BILL ANALYSIS �
AB 1858
Page 1
Date of Hearing: April 29, 2014
ASSEMBLY COMMITTEE ON JUDICIARY
Bob Wieckowski, Chair
AB 1858 (Perea) - As Introduced: February 19, 2014
As Proposed to be Amended
SUBJECT : COMMERCIAL LAW: SECURED TRANSACTIONS
KEY ISSUE : SHOULD EXISTING LAW SIMPLY REQUIRING THE DEBTOR'S
NAME TO BE PROVIDED ON THE UCC ARTICLE 9 FINANCING STATEMENT BE
CHANGED TO INSTEAD REQUIRE THE NAME THAT APPEARS ON THE DEBTOR'S
CALIFORNIA DRIVER'S LICENSE OR STATE IDENTIFICATION CARD, IF THE
DEBTOR HAS ONE OF THOSE DOCUMENTS?
SYNOPSIS
Division 9 of the Commercial Code (also known as Article 9 of
the Uniform Commercial Code), specifies 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 financing statement with the Secretary of State that
identifies, among other things, the "individual name" of the
debtor.
According to the California Bankers Association, the sponsor of
the bill, 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 the 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
AB 1858
Page 2
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.
The Committee considered this same proposal last year when it
approved AB 502 (Wagner), Ch. 531, Stats. 2013, which enacted a
broad range of amendments to UCC Article 9 that were recommended
by the Uniform Law Commission. The Committee approved the
driver's license approach in that bill, with the addition of an
amendment to address concerns about discrimination against
non-licenseholders. Subsequently to being approved by the
Committee, the provisions relating to Article 9 financing
statements were amended out of the bill, and the rest of the
bill eventually was chaptered into law. This bill renews that
discussion about the form of the debtor's name that should be
provided on the financing statement. An amendment proposed by
the author now addresses the Committee's concerns about
discrimination first raised last year during discussion of AB
502.
Proponents of the bill contend this is the best rule to adopt
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 the same
rule has been adopted by 37 other states, its adoption in
California will further the goal of uniformity of state laws
shared by the drafters of the UCC and by lenders that operate in
multiple states. The bill is opposed by a group of
California-based law professors, who strenuously argue that the
bill is unnecessary because, for reasons outlined below, the
bill's purported benefits of uniformity, cost savings, and
search efficiency are illusory. They contend that the current
UCC filing system in California has served the public well for
almost 50 years, and that the proposed changes to filing
requirements serve no one else's interests except large banks.
SUMMARY : Revises the requirements for a UCC Article 9 financing
statement to sufficiently provide the name of an individual
debtor. Specifically, this bill :
1)Requires a filer to provide on the financing statement the
name indicated on the debtor's driver's license or
identification card, if the debtor is an individual to whom
AB 1858
Page 3
the Department of Motor Vehicles (DMV) 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 surname and first personal name of the debtor.
3)Clarifies that the most recently issued driver's license or
identification card is to be used if more than one was issued
by the DMV, and further clarifies that the term "driver's
license" includes licenses authorized to be issued pursuant to
AB 60 (2013).
4)Prohibits discrimination in the provision or terms of credit
against persons who do not hold or present a driver's license,
as specified.
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.
(Commercial Code Section 9502. All further references are to
this code unless otherwise stated.)
2)With respect to a debtor that is an individual, provides that
a financing statement is sufficient only if it provides either
the individual name of the debtor, or the surname and first
personal name of the debtor. (Section 9503(a)(5).)
3)Provides that a financing statement that otherwise provides
the name of the debtor in accordance with these provisions is
not rendered ineffective by the absence of either of the
following:
a) A trade name or other name of the debtor.
b) The names of partners, members, associates, or other
persons comprising the debtor, unless otherwise required,
as specified. (Section 9503(b).)
4)Provides that a person is liable for damages in the amount of
any loss caused by a failure to comply with Article 9 of the
UCC, and that loss caused by a failure to comply may include
AB 1858
Page 4
loss resulting from the debtor's inability to obtain, or
increased costs of, alternative financing. (Section 9625(b).)
FISCAL EFFECT : As currently in print this bill is keyed
non-fiscal.
COMMENTS : In support of the bill, the author states:
When individual borrowers are provided a loan as a sole
proprietor it is often secured by accounts receivable,
inventory and equipment. To obtain a priority security
interest in such collateral, banks and other lenders often
have to file a Uniform Commercial Code (UCC) financing
statement in the state where the borrower is located. The
UCC requires that the secured party identify the "name of
the debtor" on the financing statement. When the borrower
is an entity such as a corporation, determining the name
is relatively easy, as there is an organic record of that
name within the state where the entity was formed. The
"name of the debtor" for a corporation is the name listed
in its filed Articles of Incorporation. But when lending
to a sole proprietorship (an individual), the secured
party has little statutory guidance as to the source for
that name. Is it the name appearing on a tax return, birth
certificate, social security card, passport, marriage
license, business card, driver's license or state
identification card?
This is a problem for secured creditors. Article 9 of the
UCC does not clearly define what the name of an individual
debtor is for these purposes. Lenders struggle to
determine what name to file upon and also what name or
names to search for in order to identify other secured
parties who might have filed before them. AB 1858 would
require the lenders to use the name indicated on the
borrower's driver's license when they file an Article 9
financing statement. If the borrower does not have a
driver's license, then it would be filed with the first
name and surname.
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
AB 1858
Page 5
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.
Last year, the Committee approved AB 502 (Wagner), Ch. 531,
Stats. 2013, which enacted a broad range of amendments to UCC
Article 9 that had been drafted and recommended by the National
Conference of Commissioners on Uniform State Laws (NCCUSL). AB
502 did not, however, include either of two possible approaches
recommended by the NCCUSL with respect to financing statements
under Section 9503. Because consensus between the Committee and
the bankers, a chief stakeholder on this issue, was not achieved
with respect to Section 9503, the author proceeded with AB 502
without the substantive change then sought by the bankers and
other proponents of that bill, and was successful in getting the
bill signed into law.
The present bill, sponsored by the California Bankers
Association (CBA), has renewed that dialogue with the Committee,
and seeks to make the identical substantive change to Section
9503 that was not ultimately included in AB 502 last year.
According to the sponsor, 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.
AB 1858
Page 6
In addition to the bankers, this bill is supported by 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." The bill is opposed by a group of prominent law
professors who teach commercial law in California and are
experts, who contend that the bill is not needed and would even
be "uniquely harmful" in this area of California law. These
opponents contend that the near unanimity in opposition to the
bill 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.
Clarifying the name of the individual debtor to be provided on a
financing statement. According to the bankers, 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. According to the bankers, the court cases have
created a level of uncertainty that has led secured parties to
search and file financing statements under multiple names.
Opponents, however, contend that there are no California cases
in which the court has held that a bank was unperfected because
it guessed wrong when confronted with "uncertainty" about a
debtor's name, despite having the debtor's loan applications,
credit reports and past tax returns to indicate the name.
To address the stated problem, this bill would adopt a
sufficiency standard for financing statements in California
sometimes referred to as "Alternative A", the name originally
given to it by the drafters of the UCC. The Alternative A rule
proposed to be established by this bill is also sometimes
referred to as the "only if" approach because it provides that
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,
AB 1858
Page 7
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 this
approach equates a California driver's license with a DMV-issued
identification card, for purposes of discussing this bill, this
analysis will simply refer to a "driver's license" to mean both
forms of identification issued by the DMV.)
The proponents and opponents differ on a number of issues raised
by the bill. First, proponents contend that the bill 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. They explain that "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." Opponents contend that,
despite proponents' claims that the bill 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. In addition, they contend that searching only against
the driver's license name will not necessarily result in cost
savings because 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.
Second, proponents contend that because the rule proposed by
this bill (Alternative A) has been adopted by 37 states, its
adoption in California will further the goal of uniformity of
state laws shared by the NCCUSL and by lenders that operate in
multiple states. In response, opponents 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. They contend that opposition to
AB 1858
Page 8
Alternative A is more widespread than it appears, as evidenced
by the fact that there are between seven to ten other states
that have chosen to reject the Alternative A standard contained
in this bill, in favor of a separate "safe haven" standard
titled Alternative B by the UCC drafters.
Third, proponents contend that the driver's license standard is
the best solution for the asserted problem 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.
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. In response,
opponents contend that the bill 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 obliged to provide this service.
They also contend that if the Legislature now ties UCC names to
drivers' license names, decisions made by DMV officials, whose
primary concerns are with law enforcement and with efficient
operation of the DMV system, will be imposing changes on a UCC
system that exists for entirely different purposes that are of
no concern to them.
Author's Amendment To Address Concerns Regarding Potential
Discrimination. Independently of the law professors'
objections, it should also be noted that the bill, 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, this bill may potentially
inadvertently discriminate against individuals who do not or
cannot obtain a driver's license or state ID. Because the bill
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 shall be recorded on the financing
statement, there is a significant risk that it may cause lenders
to 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. Indeed, it is a
central premise of the bill that current law, which for almost
50 years has simply required the 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
AB 1858
Page 9
the debtor, instead of just a single name. To address concerns
relating to the potential discriminatory effect that Alternative
A may have upon extension of credit for those who lack a
driver's license, the author prudently proposes to amend the
bill by adding the following provision on page 3, line 24, after
the period:
"(7) Subject to the last sentence of this subsection (7),
it is a violation of section 51 of the Civil Code for a
secured party or proposed secured party to 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 if (i) that decision was
based on the fact that the debtor's name to be included on
the financing statement is or would be that provided under
paragraph (5) rather than under paragraph (4); and (ii) all
elements that would be required to establish a claim for
violation of section 51 (including any elements relating to
motivation or state of mind) are established. Any
affirmative defenses that would be available to a claim
under section 51 would be affirmative defenses to a claim
under this subsection (7).
ARGUMENTS IN SUPPORT : In support of Alternative A, the driver's
license standard proposed by this bill, the banks and business
groups state in support:
Alternative A 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. . . If enacted, this measure
minimizes the current documentation needed to verify the
identity of a business borrower, improving the customer
experience. The overall number of financing statements
filed with the Secretary of State will decline, reducing
the filing cost associated with these commercial loan
transactions while decluttering the current filing
system. Meanwhile, creditors will achieve greater
efficiency.
ARGUMENTS IN OPPOSITION : The law professors who oppose this
bill write:
AB 1858
Page 10
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.
REGISTERED SUPPORT / OPPOSITION :
Support
California Bankers Association (sponsor)
Association of Financial Development Corporations
California Chamber of Commerce
California Credit Union League
California Independent Bankers
California Mortgage Bankers Association
Opposition
Joint letter signed by 10 commercial law professors in eight
California law schools
Analysis Prepared by : Anthony Lew / JUD. / (916) 319-2334