For over eight years, Article 9 of the UCC has undergone a comprehensive review, revision and all-around spruce up. The Article 9 Drafting Committee, which was established in 1992 jointly by the National Conference of Commissioners on Uniform State Laws (NCCUSL) and the American Law Institute (ALI), met fifteen times since 1993 (each session stretching over several days). CFA attended and actively participated in all but one of these sessions.

The Drafting Committee considered and accepted virtually all of the important changes to Article 9 which CFA requested be made in CFA's original memoranda to the Article 9 Study Committee in 1990 and 1991. Our suggested changes were few in number and were directed at simplifying the filing requirements, enhancing the scope of Article 9 to cover currently excluded collateral types (like deposit accounts, which are excluded in all but a small handful of states), making Article 9 more inclusive for factors, commercial paper conduits and other entities that purchase certain categories of payment intangibles in transactions that are not now covered by the Code, clarifying priorities for holders of purchase money security interests, eliminating the confusion created by existing restrictions on tracing collateral proceeds after bankruptcy, and otherwise fine tuning a statute that has functioned beautifully since the late 1950s'.

The drafting process has been completed; revised Article 9 (the "Revision") was approved by the ALI in May of 1998 and by NCCUSL in July of 1998. The Revision, together with the Official Comments, is now being submitted to the state legislatures for enactment as soon as possible. As of October 1, 1999, the Revision had been adopted in 7 states and introduced, but not yet enacted, in 15 other jurisdictions. See Enactment by States Will it be effective in any state this year? Will it be effective anywhere next year? Quite simply -- no. In order to reduce problems during the transition period while the Revision is being adopted in some states and old Article 9 remains the law in others, the Revision provides for an effective date of July 1, 2001. See Revision § 9-701. This lengthy delay permits the Revision to take effect at the same time in all the states that enact it before July 1, 2001. This is a good idea, and the states where the Revision has been introduced and/or enacted have all accepted the concept of a delayed effective date.

Unfortunately for us old Article 9 junkies, the Revision reflects a substantial reorganization of Article 9 and a renumbering of most sections. To make it easier to use, however, the Revision incorporates subsection captions and cross-reference tables. The changes made to existing Article 9 are quite numerous, but, except in a few specific instances, they are not particularly drastic. For the most part, they modernize and resolve ambiguities which appeared in the case law since 1972, the last time Article 9 was comprehensively revised. The general areas changed include (i) scope of coverage of Article 9; (ii) perfection by filing and by methods other than filing; (iii) choice of law; (iv) priorities; and (v) post-default enforcement. See generally Revision § 9-101, Official Comment #4. We'll address these areas one at a time.

What will revised Article 9 cover that it doesn't cover today? What types of collateral will be included that today are excluded? Most significantly for secured lenders, Article 9 will now apply to (i) sales of payment intangibles and promissory notes (only sales of accounts and chattel paper are included today); See Revision § 9-109(a)(3) (ii) security interests in health-care insurance receivables (no interests in insurance policies of any kind, except casualty insurance proceeds, are included today); See Revision § 9-109(a)(1), (a)(3), (d)(8) (iii) security interests in deposit accounts as original collateral (which, as I mentioned, are excluded today in all but a very few states); See Revision § 9-109(d)(13) and (iv) security interests in commercial tort claims (which are not included today). See Revision § 9-109(d)(12).

Also to be included under Article 9's umbrella are non-possessory, statutory agricultural liens See Revision §§ 9-102(a)(5); 9-109(a)(2) (some thought was given to including all statutory liens, but the idea was later abandoned as being overly ambitious and possibly creating difficult circularity of lien issues), all forms of consignment, See Revision § 9-104(a)(4) certain claims against governmental units, See Revision § 9-109(c)(2)-(3) and guaranties and letter of credit payment rights that support the payment or performance of other collateral such as accounts and chattel paper. See Revision §§ 9-102(a)(77); 9-102, Official Comment #5f, 9-308(d). Also included will be embedded software, which will be deemed part of the goods in which the software is embedded. See Revision §§ 9-102(a)(44); 9-109(a)(1). If, however, the software maintains its independent status, it will be treated as a general intangible. See Revision § 9-102(a)(42). Returning to deposit accounts as original collateral, inclusion will be limited to non-consumer deposit accounts See Revision § 9-109(d)(12) and filing will be eliminated as a means of perfection. See Revision § 9-312(b)(1). Instead, perfection will be obtained only through "control" over the deposit account, a concept we'll review later when we take up the subject of perfection in more detail. See Revision §§ 9-203(b)(3)(D); 9-312(b)(1).

With respect to commercial tort claims, a security interest will not attach unless the tort claim exists See Revision § 9-204(b)(2) and is specifically described in the security agreement. See Revision § 9-108(e)(1) (Specific description in the security agreement will not, however, be necessary for other types of collateral -- but more about that later.) Personal injury claims will continue to be excluded from Article 9 until they are settled and become contractual in nature, as with structured settlements. See Revision §§ 9-109(d)(12); 9-109, Official Comment #15. Once the injury claim is transformed into a contractual claim, it can thereafter be sold or pledged under Article 9 unless other state law prohibits the assignment. See Revision §§ 9-109(a)(3); 9-109, Official Comment #15.

Let's go back to health-care receivables for a moment. What are they? The Revision defines them as interests in or claims under a policy of insurance evidencing a right to the payment of money for providing health-care goods or services. See Revision § 9-102(a)(46). Including health-care receivables in Article 9 will permit health-care providers to lump insurance receivables with other accounts in a single package and finance the whole thing under Article 9. See Revision § 9-109(a)(1), (3). This change will also allow healthcare providers to take assignments of insurance claims from their patients and be perfected automatically, without the need to file anything -- a very helpful amendment. See Revision §§ 9-309(5); 9-309, Official Comment #5.

Let's briefly return to the sale of payment intangibles and promissory notes. How do you include sales of them in Article 9 (which the entire securitization industry wants done to clear up some significant "true sale" issues in the legal opinions the rating agencies and accountants request), and not have such an inclusion result in financing statements being required to be filed every time a lender sells a loan participation (which is a payment intangible) See Revision § 9-102(a)(61) to another lender? As we know, to perfect a sale of accounts under the existing Code, a financing statement is required to be filed. See Current § 9-302(1). The same is true with respect to chattel paper unless you take possession of the paper. See Current §§ 9-302(1)(a); 9-305. Well, the solution proposed is really quite ingenious. First, under the Revision the definition of "accounts" will be expanded to incorporate virtually all rights to payment except property constituting a "payment intangible," which is so narrowly drawn as to arguably include only interests in loans. See Revision § 9-102(a)(2), (61). Perfection of a sale of "accounts" (as newly defined) will still require a filing, See Revision § 9-310(a) while perfection of a sale of payment intangibles (and promissory notes) will be automatic -- no filing will be required. See Revision §§ 9-309(3)-(4); 9-310(b)(2). This will allow the securitization industry file to perfect the sale of accounts and all the intangibles surrounding the accounts that are sold to the SPV's and conduits, while not placing a filing burden on the loan participation market. It's an ingenious resolution to a difficult problem, and it should work.

Enough about the expanded scope of Article 9. Let me now touch briefly on the attachment of the security interest before we move on to perfection. Not much will change when it comes to attachment. You will still need what you always needed -- value going to the debtor, agreement of the debtor that the security interest attach, and the debtor having rights in the collateral. See Revision § 9-203(b). What is new is that the security agreement will not need to be physically signed by the debtor, nor will it have to exist on paper. See Revision §§ 9-102(a)(7); 9-203(b)(3)(A). It will, however, need to be something which you'll hear often under the Revision -- namely an "authenticated record." A "record" is defined as "information that is inscribed on a tangible medium (i.e., paper) or which is stored in an electronic or other medium and is retrievable in perceivable form." Revision § 9-102(a)(69) (emphasis added). Examples of current technologies that would qualify as a "record" include magnetic media, optical discs, digital voice message systems, electronic mail, audio tapes and photographic media. See Revision § 9-102, Official Comment #9a.

So that's a "record" -- how is a record "authenticated?" If it's paper, it's physically signed. See Revision § 9-102(a)(7)(A). If it's some other form of record, the Revision provides that it is authenticated when the authenticator encrypts or similarly processes the record with the present intention of both identifying the authenticator and adopting or agreeing to the record. See Revision § 9-102(a)(7)(B). The purpose of this expansion of existing Article 9's concepts of a "writing" and of "signed" is obvious -- new Article 9 is intended to be medium neutral. The parties don't need paper, but they still need to demonstrate in some discernable, retrievable form, that they intend to take the action the record purports to evidence. The Revision merely reflects the reality of our time -- people make agreements, initiate filings and otherwise communicate in media other than paper, and the commercial laws that govern their actions should be modernized to reflect that reality. See Revision § 9-102, Official Comment #9. More on electronic records later. Let's move now from attachment to perfection.

How will a security interest which has attached (i.e., that is enforceable against the debtor) be perfected (i.e., be enforceable against third parties, including bankruptcy trustees)? Again, basic concepts are not changed, but some existing procedures are. In essence, there are still two ways to perfect -- either by filing a financing statement or by taking actual or constructive possession of the collateral. Revision § 9-310. (Perfection in some limited instances can be automatic -- like perfection of sales of payment intangibles and security interests in supporting obligations, but for the most part, filing or "possession" will still be necessary.) See id. But where and what you file, and how you take possession are changed to simplify the process, to resolve some current problems and to reflect modern technology.

First -- filing. What's new with UCC-1 financing statements? Maybe the most significant change in the formal requisites for a UCC-1 (and maybe one of the most significant changes overall) is that the debtor's signature will no longer be required on the financing statement. See Revision § 9-502(a). This change is intended to facilitate electronic filing. See Revision § 9-502, Official Comment #3. Authorization for filing by the secured party will, in most cases, be contained in the security agreement, and authorization will be automatic to the extent the collateral described in the UCC-1 is coextensive with the collateral covered by an otherwise authenticated security agreement. See Revision § 9-509(b). If the transaction involves the pre-filing of UCC-1's, the secured party will have to obtain independent authorization. Under the Revision it will make no difference who actually makes the filing. All that is important is that the party making the filing has been authorized to do so. See Revision §§ 9-509; 9-510. The debtor's authorization is required for the filing of the initial financing statement and for any amendment that adds collateral. See Revision § 9-509(a). Only the secured party's authorization is required for other amendments, like name and address changes. See Revision § 9-509(d)(1). If the secured party is required to terminate a filing (i.e., because the secured debt is paid or because it never existed in the first place) and fails to do so, the debtor has certain limited rights to do so.See Revision § 9-509(d)(2). (This right is restricted but was thought necessary to protect debtors against secured parties that had gone out of business and against radicals in some parts of the country who file UCC-1's against public figures for personal or political revenge.)

Other changes in formal requisites for the UCC-1 include the ability to use a super- generic description of the collateral such as "all assets of the debtor now owned and hereafter acquired", assuming of course that this description accurately describes the deal between the debtor and the secured party. See Revision §§ 9-108; 9-504(2). This represents a 180 degree change from existing law applicable to financing statement descriptions. But the use of generic descriptions does not extend to the security agreement, which still must describe the collateral by item or type, and be even more precise when the collateral is a commercial tort claim or the transaction involves a consumer and the collateral is consumer goods or certain types of investment property. See Revision §§ 9-108(e); 9-203(b)(3)(A).

Before leaving the topic of filing, you should also know that the Revision (Part 5) contains several new provisions governing the operations of filing offices, where it was felt that filing officers have become too independent in their adoption of so-called local rules which sometimes resulted in otherwise legally sufficient filings being rejected. The Revision sets forth only a very few reasons for rejecting a filing such as tendering an insufficient filing fee or communicating the UCC-1 or other record to the filing office by a medium not authorized by the office. See Revision §§ 9-516; 9-520.

Filing offices will also be required to link all records received after the original filing (such as assignments and continuation statements) to the initial financing statement they relate to. See Revision § 9-519(c)-(e). Another change prohibits a filing office from deleting a financing statement and related records from the files no earlier than one year after lapse and even then only if a continuation statement hasn't been filed. See Revision §§ 9-515; 9-519(g); 9-522. This will help both to eliminate filing office discretion and to ease problems associated with multiple secured parties and multiple partial assignments. See Revision §§ 9-519; 9-520. Finally, the Revision (i) provides for the promulgation of filing office rules dealing with ministerial details best left out of the statute See Revision § 9-526 and (ii) mandates periodic reports that should lead to a harmonizing of the filing and search rules throughout the United States. See Revision § 9-527.

So that's what's new with respect to the formal requisites of the UCC-1. Where you will be required to file the UCC-1 is a topic we'll get to in a moment after we briefly explore the second method of perfection, which is possession. Earlier, when discussing deposit accounts as a category of original collateral covered by the Revision, I stated that perfection was possible only through "control." This is a concept borrowed from revised Article 8 of the UCC dealing with investment property. Control, which is a form of constructive possession, will now be imported into Article 9 to deal not only with investment property (which was accomplished in the 1994 Revisions of Article 9), See Revision § 9-106 but also with deposit accounts, See Revision § 9-104 rights to payment under letters of credit See Revision § 9-107 and "electronic chattel paper" (i.e. chattel paper that isn't on paper). See Revision § 9-105. To perfect in a deposit account, other than as proceeds of other collateral, the secured party must get the depository bank's agreement to act on the secured party's instructions (i.e., get a blocked account agreement), become the bank's customer with respect to the account or actually be the depository bank. See Revision § 9-104 If you do get a typical blocked account agreement, however, you'll know that you're perfected in the bank account. See Revision § 9-104(a). Control over rights to payment under L/C's occurs when the L/C issuer consents to the assignment of proceeds. See Revision § 9-107. (As you know, today you must take possession of the L/C to perfect.) See Current §§ 9-304(1); 9-305. The Revision shifts from possession of the piece of paper to control over the proceeds. Control is only means to perfect in deposit accounts and L/C rights as original collateral. See Revision §§ 9-203(b)(3)(D); 9-312(b)(1)-(2). To the extent the L/C supports payment of an account or payment intangible, if you're perfected in the account or payment intangible, you'll be perfected in the rights to payments under the L/C. See Revision § 9-308(d). Perfection in investment property will continue to be governed by the rules (which include both filing and control) adopted as part of the 1994 amendments. See Revision §§ 9-106; 9-309(10)-(11); 9-310; 9-313(a); 9-312; 9-314. Perfection in electronic chattel paper can be achieved either by control (a specially defined control, in "hi-tech" terms, for this type of collateral), or by filing. See Revision §§ 9-105; 9-310; 9-312; 9-314.

Finally, the Revision makes an important change in the perfection rules relating to the use of bailees. Under current law, most decisions hold that a secured party can perfect simply by giving notice to the bailee that the secured party has a security interest in the property in the bailee's possession. See Revision § 9-313, Official Comment #4 (citing In re Atlantic Systems, Inc., 135 B.R. 463 (Bankr. S.D.N.Y. 1992)). Under the Revision, however, the bailee must not only receive notice of the security interest, it must also acknowledge, in an authenticated record, that it is holding the collateral for the secured party's benefit. See Revision § 9-313(c). Unfortunately, this revision will eliminate the handy "bailee with notice" device available today, but the change was thought necessary to better evidence the fact that the secured party's control over the collateral was sufficient enough to constitute constructive possession. See Revision § 9-313, Official Comment #4. The new rule isn't wonderful, but it is more logically consistent with the Revision's concept of "control" than old § 9-305. We'll learn to live with it.

So, depending upon the type of collateral involved, you can file, you can take actual possession, or you can obtain constructive possession (i.e. control), or in some instances you can file and take possession; but if you file, which, just like today, you will do most often, where do you file? In answering this question, I believe I will be telling you about the single most important of the Article 9 revisions. It certainly is likely to save you and your customers the most money.

Today, the choice of law rules governing perfection (the rules about where you file) for most collateral, tangible and intangible, look either to (i) the law of jurisdiction where the debtor is located or (ii) the law of the jurisdiction where the collateral is located. See Current § 9-103. The jurisdiction of the debtor's location currently governs the perfection of a security interest in accounts, general intangibles and goods that typically move among different jurisdictions, such as construction equipment. See Current § 9-103(3). The debtor's location is also the proper place to file today if you elect to perfect against chattel paper or investment property by filing instead of possession or control. See Current § 9-103(4), (6). With respect to most other types of collateral (like inventory and equipment) you must file where the collateral is located, and this can involve all 50 states in some transactions. See Current § 9-103(1).

Under the Revision, however, the jurisdiction of debtor's location will apply for all types of collateral, tangible and intangible. See Revision § 9-301(1). In determining location, § 9-307 of the Revision essentially follows existing law under § 9-103, namely, location of debtor is the debtor's place of business (or chief executive office, if the debtor has more than one place of business). See Revision § 9-307(b)(2)-(3). But the new law contains three major exceptions. First, a "registered organization" such as a corporation or LLC, is deemed located in the state under whose law the debtor is organized (which, for a corporation, will be the state of incorporation). See Revision § 9-307(e). Second, an individual debtor is located at his or her principal residence. See Revision § 9-307(b)(1). Third, there are special rules for determining the location of registered organizations organized under the laws of the United States and for foreign debtors doing business in the United States but otherwise organized under the laws of a jurisdiction that doesn't have a public notice filing system for non-possessory security interests. See Revision § 9-307(f). These foreign debtors are deemed located in the District of Columbia. See Revision § 9-307(c).

What all this means is that, in most cases under the Revision, security interests in the assets of domestic corporations which can be perfected by filing, can be perfected with one filing in the state where the debtor is incorporated or registered. Not so good for the search firms, but great for us!

One interesting dichotomy in the new choice of law regime is that while location of debtor will frequently govern place of filing, it will not govern priority, See Revision § 9-301(3)(C) nor will it govern perfection of possessory security interests See Revision § 9-301(2) or agricultural liens. See Revision § 9-302. Those topics will continue to be governed by the laws of jurisdiction where the collateral is located at the time of perfection, the same as under existing law. Additional special choice-of-law rules, which are too involved for this discussion, but which don't make radical changes, will govern goods covered by certificates of title. See Revision § 9-303.

Let me make some general observations about priority and proceeds before turning to enforcement. For the most part, existing priority rules will not change. The long-standing rule (since 1972), that the first party to file a financing statement or to otherwise perfect its security interest will have priority, continues. See Revision § 9-322(a)(1). That said, there are still a number of important changes effected by the Revision.

First, as CFA requested back in 1991, the rules with respect to purchase money security interests are clarified for non-consumer transactions. The new definition of a purchase money security interest makes it absolutely clear that a security interest may be both purchase money and non-purchase money at the same time. (This is the so-called "dual-status" approach.) See Revision § 9-103(f). In effect, the change rejects the "transformation rule" under which a purchase money security interest was "transformed" into a non-purchase money security interest (and, consequently, lost its special priority status under the UCC) when there was no one-to-one correspondence between collateral and the debt which was incurred to purchase or finance the purchase of that collateral. See Revision § 9-103, Official Comment #7. This is an important change for floor plan financers who extend credit to vendors in amounts greater than the purchase price of floor planned goods. With "dual status", the security interest granted the floor plan financer can be both purchase money (with superpriority status for some of the debt) See Revision §§ 9-317(e); 9-324 and non-purchase money (subject to the regular first to file or perfect rules) for the balance of the debt. This will greatly simplify intercreditor negotiations and documentation, which today are often lengthy and costly. Next, the Revision provides a number of new rules with respect to deposit accounts which have been patterned on the rules for investment property under Article 8. If a secured party has control of the deposit account, its security interest will be senior to a security interest perfected in any other manner (such as by filing, or even as proceeds of other collateral). See Revision § 9-327(1). If more than one secured party has control of the same deposit account, priority ranks according to who obtained control first, See Revision § 9-327(2) unless one of the competing secured parties is the depository bank, which will win unless the other secured party takes control of the deposit account by becoming the depository bank's customer See Revision § 9-327(3)-(4) or unless the depository bank has agreed to the contrary. See Revision § 9-339. Another very significant amendment affecting deposit accounts gives priority to the offset rights of the depository bank over the security interest held by another secured party, including an asset-based lender who claims the deposit account as proceeds of its collateral. See Revision § 9-340. This is a 180 degree change from existing law, but was necessary to get the Federal Reserve on board with the amendments generally. The priority given to the offsetting bank can be overcome by express agreement with the bank See Revision § 9-339 or by having the competing secured party put the account in its name, thereby becoming the bank's customer. See Revision §§ 9-104(a)(3); 9-340(c). Many lenders will find that they already have such provisions in their blocked account agreements today.

Turning to letters of credit, control will also trump perfection by any other means. See Revision § 9-329(1). Remember, perfection in rights to payment under L/Cs will be accomplished by control (i.e. by obtaining the consent of the L/C issuer to the assignment of the L/C proceeds) See Revision § 9-107. instead of physical possession of the L/C unless, of course, the L/C constitutes a supporting obligation for an account receivable, in which case perfection is automatic if the security interest in the underlying obligation (be it an account or payment intangible) is perfected. See Revision § 9-308(d). But, again, control will trump automatic perfection.

The priority rules for chattel paper will not change much. Different rules will apply depending upon whether purchasers who give new value and take possession of, or obtain control over, the paper, do so with the paper being merely proceeds of other collateral or as separately financed assets. See Revision § 9-330. (This is consistent with existing law under § 9-308). Additionally, there are several new rules affecting priorities in chattel paper that deal with the role of knowledge, good faith and the effect of a previous assignment which are too complicated to address at this time. See id. Suffice it to say the new rules are helpful and resolve some issues long thought to be in need of clarification.

One note about proceeds before I conclude my remarks with a discussion on enforcement. The Revision affects "proceeds" in two significant respects. First, the definition of proceeds is greatly expanded to include distributions "on account of" collateral such as cash or stock dividends from securities. Revision § 9-102(a)(64)(B). (This overrules contrary cases such as Hastie v. FDIC, 2 F.3d 1042 (10th Cir. 1993)). See Revision § 9-102, Official Comment #13a. Proceeds will also include license revenues and claims stemming from loss or non-conformity of, defects in, or damage to, collateral, including infringement claims against third parties. See Revision § 9-102(a)(64). Finally, proceeds will include collections on account of supporting obligations, such as guaranties and rights under L/Cs. See Revision §§ 9-102(a)(64)(B); 9-102, Official Comment #13b. All these expansions in the definition of proceeds resolve in favor of the secured lender various ambiguities that have existed over the years which caused secured lenders to be denied the benefit of collateral they thought they had bargained for.

Turning to another major improvement for the secured lending industry, the section of Article 9 that prohibited the tracing of cash proceeds into commingled bank accounts after the debtor's bankruptcy (i.e. current § 9-306(4)(d)), and that otherwise gave rise to a number of frightening preference problems under the Bankruptcy Code, will be eliminated. See Revision § 9-315(b)(2). This may seem like a small improvement, but, believe me, it's major!

Finally, let's look at enforcement. The Revision makes a number of important changes in the law governing debtor default and secured party enforcement. Let me focus on those I believe may be most important.

First, the Revision makes strict foreclosures (where the secured party retains collateral, instead of selling collateral, to satisfy the debt) much more attractive for secured lenders. Under existing law, strict foreclosure was thought to be unavailable if the lender either wanted to have the collateral satisfy a part, rather than all the debt, or the lender wanted to retain intangible collateral (like accounts) rather than tangible collateral (like equipment or inventory). Both of these limitations on strict foreclosure have been eliminated by the Revision. See Revision § 9-620. And as a final blow to existing limits on strict foreclosure, the Revision makes it clear that (i) junior secured claimants are discharged by a senior's retention of the collateral -- an unlikely result under current law, See Revision § 9-622(a) and (ii) secured parties who fail to expeditiously dispose of collateral after default will not be deemed to have foreclosed on it. See Revision § 9-620(a)(1), (c).

Next, in one of the most sought after changes in Article 9, the Revision adopts the rebuttable presumption rule for creditor misbehavior during the foreclosure process, rather than absolute bar rule. See Revision § 9-626(a). This means that in non-consumer transactions, the secured party won't lose its deficiency claim simply because one aspect of the foreclosure is found not to have been commercially reasonable. Rather, the noncomplying secured party will be required to credit the debt with the greater of the net sales proceeds received on foreclosure or the amount a court later determines the secured party would have received if the foreclosure had been conducted in a commercially reasonable manner. See Revision § 9-626(a)(3)-(4). This is a very important clarification in the law.

Staying with deficiencies for a moment, the Revision contains a series of special new rules for calculating deficiencies and surpluses where the collateral is sold at foreclosure to the secured party, to an affiliate of the secured party, or to a secondary obligor (i.e. a guarantor). See Revision § 9-615(f). Some members of the Drafting Committee believed that sales to related parties could be more easily manipulated and abused, and, consequently, needed protection above and beyond what the simple commercially reasonable standard provided. See Revision § 9-615, Official Comment #6. So the drafters came up with the following solution -- if the sale yields proceeds "significantly below the range of proceeds" that a complying disposition would yield to an independent third party, then -- even if the sale itself was otherwise procedurally proper -- the deficiency or surplus will be calculated based upon the amount of proceeds that would have been realized in a commercially reasonable sale to an unrelated third party. See Revision § 9-615(f). Unfortunately, this change will either discourage secured parties from bidding at their own foreclosure sales (particularly when the collateral is hard to value and, thus, will likely generate litigation), or will prompt secured parties to obtain appraisals (maybe more than one) in each case where they intend to bid, and then place their bid at the middle or above the middle of the appraised value. Personally, I didn't believe this change was necessary, but several important representatives of our industry did (evidently, because they have witnessed more rigged sales than I have). In any event, the revision is there, and we'll have to conduct ourselves accordingly.

Finally, let me look at the notices that have to be given to third parties when foreclosing. Under current law, notice of foreclosure is required to be given only to those creditors from whom the foreclosing secured party has received notice of an interest in the collateral and a desire to receive notice. See Current § 9-504(3). This provision was part of the 1972 revisions of Article 9 and it changed then existing law. Well, we're changing back to the pre-1972 version of Article 9 and requiring the foreclosing secured party to conduct a lien search in the appropriate jurisdiction (which will be much easier when you file on everything in one place) and to provide written notice to all secured parties of record whose financing statements cover the collateral being foreclosed on. See Revision §§ 9-611(c)(3); 9-621. The Revision sets out in detail the contents of the notice and how far in advance of the sale notice must be sent. See Revision §§ 9-611 to 9-614. The Revision also contains a safe harbor if a lien search, which is conducted within a specified time prior to sale, fails to reveal a filing or if the search isn't completed within a reasonable time. See Revision § 9-611(e). But, at the end of the day, the secured party will still have to search and notify other secured parties of record -- something it doesn't have to do today unless a junior secured party so requests.

There are other new rules (i) giving junior secured parties certain protections, (ii) differentiating the rights of debtors, obligors and secondary obligors, (iii) limiting the ability of guarantors to waive certain suretyship defenses, See Revision §9-602(iv), providing secured parties greater flexibility in collecting receivables See Revision §9-607 and (v), differentiating consumer from non-consumer remedies, but I believe we covered enough for one day. Suffice it to say, there is a lot to learn, but I'm convinced that the Revision will facilitate secured financing, reduce its cost, bring greater certainty to transactions covered by Article 9 and provide greater protection to debtors and secured parties alike. These are desirable results, and the Revision deserves our support.