BILL ANALYSIS �
AB 1858
Page 1
CONCURRENCE IN SENATE AMENDMENTS
AB 1858 (Perea)
As Amended July 1, 2014
Majority vote
-----------------------------------------------------------------
|ASSEMBLY: |73-0 |(May 23, 2014) |SENATE: |35-0 |(August 7, |
| | | | | |2014) |
-----------------------------------------------------------------
Original Committee Reference: JUD.
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)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)Provides that it is a violation of the Unruh Civil Rights 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,
among other things, 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 identification
card.
4)Specifies transitional rules for carrying out this bill with
respect to its effect upon certain transactions begun before
the operative date of January 1, 2015.
The Senate amendments clarify that nothing in this bill is
intended to restrict what otherwise constitutes an Unruh Civil
Rights Act violation under existing law, and specify technical
AB 1858
Page 2
rules for implementing the transition to new filing requirements
proposed to take effect under this bill on January 1, 2015.
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."
To address the stated problem, this bill would adopt a
AB 1858
Page 3
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: 1) the individual name
of the debtor (i.e., as under current Article 9); or 2) the
debtor's surname and first personal name would be sufficient.
This bill is opposed by a group of prominent law professors who
teach commercial law in California and are experts, who contend
that this 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.
The proponents and opponents differ on a number of issues raised
by the bill. First, proponents contend that this 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,
AB 1858
Page 4
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.
Proponents also 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 this 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. Opponents 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 this 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. In order to address the potential
discriminatory effect that Alternative A may have upon extension
of credit for those who lack a driver's license, the bill would
make it a violation of Civil Code Section 51 for a secured
party or proposed secured party to decline to provide credit, or
offer to make the terms and conditions of such credit less
favorable because the debtor or proposed debtor does not hold or
present a valid DMV-issued license or identification card from
which his or her name may be replicated onto the financing
statement. As with any claim for a violation of the Unruh Civil
AB 1858
Page 5
Rights Act, all elements of a claim must be established and any
affirmative defenses would apply.
Analysis Prepared by : Anthony Lew / JUD. / (916) 319-2334
FN: 0004251