BILL ANALYSIS �
SENATE JUDICIARY COMMITTEE
Senator Hannah-Beth Jackson, Chair
2013-2014 Regular Session
AB 1858 (Perea)
As Amended June 15, 2014
Hearing Date: June 24, 2014
Fiscal: No
Urgency: No
RD
SUBJECT
Commercial law: secured transactions
DESCRIPTION
This bill would specify that for the purposes of filing a
Uniform Commercial Code Article 9 financing statement where the
debtor is an individual, the financing statement sufficiently
provides the name of the debtor only if it reflects the name
that is on the individual's most current driver's license, or,
if the person does not have a driver's license, only if the
financing statement provides the individual name of the debtor
or the surname and first personal name of the debtor.
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
(more)
AB 1858 (Perea)
Page 2 of ?
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).)
Subsequent to 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 was to
have every state and territory adopt the 2010 amendments to
Article 9 by July 31, 2013. Last year, AB 502 (Wagner, Ch. 531,
Stats. 2013) was enacted, adopting within California's Division
9, with a delayed operative date of July 1, 2014, those changes
that were made to the UCC Article 9 by the ULC. One issue,
however, was ultimately left unresolved by AB 502: whether
California would adopt Alternative A or Alternative B--or
neither-with respect to the issue of the sufficiency of the
debtor's name on the financial statement. Alternative A
mandates that if a debtor has an unexpired driver's license, the
correct name of the debtor can only be the name as it appears on
the driver's license. If the debtor does not have an unexpired
driver's license, then either the debtors' individual name" or
the surname and first personal name of the debtor may serve as
the correct name for filing purposes. Alternative B allows for
three possible name constructions, all of which would be correct
for purposes of the rule: (1) the debtor's name on the driver's
license, the use of which is not mandatory; (2) the debtor's
individual name; or (3) the debtor's surname and first personal
name.
While AB 502 originally included language to incorporate
Alternative A into California law, the provision was ultimately
taken out before the bill was heard in this Committee due to
concerns by a prior policy committee with respect to potential
for discrimination. It appears that at this time, 37 states have
elected Alternative A, while a handful of others have elected
Alternative B. California, having adopted neither of these
rules, provides that a financing statement sufficiently provides
the name of the debtor, in the case where the debtor is an
individual, if the financing statement provides either of the
following: (1) the individual name of the debtor; or (2) the
AB 1858 (Perea)
Page 3 of ?
surname and the personal name of the debtor (this second option,
safe harbor, was adopted by AB 502).
This bill, sponsored by the California Bankers Association,
would effectively implement Alternative A into Division 9 of
California's Commercial Code. The bill includes language that
seeks to address any concerns relating to discrimination.
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).)
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
located in another jurisdiction. (Com. Code Sec. 9316(a).)
Existing law generally provides that a financing statement
(the filing of which is necessary to perfect a security
interest in collateral) is sufficient only if it satisfies all
of the following conditions:
it provides the name of the debtor;
it provides the name of the secured party or a
representative of the secured party; and
it indicates the collateral covered by the financing
statement. (Com. Code Sec. 9502(a).)
Existing law provides that a financing statement sufficiently
provides the name of an individual debtor only if the
financing statement provides either of the following:
the individual name of the debtor; or
the surname and first personal name of the debtor.
(Com. Code Sec. 9503.)
This bill would, instead, provide that a financing statement
AB 1858 (Perea)
Page 4 of ?
sufficiently provides the name of the debtor only if it does
so in accordance with the following rule:
if the debtor is an individual to whom the Department of
Motor Vehicles (DMV) has issued a driver's license that has
not expired or an identification card that has not expired,
only if the financing statement provides the name of the
individual indicated on that driver's license or
identification card ("driver's license rule"); or
if the debtor is an individual to whom the above does
not apply, only if the financing statement provides the
individual name of the debtor or the surname and first
personal name of the debtor ("safe harbor").
This bill would provide that if the DMV has issued to an
individual more than one driver's licenses or identification
cards of a kind described above, the relevant driver's license
for the above propose refers to the most recently issued
license or card.
This bill would provide for the above purposes, "driver's
license" includes an original driver's license issued by the
DMV to a person who is unable to submit satisfactory proof
that the applicant's presence in the United States is
authorized under federal law if he or she meets all other
qualifications for licensure and provides satisfactory proof
to the department of his or her identity and California
residency.
2. Existing law , the Unruh Civil Rights Act, provides that all
persons in California are free and equal, and regardless of a
person's sex, race, color, religion, ancestry, national
origin, disability, medical condition, genetic information,
marital status, or sexual orientation, everyone is entitled to
the full and equal accommodations, advantages, facilities,
privileges, or services in all business establishments. (Civ.
Code Sec. 51.)
This bill would provide that, subject to the last sentence of
this paragraph, it is a violation of the Unruh Civil Rights
Act 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 that provided under the
safe harbor to the driver's license rule, above, and (B) all
AB 1858 (Perea)
Page 5 of ?
elements that would be required to establish a claim for
violation of Unruh (including any elements relating to
motivation or state of mind) are established. Any affirmative
defenses that would be available to a claim under Unruh would
be affirmative defenses to a claim under this paragraph.
3. Existing law provides transitional provisions that govern
the effect and priority given to securities perfected prior to
or after the operative date of the 2001 changes to Division 9,
as well as for those security interests perfected prior to or
after the 2010 changes to Division 9. (Com. Code Secs. 9701
et seq., 9801 et seq.)
This bill would include similar transitional provisions for
these 2014 amendments that govern the effect and priority
given to securities perfected prior to or after the operative
date of this bill. For example, the transitional provisions
would provide:
The changes to this division made this bill become
operative on January 1, 2015.
This bill's transitional provisions apply to a security
interest only to the extent that, with respect to such
security interest, both of the following apply:
o a debtor is an individual; and
o a financing statement filed before January 1, 2015,
provides the name of an individual as a debtor.
Except as otherwise provided the bill's transitional
provisions for the 2014 amendments, the changes to this
division made by this bill apply to a transaction or lien
within its scope, even if the transaction or lien was
entered into or created before January 1, 2015.
The changes to this division made by this bill do not
affect an action, case, or proceeding commenced before
January 1, 2015.
The provision above relating to the anti-discrimination
language as added by this bill applies only with respect to
events occurring on or after January 1, 2015.
A security interest that is a perfected security
interest immediately before January 1, 2015, is a perfected
security interest under this division as amended by this
act if, as of January 1, 2015, the applicable requirements
for attachment and perfection under this division as of
that date are satisfied without further action.
A security interest that is an unperfected security
interest immediately before January 1, 2015, becomes a
perfected security interest as follows:
AB 1858 (Perea)
Page 6 of ?
o without further action, on January 1, 2015, if the
applicable requirements for perfection under Division 9
as amended by this bill are satisfied before or at that
time; and
o when the applicable requirements for perfection are
satisfied if the requirements are satisfied after that
time.
The changes to this division made by this bill determine
the priority of conflicting claims to the collateral.
However, if the relative priorities of the claims were
established before those changes become effective and
operative on January 1, 2015, this division as it existed
before those changes become effective and operative
determines priority.
COMMENT
1. Stated need for the bill
According to the author:
Banks and other lenders provide loans to individual borrowers,
loans which are frequently business purpose loans to sole
proprietorships secured by accounts receivable, inventory and
equipment. To obtain a priority security interest in such
collateral, the secured creditor most often has 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. For example, with a corporation that is a
borrower, its name for filing purposes would be derived from
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, a
birth certificate, a social security card, a passport, a
marriage license, a business card, a driver's license or a
state identification card?
Therein lies the problem for secured creditors today. Article
AB 1858 (Perea)
Page 7 of ?
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 a Uniform
Commercial Code (UCC) financing statement. If the borrower
does not have a driver's license, then it would be filed with
the first name and surname. This is known as Alternative A.
Alternative A states that the name on a financing statement
filed against an individual debtor will only be sufficient if
it provides the name indicated on the debtor's driver's
license (if the debtor does not have an unexpired driver's
license, then it is to provide the individual name or the
surname and first personal name).
2. Sufficiency of the debtor's name on a financing statement
In 1990, the Permanent Editorial Board for the Uniform
Commercial Code, with the support of its sponsors, the American
Law Institute and the National Conference of Commissioners on
Uniform State Laws (NCCUSL, now known as the Uniform Law
Commission (ULC)), established a committee to study Article 9 of
the UCC and to make recommendations to the Board. In 1992, the
study committee recommended that the Board create a drafting
committee to reorganize the UCC Article 9 and recommended
various changes. The drafting committee met 15 times between
1993 and 1998, until the sponsors (ALI and the NCCUSL) approved
the new, revised Article 9. However, the ULC did not reach
consensus on the appropriate, and uniform, way to address the
question of the sufficiency of the debtor's name on a financing
statement. Instead, the ULC provided two options (arguably with
a third option of choosing neither alternative): Alternative A
and Alternative B. Alternative A requires that, at the risk of
being found unperfected, the name presented on the financing
statement must be exactly as shown on the debtor's driver's
license. The debtor's individual name, or his or her surname
and first name can only be used in the absence of an unexpired
driver's license. Alternative B permits the use of the debtor's
driver's license name, while also allowing for use of the
debtor's actual (or individual) name, or his or her surname and
first personal name.
Generally, Article 9 applies to any transaction, regardless of
AB 1858 (Perea)
Page 8 of ?
its form, that creates a security interest in personal property
or fixtures by contract. The filing of a financing statement is
necessary to perfect a security interest and the statement is
sufficient only if it satisfies certain conditions, including
the name of the debtor. Thus, the issue of the debtor's name is
critical, because if the financing statement does not provide
the so-called "correct" name of the debtor, then it does not
perfect the security interest.
While it might seem as though that every person only has one
correct name, it is, in reality, not that simple. An individual
debtor in a security interest transaction could be known by
various names: a birth certificate name, driver's license name,
passport name, or even a nickname. Moreover, names can be
changed: hyphens added or removed, middle names dropped, maiden
names made middle names, maiden names dropped or readopted-the
list goes on. If a creditor does not identify the name
correctly and the security interest is thereby not perfected,
someone else might perfect a security interest in the same
property of the debtor and gain priority over the original
creditor's security interest by the time the error is fixed.
Under California law, as amended by AB 502 (Wagner, Ch. 531,
Stats. 2013) operative July 1, the name on the financing
statement must be (1) individual name of the debtor, or (2) the
surname and the personal name of the debtor. This bill now
seeks to implement Alternative A as the rule in California for
UCC Division 9 purposes.
3. Arguments for and against Alternative A
In support of the bill, the California Bankers Association, the
sponsor of this bill, and a coalition of supporters, writes:
Alternative A is the most effective, simple and certain method
for creditors 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. Alternative A ensures not only perfection, but also
lien priority. A core mission of the NCCUSL is uniformity of
state laws, an important goal shared by lenders that operate
in multiple states. Accordingly, thirty-seven states have
enacted Alternative A.
Importantly, the driver's license is a primary document used
to verify an individual borrower's identity under federal
"Know Your Customer" requirements promulgated through the U.S.
AB 1858 (Perea)
Page 9 of ?
Patriot Act. Given the nature of these commercial loan
transactions involving a business owner, it is highly unlikely
that those customers will lack a driver's license.
Notwithstanding, Alternative A provides a solution in those
circumstances where a business borrower cannot obtain or
produce a driver's license. In this instance, the financing
statement is deemed sufficient if filed under the debtor's
first personal name and surname.
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.
In opposition to the bill, a group of 10 law professors who
teach commercial or debtor/creditor law across eight law
schools, including Boalt (UC Berkeley), UC Hastings, UCLA,
Loyola, Santa Clara, among others, argue that the current rule,
which has been in place for over 50 years, in conjunction with
the added safe harbor (i.e. surname and first name of the
individual) that is to go into effect on July 1, 2014, per AB
502 (Wagner, Ch. 531, Stats. 2013), is the best rule for
California. The professors write that, in contrast to other
states, "[n]o 'fix' is needed in California because we already
have an excellent filing and searching practice that does not
present the problems which the large banks assert require a
drastic change of law, a change likely to present difficulties
for small financial institutions, small law firms and solo
practitioners, sellers of equipment and sellers of inventory to
retailers, and ultimately their borrowers, clients and buyers,
especially SME's [small and medium enterprises]." Moreover,
they note that AB 60 (Alejo, Ch. 524, Stats. 2013) was adopted
just last year, allowing undocumented people to apply for a
driver's license and urge caution against moving too fast in
California:
The applications may trigger changes in the Department of
Motor Vehicles' name presentation practices to contend with
Hispanic surname practices, matronymics/ patronymics
presentation, accent marks, tildes, multi- element names,
Asian name presentation practices and other issues too
numerous to mention, as well as those that we cannot
AB 1858 (Perea)
Page 10 of ?
anticipate. If the legislature now ties UCC names to DMV
names, decisions made by DMV officials, whose primary concerns
are with law enforcement and with efficiency and costs of
operating the DMV system, will be imposing changes on a UCC
system that exists for entirely different purposes that are of
no concern to them. Moreover, long-standing UCC filing and
searching practices may change in unpredictable ways. The
overall result of imposing the license name rule may well be
to introduce uncertainty under the UCC and require judicial
clarification. That in turn may affect the availability and
cost of secured lending in California and generate malpractice
litigation.
They believe that since AB 60 does not go into effect until
January 1, 2015, this is the absolute wrong time to impose the
driver's license name rule on UCC practice. "At the very least,
the Legislature should postpone all further change to UCC
[Section] 9-503 and allow the law on the books to continue as
is. If the large banks continue to urge use of the license as
the source for the UCC name, the Legislature should consider
that in two or three years, after the effects of AB 60 are known
and after a careful study. Some of us would be willing to serve
on a study group and undertake to report to this Committee."
Professor Harry Sigman, in opposition, adds that the proponents
have understated who the bill would effect and overstated the
benefits of Alternative A. While one might argue that the
proponents of this bill are the parties who stand to lose if
they get the name wrong for the purpose of perfection, Professor
Sigman points out that commercial filers such as the big banks
are not the only filers who would be affected by this
bill-indeed, "UCC Article 9 is used by sellers of equipment,
sellers of small businesses, parties who are seeking to secure
the promises of counterparties in various business transactions,
divorces, child custody arrangements," as well as by local banks
and credit unions, and by bigger national banks, among others.
Accordingly, the proposed change to move California to a
driver's license rule could cause complications for these other
non-commercial, and potentially less-sophisticated, filers.
Moreover, Professor Sigman challenges both the stated need for
the bill, and the benefits of cost-efficiency and uniformity
that are presumed to result from adoption of Alternative A. To
this end, he explains that whereas in other states, a search of
"B. Obama" would only disclose an exact match for "B. Obama,"
causing the filer to search all possible variations
individually, at additional cost, in California, the initial "B.
AB 1858 (Perea)
Page 11 of ?
Obama" search would disclose all fillings against any variation
of the name "B. Obama." Furthermore, the professor argues that
even under Alternative A, no well-advised prospective secured
creditor would search only under the driver's license name, as
both California state tax liens and judgment liens are filed in
the Secretary of State's office and indexed with the UCC
financing statements-neither of which are required to use the
debtor's driver's license name.
Staff notes that Alternative B would arguably include some
flexibility as to what is the "correct" debtor's name, which
might address some of the oppositions concerns. That being
said, the proponents of AB 1858 would argue that Alternative B
is not preferable as it provides less certainty than Alternative
A as it allows more than one name of an individual to be used on
a financing statement-which means that lenders who want to
obtain a first priority security interest will continue to face
uncertainty as to what names to search under. Moreover, they
argue that Alternative B does not guarantee that filing under
the driver's license name will give the lender priority, because
prior filings made by other lenders under other names may be
sufficient under Alternative B. So, under Alternative B,
lenders can be expected to continue to deal with additional
time, confusion, and cost in defining an individual name for the
purposes of filing and searching.
4. Anti-discrimination language
California law, the Unruh Civil Rights Act, provides that all
persons are free and equal, and that regardless of a person's
sex, race, color, religion, ancestry, national origin,
disability, medical condition, genetic information, marital
status, or sexual orientation, everyone is entitled to the full
and equal accommodations, advantages, facilities, privileges, or
services in all business establishments. (Civ. Code Sec.
51(a).)
This bill would provide that it is a violation of the Unruh
Civil Rights Act 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 that provided under the
safe harbor to the driver's license rule, above, and (B) all
elements that would be required to establish a claim for
AB 1858 (Perea)
Page 12 of ?
violation of Unruh (including any elements relating to
motivation or state of mind) are established. Any affirmative
defenses that would be available to a claim under Unruh would be
affirmative defenses to a claim under this paragraph.
As currently drafted, the bill would require, for the first time
in statute, that for there to be a violation of Unruh, the
plaintiff must prove any elements relating to motivation or to
state of mind. Staff notes that this is not language drawn from
the Unruh statute, nor is such language referenced in any other
statute in relation to potential Unruh violations. Even if
those elements would be necessary to a successful Unruh action,
to include this language in the proposed statute could be
misleading.
Moreover, as currently drafted, there is a potential concern
that the bill could inadvertently be read to limit what would
constitute an Unruh violation. Insofar as discrimination is a
concern, that concern potentially arises out of the decision to
decline credit or to make the terms and conditions less
favorable based upon the fact that the person either did not
have a valid driver's license, declined to provide their
driver's license for the purposes of identification, or
presented a driver's license issued under last year's AB 60 (see
Comment 2 above) indicating that he or she is an undocumented
immigrant. The violation could feasibly also arise because the
detrimental decision is made based on a presumption by the
creditor (or his or her agent) that any person who claims to not
have a license is actually a person with an undocumented
immigrant's license or is otherwise an illegal immigrant. The
current language of the bill, however, does not appear to
recognize that possibility and the language should therefore be
clarified avoid any confusion.
Accordingly, the following amendment is suggested to strike
reference to motivation or state of mind and to clarify that
this bill is not intended to restrict what otherwise constitutes
an Unruh violation under existing law:
Suggested amendment :
On page 4, starting at line 3, amend the bill to read: "(7)
Subject to the last following sentence of this paragraph, 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
AB 1858 (Perea)
Page 13 of ?
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 that provided under paragraph (5)
rather than under paragraph (4), 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. Any affirmative defenses that
would be available to a claim under Section 51 would be
affirmative defenses to a claim under this paragraph. Nothing
in this paragraph shall be construed to alter, expand, limit,
or negate any other rights, defenses, or remedies under
Section 51. "
Staff notes that the bill was also recently amended to include
among the transitional provisions for these 2014 amendments to
Division 9 a statement to the effect that the
anti-discrimination language as added by this bill applies only
with respect to events occurring on or after January 1, 2015.
Such language is not only unnecessary, as the transitional
provisions make clear that the changes under this bill apply as
of January 1, 2015, but it could also have an effect of limiting
Unruh. The following amendment is suggested to delete this
provision.
Suggested amendment :
On page 5, strike lines 32-34, inclusive
Support : Association of Financial Development Corporations; Bay
Area Council
California Business Roundtable; California Chamber of Commerce;
California Credit Union League; California Independent Bankers;
California Mortgage Bankers Association; Latin Business
Association; National Federation of Independent Business
Opposition : 10 law professors
HISTORY
Source : California Bankers Association
Related Pending Legislation : None Known
Prior Legislation : AB 502 (Wagner, Ch., Stats. 2013) See
AB 1858 (Perea)
Page 14 of ?
Background.
Prior Vote :
Assembly Floor (Ayes 73, Noes 0)
Assembly Judiciary Committee (Ayes 10, Noes 0)
**************