Jun 21, 2006
In This Issue
The end of the transition period instituted by Revised Article 9 of the Uniform Commercial Code is approaching. Section 9-705(c) of the Uniform Commercial Code causes pre-effective date financing statements to cease to be effective on the earlier of the original lapse date, or June 30, 2006. This means that pre-effective date financing statements will no longer be effective after June 30th, unless they are first brought into compliance with Revised Article 9.
The transition cutoff creates a special problem for some financing statements that were scheduled to lapse after the effective date of Revised Article 9. If these financing statements were continued prior to the effective date of Revised Article 9 and during the six-month window within which continuations may be filed, they may cease to be effective on June 30th, not the lapse date of record following continuance.
If these financing statements need to be continued again in 2006, the secured party must pay close attention to the transition cutoff date. The continuation should be filed during the "safe harbor" portion of the six-month window. The safe harbor runs from the beginning of the window through June 30th.
Due to the ambiguity surrounding § 9-705(c), secured parties and their legal counsel should be aware of the following best practices through the transition period:
The § 9-705(c) problem was little known until the National Conference of Commissioners on Uniform State Laws (NCCUSL) Permanent Editorial Board (PEB) released its report on the issue in late 2005. Since that time, a number of states have taken action to address the issue through legislation. Several states have notified or plan to notify secured parties that a potential problem exists.
Several states have considered a legislative fix proposed by Neil Cohen, Harry Sigman, Ed Smith and Steve Weise. This legislation makes it clear that the cutoff provision in § 9-705(c)(2) does not apply to financing statements filed in the correct location for both Old Article 9 and Revised Article 9. Financing statements that need to be moved to a new location through filing in lieu remain subject to the effect of § 9-705(c).
The bright side of all of this is that the transition period is nearing its end. The search and filing process will soon be simpler and more certain. Until then, secured parties and legal counsel can reduce their risk by following proper transition procedures and paying attention to related state legislation.
H. Katerina Hertzog Ms. Hertzog’s practice includes commercial, financial, real estate and secured transactions, specializing in lending to technology companies, real estate developers, and construction companies, application of revised UCC Article/Division 9, debt finance, asset based lending, bridge financing, capital call lines, equipment lease financing, syndicated and participated loan transactions, factoring, restructuring, forbearance, workout documentation, letters of credit, intercreditor and subordination agreements, real property leases, commercial purchase and sale transactions, perfecting security interests in patents, trademarks, copyrights, licenses, real estate, partnership interests and distributions.
Katerina H. BohannonPartner
Harold P. ReichwaldPartner
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