other minor
amendments to the provisions above.
4. Existing law specifies rules for the perfection of and
priority given to a security interest. (Com. Code Sec. 9301
et seq.) Existing law provides that a security interest
perfected pursuant to the law of the jurisdiction in which the
debtor is located, as specified, remains perfected until the
earliest of any of the following:
the time perfection would have ceased under the law of
that jurisdiction;
the expiration of four months after a change of the
debtor's location to another jurisdiction; or
the expiration of one year after a transfer of
collateral to a person that thereby becomes a debtor and is
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located in another jurisdiction. (Com. Code Sec. 9316(a).)
Existing law provides that if a security interest described
above becomes perfected under the law of the other
jurisdiction before the earliest time or event prescribed, it
remains perfected thereafter. Otherwise, it becomes
unperfected and is deemed never to have been perfected as
against a purchaser of the collateral for value. (Com. Code
Sec. 9316(b).)
This bill would provide specified rules for perfection that
apply to collateral to which a security interest attaches
within four months after the debtor changes its location to
another jurisdiction, as follows:
A financing statement filed before the change pursuant
to the law of the jurisdiction of the debtor's location, as
specified, is effective to perfect a security interest in
the collateral if the financing statement would have been
effective to perfect a security interest in the collateral
had the debtor not changed its location.
If a security interest perfected by a financing
statement that is effective, as specified, becomes
perfected under the law of the other jurisdiction before
the earlier of the time the financing statement would have
become ineffective under the law of the jurisdiction of the
debtor's location, as specified, or the expiration of the
four-month period, it remains perfected thereafter. If the
security interest does not become perfected under the law
of the other jurisdiction before the earlier time or event,
it becomes unperfected and is deemed never to have been
perfected as against a purchaser of the collateral for
value.
This bill would provide specified rules relating to perfection
where there is a new debtor who is a successor by merger and
the new debtor is located in another jurisdiction, in order to
allow for temporary perfection in collateral owned by the
successor before the merger, as well as collateral acquired by
the successor within four months after the merger. This bill
would also provide that a security interest created by a new
debtor in collateral in which the new debtor has or acquires
rights and is perfected pursuant to this bill, as specified,
is subordinate to a security interest in the same collateral
which is perfected other than by such a filed financing
statement.
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5 Existing law provides that except as otherwise provided, as
specified, certain terms in an agreement between an account
debtor and an assignor or in a promissory note are
ineffective. Existing law specifies that this provision does
not apply to the sale of a payment intangible or promissory
note. (Com. Code Sec. 9406(d), (e).)
This bill would instead provide that the provision above does
not apply to the sale of a payment intangible or promissory
note, other than a sale pursuant to a disposition or
acceptance of collateral under specified provisions relating
to defaults.
6. Existing law provides that certain terms in a promissory
note or an agreement between an account debtor and a debtor
that relates to a health care insurance receivable or a
general intangible, as specified, are ineffective. Existing
law specifies that this provision applies to a security
interest in a payment intangible or a promissory note only if
the security interest arises out of a sale of the payment
intangible or promissory note. (Com. Code Sec. 9408(a),
(b).)
This bill would instead provide that the provision above
applies to the sale of a payment intangible or promissory
note, other than a sale pursuant to a disposition or
acceptance of collateral under specified provisions relating
to defaults.
7. Existing law provides that a person may file in the filing
office a correction statement with respect to a record indexed
here under the person's name if the person believes that the
record is inaccurate or was wrongfully filed. Existing law
specifies requirements that must be met by a correction
statement. (Com. Code Sec. 9518.)
This bill would replace references to "correction" statements
with "information" statements various provisions of law,
including in the above.
8. Existing law lists circumstances in which filing does not
occur with respect a record that a filing office refuses. One
such circumstances is where in the case of an initial
financing statement or an amendment that provides a name of a
debtor which was not previously provided in the financing
statement to which the amendment relates, the record fails to
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do any of the following:
provide a mailing address for the debtor;
indicate whether the debtor is an individual or an
organization; or
if the financing statement indicates that the debtor is
an organization, provide any of the following:
o a type of organization for the debtor;
o a jurisdiction of organization for the debtor; or
o an organization identification number for the debtor
or indicate that the debtor has none. (Com. Code Sec.
9516(b)(5).)
This bill would instead revise and limit the provision above
to where the record fails to (i) provide a mailing address for
the debtor; or (ii) indicate whether the name provided as the
name of the debtor is the name of an individual or an
organization.
9. This bill would make other technical, clarifying changes.
COMMENT
1. Stated need for the bill
According to the author:
California enacted major revisions to Division 9 of the
California Commercial Code in 1999 [AB 45] ([Sher,] Ch. 991,
Stats. 1999). Division 9 provides rules governing any
transaction, other than a finance lease, that couples a debt
with a creditor's interest in a debtor's personal property.
If the debtor defaults, the creditor may repossess and sell
the property to satisfy the debt. The creditor's interest is
a security interest. In enacting the changes in 1999,
California adopted 1998 amendments to Article 9 of the Uniform
Commercial Code prepared by a drafting committee of the
Uniform Law Commission.
In the decade since the changes described in Paragraph 2 were
made to the Uniform Commercial Code, certain filing issues and
other matters have arisen as states gained experience with the
revised version of Article 9 of the Uniform Commercial Code.
Thus, the Uniform Law Commission adopted additional amendments
to that article in response. Assembly Bill 502 would enact
those additional amendments.
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Assembly Bill 502 would bring California into compliance with
other states that have adopted the amendments to Article 9 of
the Uniform Commercial Code prepared by the Uniform Law
Commission. It is the goal of the Uniform Law Commission to
have all states adopt these amendments with a uniform
effective date of July 1, 2013.
Assembly Bill 502 would, among other things, (1) define a
"public organic record" and revise the definitions of
"authenticate," "certificate of title," and "registered
organization" for purposes of Division 9, (2) specify an
additional requirement for determining whether a secured party
has control of electronic chattel paper, (3) specify rules
that apply to collateral to which a security interest attaches
within four months after the debtor changes its location to
another jurisdiction, and (4) provide for a secured party of
record with respect to a financing statement to file an
information statement with respect to a record if the secured
party believes that the person that filed the record was not
entitled to do so.
The bill would also provide greater guidance as to the name of
a debtor that is provided on a financing statement. This
guidance relates to debtors that are business entities and
other registered organizations. While the Uniform Law
Commission amended Article 9 to also provide greater guidance
as to the name of an individual debtor and, in that regard,
included Alternatives A and B from which the individual states
could choose. This bill does not contain those amendments.
However, an earlier version of Assembly Bill 502 contained
Alternative A.
Assembly Bill 502 would become operative July 1, 2014. It
includes an appropriation to the Secretary of State for
purposes of implementing the act.
2. This bill seeks to adopt changes made to the Article 9 of
the UCC within California's Commercial Code counterpart
(Division 9)
As noted in the background, this bill is one of the ULC's
nationwide legislative efforts to ensure that all 50 states
adopt the 2010 amendments to Article 9 of the UCC into their
respective state laws. California's counterpart to Article 9 of
the UCC is Division 9 of the Commercial Code.
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As acknowledged by the author in Comment 1 above, the most
controversial element to the bill was amended out in the
Assembly, in favor of maintaining and updating existing
provisions relating to the naming of a debtor on financing
statements. The remaining provisions of the bill appear to be
clarifying and seek to address issues that have arisen since the
UCC underwent its last major revisions in the late 1990s. Such
provisions, for example, would:
improve the financing statements by adding guidance on the
correct name of a debtor to be included on the statement and
by deleting of extraneous information currently provided on
financing statements;
provide additional clarity on rules relating to control of
electronic chattel paper; and
modify existing definitions, as well as provide a new
definition of "public organic record" which will make clear
that the relevant public records are those records that are
available to the public for inspection (such as the record
initially filed with or issued by a state or the United States
to form or organize an organization), which in turn is
relevant for the correct naming of a debtor that is a
registered organization on filing statements.
Significantly, these provisions also include new rules that
would give a filer (the creditor) greater protection when its
debtor relocates to another state or merges with another entity
in another jurisdiction (which consequently changes the
applicable governing law) by allowing for continued perfection,
or temporary perfection, of a security interest. In contrast,
existing law only applies a temporary four-month perfection
period with respect to collateral owned by the debtor at the
time he or she changes location to another jurisdiction, and any
after-acquired collateral must be perfected pursuant to the law
of the new jurisdiction.
Staff notes that, in general, the remaining non-controversial
changes would not only appear to help address issues raised in
the decade since Article 9 was last substantially amended, but
also help maintain a level of uniformity in an otherwise
complicated area of law.
Support : California Bankers Association; California Business
Roundtable; California Chamber of Commerce; California Mortgage
Bankers Association; Fremont Bank (prior version of the bill);
National Federation of Independent Business
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Opposition : None Known
HISTORY
Source : California Commission on Uniform State Laws
Related Pending Legislation : SB 6 (Lieu) is an urgency bill
that would re-enact repealed provisions of California's Uniform
Commercial Code, Article 9, relating to the rights that certain
licensees take under a nonexclusive license where a security
interest exists in a general intangible, as specified. This
bill has been enrolled.
Prior Legislation : SB 45 (Sher, Ch. 991, Stats. 1999) See
Background.
Prior Vote :
Assembly Floor (Ayes 77, Noes 0)
Assembly Appropriations Committee (Ayes 16, Noes 0)
Assembly Judiciary Committee (Ayes 6, Noes 4)
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