Report of Banking, Commercial and Bankruptcy Law Committee

Report of Banking, Commercial and Bankruptcy Law Committee 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 To the Council of Delegates: The Banking, Commercial, and Bankruptcy Law Committee, after review and discussion by its Legislative Review Subcommittee, respectfully requests your favorable consideration of the following proposal: To enact revisions to R.C. Chapter 1309 as proposed by the National Conference of Commissioners on Uniform State Laws at its July 2010 annual meeting, and subsequently approved by the American Law Institute. These changes also have the support of the American Bar Association. The proposed changes are attached as Exhibits A-P. The proposed revisions clarify several sections of Chapter 1309, correct a few errors in the 2001 amendments to Chapter 1309, and provide more specific rules for the effectiveness of financing statements involving names of both corporate and individual debtors. What appears at first to be a lengthy revision is really quite modest. This is due to NCCUSL s practice of including the entire text of any section that contains even the smallest change. Upon review of the 130 page text of NCCUSL s report, only a few pages contain actual changes. Further, many of the changes proposed by NCCUSL are to the Official Comments, that are not enacted in Ohio. Finally, these proposals have already been introduced into the legislatures of 10 states. They are expected to become effective uniformly across the country on July 1, 2013. Respectfully submitted, Justin W. Ristau, Columbus Chair EXHIBIT A - Clarification of the definition of authenticate in R.C. 1309.102(A)(7) 1309.102 Definitions and index of definitions - UCC 9-102. (A) As used in this chapter, unless the context requires otherwise: (7) Authenticate means: (a) To sign; or 49

30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 (b) 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. with present intent to adopt or accept a record, to attach to or logically associate with the record an electronic sound, symbol, or process. Rationale for amendment: Under current 1309.102(A)(7) Authenticate means: (a) To sign; or (b) 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. The proposed revision would make a modest change to this language to Authenticate means: (A) to sign; or (B) with present intent to adopt or accept a record, to attach to or logically associate with the record an electronic sound, symbol, or process. This change clarifies a potential ambiguity created by the use of the phrase authenticating person in the definition of authenticate. EXHIBIT B - Revision of the definition of certificate of title in R.C. 1309.102(A)(10) 1309.102 Definitions and index of definitions - UCC 9-102. (A) As used in this chapter, unless the context requires otherwise: (10) Certificate of title means a certificate of title with respect to which a statute provides for the security interest in question to be indicated on the certificate as a condition or result of the security interest s obtaining priority over the rights of a lien creditor with respect to the collateral. The term includes another record maintained as an alternative to a certificate of title by the governmental unit that issues certificates of title 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. 62 Rationale for amendment: 50

63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 The proposed change is designed to reflect modern practice by many state motor vehicle and boat titling agencies, of using digital records as the title certificate for covered vehicles and vessels. Current 1309.102(A)(10) provides: Certificate of title means a certificate of title with respect to which a statute provides for the security interest in question to be indicated on the certificate as a condition or result of the security interest s obtaining priority over the rights of a lien creditor with respect to the collateral. The proposed change would alter the definition to add a sentence and provide: Certificate of title means a certificate of title with respect to which a statute provides for the security interest in question to be indicated on the certificate as a condition or result of the security interest s obtaining priority over the rights of a lien creditor with respect to the collateral. The term includes another record maintained as an alternative to a certificate of title by the governmental unit that issues certificates of title 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. This comports with modern practice, and makes it clear that a record maintained by the appropriate governmental agency, in Ohio or elsewhere, qualifies as a certificate of title. Without this addition, the perfection of security interests in states that maintain such records might be in jeopardy if there is not a traditional paper certificate even though perfection is accomplished under the law of the state that maintains the certificate without filing a UCC-1 with the State Secretary of State where Article 9 filings are otherwise kept. EXHIBIT C - Addition of a definition of public organic record to R.C. 1309.102. 1309.102 Definitions and index of definitions - UCC 9-102. (A) As used in this chapter, unless the context requires otherwise: (68) Public organic record means a record that is available to the public for inspection and is: (a) a record consisting of the record initially filed with or issued by a State or the United States to form or organize an organization and any record filed with or issued by the State or the United States which amends or restates the initial record; (b) an organic record of a business trust consisting of the record initially filed with a State and any record filed with the State which amends or restates the initial record, if a statute of the State governing business trusts requires that the record be filed with the State; or 51

98 99 100 101 102 103 104 105 106 107 108 109 110 111 112 113 114 115 116 117 118 119 120 121 122 123 124 125 126 127 128 129 (c) a record consisting of legislation enacted by the legislature of a State or the Congress of the United States which forms or organizes an organization, any record amending the legislation, and any record filed with or issued by the State or the United States which amends or restates the name of the organization. (68)(69) Pursuant to commitment, with respect to an advance made or other value given by a secured party, means pursuant to the secured party s obligation, whether or not a subsequent event of default or other event not within the secured party s control has relieved or may relieve the secured party from its obligation. (69)(70) Record, except as used in for record, of record, record or legal title, and record owner, means information that is inscribed on a tangible medium or that is stored in an electronic or other medium and is retrievable in perceivable form. (70)(71) Registered organization means an organization formed or organized solely under the law of a single State or the United States and as to which the State or the United States must maintain a public record showing the organization to have been organized by the filing of a public organic record with, the issuance of a public organic record by, or the enactment of legislation by the State or United States. The term includes a business trust that is formed or organized under the law of a single State if a statute of the State governing business trusts requires that the business trust s organic record be filed with the State. (71) (72) Secondary obligor means an obligor to the extent that: (a) The obligor s obligation is secondary; or (b) The obligor has a right of recourse with respect to an obligation secured by collateral against the debtor, another obligor, or property of either. (72) (73) Secured party means: (a) A person in whose favor a security interest is created or provided for under a security agreement, whether or not any obligation to be secured is outstanding; (b) A person that holds an agricultural lien; (c) A consignor; (d) A person to whom accounts, chattel paper, payment intangibles, or promissory notes have been sold; (e) A trustee, indenture trustee, agent, collateral agent, or other representative in whose favor a security interest or agricultural lien is created or provided for; or 52

130 131 132 133 134 135 136 137 138 139 140 141 142 143 144 145 146 147 148 149 150 151 152 153 154 155 156 157 158 159 (f) A person who holds a security interest arising under section 1302.42, 1302.49, 1302.85, 1304.20, 1305.18, or 1310.54 of the Revised Code. (73) (74) Security agreement means an agreement that creates or provides for a security interest. (74) (75) Send, in connection with a record or notification, means: (a) To deposit in the mail, deliver for transmission, or transmit by any other usual means of communication, with postage or cost of transmission provided for, addressed to any address reasonable under the circumstances; or (b) To cause the record or notification to be received within the time that it would have been received if properly sent under division (A)(74)(a) of this section. (75)(76) Software means a computer program and any supporting information provided in connection with a transaction relating to the program. Software does not include a computer program that is included in the definition of goods. (76)(77) State means a state of the United States, the District of Columbia, Puerto Rico, the United States Virgin Islands, or any territory or insular possession subject to the jurisdiction of the United States. (77)(78) Supporting obligation means a letter-of-credit right or secondary obligation that supports the payment or performance of an account, chattel paper, a document, a general intangible, an instrument, or investment property. (78)(79) Tangible chattel paper means chattel paper evidenced by a record consisting of information that is inscribed on a tangible medium. (79)(80) Termination statement means an amendment of a financing statement that: (a) Identifies, by its file number, the initial financing statement to which it relates; and (b) Indicates either that it is a termination statement or that the identified financing statement is no longer effective. (80) (81) Transmitting utility means a person primarily engaged in the business of: (a) Operating a railroad, subway, street railway, or trolley bus; (b) Transmitting communications electrically, electromagnetically, or by light; (c) Transmitting goods by pipeline or sewer; or (d) Transmitting or producing and transmitting electricity, steam, gas, or water. 53

160 161 162 163 164 165 166 167 168 169 170 171 172 173 174 175 176 177 178 179 180 181 182 183 184 185 186 187 188 189 190 191 192 193 194 Rationale for amendments: This addition will make it clear that electronic records of organizations, such as corporations, limited partnerships, and LCCs, maintained by State Secretaries of State have the same effect as a corporate charter or other similar paper document that establishes the existence of the chartered organization. This is a new definition to Chapter 1309. Its addition, together with revisions to 1309.503 is an important change. It solves a recurring problem caused when creditors rely on information in a public record of a corporation, limited partnership, LLC, or other registered organization, in preparing an initial financing statement (UCC-1). The Ohio Secretary of State provides such a public record on its web site at http://www.sos.state.oh.us/sos/businessservices.aspx Other states have similar online records. The new definition, to be codified at ORC 1309.102(A)(68) will specify that (68) Public organic record means a record that is available to the public for inspection and is: (A) a record consisting of the record initially filed with or issued by a State or the United States to form or organize an organization and any record filed with or issued by the State or the United States which amends or restates the initial record; (B) an organic record of a business trust consisting of the record initially filed with a State and any record filed with the State which amends or restates the initial record, if a statute of the State governing business trusts requires that the record be filed with the State; or (C) a record consisting of legislation enacted by the legislature of a State or the Congress of the United States which forms or organizes an organization, any record amending the legislation, and any record filed with or issued by the State or the United States which amends or restates the name of the organization. This language works with proposed changes to ORC 1309.503 regarding the sufficiency of name of a registered organization, as explained below in connection with exhibit J. In connection with this provision, the definition of Registered Organization in ORC 1309.102(A)(70) will also change, and will be renumbered as 1309.102(A)(71). The current definition provides: (70) Registered organization means an organization organized solely under the law of a single state or the United States and as to which the state or the United States must maintain a public record showing the organization to have been organized. 54

195 196 197 198 199 200 201 202 203 204 205 206 207 208 209 210 211 212 213 214 215 216 217 218 219 220 221 222 223 224 225 226 227 228 229 230 231 232 233 234 The definition will be changed to provide: (71) Registered organization means an organization formed or organized solely under the law of a single State or the United States and as to which the State or the United States must maintain a public record showing the organization to have been organized by the filing of a public organic record with, the issuance of a public organic record by, or the enactment of legislation by the State or United States. The term includes a business trust that is formed or organized under the law of a single State if a statute of the State governing business trusts requires that the business trust s organic record be filed with the State. With respect to registered organizations, such as corporations, limited liability companies, and limited partnerships that must register with the state to exist as an entity, these changes will facilitate the ability of lenders to rely on the public web site, or other public organic record in determining the debtor s name. Thus, even if the paperwork filed by the debtor contains a different name, if the financing statement reflects the name appearing in the public organic record, the financing statement is effective. When a financing statement covers collateral that is held in a trust that is a registered organization, subsection (A)(1) governs the name of the debtor, and the lender can rely on the name appearing in the public organic record. However, if the collateral is held in a trust that is not a registered organization, subsection (A)(3) applies. (Note that, as used in Article 9, collateral held in a trust includes collateral as to which the trust is the debtor as well as collateral as to which the trustee is the debtor.) This subsection adopts a rule that generally results in the name of the trust or the name of the trust s settlor being provided as the name of the debtor on the financing statement, even if, as typically is the case with common-law trusts, the debtor (defined in Section 1309.102) is a trustee acting with respect to the collateral. This convention provides more accurate information and eases the burden for searchers, who otherwise would have difficulty with respect to debtor trustees that are large financial institutions. More specifically, if a trust s organic record specifies a name for the trust, subsection (A)(3) requires the financing statement to provide, as the name of the debtor, the name for the trust specified in the organic record. In addition, the financing statement must indicate, in a separate part of the financing statement, that the collateral is held in a trust. If the organic record of the trust does not specify a name for the trust, the name required for the financing statement is the name of the settlor or, in the case of a testamentary trust, the testator, in each case as determined under subsection (H). In addition, the financing statement must provide sufficient additional information to distinguish the trust from other trusts having one or more of the same settlors or the same testator. In many cases, an indication of the date on which the trust was settled will satisfy this requirement. If neither the name nor the additional information indicates that the collateral is held in a trust, the financing statement must indicate that fact, but not as part of the debtor s name. 55

235 236 237 238 239 240 241 242 243 244 245 246 247 248 249 250 251 252 253 254 255 256 257 258 259 260 261 262 263 264 265 266 267 Additional details with respect to debtor s individual names are provided below, with respect to other changes made to 1309.503, in connection with exhibit J. EXHIBIT D - Clarification of the meaning of control with respect to security interests in electronic chattel paper 1309.105 Control of electronic chattel paper - UCC 9-105. (A) A secured party has control of electronic chattel paper if a system employed for evidencing the transfer of interests in the chattel paper reliably establishes the secured party as the person to which the chattel paper was assigned. (B) A system satisfies subsection (A), and a secured party has control of electronic chattel paper, if the record or records comprising the chattel paper are created, stored, and assigned in such a manner that: (A)(1) Aa single authoritative copy of the record or records exists that is unique, identifiable, and, except as otherwise provided in divisions paragraphs (D)(4), (E)(5), and (F)(6) of this section, unalterable; (B)(2) Tthe authoritative copy identifies the secured party as the assignee of the record or records; (C)(3) Tthe authoritative copy is communicated to and maintained by the secured party or its designated custodian; (D)(4) Ccopies or revisions amendments that add or change an identified assignee of the authoritative copy may be made only with the participation consent of the secured party; (E)(5) Each copy of the authoritative copy and any copy of a copy is readily identifiable as a copy that is not the authoritative copy; and (F)(6) Any revision amendment of the authoritative copy is readily identifiable as an authorized or unauthorized revision. Rationale for amendments: ORC 1309.105 will be changed to alter the definition of control of chattel paper collateral in order to bring Article 9 into conformity with the Uniform Electronic Transactions Act, adopted in Ohio as Chapter 1306 of the Ohio Revised Code. Current 1309.105 provides: A secured party has control of electronic chattel paper if the record or records comprising the chattel paper are created, stored, and assigned in such a manner that: (A) A single authoritative copy of the record or records exists that is unique, identifiable, and, except as otherwise provided in divisions (D), (E), and (F) of 56

268 269 270 271 272 273 274 275 276 277 278 279 280 281 282 283 284 285 286 287 288 289 290 291 292 293 294 295 296 297 298 299 300 301 302 303 304 305 306 307 308 309 this section, unalterable; (B) The authoritative copy identifies the secured party as the assignee of the record or records; (C) The authoritative copy is communicated to and maintained by the secured party or its designated custodian; (D) Copies or revisions that add or change an identified assignee of the authoritative copy may be made only with the participation of the secured party; (E) Each copy of the authoritative copy and any copy of a copy is readily identifiable as a copy that is not the authoritative copy; and (F) Any revision of the authoritative copy is readily identifiable as an authorized or unauthorized revision. Under the proposed revisions, it will be altered to provide: (A) A secured party has control of electronic chattel paper if a system employed for evidencing the transfer of interests in the chattel paper reliably establishes the secured party as the person to which the chattel paper was assigned. (B) A system satisfies subsection (A), and a secured party has control of electronic chattel paper, if the record or records comprising the chattel paper are created, stored, and assigned in such a manner that: (1) a single authoritative copy of the record or records exists which is unique, identifiable, and, except as otherwise provided in paragraphs (4), (5), and (6), unalterable; (2) the authoritative copy identifies the secured party as the assignee of the record or records; (3) the authoritative copy is communicated to and maintained by the secured party or its designated custodian; (4) copies or revisions amendments that add or change an identified assignee of the authoritative copy can be made only with the participation consent of the secured party; (5) each copy of the authoritative copy and any copy of a copy is readily identifiable as a copy that is not the authoritative copy; and (6) any revision amendment of the authoritative copy is readily identifiable as an authorized or unauthorized revision. These changes are derived from the Uniform Electronic Transactions Act, and set forth the general test for control. Subsection (B) sets forth a safe harbor test that if satisfied, establishes control under the general test in subsection (A). Chapter 1309 will still leaves the development of systems and procedures to satisfy this test to the marketplace. Systems that evolve for control of electronic chattel paper may or may not involve a third party custodian of the relevant records. As under UETA, a system must be shown to reliably establish that the secured party is the assignee of the chattel paper. Reliability is a high standard and encompasses the general principles of uniqueness, identifiability, and unalterability found in subsection (b) without setting forth specific guidelines as to how these principles must be achieved. However, the standards applied to determine whether a party is in control of electronic chattel paper should not 57

310 311 312 313 314 315 316 317 318 319 320 321 322 323 324 325 326 327 328 329 330 331 332 333 334 335 336 337 338 339 340 341 342 343 344 345 be more stringent than the standards now applied to determine whether a party is in possession of tangible chattel paper. For example, just as a secured party does not lose possession of tangible chattel paper merely by virtue of the possibility that a person acting on its behalf could wrongfully redeliver the chattel paper to the debtor, so control of electronic chattel paper would not be defeated by the possibility that the secured party s interest could be subverted by the wrongful conduct of a person (such as a custodian) acting on its behalf. This section and the concept of control of electronic chattel paper are not based on the same concepts as are control of deposit accounts ( 1309.104), security entitlements, a type of investment property ( 1309.106), and letter-of-credit rights ( 1309.107). The rules for control of that collateral are based on existing market practices and legal and regulatory regimes for institutions such as banks and securities intermediaries. Analogous practices for electronic chattel paper are developing nonetheless. The flexible approach adopted by this section, moreover, should not impede the development of these practices and, eventually, legal and regulatory regimes, which may become analogous to those for, for example, investment property. EXHIBIT E - Amend ORC R.C. 1309.307 to clarify the location of certain federal organizations. 1309.307 Location of debtor - UCC 9-307. (F)Except as otherwise provided in division (I) of this section, a registered organization that is organized under the law of the United States and a branch or agency of a bank that is not organized under the law of the United States or a state are located: (1) in the state that the law of the United States designates, if the law designates a state of location; (2) in the state that the registered organization, branch, or agency designates, if the law of the United States authorizes the registered organization, branch, or agency to designate its state of location, including by designating its main office, home office, or other comparable office; or (3) in the District of Columbia, if neither division (F)(1) nor (2) of this section applies. Rationale for amendment: This change will amend ORC 1309.307, regarding the location of organizations registered under federal law, such as banks, for the purposes of applying Article 9 s choice of law rules to determine the place for filing. Current 1309.307(F) provides: 58

346 347 348 349 350 351 352 353 354 355 356 357 358 359 360 361 362 363 364 365 366 367 368 369 370 371 372 373 374 375 376 377 378 379 380 381 382 383 Except as otherwise provided in division (I) of this section, a registered organization that is organized under the law of the United States and a branch or agency of a bank that is not organized under the law of the United States or a state are located: (1) In the state that the law of the United States designates, if the law designates a state of location; (2) In the state that the registered organization, branch, or agency designates, if the law of the United States authorizes the registered organization, branch, or agency to designate its state of location; or (3) In the District of Columbia, if neither division (F)(1) nor (2) of this section applies. The propose change will add a few words to the end of 1309.307(F)(2), so that subsection (F) will provide: Except as otherwise provided in division (I) of this section, a registered organization that is organized under the law of the United States and a branch or agency of a bank that is not organized under the law of the United States or a state are located: (1) in the state that the law of the United States designates, if the law designates a state of location; (2) in the state that the registered organization, branch, or agency designates, if the law of the United States authorizes the registered organization, branch, or agency to designate its state of location, including by designating its main office, home office, or other comparable office; or (3) in the District of Columbia, if neither division (F)(1) nor (2) of this section applies. EXHIBIT F - Revised R.C. 1309.316 regarding the perfection of security interests in after-acquired collateral acquired by a debtor after a change in applicable law. 1309.316 Continued perfection of security interest following change in governing law - UCC 9-316. (H) The following rules apply to collateral to which a security interest attaches within four months after the debtor changes its location to another jurisdiction: (1) A financing statement filed before the change pursuant to the law of the jurisdiction designated in Section 9-301(1) or 9-305(c) is effective to perfect a security interest in the collateral if the financing statement would have been effective to perfect a security interest in the collateral had the debtor not changed its location. (2) If a security interest perfected by a financing statement that is effective under paragraph (1) becomes perfected under the law of the other jurisdiction before the earlier of the time the financing statement would have become ineffective under the law of the jurisdiction designated in Section 9-301(1) or 9-305(c) or the expiration of the fourmonth period, it remains perfected thereafter. If the security interest does not become perfected under the law of the other jurisdiction before the earlier time or event, it 59

384 385 386 387 388 389 390 391 392 393 394 395 396 397 398 399 400 401 402 403 404 405 406 407 408 409 410 411 412 413 414 415 416 417 418 419 420 421 becomes unperfected and is deemed never to have been perfected as against a purchaser of the collateral for value. (I) If a financing statement naming an original debtor is filed pursuant to the law of the jurisdiction designated in Section 9-301(1) or 9-305(c) and the new debtor is located in another jurisdiction, the following rules apply: (1) The financing statement is effective to perfect a security interest in collateral in which the new debtor has or acquires rights before or within four months after the new debtor becomes bound under Section 9-203(d), if the financing statement would have been effective to perfect a security interest in the collateral if the collateral had been acquired by the original debtor. (2) A security interest that is perfected by the financing statement and which becomes perfected under the law of the other jurisdiction before the earlier of the expiration of the four-month period or the time the financing statement would have become ineffective under the law of the jurisdiction designated in Section 9-301(1) or 9-305(c) remains perfected thereafter. A security interest that is perfected by the financing statement but which does not become perfected under the law of the other jurisdiction before the earlier time or event becomes unperfected and is deemed never to have been perfected as against a purchaser of the collateral for value. Rationale for amendment: These changes correct a mistake in the 2001 revision to Article 9 dealing with the perfection of security interests in after-acquired collateral that the debtor acquired four months after a change in governing law and the place for filing under ORC 1309.316 by adding subsections (H) and (I). The proposed new language will provide: (H) The following rules apply to collateral to which a security interest attaches within four months after the debtor changes its location to another jurisdiction: (1) A financing statement filed before the change pursuant to the law of the jurisdiction designated in Section 9-301(1) or 9-305(c) is effective to perfect a security interest in the collateral if the financing statement would have been effective to perfect a security interest in the collateral had the debtor not changed its location. (2) If a security interest perfected by a financing statement that is effective under paragraph (1) becomes perfected under the law of the other jurisdiction before the earlier of the time the financing statement would have become ineffective under the law of the jurisdiction designated in Section 9-301(1) or 9-305(c) or the expiration of the fourmonth period, it remains perfected thereafter. If the security interest does not become perfected under the law of the other jurisdiction before the earlier time or event, it becomes unperfected and is deemed never to have been perfected as against a purchaser of the collateral for value. 60

422 423 424 425 426 427 428 429 430 431 432 433 434 435 436 437 438 439 440 441 442 443 444 445 446 447 448 449 450 451 452 453 454 455 456 457 458 459 (I) If a financing statement naming an original debtor is filed pursuant to the law of the jurisdiction designated in Section 9-301(1) or 9-305(c) and the new debtor is located in another jurisdiction, the following rules apply: (1) The financing statement is effective to perfect a security interest in collateral in which the new debtor has or acquires rights before or within four months after the new debtor becomes bound under Section 9-203(d), if the financing statement would have been effective to perfect a security interest in the collateral if the collateral had been acquired by the original debtor. (2) A security interest that is perfected by the financing statement and which becomes perfected under the law of the other jurisdiction before the earlier of the expiration of the four-month period or the time the financing statement would have become ineffective under the law of the jurisdiction designated in Section 9-301(1) or 9-305(c) remains perfected thereafter. A security interest that is perfected by the financing statement but which does not become perfected under the law of the other jurisdiction before the earlier time or event becomes unperfected and is deemed never to have been perfected as against a purchaser of the collateral for value. Subsection (H) addresses the issue when the debtor simply changes its location, such as when an individual debtor, who lives in Portsmouth, Ohio, moves across the river to South Shore, Kentucky. Subsection (I) addresses the problem when a new debtor located in a different state becomes responsible for the original debtor s obligations, such as when there is a corporate merger, or an individual, who lives in Covington, but operates a sole proprietorship in Cincinnati, incorporates her operation as an Ohio Corporation These changes will repair what should have been an obvious oversight in the 1999 amendments that became effective in Ohio and elsewhere, in 2001. New Comments 7 & 8, which include Examples 9 and 10, explain the effect of the new provisions. These provisions are accompanied by conforming changes to other provisions, such as 9-326, which deals with priority of security interests in collateral acquired by a new debtor. EXHIBIT G - Minor style changes to R.C. 1309.317 regarding basic priorities of security interests. 1309.317 Interests that take priority over or take free of unperfected security interest or agricultural lien - UCC 9-317. (A) A security interest or agricultural lien is subordinate to the rights of: (1) a person entitled to priority under Section 1309.322; and (2) except as otherwise provided in subsection (E), a person that becomes a lien creditor before the earlier of the time: (a) the security interest or agricultural lien is perfected; or 61

460 461 462 463 464 465 466 467 468 469 470 471 472 473 474 475 476 477 478 479 480 481 482 483 484 485 486 487 488 489 490 491 492 493 494 495 496 497 (b) one of the conditions specified in section 1309.203(B)(3) is met and a financing statement covering the collateral is filed. (B) Except as otherwise provided in subdivision (E) of this section, a buyer, other than a secured party, of tangible chattel paper, tangible documents, goods, instruments, or a security certificate certificated security takes free of a security interest or agricultural lien if the buyer gives value and receives delivery of the collateral without knowledge of the security interest or agricultural lien and before it is perfected. (C) Except as otherwise provided in subsection (E), a lessee of goods takes free of a security interest or agricultural lien if the lessee gives value and receives delivery of the collateral without knowledge of the security interest or agricultural lien and before it is perfected. (D) A licensee of a general intangible or a buyer, other than a secured party, of accounts, electronic chattel paper, electronic documents, general intangibles, or investment property collateral other than tangible chattel paper, tangible documents, goods, instruments, or a certificated security takes free of a security interest if the licensee or buyer gives value without knowledge of the security interest and before it is perfected. (E) Except as otherwise provided in sections 1309.320 and 1309.321 of the Revised Code, if a person files a financing statement with respect to a purchase money security interest before or within twenty days after the debtor receives delivery of the collateral, the security interest takes priority over the rights of a buyer, lessee, or lien creditor that arise between the time the security interest attaches and the time of filing. Rationale for amendments: The revisions will change the style of several subsections of 1309.317 and clarify ambiguities that appear in the original text. These minor changes are reflected in the revised language. EXHIBIT H - Minor stylistic changes to R.C. 1309.326 to remove ambiguities that have been identified. 1309.327 Priority of security interests in deposit account - UCC 9-327. (A) Subject to subsection (B), a security interest that is created by a new debtor which is in collateral in which the new debtor has or acquires rights and perfected by a filed financing statement that is effective solely under Section 1309.508 of the Revised Code in collateral in which a new debtor has or acquires rights would be ineffective to perfect the security interest but for the application of section 1309.508 or of Sections 1309.508 and 1309.316(I)(1) of the Revised Code is subordinate to a security interest in the same collateral which is perfected other than by such a filed financing statement that is effective solely under Section 1309.508 of the Revised Code. (B) The other provisions of this part determine the priority among conflicting security interests in the same collateral perfected by filed financing statements that are effective 62

498 499 500 501 502 503 504 505 506 507 508 509 510 511 512 513 514 515 516 517 518 519 520 521 522 523 524 525 526 527 528 529 530 solely under Section 9-508 described in subsection (A) of this section. However, if the security agreements to which a new debtor became bound as debtor were not entered into by the same original debtor, the conflicting security interests rank according to priority in time of the new debtor's having become bound. Rationale for amendments: The revisions will change the style of several subsections of 1309.327 and clarify ambiguities that appear in the original text and are made to conform to the revisions to 1309.508 and 1309.516.. EXHIBIT I - Modest changes to R.C.1309.406 and 1309.408, to clarify the scope of Article 9 s rules on certain sales of collateral and on the ineffectiveness of antiassignment provisions. 1309.406 Discharge of account debtor - UCC 9-406. (E) Subsection (D) does not apply to the sale of a payment intangible or promissory note, other than a sale pursuant to a disposition under Section 1309.610 of the Revised Code or an acceptance of collateral under Section 1309.620 of the Revised Code. 1309.408 Restrictions on assignment of promissory notes, health-care-insurance receivables, and certain general intangibles ineffective - UCC 9-408. (B) Subsection (A) applies to a security interest in a payment intangible or promissory note only if the security interest arises out of a sale of the payment intangible or promissory note, other than a sale pursuant to a disposition under Section 1309.610 of the Revised Code or an acceptance of collateral under Section 1309.620 of the Revised Code. EXHIBIT J - R.C. 1309.503 s rules regarding debtor s names on financing statements will be revised to provide greater clarity. 1309.503 Name of debtor and secured party - UCC 9-503. (A) A financing statement sufficiently provides the name of the debtor: (1) except as otherwise provided in subdivision (A)(3) of this section, If if the debtor is a registered organization, or the collateral is held in a trust that is a registered 63

531 532 533 534 535 536 537 538 539 540 541 542 543 544 545 546 547 548 549 550 551 552 553 554 555 556 557 558 559 560 561 562 563 564 565 organization, only if the financing statement provides the name of the debtor indicated that is stated to be the registered organization s name the public organic record of most recently filed with or issued or enacted by the debtor s registered organization s jurisdiction of organization that shows the debtor to have been organized; purports to state, amend, or restate the registered organization s name; (2) subject to subdivision (F) of this section, If if the debtor is a decedent s estate, collateral is being administered by the personal representative of a decedent, only if the financing statement provides, as the name of the debtor, the name of the decedent and, in a separate part of the financing statement, indicates that the debtor is an estate collateral is being administered by a personal representative; (3) If the debtor is a trust or a trustee acting with respect to property held in trust, only if the financing statement: (a) Provides the name specified for the trust in its organic documents or, if no name is specified, provides the name of the settlor and additional information sufficient to distinguish the debtor from other trusts having one or more of the same settlors; and (b) Indicates, in the debtor s name or otherwise, that the debtor is a trust or is a trustee acting with respect to property held in trust. collateral is held in a trust that is not a registered organization, only if the financing statement: (a) provides, as the name of the debtor: (i) if the organic record of the trust specifies a name for the trust, the name specified; or (ii) if the organic record of the trust does not specify a name for the trust, the name of the settlor or testator; and (b) in a separate part of the financing statement: (i) if the name is provided in accordance with subdivision (3)(a)(i) of this section, indicates that the collateral is held in a trust; or (ii) if the name is provided in accordance with subdivision (3)(a)(ii) of this section, provides additional information sufficient to distinguish the trust from other trusts having one or more of the same settlors or the same testator and indicates that the collateral is held in a trust, unless the additional information so indicates; (4) subject to subdivision (G) of this section, if the debtor is an individual to whom this State has issued a driver s license that has not expired, only if the financing statement provides the name of the individual which is indicated on the driver s license; (5) if the debtor is an individual to whom paragraph (4) does not apply, only if the financing statement provides the individual name of the debtor or the surname and first personal name of the debtor; and 64

566 567 568 569 570 571 572 573 574 575 576 577 578 579 580 581 582 583 584 585 586 587 588 589 590 591 592 593 594 595 596 597 (4) (6) In other cases: (a) If the debtor has a name, only if it provides the individual or organizational name of the debtor; and (b) If the debtor does not have a name, only if it provides the names of the partners, members, associates, or other persons comprising the debtor, in a manner that each name provided would be sufficient if the person named were the debtor. (B) A financing statement that provides the name of the debtor in accordance with division (A) of this section is not rendered ineffective by the absence of: (1) A trade name or other name of the debtor; or (2) Unless required under division (A)(4)(b) (A)(6)(b) of this section, names of partners, members, associates, or other persons comprising the debtor. C) A financing statement that provides only the debtor s trade name does not sufficiently provide the name of the debtor. (D) Failure to indicate the representative capacity of a secured party or representative of a secured party does not affect the sufficiency of a financing statement. (E) A financing statement may provide the name of more than one debtor and the name of more than one secured party. (F) The name of the decedent indicated on the order appointing the personal representative of the decedent issued by the court having jurisdiction over the collateral is sufficient as the name of the decedent under division (A)(2) of this section. (G) If this State has issued to an individual more than one driver s license of a kind described in division (A)(4) of this section, the one that was issued most recently is the one to which division (A)(4) of this section refers. (H) [Definition.] In section 1309.503 of the revised code, the name of the settlor or testator means: (1) if the settlor is a registered organization, the name that is stated to be the settlor s name on the public organic record most recently filed with or issued or enacted by the settlor s jurisdiction of organization which purports to state, amend, or restate the settlor s name; or (2) in other cases, the name of the settlor or testator indicated in the trust s organic record. Rationale for amendments: 65

598 599 600 601 602 603 604 605 606 607 608 609 610 611 612 613 614 615 616 617 618 619 620 621 622 623 624 625 626 627 628 629 630 631 632 633 634 The revisions also provide greater certainty with respect to the debtor s names as they appear on UCC financing statements with respect to both individual debtors and registered organizations such as corporations, limited liability companies, and limited partnerships. As explained in connection with Exhibit C regarding the addition of a definition of Public Organic Record and the revision to the definition of Registered Organization in ORC 1309.102, these revisions permit creditors to rely on the name of registered organizations that appears on the public web site of the Ohio Secretary of State. With respect to names of individuals, NCCUSL s draft of the proposed changes to 9-503 contained two alternative provisions for states to select from for determining when a individual debtor s name is effective. The first alternative (Alternative A) makes a financing statement filed in Ohio effective for an individual with an unexpired Ohio drivers license, only if it contains the name displayed on the license at the time of the filing. If the debtor doesn t have an unexpired Ohio drivers license, the financing statement is effective if it contains either the debtor s individual name or the debtor s surname & first personal name. The second alternative (Alternative B) contained no preference for the name on the debtor s drivers license, but instead makes the financing statement effective it contains either the individual name, the surname & first personal name, or the name on the debtor s unexpired Ohio driver s license. Thus, both alternatives make a financing statement effective if it contains the name provided on the debtor s Ohio driver s license. States where the 2010 Revisions to Article 9 have already been introduced (10 of them, as of February 25, 2011), have overwhelmingly elected the first alternative. The first alternative provides certainty and is recommended for adoption by the Committee. The second alternative is designed primarily for states whose Secretary of State s offices cannot accommodate special characters that might appear on a debtor s driver s license. In Ohio, the Secretary of State s office rule specifies that the name should be indexed as it appears on the UCC-1. See, in this regard Ohio Administrative Code 111-11-32 - Names of debtors who are Individuals. The Ohio rule closely resembles the IACA Model Administrative Rules. EXHIBIT K - Clarification of rules in R.C. 1309.507 regarding changes in a debtor s name that make a filed financing statement seriously misleading. 1309.507 Effect of certain events on effectiveness of financing statement - UCC 9-507. 66

635 636 637 638 639 640 641 642 643 644 645 646 647 648 649 650 651 652 653 654 655 656 657 658 659 660 661 662 663 664 665 666 667 668 (C) If a debtor so changes its the name that a filed financing statement provides for a debtor becomes insufficient as the name of the debtor under Section 9-503(a) so that the financing statement becomes seriously misleading under Section 9-506: (1) the financing statement is effective to perfect a security interest in collateral acquired by the debtor before, or within four months after, the change filed financing statement becomes seriously misleading; and (2) the financing statement is not effective to perfect a security interest in collateral acquired by the debtor more than four months after the change filed financing statement becomes seriously misleading, unless an amendment to the financing statement which renders the financing statement not seriously misleading is filed within four months after the change that event. Rationale for amendments: The proposed revision makes minor stylistic changes to the text of this rule, to remove ambiguities that have been identified in this current language. This change is not intended to alter the substantive effect of a debtor s seriously misleading name change. EXHIBIT L - Minor correction to R.C. 1309.515(F) 1309.515 Duration and effectiveness of financing statement - effect of lapsed financing statement - UCC 9-515. (F) If a debtor is a transmitting utility and a filed initial financing statement so indicates, the financing statement is effective until a termination statement is filed. Rationale for amendments: Section 1309.515(F) currently refers to a filed financing statement of a transmitting utility. The proposed change adds the word initial to make it clear that the section refers only to a filed initial financing statement. With respect to transmitting utilities, because of 1309.515(F) there should is no need for a continuation statement. EXHIBIT M - Section 1309.516(B) is amended in several places to conform to the changes that are to be made to 1309.503 regarding the debtor s name. 1309.516 What constitutes filing - effectiveness of filing - UCC 9-516. (A) Except as otherwise provided in subsection (b), communication of a record to a filing office and tender of the filing fee or acceptance of the record by the filing office constitutes filing. 67