BILL ANALYSIS Ó ----------------------------------------------------------------- |SENATE RULES COMMITTEE | AB 502| |Office of Senate Floor Analyses | | |1020 N Street, Suite 524 | | |(916) 651-1520 Fax: (916) | | |327-4478 | | ----------------------------------------------------------------- THIRD READING Bill No: AB 502 Author: Wagner (R) Amended: 6/24/13 in Senate Vote: 21 SENATE JUDICIARY COMMITTEE : 6-0, 7/2/13 AYES: Walters, Anderson, Corbett, Jackson, Leno, Monning NO VOTE RECORDED: Evans SENATE APPROPRIATIONS COMMITTEE : 7-0, 8/30/13 AYES: De León, Walters, Gaines, Hill, Lara, Padilla, Steinberg ASSEMBLY FLOOR : 77-0, 5/29/13 - See last page for vote SUBJECT : Commercial law: secured transactions SOURCE : California Commission on Uniform State Laws DIGEST : This bill on and after July 1, 2014, incorporates amendments made to the Uniform Commercial Code (UCC) Article 9 into California's comparable statute, Commercial Code Division 9 (governing security interests). This bill applies to a transaction or lien within its scope, even if entered into or created prior to July 1, 2014, but specifies that its changes do not affect any action, case or proceeding commenced prior to that date. This bill provides previously perfected security interests one year to meet the requirements for perfection under the amended division, and includes an appropriation of $240,000 to the Secretary of State (SOS) for necessary regulatory updates and computer application modifications. CONTINUED AB 502 Page 2 ANALYSIS : Existing law, the UCC-Secured Transactions division, governs security interests in personal property. This bill revises and recasts various Division 9 provisions and makes conforming changes to existing cross references throughout other code sections. This bill revises various definitions for terms used throughout Division 9, including for the terms "authenticate," "certificate of title," "jurisdiction of organization" and "registered organization." This bill adds a new definition for the term "public organic record." This bill updates specified statutory UCC forms. This bill includes various transitional provisions that, among other things: 1.Provide the changes to this Division become operative July 1, 2014. 2.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. 3.Prohibit the changes to this Division from affecting an action case, or proceeding commenced before July 1, 2014. 4.Specify rules relating to perfection of security interests immediately prior to July 1, 2014. 5.Specify rules relating to the filing of financing statements or initial financing statements before July 1, 2014 and the effectiveness of such filed statements. 6.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, as part of the transition provisions described above, CONTINUED AB 502 Page 3 specifies that, except as otherwise provided, if, immediately prior to July 1, 2014, a security interest is 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 includes an appropriation of $240,000 to the SOS for necessary regulatory updates and computer application modifications. 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: 1.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; 2.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; 3.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: A. 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 B. 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: A. If the debtor has a name, only if it provides the individual or organizational name of the debtor; or CONTINUED AB 502 Page 4 B. 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. This bill revises and clarifies 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 in a trust, as specified. Specifically, in relevant part, a financing statement is deemed to sufficiently provide the name of the debtor only if it does so in accordance with the following rules: 1.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). 2.If the collateral is held in a trust that is not a registered organization, only if the financing statement satisfies the following: A. Provides, as the name of the debtor, either: (1) the name specified in the organic record of the trust, if the organic record of the trust specifies a name for the trust; or (2) the name of the settlor or testator if the organic record of the trust does not specify a name for the trust; and B. In a separate part of the financing statement, the following information is provided, as applicable: (1) 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 (2) if the name provided is the name of the settlor or testator, the financing statement provides additional information sufficient to CONTINUED AB 502 Page 5 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. 1.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 adds 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 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 provides 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 makes 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. 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: 1.A single authoritative copy of the record(s) exists which is unique, identifiable, and except as specified, unalterable; 2.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 3.Any revision of the authoritative copy is readily identifiable as an authorized or unauthorized version. CONTINUED AB 502 Page 6 This bill adds 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 makes other minor amendments to the provisions above. Existing law specifies rules for the perfection of and priority given to a security interest. 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: 1.The time perfection would have ceased under the law of that jurisdiction; 2.The expiration of four months after a change of the debtor's location to another jurisdiction; or 3.The expiration of one year after a transfer of collateral to a person that thereby becomes a debtor and is located in another jurisdiction. 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. This bill provides 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: 1.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. CONTINUED AB 502 Page 7 2.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 becomes 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 provides 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 also provides 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. 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. This bill instead provides 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. 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. This bill instead provides that the provision above applies to CONTINUED AB 502 Page 8 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. 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. This bill replaces references to "correction" statements with "information" statements in various provisions of law, including in the above. 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 do any of the following: 1.Provide a mailing address for the debtor; 2.Indicate whether the debtor is an individual or an organization; or 3.If the financing statement indicates that the debtor is an organization, provide any of the following: A. A type of organization for the debtor; B. A jurisdiction of organization for the debtor; or C. An organization identification number for the debtor or indicate that the debtor has none. This bill instead revises and limits the provision above to where the record fails to (1) provide a mailing address for the debtor; or (2) indicate whether the name provided as the name of the debtor is the name of an individual or an organization. This bill makes other technical, clarifying changes. CONTINUED AB 502 Page 9 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 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) 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. (AB 45 Sher, Chapter 991, Statutes of 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. Comments According to the author's office, California enacted major revisions to Division 9 of the California Commercial Code in 1999 AB 45 (Sher, Chapter 991, Statutes of 1999). Division 9 provides rules governing any transaction, other than a finance CONTINUED AB 502 Page 10 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 UCC prepared by a drafting committee of the ULC. In the decade since the changes described were made to the UCC, certain filing issues and other matters have arisen as states gained experience with the revised version of Article 9 of the UCC. Thus, the ULC adopted additional amendments to that article in response. Assembly Bill 502 enacts those additional amendments. AB 502 brings California into compliance with other states that have adopted the amendments to Article 9 of the UCC prepared by the ULC. It is the goal of the ULC, to have all states adopt these amendments with a uniform effective date of July 1, 2013. AB 502, among other things, (1) defines a "public organic record" and revises the definitions of "authenticate," "certificate of title," and "registered organization" for purposes of Division 9, (2) specifies an additional requirement for determining whether a secured party has control of electronic chattel paper, (3) specifies 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) provides 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 also provides 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. FISCAL EFFECT : Appropriation: Yes Fiscal Com.: Yes Local: No According to the Senate Appropriations Committee, one-time appropriation of $240,000 (Special Fund) from the SOS Business Fees Fund for expenditures associated with promulgating CONTINUED AB 502 Page 11 regulations, modifying automated filing systems and programming, and updating filing forms. SUPPORT : (Verified 8/30/13) California Commission on Uniform State Laws (source) California Bankers Association California Business Roundtable California Chamber of Commerce California Mortgage Bankers Association Fremont Bank ASSEMBLY FLOOR : 77-0, 5/29/13 AYES: Achadjian, Alejo, Allen, Ammiano, Atkins, Bigelow, Bloom, Blumenfield, Bocanegra, Bonilla, Bonta, Bradford, Brown, Buchanan, Ian Calderon, Campos, Chau, Chávez, Chesbro, Conway, Cooley, Dahle, Daly, Dickinson, Donnelly, Eggman, Fong, Fox, Frazier, Beth Gaines, Garcia, Gatto, Gomez, Gonzalez, Gordon, Gorell, Gray, Grove, Hagman, Hall, Harkey, Roger Hernández, Jones, Jones-Sawyer, Levine, Logue, Lowenthal, Maienschein, Mansoor, Medina, Melendez, Mitchell, Morrell, Mullin, Muratsuchi, Nazarian, Nestande, Olsen, Pan, Patterson, Perea, V. Manuel Pérez, Quirk, Quirk-Silva, Rendon, Salas, Skinner, Stone, Ting, Wagner, Waldron, Weber, Wieckowski, Wilk, Williams, Yamada, John A. Pérez NO VOTE RECORDED: Holden, Linder, Vacancy AL:ej:n 8/31/13 Senate Floor Analyses SUPPORT/OPPOSITION: SEE ABOVE **** END **** CONTINUED