In 2008, the American Law Institute (ALI) and the Uniform Law Commission (ULC) (also known as the National Conference of Commissioners on Uniform State Laws, or NCCUSL) formed a Uniform Commercial Code (UCC) Article 9 Joint Review Committee (Committee) to make limited revisions to the 1999 version of UCC Article 9 (Secured Transactions). The Committee has since met four times and some of the proposed revisions affecting consumer creditors are now reasonably clear. As a member of the Committee, I wanted to give our readers a sneak peak of these changes. Look to future issues of Basis Points where I will highlight additional changes of interest to consumer creditors as they evolve.
Certificate of Title Issues
Every state’s title statutes provide a mechanism to list for a security interest on a motor vehicle certificate of title. The drafters of UCC Article 9 wisely chose to delegate matters relating to the method of perfection, duration of perfection, and renewal of perfection with respect to a motor vehicle to these title statutes to avoid the disruption to long-standing practices in the vehicle financing market that would have resulted by requiring a UCC filing for motor vehicles. Article 9’s mechanism for handing off these functions to the title statutes relies on (i) each state legislature identifying its own title statutes in § 9-311(a)(2), (ii) the title statute from other jurisdictions qualifying as a “certificate of title” statute under § 9-311(a)(3), and (iii) the certificates issued under the title statutes fitting within the definition of “certificate of title” under § 9-102(a)(10). Each of these branches requires that the title statute in question provide “for the security interest in question to be indicated on the certificate of title as a condition or result of the security interest’s obtaining priority over the rights of a lien creditor.” See September Meeting Draft here.
However, some practitioners have expressed concerns about whether the bold language above accommodates (i) electronic lien notation systems in some states and (ii) certain state title statutes. Some state title statutes permit a creditor to perfect a security interest in a motor vehicle via state-maintained electronic records listing the creditor’s security interest without the state issuing a paper title. To release the security interest, the creditor notifies the state electronically and the state produces a lien-free certificate of title. Thus, the security interest may never “be indicated on the certificate” unless the state’s electronic records qualify as a “certificate.” These records certainly could qualify as an electronic certificate of title under Article 9, but it is unclear whether the electronic records are considered a certificate of title under the applicable title statutes.
To address the electronic lien issue, the Committee proposes to add the following to the definition of certificate of title:
The term includes another record maintained by the governmental unit that issues certificates of title as an alternative to issuing a certificate for the collateral if a statute permits the security interest in question to be indicated on the record as a condition or result of the security interest’s obtaining priority over the rights of a lien creditor with respect to the collateral.
See September Meeting Draft here.
Text will be also added to the Official Comments to this section to help explain this addition.
Practitioners have also expressed concerns about whether some state title statutes measure-up to the current Article 9 definition of certificate of title. For example, some title statutes neither expressly nor impliedly refer to the means of achieving perfection or priority over lien creditors. It appears that this priority has, in practice, been achieved through compliance with these statutes – probably through a combination of judicial interpretation and reliance on other statutory law. But there is uncertainty about whether the current Article 9 definition of certificate of title embraces these statutes.
Other title statutes provide that perfection is achieved by properly submitting an application for a certificate of title that identifies the security interest. Some of these statutes require the state agency responsible for titles to list the security interest on the certificate when issued. In some states, the state agency simply indicates the security interest on the certificate as matter of practice. The lack of a direct connection between the act resulting in perfection (i.e., the application) and the indication on the title creates some uncertainty about whether these statutes “provide” that the security interest be indicated on the certificate as a “result” of perfection. For a more complete discussion of these two issues, see Stephen Sepinuck’s February 2009 report here.
The Committee proposes to address this second set of issues by adding the following text to the Official Comment to the definition of certificate of title:
Statutes often require applicants for a certificate of title to identify all security interests on the application and require the issuing agency to indicate the identified security interests on the certificate. Some of these statutes provide that priority over the rights of a lien creditor (i.e., perfection of a security interest) in goods covered by the certificate occurs upon indication of the security interest on the certificate; that is, they provide for the indication of the security interest on the certificate as a “condition” of perfection. Other statutes contemplate that perfection is achieved upon the occurrence of another act, e.g., delivery of the application to the issuing agency, that “results” in the indication of the security interest on the certificate. A certificate governed by either type of statute can qualify as a “certificate of title” under this Article. The statute need not expressly state the connection between the indication and perfection. For example, a certificate issued pursuant to a statute that requires applications to identify security interests, requires the issuing agency to indicate the identified security interests on the certificate, but is silent concerning the legal consequences of the indication would be a “certificate of title” if, under a judicial interpretation of the statute, perfection of a security interest is a legal consequence of the indication. See September Meeting Draft here.
Authentication of Electronic Records
The Committee has also decided to address a technical problem with Article 9’s definition of “authenticate” as it relates to electronic records. Section 9-102(a)(7) states that “authenticate” means to sign or “to execute or otherwise adopt a symbol, or encrypt or similarly process a record in whole or in part, with the present intent of the authenticating person to identify the person and adopt or accept a record.” This definition appears to require that a person authenticate with the intent to identify that person. Contrast this with definition of “sign” in UCC Article 7. UCC Article 7-102(11) defines sign to mean, “with present intent to authenticate or adopt a record:
(A) to execute or adopt a tangible symbol; or
(B) to attach to or logically associate with the record an electronic sound, symbol, or process.”
The Article 7 definition is comparable to the Uniform Electronic Transactions Act (UETA) and the federal Electronic Signatures in Global and National Commerce Act (ESIGN). The current Article 7 definition does not require intent to “identify” be part of the authentication process. Thus, most attorneys practicing in this area think the Article 7 approach is the better one and the Committee proposes to adopt it for Article 9.
Stay Tuned to Basis Points!
In future issues, I will provide updates on the other issues before the Committee that are important to vehicle financiers such as:
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New guidance on how a notification of an internet disposition of repossessed goods can comply with the notice of sale requirements found in sections 9-613 and 9-614.e sections.
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Clarification of how to perfect a security interest in retail installment sale and lease contracts evidenced in part by electronic records and in part by tangible records.
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Additional guidance on conversion of installment sale contracts and lease contracts from paper to electronic form and new guidance on the conversion of electronic contracts to paper.
Tom Buiteweg is a partner in the Michigan office of Hudson Cook, LLP, and a member of the Article 9 Joint Review Committee. Basis Points readers can reach Tom at 734-222-6025 or by email at tbuiteweg@hudco.com.