This narrative addresses types of collateral which revised Article 9 will cover that are not covered today and terms which will be defined by the revisions that Article 9 currently does not define or defines differently today.

First of all, what difference does it make whether a type of property or interest in property is covered by Article 9 or excluded from Article 9? The answer is simple - inclusion means that applicable perfection, priority and enforcement rules are clear and, for the most part, uniform. Exclusion means we still have to look to a particular state's common or statutory lien law for guidance (and oft times there is precious little guidance). Federal exclusions (like those that relate to ships, aircraft, railroad rolling stock and the like) will of course remain unchanged. The UCC is a state law and cannot preempt federal law. It's the other way around. But there is some news on this front as it relates to intellectual property that I'll share with you later.

So what's to be included that wasn't included before? Let me tick off a list of new inclusions and then come back and deal with several of them in more detail. Most significantly for the lending and securitization communities, Article 9 will now apply to sales of payment intangibles and promissory notes. (Rev. §§9-109(d)(5) and (7)) Payment intangibles are a subset of general intangibles under which the account debtor's principal obligation is the payment of money. (Rev. §9-102(a)(61)) Promissory notes are a subset of instruments that evidence a promise to pay but are not checks or CDs. (Rev. §9-109(a)(65)) Today, Article 9 only applies to sales of accounts and chattel paper, not to sales of anything else. We'll get to the significance of the expansion of coverage to include sales of payment intangibles and promissory notes in a few minutes.

The Code will also apply to security interests in health-care insurance receivables. These receivables are a subset of the greatly expanded category of accounts. (Rev. §§9-102(a)(2); 9-109(d)(8)) Healthcare insurance receivables are defined as "an interest in or claim under a policy of insurance which is a right to payment of a monetary obligation for healthcare goods or services provided by a healthcare provider." (Rev. §9-102(a)(46)) In otherwords - these are the patient's rights against the insurance company and the rights of the providers of the healthcare against the insurance companies after the patient assigns its rights under the insurance policy to the healthcare provider. Today, no interests in insurance policies of any kind, except casualty insurance proceeds, are included.

Also included will be deposit accounts (i.e., bank accounts) as original collateral (not just as proceeds) - only 5 states, including Illinois, have special provisions including them today. (Rev. §§9-102(a)(29)) Deposit accounts of consumers will continue to be excluded, however, if pledged in the context of a "consumer transaction" (which is a transaction in which an individual grants a security interest in collateral held or acquired for personal, family or household purposes. (Rev. §9-109(d)(13)).

Something else which will be newly covered by revised Article 9 are commercial tort claims, which are not included in any state's UCC today. What is a commercial tort claim? It's any claim arising in tort (like fraud or misrepresentation) where the claimant is a business organization or if the claimant is an individual, the claim arises in the course of the claimant's business or profession, but is not a claim for personal injury. (Rev. §§9-102(a)(13); 9-109(d)(12)). Personal injury claims will continue to be outside Article 9.

Also to be included are agricultural liens. (Rev. §§9-102(a)(5); 9-109(a)(2); 9-109(d)(2)). Unlike all other Article 9 security interests, these are not consensual, contractual security interests. Rather, they are nonpossessory, statutory liens on a debtor's farm products in favor of a landlord or a supplier of goods or services to the debtor in connection with the debtor's farming operations (a typical example would be an agister's or feeder's lien). The Drafting Committee gave some thought to including all state statutory liens, so there would be a single filing office to look for them and a single set of priority rules governing them, but the Drafting Committee gave up the idea when it became clear that including all statutory liens would likely give rise to some very difficult circularity of lien and other issues.

Also newly included will be security interests granted by a state or foreign government, or "governmental unit" (which includes cities, counties, parishes or other units of government or organizations eligible to issue tax free debt), if no other state or foreign statute governs security interests by that entity (which is very helpful when you're involved in a secured financing a municipality that, for example, is purchasing school buses and the like). (Rev. §§9-102(a)(45); 9-102(a)(76))

Other inclusions will be all forms of consignment (which are for the most part, dealt with in Article 2 today and, under the Revisions, will be treated like purchase money security interests in inventory) (Rev. §§9-102(a)(20); 9-109(a)(4)) and software which is either embedded in goods, in which case, it will be deemed part of the goods or is maintained separately, in which case it will be a general intangible - the copyright or patent aspects of the software we'll address later. (Rev. §§9-102(a)(75); 9-102(a)(44))

Then there will be a newly defined type of high-tech collateral which Revised Article 9 calls "electronic chattel paper". (Rev. §9-102(a)(31)) This is chattel paper (i.e. a personal property lease or conditional sales contract) which is evidenced by a "record" or "records" consisting of information stored in an electronic medium. You may have seen those screens that display a document and have a place to sign the document with a special stylus. I've seen them in car dealerships. Well, Article 9 will make its way into the 21^st century and cover this digitalized property, as well as regular chattel paper.

Other inclusions result from the expansion of certain definitions of existing categories of collateral. Maybe most important is the expanded definition of "accounts" which clears up a number of ambiguities under existing law, and as I mentioned earlier, includes the new category of healthcare receivables. Under current law, an account is any right to payment for goods sold or services rendered which is not evidenced by an instrument or chattel paper, whether or not it has been earned by performance. The Revisions expand this definition well beyond traditional trade receivables to include a number of property interests that are likely, but not certainly, to be classified as general intangibles today. These include rights to payment for or under (i) contracts for the sale of real property; (ii) licenses of intellectual property; (iii) insurance policies (in particular, the premiums due under the policies); (iv) guaranties or other suretyship contracts; (v) credit cards; (vii) contracts for the supply of gas or electricity; and (viii) government sponsored lottery winnings. (Rev. §9-102(a)(2))

Why this expansion? What was wrong with leaving all these forms of monetary obligations as general intangibles? The answers to these questions will highlight one of the more important and necessary changes that will be implemented by the Revisions. Remember, a few minutes ago I mentioned that Revised Article 9 will cover sales of payment intangibles and promissory notes as well as sales of accounts and chattel paper. This was done in large part to accommodate the needs of the securitization industry which, as you know, has at its core the true sale of all types of payment streams, not just trade receivables and leases. But how do you include the sale of payment intangibles and promissory notes and not have such an inclusion in Article 9 result in a UCC-1 financing statement being required to be filed every time a lender sells a loan participation (which is a "payment intangible") to another lender? This would be intolerable! Here's where the expanded definition of accounts comes into play.

As we know, under existing law a sale of accounts requires a financing statement to be filed to perfect the transfer. The same is true for chattel paper unless you take possession. This won't change under the Revisions. But what will change is that by expanding the definition of accounts to incorporate virtually all rights to payment, except those constituting payment intangibles or those evidenced by promissory notes (which evidence loans and interests in loans) the drafters have created a scheme that allows sales of accounts, on the one hand, and sales of payment intangibles (and, thus, loan participations) on the other, to be perfected differently. Under the new law, perfection of a sale of accounts (as newly defined and expanded) will still require a filing, (Rev. §9-310), unless the sale is of an isolated, insignificant amount of the seller's accounts, while perfection of a sale of payment intangibles and the notes that evidence them will be automatic - no filing will be required. (Rev. §§9-309(3); 9-309(4)) What this will accomplish is to allow the securitization industry to file a UCC-1 to perfect the sale to SPVs of many, many forms of monetary obligations and payment streams without placing a filing burden on the loan participation market. This is an ingenious resolution to a very difficult problem and it should work.

This resolution should also dramatically reduce the length, complexity and cost of "true sale" legal opinions that the accountants and rating agencies require in many securitization transactions today. Why? Because today you can't perfect a sale of general intangibles under Article 9; Article 9 doesn't apply to sales of general intangibles. This has meant that lawyers have had to examine the laws and caselaw jurisprudence of each state that might be applicable to the assignment of payment rights that aren't traditional trade receivables, personal property leases or conditional sales contracts. Once you expand Article 9 "accounts" to include things like credit card receivables, lottery winnings, insurance premiums and the like and once you are permitted to file on them, you will have a uniform, simple method of perfecting the sale of such payment streams. No more agonizing over choice of law and common law assignment issues. This should make the true sale process much more efficient.

One other aspect of the expanded definition of accounts before we leave the topic - namely healthcare insurance receivables. Why include this category? Essentially, it's to permit healthcare providers like doctors and hospitals to include their claims against insurance companies for services to patients, in the collateral offered to healthcare lenders. And to make this as easy as possible, perfection of the assignment by the patient to the service provider of the patient's rights against the insurer will be automatic (no UCC-1 will need to be filed). (Rev. §9-309(5)) Thereafter, when the provider finances its accounts with a lender, a UCC-1 will have to be filed whether the provider factors its accounts or borrows against them. (Rev. §9-310) This expansion of Article 9's coverage should, it is hoped, facilitate financing in the healthcare industry - we'll wait and see. By the way, no other expansion of existing Article 9's general insurance policy exclusion is made by the Revisions.

Back to commercial tort claims for a moment. As I mentioned, these are defined to include claims of a business organization that arise in tort, but do not include wrongful death or personal injury claims. A security interest will not attach to a commercial tort claim under Revised Article 9 unless the tort claim actually exists and is specifically described in the security agreement. (Rev. §§9-204(b)(2); 9-108(e)(1)) These are unique requirements. Specific description will not be necessary for other types of collateral and after-acquired property interests in other types of collateral will not depend upon the existence of such collateral at the time the security agreement is executed. These special requirements are just for commercial tort claims.

Personal injury claims will, as I noted, continue to be excluded from Article 9 until they are settled and thereafter converted into a written contract, a/k/a a "structured settlement". Once the injury claim is transformed into a contractual claim evidencing a right to payment, it can thereafter be sold or pledged under Article 9 as a payment intangible, unless applicable state law prohibits the assignment, which several states have done to protect their citizens from selling their settlement claims for too large a discount.

Another helpful addition to Article 9 will be the concept of "supporting obligations". (Rev. §9-102(a)(77)) What the Revisions do is to collect several kinds of contractual rights, such as guarantees, security agreements and rights to payment under letters of credit that follow or support accounts or chattel paper and call these rights "supporting obligations". Under the Revisions, the creation of a security interest in a payment obligation automatically attaches to the "supporting obligations" related to the payment obligation, and the perfection of a security interest in the supported obligation automatically perfects the security interest in the supporting obligation. (Rev. §§9-203(f); 9-308(d)). If, however, the guaranty or letter of credit payment right is being claimed as original collateral, rather than as a supporting obligation, perfection won't be automatic, but will require a filing or control, as the case may be. (Rev. §§9-104 through 9-107; 9-312)

Now let's turn to a category of collateral which is quite important - namely intellectual property, and specifically patents, trademarks and copyrights. In our high-tech world, these are very valuable property interests and should be able to be financed, like any other property. What have the Revisions done in this area? Nothing, really, except for defining "software", and included embedded software as part of the goods in which the software is embedded and specifying that non-embedded software is a general intangible. (Rev. §9-102(a)(44)) Patents, trademarks and copyrights are, for the most part, creatures of federal law, and to the extent assignments of interests in them are covered by federal law, federal law is preemptive.

So, if the Revisions don't treat the issue of perfection of a security interest in intellectual property any differently from existing law, why am I bring the topic up at all? Because it's very important and the subject of many recent cases. It is also the subject of various legislative initiatives sponsored by the ABA and the Commercial Finance Association for which I act as general counsel.

What the cases of the past year or so appear to be telling us is that as against lien creditors (including bankruptcy trustees and debtors in possession), security interests in trademarks, patents and unregistered copyrights can be perfected only under Article 9. Why? Because the "assignment", at least as that term is used in the federal Patent Act and the federal Lanham Act (which deals with trademark transfers), isn't broad enough to cover consensual security interests - it only covers outright ownership transfers (and thus doesn't deal with perfection of liens). And while the word "assignment" in the federal Copyright Act is broad enough to cover consensual security interests, the Act does not appear to deal at all with unregistered copyrights, and, therefore, shouldn't be read to govern how security interests in unregistered copyrights are to be perfected. In other words, the Copyright Act can't preempt what it doesn't cover. Citations to the cases I'm referring to are In re Together Dev. Corp, 227 B.R. 439 (Bankr. D. Mass 1998) (trademarks); Moldo v. Matsco, Inc., 239 B.R. 917 (B.A.P. 9th Cir. 1999) (patents); In re World Auxiliary Power Co., 244 B.R. 149 (Bankr. N.D. Cal. 1999) (unregistered copyrights) Also see, National Peregrine, Inc. v. Capitol Fed. Sav. & Loan, 116 B.R. 194 (D.C. 1990) (registered copyrights) (see attached).

Now let me turn to a couple of additional miscellaneous topics. The first relates to what the Revisions have done with respect to proceeds. Specifically, the definition of proceeds has been greatly expanded to include distributions on account of collateral, such as cash dividends or stock dividends payable on account of securities, thereby confirming the correctness of the overruling of cases like Hastie v. FDIC, (2 F.3d 1042 (10th Cir. 1993)) (Rev. §9-102(a)(64). Proceeds will also include license revenues and claims stemming from loss or non-conformity of, defects in, or damage to collateral, including IP infringement claims against third parties. Finally, proceeds will include collections on account of supporting obligations, such as guarantees and rights under L/Cs. All these expansions in the definition of proceeds resolve in favor of secured parties various ambiguities that have arisen over the years which have caused secured lenders to be denied the benefit of the collateral they thought they had bargained for. In another major victory 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 (§9-306(4)(d)), and that otherwise gave rise to a number of frightening preference problems under the Bankruptcy Code, will be eliminated. (Rev. §9-315, Official Comment #8) This may seem like a small improvement, but believe me, it's really quite major. Finally, and without going into too much detail, the Revised Code has carefully redone the definition of "debtor" in order to clarify the entities to whom the secured party owes duties under Part 6 of Article 9 (which is now the enforcement part of Article 9 - it used to be part 5, as you know). First, the Revisions differentiate "debtors" (those having an ownership interest in the collateral) from "obligors" (those owing payment or performance on the obligation secured by the collateral). Second, the Revisions further differentiate debtors and obligors from "secondary obligors", who are essentially guarantors of the secured debt. (Rev. §§9-102(a); 9-102(a)(59); 9-102(a)(71)). These three categories are designed to distinguish those persons who may have a stake in the proper enforcement of a security interest, because they either have an ownership (non-lien) interest in the collateral or they have guaranteed the secured debt, from those who are primarily obligated to pay the secured debt and who do not own the collateral securing the debt. Part 6 imposes certain enforcement obligations on the secured party (such as providing notice of sale) which run to debtors and secondary obligors, but not to obligors. (See e.g. Rev. §9-611)