BILL ANALYSIS �
AB 1858
Page 1
ASSEMBLY THIRD READING
AB 1858 (Perea)
As Amended May 19, 2014
Majority vote
JUDICIARY 10-0
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|Ayes:|Wieckowski, Wagner, | | |
| |Alejo, Chau, Dickinson, | | |
| |Garcia, Gorell, | | |
| |Maienschein, Muratsuchi, | | |
| |Stone | | |
|-----+--------------------------+-----+--------------------------|
| | | | |
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SUMMARY : Revises the requirements for a Uniform Commercial Code
(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 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
(Alejo), Chapter 524, Statutes of 2013.
4)Provides that it is a violation of the Unruh Act (Civil Code
Section 51) 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 the credit less favorable to
the debtor or proposed debtor if: a) that decision was based on
the fact that the debtor's name to be included on the financing
statement is or would be the individual name of the debtor rather
than that as provided on the debtor's driver's license or
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identification card; and b) 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.
Further clarifies that any affirmative defenses that would be
available to a claim under Section 51 would be affirmative
defenses to a claim under this provision.
FISCAL EFFECT : None
COMMENTS : Article 9 of the UCC governs secured transactions in
personal property-that is, the granting of credit secured by
personal property. Article 9 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.
According to the California Bankers Association, the sponsor of this
bill, 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. They contend, "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? 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."
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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, however, the debtor has not been
issued a driver's license or state identification 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.
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.
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. In direct contrast to proponents' claims about
uncertainty in the courts, these opponents contend that there are no
California court 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. They also contend that the near unanimity in opposition
to the bill among the opposing commercial law professors 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.
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
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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 National Conference of Commissioners on Uniform State Laws
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 Alternative A is more widespread than it appears,
as evidenced by the fact that there are between seven to 10 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
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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.
Because the bill so highly incentivizes lenders to demand
presentation of a driver's license or state identification 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. Recent author's amendments to the bill seek to address
the potential discriminatory effect that Alternative A may have upon
extension of credit for those who lack a driver's license.
Analysis Prepared by : Anthony Lew / JUD. / (916) 319-2334
FN: 0003515