As discussed in last month's column, the transition rules for revised Article 9 mean that most existing security interests that have been properly created and perfected under current Article 9 will remain valid and perfected after the July 1, 2001, effective date of the revision.²

This is particularly true of security interests that have been perfected by filing a financing statement. Under the transition rules, a financing statement properly filed under current law (an "old-act financing statement") remains effective until the earlier of its normal lapse date or June 30, 2006. See §9-705(c).³ Under current law, most financing statements lapse at the end of five years, unless they are continued by the filing of a continuation statement before they lapse. See current §9-403(2). The continuation statement is valid only if it is filed during the last six months prior to lapse—between four and five years after the initial filing. See current §9-403(3). Thus, the effect of the transition rule is that most old-act financing statements will remain effective for five years after their initial filing. The June 30, 2006, "drop-dead" date will reduce the life-span of an old-act financing statement in those states that fail to adopt the uniform July 1, 2001, effective date.⁴

Perfection in After-acquired Property

Although the rule clearly preserves the perfected status of an existing pre-effective date security interest that was perfected by an old-act financing statement, its effect is much broader. The old-act financing statement is not merely effective with respect to pre-revision transactions, it is fully effective for all purposes.

Thus, for example, an old-act financing statement covering "inventory" and filed in the proper state under current law (i.e., the state where the inventory is located) will remain fully effective to perfect a security interest in inventory acquired in that state by the debtor after July 1, 2001. This is true even though the proper state in which to file an inventory financing statement under the revised act may be a different state (e.g., the state of the debtor's incorporation). As a result, even in a transaction involving only newly acquired post-effective date assets, it will be necessary to search the UCC filing records under both the current law and the revised act until the June 30, 2006, "drop-dead" date.

The issue is complicated further by the revision's recharacterization of certain types of collateral. For example, rental and license fees are "general intangibles" under current law, but are "accounts" under the revised act. Compare current §9-106 with §9-102(a)(2)(i), cmt. 5a. Thus, between July 1, 2001, and June 30, 2006, a security interest in license fees could be perfected either by an old-act financing statement listing the collateral as "general intangibles" or by a revised-act financing statement listing the collateral as "accounts."

Continuing the Old-act Financing Statement

As noted above, the old-act financing statement will remain effective for up to five years. How do you continue the old-act financing statement if you wish to remain perfected beyond that point? Here, there are two possibilities—either the proper place to file under revised Article 9 is the same office where the old-act financing statement is on file, or it is not.

As discussed in the March 2000 column, the revision requires that most financing statements be filed in the state of the debtor's location, which is the state of registration for a registered organization.⁵ In contrast, current law requires that financing statements for tangible collateral be filed in the state where the collateral is located and that intangible collateral be filed in the state where the business has its chief executive office. See current §9-103(1) and (3). In addition, in some states, financing statements for consumer goods, farm-related collateral and certain local businesses must be filed locally at the county level, rather than in a statewide office. See current §9-401(1) (Second Alternative and Third Alternative). The revision dispenses with the local filing requirement for non-real estate-related collateral.

Under the first possibility, the proper state for filing and the proper office in that state is the same under both current law and the revision. In such a case, the old-act financing statement may be continued only⁶ under the normal rules by filing an ordinary "continuation statement" in that office within the normal four- to five-year time frame. See §9-705(d).

Note, however, that the revised act's requirements for debtor's name, secured party's name and collateral description will apply to the continuation statement. See §9-705(f), cmt. 6. Thus, for example, an old-act financing statement that describes the collateral as "general intangibles" will perfect a security interest in license fees until it is continued. However, if it is continued without amending the collateral description to list "accounts" or "license fees," perfection will lapse after the fifth year. Similarly, if the financing statement lists only a trade name for the debtor (and if that is sufficient in the relevant jurisdiction under current law), perfection will lapse when the old-act financing statement expires unless the continuation statement amends the debtor's name to conform to the requirements of revised Article 9.

The other possibility is that the old-act financing statement is on file in a state, or in an office in a state, that would not be the proper place to file a financing statement under the revised act. In this case, the old-act financing statement may be continued only by filing in the proper new state or office a new "initial financing statement in lieu of a continuation statement" (IFSILOACS). The filing of an ordinary continuation statement in either state will not continue the old-act financing statement.⁷ The filing of a new regular initial financing statement in the new state or office will not continue the old-act financing statement.⁸

In order for the new initial financing statement to qualify as an IFSILOACS, it must meet several conditions. See §9-706(c). First, it obviously must satisfy all of the revision's requirements for a valid and effective financing statement. Second, in order to serve the goal of translating the old-act financing statement into the new state's filing system, it must identify the old-act financing statement or statements that it is designed to continue. The IFSILOACS must identify the old-act financing statement by (1) indicating the office in which it was filed, and (2) providing the dates of filing. This must be done for the old-act financing statement and for the most recent continuation statement, if any. Finally, the IFSILOACS must indicate that the old-act financing statement remains effective.

Multiple old-act financing statements may be continued in a single IFSILOACS. Indeed, in the case of inventory financing for a debtor with stores in many states, current law may have required multiple filings in several different states and counties. A single IFSILOACS in the new proper state will continue all of the old-act filings.

It is not necessary to attach copies of the old-act financing statements and continuation statements to the IFSILOACS. However, since the old-act filings will be discarded by the original filing office after six years, the secured party would be well-advised to preserve some evidence of its pre-revision filings in case a priority dispute arises after the old-act files have been purged.

Unlike an ordinary continuation statement, an IFSILOACS can be filed at any time before the old-act financing statement lapses. See §9-706, cmt. 1. Thus, a cautious secured party could file an IFSILOACS immediately after July 1, 2001, instead of waiting until the normal four- to five-year continuation window. For example, if the old-act financing statement was filed on March 15, 1999, its lapse date would be in March of 2004. By filing the IFSILOACS on July 2, 2001, the secured party preserves the March 15, 1999, priority date established by its old-act financing statement and obtains a new lapse date of July 2006. In the six-month window before the July 2006 lapse date, the IFSILOACS could be continued for an additional five years by filing an ordinary continuation statement. See §9-515(d).

Enactment Update

Three new states have adopted revised Article 9 since the last issue: Arkansas, Georgia and North Dakota. Thus, as of early May, a total of 35 states plus the District of Columbia have adopted revised Article 9. In addition, revision bills are pending in 15 states plus the U.S. Virgin Islands.

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Footnotes

¹ The views expressed herein are Prof. Warner's and do not necessarily reflect the views of the University of Missouri, St. John's University or the law firm of Greenberg Traurig LLP. Return to article

² See Warner, G. Ray, "Surviving the Transition to Revised Article 9—The Basics," 20 Am. Bankr. Inst. J. __ (May 2001). Return to article

³ All citations are to the revised 1999 version of Article 9 of the Uniform Commercial Code, unless otherwise indicated. Citations to the currently applicable 1972 version of Article 9 are indicated by the term "current." Return to article

⁴ Although §9-701 attempts to establish a uniform national effective date of July 1, 2001, not all states will have adopted the revision by that deadline, and in addition, at least one of the adopting states has set a later effective date. Thus, the revision will not become effective in all U.S. jurisdictions on July 1. This will create a number of conflict-of-law problems, most of which are beyond the scope of this column. Return to article

⁵ See Warner, G. Ray, "Secured Transactions: New Filing Rules Follow the Debtor," 19 Am. Bankr. Inst. J. 16 (March 2000). Return to article

⁶ This is a very technical point. Although the statute does not expressly prohibit filing an IFSILOACS (discussed below) in such cases, a close reading of §9-706(a)(2) indicates that an IFSILOACS only works where the old-act financing statement is on file in an office that would not be appropriate under the revised act. The improper IFSILOACS would, however, qualify as an initial financing statement and would perfect the security interest, albeit with a new, less-advantageous priority date. Return to article

⁷ However, since not all states will adopt the revision in time, the secured creditor would be well advised to continue old-act financing statements in the old-act state until all relevant states have converted to revised Article 9. Return to article

⁸ The filing of a new initial financing statement would, however, perfect the security interest. The problem is that it will establish a new priority date as of the date it is effective; it will not preserve the priority date established by the old-act financing statement. Return to article