Sepember 2001

A New Law for Secured Transactions

by Daniel B. Ritter

Uniform Commercial Code Revised Article 9 represents a major overhaul and updating — the first since 1972 — of the law governing security interests in personal property (and outright sales of some types of intangible property). Wash. Sess. Laws of 2000, ch. 250, as amended by Laws of 2001, ch. 32, effective July 1, 2001, adding RCW 62A.9A. In brief, the revised article:

• accommodates technological developments such as software and electronic commerce;
• simplifies the filing system; for example, it promulgates a national form of financing statement and designates the debtor’s location as the place to file against tangible property as well as intangible;
• expands the scope of Article 9 to cover more types of collateral (for example, deposit accounts) and more transactions (for example, asset securitizations);
• adds a number of special rules for consumer transactions;
• provides more detailed rules on nonjudicial enforcement of security interests, including safe-harbors as well as additional requirements; and
• clarifies and elaborates prior law to fill in gaps, eliminate ambiguities, and resolve conflicts in judicial interpretation.

Similarly, the official comments to Revised Article 9 explain how the law works in much greater detail than do the official comments to prior Article 9. As a result of this increased specificity, Revised Article 9 and the accompanying official comments occupy 327 pages in the Uniform Commercial Code (West 1999 edition) as compared to 128 pages for prior Article 9 and official comments. Given the length of the new law, this article can do no more than note the most important changes and additions. Significant Washington variations from the official text of Revised Article 9 will also be noted. (In the ensuing text, numbers in brackets refer to sections of RCW 62A.9A unless otherwise indicated.)

Coverage of Additional Transactions. Revised Article 9 applies to many transactions that fall outside the scope of prior Article 9. The prior law applied to security interests in accounts, chattel paper, or general intangibles, and to sales of accounts or chattel paper, but not to sales of general intangibles. The revised article is expanded to cover sales of "payment intangibles"— general intangibles under which the debtor’s principal obligation is a monetary obligation [9A-102(a) (61); 9A-109(a)(3)]. In addition, the definition of "account" is significantly broadened [9A-102 (a) (2)]. No longer limited to rights to payment arising out of the sale or lease of goods or services, the new definition sweeps up several kinds of payment rights previously classified as general intangibles; for example, rights to payment for insurance premiums, for energy, for vessel hire, for software licenses, and for lottery winnings. Accounts also include receivables from heath-care insurance and credit-card receivables.

By covering sales of payment intangibles and broadening the definition of "account," Revised Article 9 applies to many more sales than does prior law. This expansion facilitates commercial financings, especially asset securitizations, which typically involve the sale of intangibles. With similar effect, the revised article covers sales of promissory notes [9A-102(a)(65); 9A-109(a)(3)].

Coverage of Additional Types of Collateral. Revised Article 9 applies to several types of collateral previously excluded. An important addition is coverage of deposit accounts as original collateral, except for checking accounts in consumer transactions [9A-102(a)(29); 9A-109(d)(13)]. Although the exclusion for insurance claims is generally retained, the new law (as noted above) applies to receivables from health-care insurance taken as original collateral. (As before, Article 9 applies to insurance claims that are proceeds of other collateral.) Revised Article 9 applies to "commercial tort claims"— claims arising in the course of a business or profession, excluding claims for personal injury [9A-102(a)(13); 9A-109 (d)(12)]. The definition of "goods" is broadened to include embedded software [9A-102(a)(44)], and the definition of "chattel paper" is broadened to include obligations secured by software used in goods when the security interest also covers the goods [9A-102(a)(11)]. "Electronic chattel paper" is also covered [9A-102(a) (31)].

Consignments. Revised Article 9 applies generally to true consignments, so that the consignor must now file to protect itself. There are exceptions where the consignor is a consumer, the goods are worth less than $1,000, or the consignee is generally known to be selling the goods of others [9A-102(a)(20); 9A-109(a)(4); revised UCC 1-201(37)].

Agricultural Liens. Although other statutes govern the creation of "agricultural liens," Revised Article 9 governs their perfection and priority [9A-102(a)(5); 9A-109 (a)(2)]. The definition of "agricultural lien" excludes a possessory lien. Washington’s crop lien law, RCW ch. 60. 11, is generally retained except that a lien claimant will file an ordinary UCC financing statement. The more detailed statement now required by RCW 60.11.040(2) need not be filed, but must be furnished on request. As before, the lien of a handler of orchard crops will be perfected without filing.

Investment Property. Revised Article 8 (investment securities) was accompanied by a conforming amendment to Article 9 that added Section 9-115 to govern all aspects of security interests in "investment property." Revised Article 9 spreads the contents of that section throughout Article 9, so that attachment of a security interest in investment property is governed by parts 1 and 2, and perfection and priority are governed by part 3. However, the substantive treatment of investment property remains essentially unchanged.

Clarification. Revised Article 9 confirms that federal law controls only when it actually preempts the UCC [9A-109(c) (1)]. This is pertinent to aircraft and to intellectual property. Revised Article 9 explicitly applies to a security interest in a note secured by real property [9A-109(b)], and it applies to letter-of-credit rights (i.e., rights to proceeds of a letter of credit, not the right to draw under the credit) [9A-102(a)(51); 9A-109(c)(4)].

Electronic Commerce. The term "record" is used in place of "writing" and includes information stored in an electronic medium if it is retrievable in perceivable form [9A-102(a)(69)]. Correlatively, the verb "authenticate" is used in place of "sign," and includes any processing of a record with the intention to identify oneself and adopt or accept the record [9A-102(a)(7)].

Collateral Description [9A-108]. Although a security agreement must "reasonably identify" the collateral, Revised Article 9 provides a safe harbor; it generally suffices to designate a type of collateral defined in the UCC, e.g., accounts, equipment, inventory, chattel paper, investment property, and so forth. However, in a consumer transaction, it is necessary to be more specific. Likewise, a commercial tort claim must be described specifically; indeed, a security interest cannot attach to after-acquired commercial tort claims [9A-204(b) (2)].

Automatic Attachment. When a security interest attaches to a payment right, it automatically attaches to any security interest or lien that secures the payment right [9A-203(g)]. For example, when a promissory note is secured by a real-property mortgage, attachment of a security interest in the note automatically extends to the mortgage without any recordation of an assignment of mortgage. In other words, the mortgage follows the debt. So too does a "supporting obligation," i.e., a guaranty or letter of credit that supports the debt [9A-102(a)(71) & (77); 9A-203(f)]. As under prior law, a security interest in original collateral automatically attaches to identifiable proceeds [9A-203(f); 9A-315(a) (2)], and the definition of "proceeds" has been expanded [9A-102(a)(64)]. It is no longer limited to what is received upon a "disposition," but includes, for example, dividends on securities held as collateral, payments on guaranties or letters of credit supporting promissory notes held as collateral, warranty claims arising from defects in collateral, and payments for licenses of collateral.

Rights in Collateral. Generally, a security interest can attach only if the debtor has rights in the collateral, and Revised Article 9 makes explicit that a seller of accounts, chattel paper, payment intangibles or promissory notes no longer has rights in what was sold (thus overruling Octagon Gas Systems, Inc. v. Rimmer, 995 F.2d 948 (10th Cir. 1993)). However, until the purchaser perfects its security interest, the seller retains power to transfer the collateral to a third party [9A-203(b)(2); 9A-318].

New Debtor. When a debtor is acquired by merger or sale of substantially all its assets, the acquirer will usually succeed to or assume the debtor’s obligations, including security agreements. Provided they cover after-acquired property, Revised Article 9 makes the original debtor’s security agreements enforceable against the "new debtor" with respect to after-acquired property as well as existing property [9A-102(a)(56); 9A-203(d) & (e)]. Consequently, a new security agreement will not be needed. But usually a new financing statement will be required for after-acquired property because the old one will become seriously misleading [9A-508].

Free Assignability. A contract may prohibit selling or granting a security interest in certain personal-property rights. In a complex set of provisions [9A-406; 9A-407; 9A-408], Revised Article 9 generally invalidates most such prohibitions, but there are several exceptions. For example, in an agreement between the assignor and its lender, a "negative pledge" remains enforceable, so even if effective, the assignor’s sale or grant of a security interest may constitute a breach of contract. The rules on anti-assignment clauses in leases are not new in substance, but have been moved to Article 9 from RCW 62A. 2A-303.

Where to File. As under prior law, filing under Revised Article 9 is at the county level for fixtures, timber to be cut, oil, gas and minerals, and accounts arising from sale of oil, gas or minerals at the wellhead or minehead [9A-102(a)(6); 9A-301(3) & (4); 9A-501(a)]. Otherwise, all financing statements are filed at the "location" of the debtor [9A-301(1)]. So if the collateral includes inventory and equipment located in 20 states, it is no longer necessary to file in 20 states. Instead, it will be necessary and sufficient to file in one state — that in which the debtor is located.

Location of Debtor. The "location" of a "registered organization" such as a corporation, limited partnership or limited liability company is the jurisdiction where it is organized, e.g., the state of incorporation of a corporation [9A-102(a)(70); 9A-307(e)]. Consequently, a prudent secured party will obtain a good-standing certificate before advancing funds. A foreign debtor whose home jurisdiction does not maintain a filing or recording system for personal-property security interests is "located" in the District of Columbia [9A-307(c)]. Other definitions of "location" are provided for individuals, nonregistered organizations, federally chartered organizations, foreign banks and foreign air carriers [9A-307]. A debtor that ceases to exist continues to be "located" in the same jurisdiction as before [9A-307(d)].

Form of Financing Statement. Revised Article 9 provides a simplified uniform financing statement that must be accepted by the filing office [9A-521].

• Name of Debtor. If the debtor is a registered organization, the financing statement must contain its exact name [9A-502(a)(1); 9A-503(a)(1)]. Otherwise, the financing statement is "seriously misleading," hence ineffective, unless the debtor’s exact name would be disclosed by a records search using the filing office’s standard search logic [9A-506]. Consequently, a prudent secured party will obtain, at least in large transactions, certified copies of the debtor’s constituent documents and all amendments.
• Name of Secured Party. The financing statement may name either the secured party or its representative, whose representative capacity need not be indicated [9A-102(a)(72); 9A-502(a)(2); 9A-503 (d)]. So, in a syndicated loan by X, Y and Z, where X is agent, the financing statement may name as secured party: (1) X as agent for X, Y and Z; or (2) X as agent; or (3) simply X. Multiple debtors or secured parties may be named. In the case of multiple secured parties, each may file amendments and termination statements with respect to its interest or may authorize another secured party of record to do so [9A-503(e); 9A-509(d); 9A-510(b)].
• Collateral Covered. As under prior law, the financing statement must "indicate" what collateral is covered. Yet although the security agreement requires a "description" of collateral, the financing statement will suffice if it merely indicates that it covers "all assets" or "all personal property" of the debtor [9A-502(a)(3); 9A-504(2)].
• No Debtor Signature. The last major change in the financing statement is that it no longer requires the debtor’s signature. Nor does an amendment. The debtor must authorize the filing, but the debtor’s authentication of a security agreement constitutes authorization to file a financing statement covering collateral described in the security agreement [9A-509(a) & (b)]. This authorization binds a new debtor who becomes bound on the security agreement pursuant to a merger or asset acquisition. If the secured party wishes to use a super-generic description in the financing statement, e.g., "all assets," it is advisable to include express authorization in the security agreement. Otherwise, the financing statement is unauthorized to the extent it covers collateral not described in the security agreement. When the security agreement is to be signed at closing, filing before closing can be authorized in the credit application or some other preclosing document.

Correction Statements. If you believe that a filing against your name is inaccurate or was wrongfully filed, you may file a correction statement [9A-518]. This will not change the legal effect of the filing, if any, but will give notice that an issue exists. Such notice affords some protection against bogus filing (as when a losing litigant files against the judge) without enabling a debtor to defraud the secured party by unilateral termination of a financing statement.

The Filing Office. There are just a few specified reasons for which the filing office may reject a financing statement [9A-516(b); 9A-520(a)]. A financing statement that is wrongfully refused is effective anyway, except against a purchaser (including another secured party) who gives value in reasonable reliance on the absence of a filing [9A-516(d)]. This allocation of risk is fair because the first secured party is in a better position to discover that its filing was rejected. On the other hand, if the filing office accepts a financing statement but fails to index it correctly, the secured party is prior to a purchaser or subsequent secured party, even though a records search could not have discovered the misindexed filing [9A-517]. Consequently, a secured party need not conduct a post-filing search to protect itself against misindexing. However, to avoid problems it is nevertheless prudent to conduct a post-filing search, at least in large transactions.

Termination Statements. In a commercial credit transaction (as distinguished from a sale of accounts, etc.), if no indebtedness or commitment remains outstanding, the secured party must file a termination statement within 20 days after the debtor requests it [9A-513(c)]. Failure to comply incurs a $500 penalty [9A-625(e)(4)]. If the financing statement covers consumer goods, the secured party must file a termination statement within 30 days after the secured indebtedness is paid in full and no credit commitment remains outstanding, regardless of whether the consumer debtor makes a request [9A-513(a) & (b)]. However, the $500 penalty applies only if the secured party fails to file the termination statement within 20 days after the consumer debtor requests it [9A-625(e)(4)].

Control. Revised Article 9 adopts and extends the concept of "control" introduced for investment property by Revised Article 8. With respect to investment property, the rules for control under Revised Article 9 have not been changed except when there is a conflict between security interests both perfected by control. In that situation, Revised Article 9 adopts the rule of first-in-time, first-in-right [9A-328(2)].

Deposit Accounts. A security interest in a deposit account can be perfected only by control [9A-312(b)(1); 9A-314]. The control rules track those applicable to investment property. So, if the depositary is the secured party, control is automatic and, unless otherwise agreed, the depositary’s security interest is prior to any conflicting security interest [9A-104(a)(1); 9A-327]. A secured party other than the depositary can obtain control either by transfer of the account into its own name or by entering into a control agreement in which the depositary agrees, with the consent of the debtor, to comply with instructions from the secured party without any further consent from the debtor [9A-104; 9A-312(b); 9A-314]. A depositary need not enter into a control agreement and, unless it does, its rights and duties with respect to the account are unaffected by any security interest [9A-341; 9A-342].

A perfected security interest defeats the depositary’s common-law right of set-off against the debtor when control is obtained by transfer of the account, but not when control is obtained by a control agreement (unless otherwise agreed). However, a right of recoupment always defeats the security interest [9A-340]. A right of recoupment arises when the depositary’s claim relates to funds in the account, e.g., an overdraft, while a right of set-off arises from an unrelated claim, e.g., default on a loan.

Letter-of-Credit Rights. Control over letter-of-credit rights is obtained when the issuer has consented to an assignment of proceeds of the credit pursuant to Article 5 [9A-107; 9A-314(a)]. If the letter of credit is a supporting obligation, e.g., it serves as credit enhancement for a promissory note, then a security interest in the letter-of-credit rights is perfected automatically (without control) by perfecting a security interest in the supported obligation (the note) [9A-308(d); 9A-312(b)(2)]. But absent control, Article 5 will preclude the secured party from enforcing its security interest against the issuer.

Investment Property. As noted above, Revised Article 9 continues prior law with respect to security interests in investment property. They can be perfected either by filing or control [9A-102(a)(49); 9A-312 (a); 9A-313(e); 9A-314]. A security interest perfected by control prevails over one perfected by filing [9A-328]. Control of a certificated security is obtained by possession, together with any necessary indorsement. For other kinds of investment property control can be obtained either by transfer into the name of the secured party or by means of a control agreement [9A-106; revised RCW 62A.8-106 & 8-301].

Chattel Paper. Under prior law a security interest in chattel paper could be perfected either by filing or by possession. Revised Article 9 continues this rule for tangible chattel paper. As it is impossible to possess electronic chattel paper, a security interest in that kind of chattel paper can be perfected either by filing or by control [9A-312(a); 9A-313(a); 9A-314(a)]. Control of electronic chattel paper is obtained by identification of the secured party on an authoritative electronic record comprising the chattel paper [9A-105]. Wheth-er the chattel paper is tangible or electronic, Revised Article 9 continues existing rules governing priorities between a purchaser of chattel paper and a secured party claiming the chattel paper merely as proceeds of inventory [9A-330(a)].

Instruments. A security interest in an instrument can now be perfected either by possession or filing [9A-312(a); 9A-313 (a)]. However, a secured party who perfects by filing is subordinate to a purchaser (including another secured party) who gives value and takes possession in good faith without knowledge that the purchase violates the rights of the secured party who filed. [9A-330(d)]. The official comment states that this test is less stringent than the Article 3 test for holder-in-due-course status, and of course, a holder in due course is prior to anyone else [9A-331(a)]. Pledges of instruments are thus treated the same as pledges of certificated securities, except that for instruments there is no indorsement requirement. Regardless of perfection, however, an unindorsed instrument is harder to enforce against the maker.

Automatic Perfection. A security interest arising from sale of a promissory note is automatically perfected upon attachment [9A-309(4)]. However, if the purchaser does not take possession, it will lose to a subsequent holder in due course [9A- 33(a)]. Revised Article 9 also provides automatic perfection upon attachment for sales of payment intangibles [9A-309(3)]. This provision resolves a dilemma between asset securitizers, who want the protection of Article 9 coverage, and banks selling loan participations, who do not want financing statements to be filed against them by the participants.

Possession by Bailee. When collateral is in the possession of a bailee, prior Article 9 allowed a secured party to perfect by mere notice to the bailee. Revised Article 9 requires the bailee to acknowledge that it holds the collateral for the secured party’s benefit [9A-313(c)(1)]. However, such acknowledgement can be given prospectively [9A-313(c)(2)], thus facilitating mortgage warehousing. Under Revised Article 9, the law of the location of collateral governs perfection of possessory security interests [9A-301(2)]. Consequently, the law of the place where the bailee holds the collateral must be consulted to determine whether an acknowledgement is required.

Proceeds. As noted above, Revised Article 9 expands the definition of proceeds. The treatment of proceeds is also simplified somewhat [9A-315]. A security interest attaches to any identifiable proceeds of collateral and is automatically perfected if the security in the original collateral was perfected. Commingled proceeds are identifiable if they can be traced. Perfection in noncash proceeds is lost 21 days after attachment unless the security interest has been perfected by other means.

Purchase-Money Security Interests. Revised Article 9 makes several changes with respect to purchase-money security interests (PMSIs). A security interest in goods is a PMSI to the extent it secures a purchase- money obligation, including a refinancing [9A-103(b)(1) & (f)]. Thus, the dual-status rule is adopted and the transformation rule rejected. But the dual-status rule is not adopted for consumer goods; whether it should be is left to the courts [9A-103(h)]. A PMSI in inventory remains a PMSI to the extent it secures purchase-money obligations for other inventory [9A-103(b) (2)].

A PMSI priority in inventory extends not only to cash proceeds received before delivery of the inventory to the buyer (as under prior law), but also in some circumstances to chattel paper received as proceeds of the inventory [9A-324(b)]. A PMSI can be taken in software, even when it is not embedded in goods, if it is financed together with the goods in which the software will be used [9A-103(c)]. A seller’s PMSI taken to secure the purchase price has priority over the PMSI of a third party who makes a purchase money loan [9A-324(g)]. If there is more than one purchase money loan, priority ranks in order of filing.

Authorized Disposition. A transferee takes free of a security interest if the secured party authorized the disposition "free of other security interests" [9A-315(a)(1)]. This change does not answer the question of whether a disposition is authorized when consent is conditioned on the secured party’s receipt of sale proceeds.

Buyer in Ordinary Course. The long-standing rule that a buyer of collateral in the ordinary course of business takes free of a security interest does not apply to a possessory security interest [9A-317(b); [9A-320(e)]. This provision rejects the holding of Tanbro Fabrics Corp. v. Deering Milliken, Inc., 350 N.E.2d 590 (N.Y. 1976).

Licensee in Ordinary Course. A nonexclusive licensee in the ordinary course of business takes free of a security interest created by its immediate licensor [9A-321]. Of course, the licensee remains subject to the terms of the license.

Junior Secured Party. A junior secured party who receives an instrument as proceeds of collateral must account to the senior secured party if the junior knows that its receipt violates the rights of the senior [9A-330(d)].

Transferee of Funds. Unless it acted "in collusion with" the debtor, a transferee of money or of funds from a deposit account takes free of a security interest in the money or funds.

Notice of Sale. As before, the secured party must give notice of disposition, not only to the debtor and any guarantors, but also (unless the collateral is consumer goods) to other secured parties who have filed financing statements [9A-611(c)(3)]. Except in nonconsumer transactions, 10 days’ notice of sale is sufficient [9A-612]. Two safe-harbor forms of notice of disposition are provided, one for consumer goods and one for other collateral [9A-613; 9A-614]. The consumer form is written in plain English and provides more information.

Commercially Reasonable Sale. A secured party may dispose of collateral "in its then condition or following any commercially reasonable preparation or processing" [9A-610(a)]. The official comment indicates that a cost-benefit analysis should be used to determine what preparation, if any, is reasonable. Noncash proceeds must be immediately credited against the debtor’s obligation only if it would be unreasonable not to do so [9A-615(c)]. So if collateral is paid for with a promissory note, it should ordinarily be permissible to give credit only as payments on the note are received. But if the note is supported by a letter of credit, it may be unreasonable to defer credit.

Sales Warranties. A secured party selling collateral is now deemed to give a seller’s usual implied warranties of title unless they are expressly disclaimed [9A-610(d)]. A disclaimer is sufficient if it states "there is no warranty relating to title, possession, quiet enjoyment, or the like in this disposition" [9A-610(f)].

Deficiency Judgment. A secured party who seeks a deficiency judgment following nonjudicial foreclosure must, if challenged, prove that the conduct of the sale was commercially reasonable. If it was not, the rebuttable presumption rule applies, i.e., the collateral is rebuttably presumed to have been worth the amount of the secured debt [9A-626]. This rule, which reflects the weight of case authority, rejects both the absolute bar rule and the actual damages rule. A secured party incurs a $500 penalty by demanding payment of a deficiency from a consumer obligor without providing a detailed explanation of how the deficiency was calculated or by failing to provide such an explanation when the debtor requests it [9A-616; 9A-625(e)(5) & (6)].

Account Debtors. Revised Article 9 makes explicit that, when collateral includes accounts or other rights to payment, the secured party may, after default, effect collection directly from the underlying account obligors and their guarantors and may realize on any collateral they have provided [9A-607]. Account debtors of all kinds may waive claims against assignees, including secured creditors of the assignor [9A-403(b)]. Absent waiver, an account debtor’s claims against the assignor may be asserted as a defense to the assignee, but the account debtor is not entitled to an affirmative recovery against the assignee [9A-404(b)]. However, such recovery may be permitted under the form of notice required to be included in consumer notes by the Federal Trade Commission holder-in-due-course regulation, 16 C.F.R. Part 433. Revised Article 9 provides that, when other law requires such a notice to be included and it is not, the account debtor has the same rights against the assignee as if the notice had been included [9A-404(d)].

Strict Foreclosure [9A-620; 9A-621; 9A-622]. As under prior law, a secured party may accept collateral in full satisfaction of the secured obligations, provided notice is given to the debtor and other secured parties and they do not object within 20 days (formerly 21 days). But it will now be possible, with the debtor’s consent given after default, to accept collateral in partial satisfaction of the secured obligations. Moreover, it is not necessary for the secured party to acquire possession of the collateral before accepting it in full or partial satisfaction. Under Revised Article 9, there is no constructive acceptance of collateral as a result of taking possession of collateral and waiting too long to dispose of it. This overrules Service Chevrolet, Inc. v. Sparks, 99 Wn.2d 199, 660 P.2d 760 (1983). The official comment indicates that excessive delay bears on whether the eventual disposition is commercially reasonable.

Like prior law, RCW 62A.9A contains several variations from the official text promulgated by the American Law Institute and the National Conference of Commissioners on Uniform State Laws. These variations, however, are not of the sort that will create conflicts-of-law problems in multistate transactions. Some of the variations are technical changes needed to conform with existing Washington statutes on manufactured homes, motor vehicles, crop liens, recording of instruments, and foreclosure on real property. Other variations merely clarify the official text. But a few variations are substantive:

• The definition of "consumer transaction" excludes the incurrence of an obligation exceeding $40,000 [9A-102(24), (25) & (26)]. There is an exception for mobile-home financing.
• The definition of "instrument" excludes a writing that does not contain an order or promise to pay or expressly states that it is nontransferable or nonassignable [9A-102(47)].
• Transfers by the state of Washington and its political subdivisions continue to be excluded from Article 9 [9A-109(d) (14)].
• While Revised Article 9 generally covers security interests in deposit accounts, the official text contains an exclusion for consumer transactions; Washington limits the exclusion to a security interest in the consumer’s checking account [9A-109(d) (13)].
• Automatic perfection, without filing, for assignment of an "insignificant" part of an assignor’s accounts or payment intangibles is limited to an assignment not exceeding $50,000 or 10 percent of the assignor’s outstanding accounts and payment intangibles [9A-309(2)]. This limit provides the specificity required by Architectural Woods v. State, 88 Wn.2d 406, 562 P.2d 248 (1977).
• As before, a possessory lien for materials or services will be prior to a perfected security interest only if the lien is created by a statute that expressly so provides [9A-333].
• Washington omits a provision in the official text that would generally invalidate a law or regulation prohibiting, or requiring governmental approval for, the transfer of an account or chattel paper [9A-406(f)]. So, for example, the statutory requirement of court approval to assign lottery winnings will remain in force.
• The Washington statute preserves existing case law upholding waivers of suretyship defenses [9A-602; 9A-624(a)].
• As before, a secured party is required to give notice of foreclosure sale to other secured parties only if they are perfected [9A-611; 9A-621].
• The Washington statute omits a novel upset price procedure allowing a debtor to challenge the sufficiency of the sale price obtained at a foreclosure sale at which the purchaser was the secured party or a guarantor, even though the secured party proves that the sale was commercially reasonable [9A-615(f)].
• While a debtor may generally agree after default to surrender collateral in full or partial satisfaction of the secured obligation, the official text contains an exclusion for surrender in partial satisfaction of a consumer obligation; Washington omits this exclusion [9A-620(g)].
• The $500 penalty for failure to file a termination statement applies in a commercial transaction only if the debtor requests the filing, but under the official text, the penalty applies in a consumer transaction even absent a debtor request. The Washington statute requires a debtor request in all transactions [9A-625(e)(4)].
• When a secured party seeking to recover a deficiency fails to prove that the conduct of its foreclosure sale was commercially reasonable, the official text applies the rebuttable presumption rule (described above) in a commercial transaction, but leaves it for the courts to decide what rule will govern in a consumer transaction. The Washington statute applies the rebuttable presumption rule to all transactions [9A-626]. This is consistent with Washington case law, e.g., McChord Credit Union v. Parrish, 61 Wn. App. 8, 809 P.2d 759 (1991).

Revised Article 9 has been adopted in all 50 states and the District of Columbia, and became effective in all jurisdictions on July 1, 2001 except for Alabama, Florida, Mississippi (where the effective date is January 1, 2002) and Connecticut (with an effective date of October 1, 2001).

Savings Clause. The new law does not apply to pending actions, but does apply to existing transactions within its scope except for valid transactions not governed by former Article 9; they will continue to be governed by the same law as before [9A-702]. For example, if a security interest in a commercial tort claim was valid under prior law, it will remain valid under the new law. However, as will appear, the security interest will become unperfected one year after the new law’s effective date unless it has been perfected under the new law by the filing of a financing statement.

Perfection. Suppose a security interest was perfected under prior law (either under Article 9 or outside of it). There are three possibilities:

(1) The security interest was perfected by acts that would constitute perfection under the new law as well. In this situation, the security interest remains perfected [9A-703(a)]. Examples: (a) a pledge of promissory notes; (b) the filing of a financing statement covering accounts of a debtor incorporated in the state where its chief executive office is located.

(2) The security interest was perfected by acts (other than filing) that would not constitute perfection under the new law. In this situation, perfection will continue for one year after the effective date and then lapse unless the security interest has been perfected under the new law [9A-703(b)]. Examples: (a) security interest in a commercial tort claim that was perfected (say) by filing an assignment with the clerk of the court; (b) security interest in goods in the possession of a bailee that was perfected by notice to the bailee. Perfection will continue beyond one year in example (a) if a proper financing statement is filed, and in example (b) if the bailee acknowledges that it holds the goods for the secured party.

(3) The security interest was perfected by filing a financing statement, but the filing would not constitute perfection under the new law. In this situation, perfection will continue until the normal lapse date of the financing statement (but never longer than five years after the effective date) [9A-705]. Examples: (a) the filing of a financing statement covering accounts of a debtor incorporated in a state other than the location of its chief executive office; (b) the filing of a financing statement covering inventory and equipment located in a state other than the state where the debtor is incorporated. In these examples, the filing does not constitute perfection under the new law because the place of filing has changed. In both examples, the new law calls for filing in the state where the debtor is incorporated. To continue these carry-over filings, it is necessary to file in the state of the debtor’s incorporation an initial financing statement in lieu of a continuation statement [9A-706]. This "in lieu of" financing statement must identify the pre-effective-date financing statement by indicating where and when it was filed and giving applicable filing numbers.

Because of its great length (compared to other articles of the UCC) and the complexity of certain provisions (such as the transition rules), Revised Article 9 might seem at first to emulate America’s most-maligned statute, the Internal Revenue Code. Indeed, the casual reader will find the going hard and might easily lose his way. However, greater familiarity with this text reveals that the vice of prolixity is more than offset by the virtues of clarity and specificity. And paradoxically, the system that the new law describes in such great detail will operate more easily and simply than the system it replaces. You will find it easier and faster to create and perfect a security interest, you will encounter fewer priority disputes, and the rules governing nonjudicial enforcement of security interests will be more certain. All in all, a significant improvement in commercial law.

Adapted from the author’s article of the same title in 17 Journal of Equipment Lease Financing 26 (Fall 1999).

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