As appeared in the Summer 2000 issue of The Real Estate Finance Journal.

Revised UCC Article 9: Its Broad and

Varied Impact on Real Estate Finance

by Gary A. Goodman
Akin, Gump, Strauss, Hauer & Feld, L.L.P.

Lenders and borrowers should both benefit when the new law takes effect.

Revised Article 9 of the Uniform Commercial Code (UCC), scheduled to take effect on July 1,
2001, in numerous states across the country, will affect real estate financings in a variety of
ways. Among other things, the new law (1) helps facilitate securitizations, (2) makes it easier to
perfect liens in syndicated credit transactions, and (3) changes how real estate-related collateral
must be described on financing statements—and where those financing statements must be filed.
In addition, revised Article 9 significantly alters the rules applicable to mortgage loan
participations, offers more protection to secured lenders holding liens on proceeds of collateral
when the proceeds arise after a borrower’s bankruptcy, and contains a form of a “notice of sale”
that is a safe harbor on which foreclosing creditors may rely.

Expanded Scope
Revised Article 9’s increased interest to real estate finance professionals begins at the beginning:
The revision covers more transactions than does current Article 9. That means, for example, that
there will be fewer instances where creditors will be forced to rely on liens under the common
law, and this will make for more certainty.
The new scope of revised Article 9 is reflected in various definitions. For example,
although current Article 9 precludes deposit accounts from being considered as collateral,
revised Article 9 permits it (except in consumer transactions). In addition, “general intangibles”
now includes “software” as well as “payment intangibles.” A payment intangible is defined as
“a general intangible under which the account debtor’s principal obligation is a monetary
obligation.” Indeed, Article 9 will cover the outright sale of “payment intangibles,” which will
facilitate securitizations. Lenders should note that under revised Article 9, a security interest
created on the outright sale of a payment intangible is automatically perfected if it does not, by
itself or in conjunction with other assignments to the same assignee transfer a significant part of
the assignor’s outstanding accounts or payment intangibles (which undoubtedly will allow
institutions to take advantage of the automatic perfection rule); as a result, there will be no need
for a purchaser of a loan participation to file a financing statement against the financial
institution that sells it.
Under revised Article 9, “instruments” includes promissory notes. The revised law also
includes the outright sale of promissory notes within its scope. That is a useful addition, given
that lenders often engage in those kinds of transactions.
Another change in the scope of Article 9 permits a security interest to attach to assets as
diverse as rights under a letter of credit, contracts, licenses, and franchises despite a contractual
limit—or a statutory limit—on such an assignment. Revised Article 9 also permits financing
statements to describe collateral using a “supergeneric” description, such as “all assets of the

Akin, Gump, Strauss, Hauer & Feld, L.L.P.

debtor, now owned or hereafter acquired;” however, these descriptions are insufficient in a
security agreement.
Revised Article 9 expands the definition of “proceeds” to include “distributions on
account of collateral,” such as cash or stock dividends from securities and collections on account
of “supporting obligations” such as guaranties. There also is no longer a requirement that the
proceeds actually be received by the debtor.
The new law, rather than non-Article 9 law, applies to a security interest in a note secured
by real estate. When the revised statute takes effect, a creditor that perfects a lien on a note also
will perfect an assignment of the underlying real estate collateral.

Financing Statements
Revised Article 9 makes substantial changes to current law relating to the contents of financing
statements and where they must be filed. Under the revised law, the name of the debtor must be
its registered name, if it has one, rather than a trade name. An incorrect name will be considered
“seriously misleading” if it cannot be found through a standard search.
Another change permits a representative of a secured creditor to be listed on the financing
statement without an indication that the representative is acting in a representative capacity, as
required by some courts. This should make it easier to prepare financing statements in
syndicated credit deals or in transactions involving multiple creditors.
The revised law also has a number of provisions relating to financing statements covering
fixtures or other real estate-related collateral. For instance, it must include the name of the
record owner of the property if it is a person or an entity other than the debtor. In addition, the
law permits a real estate mortgage to suffice as a UCC financing statement with respect to such
real estate-related collateral if the mortgage satisfies the requirements for a financing statement,
among other things. Indeed, in this case the mortgage can be effective as a financing statement
for its full term, rather than the typical five years.
Two changes bring real estate finance into the twenty-first century. First, creditors no
longer have to describe real estate in “metes and bounds” language. As explained in Comment 5
to revised UCC §§ 9-501, real estate must be described in a way that is “sufficient so that the
financing statement will fit into the real-property search system and be found by a real property
searcher.” Second, financing statements no longer require a debtor’s signature, thus allowing
creditors to file financing statements electronically. (Instead, revised Article 9 specifically bars
the unauthorized filing of a UCC-1 financing statement.)

Place For Filing

Revised Article 9 also changes some of the rules relating to where UCC-1 financing
statements must be filed. Under the revised law, all filings must be made in the jurisdiction
where the debtor is located. This is a change from current law, which requires filings where
tangible collateral is located and filings where the debtor is located only for intangible collateral
and mobile goods. This change should make it easier for secured creditors to determine where to
file their financing statements and should permit them to file fewer of such statements. It should
be noted, however, that when a financing statement covers goods that are to become fixtures, the
creditor must file it in the state in which the fixtures are to be located.
Generally speaking, a debtor is located at its place of business or at its chief executive
office in situations where it has more than one place of business. However, a “registered
organization” is located in the state in which it is organized. That means that a creditor should

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file financing statements against a Delaware corporation—or limited partnership or limited
liability company—in Delaware. Creditors have four months to refile in another state when a
debtor changes its place of organization. Foreign debtors from a jurisdiction that does not have a
public filing system (such as countries in Eastern Europe) are deemed to be located in
Washington, D.C.
Although revised Article 9 provides for filing of financing statements based on the
location of the debtor, the priority rules in the revised law continue to focus on the location of the
collateral, at least to the extent that the revised statute provides that the priority of a lender’s lien
should be determined by the law of the state in which the collateral is located.

Default
Revised Article 9 contains some significant changes to current law relating to defaults by
nonconsumer debtors and relating to creditors’ rights.
Under the revised statute, there are three categories of “debtor:” debtors, obligors, and
secondary obligors. The debtor is the entity that owns the property subject to a creditor’s lien.
The obligor is the entity that is required to make payments to the creditor. Secondary obligors
are guarantors or other sureties who possess a right of recourse. Once revised Article 9 takes
effect, a secondary obligor may not waive suretyship defenses prior to default. In addition, a
secondary obligor that assumes the obligations of the primary obligor has the rights—and
concomitant duties—of the secured creditor.
A foreclosing creditor is deemed to provide warranties of title with respect to the
collateral, but the revised statute also includes provisions permitting such a creditor to exclude
these warranties. A foreclosing lender should not be considered a “merchant” and therefore need
not be concerned about implied warranties of quality with respect to the collateral.
One change to be effected by revised Article 9 relates back to prior UCC law: Now,
secured creditors intent on disposing collateral must notify other secured creditors who have
filed UCC-1 financing statements with respect to that collateral, much as they were required to
do before the UCC was revised in the early 1970s. The revised law contains a form that
foreclosing creditors can use for their purpose. The drafters of the revised statute believe that
this will limit disputes among competing creditors following one creditor’s foreclosure. A
secured party that transfers collateral to a secondary obligor—a transfer that is not considered a
foreclosure sale—is relieved of all other duties.

Strict Foreclosure
Secured creditors are more likely to use strict foreclosure once revised Article 9 takes effect than
they have in the past. Strict foreclosure, where a secured creditor retains the collateral and
forgoes deficiency claims against the debtor, is encouraged under the revised law. For one thing,
a secured creditor will be able to accept collateral in partial satisfaction of the debt with the
consent of the debtor and it may do so even if it does not have possession of the property. In
addition, a secured creditor holding a lien on intangible property will be able to use strict
foreclosure. Revised Article 9 also provides that a secured creditor that accepts collateral in a
strict foreclosure will result in junior creditors’ claims to the collateral being discharged.
In addition, the current rule regarding “constructive” strict foreclosures that has been
adopted by a number of courts is reversed. Creditors that hold collateral for “too long” will not
have to be concerned that a court will bar them from seeking a deficiency judgment.
Secured creditors obtained another significant victory in the revised law, at least in

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nonconsumer cases. The change relates to so-called creditor “misbehavior” during foreclosure,
such as by failing to provide proper notice. To date, many courts have ruled that a creditor that
does not completely follow the rules relating to foreclosure—including what can be
characterized at worst as technical violations—is absolutely barred from seeking a deficiency
judgment. The revised law limits the debtor’s deficiency liability to the amount by which the
secured debt exceeds the greater of the proceeds actually received by the lender or the amount
that it would have received if it had acted properly. In addition, a debtor that successfully
eliminates its deficiency in this manner is prohibited from also obtaining damages from the
lender for its noncompliance with the foreclosure rules.
When a creditor or a related entity, or even a secondary obligor, purchases collateral at
foreclosure, it may be difficult to determine the amount of the deficiency. Revised Article 9
seeks to avoid collusion by providing that if the proceeds received at a sale of collateral are
“significantly below” the amount that would have been obtained at an arm’s length transaction,
courts are permitted to determine the deficiency based on the amount that would have been
obtained from an independent third party.
The revised law should assist lenders when borrowers enter bankruptcy. Under existing
law, the priority of a judgment obtained by a lender against a debtor relates back to the date the
lender’s security interest was perfected. The revised statute provides, by contrast, that the
lender’s priority relates back to the earlier of perfection or when the lender filed its financing
statement.
Often a creditor’s lien covers both real property and personal assets. The revised statute
permits a lender to foreclose against the debtor’s personal property separately from the real
estate.
A lender that chooses to foreclose on personal property under the UCC rather than under
real property law may conduct a public or private sale or retain the collateral in satisfaction of
the debt. Revised Article 9 changes the rule requiring that lenders send notices of public or
private sales only to the debtor and other creditors that have sent the foreclosing creditor a
written notice claiming an interest in the collateral. Instead, the revised law requires a
foreclosing lender in this situation to send a notice—at least 10 days before the foreclosure
sale—to the debtor, to other creditors who have notified the lender that they claim an interest in
the collateral, to any lenders that have filed a UCC-1 financing statement, and to certain other
creditors.
A foreclosing lender must determine whether the Internal Revenue Service (IRS) has
asserted any federal tax liens before foreclosing if it expects to cut off the IRS’ rights. Only if
the IRS receives notice prior to a sale will a federal tax lien be extinguished.

Transition
Generally speaking, the transition rules for revised Article 9 provide that it applies to
transactions within its scope even if the transactions closed prior to the revised law’s effective
date. One exception provides that transactions that were not subject to the existing Article 9 but
which would be covered by the revised statute may be terminated, completed, consummated, or
enforced under revised Article 9 or under prior law.
The revised statute also provides that it does not affect an “action, case, or proceeding
commenced before” its effective date; these lawsuits therefore are to be completed under prior
law. It would appear, however, that something other than a lawsuit, such as a private foreclosure
sale, that a creditor commences but does not complete before the revised law’s effective date

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should be concluded under the revised statute’s provisions.
Other rules (1) explain what action, if any, secured creditors must take to perfect liens
that were perfected under the existing Article 9 when such previous action would be insufficient
under the revised version of the law (and the date by which they must act); (2) explain where
continuation statements should be filed; and (3) resolve priority issues. Despite the numerous
transition rules contained in revised Article 9, because some states will not enact the law or will
not enact it until after next summer’s general effective date, there will be choice-of-law problems
that will have to be resolved. Moreover, because the revised law is likely to influence courts
even before its effective date, parties should be aware of its provisions now.

Conclusion
All in all, the changes to Article 9 should enhance a lender’s ability to protect itself when making
real estate-related loans. By the same token, the changes should result in lenders making more
such loans available to borrowers, at lower cost. Both lenders and borrowers therefore should
look forward to the revised Article 9’s becoming law in virtually all states across the country.

BIO: Gary A. Goodman, Esq., is a partner in the New York office of Akin, Gump, Strauss,
Hauer & Feld, LLP, where he co-heads the New York real estate group, concentrating in real
estate finance. For additional information on this topic, please contact Mr. Goodman at
ggoodman@akingump.com.

Akin, Gump, Strauss, Hauer & Feld, L.L.P.

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