In our last issue, I explained some of the changes to UCC Article 9 (Secured Transactions) proposed by the ALI/NCCUSL Joint Review Committee (Committee). (See Coming Soon to Your UCC: Revised “Revised” Article 9, Basis Points, December 2009). In that article, I promised to provide updates on the Committee’s efforts in future issues. As promised, here are some more previews of the important Article 9 changes on the horizon.
Internet Dispositions of Repossessed Goods
The Committee proposes to add text to the Official Comments to sections 9-610 and 9-613 to explain how a notification of an Internet disposition may comply with those sections. Section 9-613 and 9-614 provide that a notification of a disposition of collateral must provide the time and place of a public disposition or the time after which any other disposition is to be made. Each section also provides a safe-harbor form of notification that, when properly completed, is sufficient to comply with the requirements of the section.
Secured parties have found that the Internet expands the potential markets for repossessed goods and other collateral, and that its use can benefit both the secured party and the debtor. However, neither section 9-613 nor section 9-614, nor the current Official Comments, provide guidance to secured parties on how to comply with the requirement to give the time and place of a public disposition as required by these sections and the safe harbor forms, if the disposition will be through the Internet.
The Committee proposes to revise Official Comment 2 to section 9-610 to read as follows:
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Commercially Reasonable Dispositions.
Subsection (a) follows former Section 9-504 by permitting a secured party to dispose of collateral in a commercially reasonable manner following a default. Although subsection (b) permits both public and private dispositions, including public and private dispositions conducted over the Internet, “every aspect of a disposition . . . must be commercially reasonable.” This section encourages private dispositions on the assumption that they frequently will result in higher realization on collateral for the benefit of all concerned. Subsection (a) does not restrict dispositions to sales; collateral may be sold, leased, licensed, or otherwise disposed. Section 9-627 provides guidance for determining the circumstances under which a disposition is “commercially reasonable.”
See September Meeting Draft at http://www.nccusl.org/Update/CommitteeSearchResults.aspx?committee=320 (emphasis added).
The Committee also proposes to revise Comment 2 to section 9-613 as follows:
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Contents of Notification.
To comply with the “reasonable authenticated notification” requirement of Section 9-611(b), the contents of a notification must be reasonable. Except in a consumer-goods transaction, the contents of a notification that includes the information set forth in paragraph (1) are sufficient as a matter of law, unless the parties agree otherwise. (The reference to “time” of disposition means here, as it did in former Section 9-504(3), not only the hour of the day but also the date.) Although a secured party may choose to include additional information concerning the transaction or the debtor’s rights and obligations, no additional information is required unless the parties agree otherwise. A notification that lacks some of the information set forth in paragraph (1) nevertheless may be sufficient if found to be reasonable by the trier of fact, under paragraph (2). A properly completed sample form of notification in paragraph (5) or in Section 9-614(a)(3) is an example of a notification that would contain the information set forth in paragraph (1). Under paragraph (4), however, no particular phrasing of the notification is required.
This section applies to a notification of a public disposition conducted electronically. A notification of an electronic disposition satisfies paragraph (1)(E) if it states the time when the disposition is scheduled to begin and states the electronic location. For example, under the technology current in 2009, the Uniform Resource Locator (URL) or other Internet address where the site of the public disposition can be accessed suffices as an electronic location.
See September Meeting Draft at http://www.nccusl.org/Update/CommitteeSearchResults.aspx?committee=320 (emphasis added).
“Hybrid” Installment Sale and Lease Contracts - Part Electronic, Part Paper
The Committee considered whether a purchaser of retail installment sale or lease contracts (“chattel paper” in Article 9 terms), evidenced in part by electronic records (for example, the base contract documents) and in part by tangible records (for example, a paper rider to the electronic contract), can obtain priority under section 9-330 by control of the electronic records and possession of the tangible ones.
Some have interpreted section 9-330 as requiring perfection with respect to all of the records evidencing the chattel paper exclusively by one or the other method. However, Article 9 recognizes that chattel paper can be evidence by more than one record. The Committee concluded that there is no reason to require that records be either all electronic or all written on paper as a condition of priority. The interests of third parties are not harmed if the purchaser has control of the electronic record and possession of the tangible one. These parties will receive notice of the purchaser’s claim that is comparable if not greater than they would have received had the chattel paper existed in a single medium.
The Committee proposes to add the following to Official Comment 3 to section 9-330 to clarify the point:
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For a security interest to qualify for priority under subsection (a) or (b), the secured party must ‘take possession of the chattel paper or obtain control of the chattel paper under Section 9-105.’ When chattel paper comprises one or more tangible records and one or more electronic records, a secured party satisfies this requirement if it has possession of the tangible records and control of the electronic records.
See September Meeting Draft at http://www.nccusl.org/Update/CommitteeSearchResults.aspx?committee=320.
Still More to Come
Stay tuned to future issues of Basis Points in which I’ll review issues before the Committee that are important to vehicle financiers, including:
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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.
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Revisions to the requirements on “control” of electronic installment sale and lease contracts after an assignment of the contracts.
Tom Buiteweg is a partner in the Michigan office of Hudson Cook, LLP, and 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.