The changes provide modernization but with some nonuniform provisions.
On December 17, 2014, New York Governor Andrew Cuomo signed into law New York Assembly Bill 9933, which amends the Uniform Commercial Code (the UCC) of the State of New York. The bill, enacted as Chapter 505 of the Session Laws of 2014, generally adopts the 2001 revisions of Article 1, the 2003 revisions of Article 7, and the 2010 amendments to Article 9. However, the bill contains a number of provisions that differ from the uniform provisions promulgated by the American Law Institute and the Uniform Law Commission. The New York nonuniform provisions are noteworthy but, in some cases, raise further questions. Here is a summary.
UCC Article 1—General Provisions
The bill generally adopts the uniform revisions to Article 1. The revisions reorganize a number of Article 1’s sections, explicitly state that the substantive rules in Article 1 apply only to transactions within the scope of the other UCC’s articles, and add the concept of “course of performance” (taken from Article 2, dealing with sales of goods, and Article 2A, dealing with leases of goods) to the list of contract interpretation tools that already includes course of dealing and usage of trade.
But a number of nonuniform Article 1 provisions are included in the bill:
UCC Article 7—Documents of Title
The bill adopts the uniform revisions to Article 7. The revisions (a) permit electronic documents of title in addition to the paper-based ones contemplated by former Article 7, (b) provide rules for the conversion of paper-based documents of title to electronic ones and vice versa, and (c) create a concept of “control” of an electronic document that substitutes for the paper-based concepts of possession and indorsement.
Except as discussed under “transition” below, the bill contains no significant nonuniform changes to the revisions to Article 7.
UCC Article 8—Investment Securities
The bill contains a nonuniform provision in the definition of the term “security” in § 8-102(a)(15) by adding to the definition the following:
(h) An obligation, share, participation, or interest does not satisfy § 8-102(a)(13)(ii) or 8-102(a)(15)(i) merely because the issuer or a person acting on its behalf
(1) maintains records of the owner thereof for a purpose other than registration of transfer; or
(2) could, but does not, maintain books for the purpose of registration of transfer.
The nonuniform addition is intended to change the result in Highland Capital Management L.P. v. Schneider, 8 N.Y.3d 406 (2006), which found that a set of promissory notes issued by an issuer were securities rather than instruments even though the issuer did not maintain a transfer register for the promissory notes. The Official Comments to the UCC, as well as a commentary by the Permanent Editorial Board for the UCC, suggest that the case was wrongly decided. But, because the decision was issued by New York’s highest court, a nonuniform amendment to New York’s UCC was considered advisable.
The bill also modifies the definition of “control” for investment property in § 8-106 to add the following new provisions modeled from similar nonuniform provisions in Delaware’s UCC:
(h) Under subsection (c)(2) or (d)(2), authentication of a record does not impose upon the issuer or securities intermediary any duty not expressly agreed to by the issuer or securities intermediary in the record.
(i) A purchaser has “control” under subsection (c)(2) or (d)(2) even if any duty of the issuer or the securities intermediary to comply with instructions or entitlement orders originated by the purchaser is subject to any condition or conditions (other than further consent by the registered owner or the entitlement holder).
UCC Article 9—Secured Transactions
The bill generally has adopted the amendments to Article 9 promulgated in 2010 and summarized below:
However, the bill did not adopt other uniform 2010 amendments:
The bill also expands the definition of “control” for a deposit account in § 9-104 modeled after similar nonuniform provisions in Delaware’s UCC. The bill adds the following two new methods of control to the methods of control already contained in § 9-104(a):
(4) the name on the deposit account is the name of the secured party or indicates that the secured party has a security interest in the deposit account; or
(5) another person has control of the deposit account on behalf of the secured party or, having previously acquired control of the deposit account, acknowledges that it has control on behalf of the secured party.
Moreover, the bill adds the following new clauses (c), (d), and (e) to § 9-104:
(c) No implied duties of bank. The authentication of a record by the bank under subsection (a)(2) does not impose upon the bank any duty not expressly agreed to by the bank in the record. The naming of the deposit account in the name of the secured party or with an indication that the secured party has a security interest in the deposit account under subsection (a)(4) does not impose upon the bank any duty not expressly agreed to by the bank.
(d) Conditions not relevant. A secured party has control under subsection (a)(2) even if any duty of the bank to comply with instructions originated by the secured party directing disposition of the funds in the deposit account is subject to any condition or conditions (other than further consent by the debtor).
(e) No inferences. The procedures and requirements of subsection (a)(4) available to obtain control shall not be used in interpreting the sufficiency of a secured party’s compliance with the procedures and requirements of subsection (a)(1), (a)(2) or (a)(3) to obtain control. The provisions of subsection (a)(4) shall create no inference regarding the requirements for compliance with subsection (a)(1), (a)(2) or (a)(3).
In addition, the bill provides that a security interest in an account that is a right to payment of lottery winnings is automatically perfected under § 9-309. This is a uniform provision that was not previously adopted by New York in the 2001 revisions to Article 9.
The bill omits the finely tailored transition rules for the Article 7 revisions and the 2010 amendments to Article 9 in favor of a simple but inexact overall transition rule. The bill applies to any “transaction” entered into, on, or after December 17, 2014. Presumably, a loan made and secured by collateral existing before that date will not be covered by the changes to the UCC contained in the bill. However, because the term “transaction” is not defined in the bill, it may be unclear whether a future advance or the debtor’s acquisition of new collateral, or an amendment, joinder, or the like, occurring or made on or after December 17, 2014 is a new, post-effective date transaction to which the UCC changes apply. A secured party would be prudent, if there is any doubt about the applicability of the changes, to comply with the changes as well as with the pre-effective date rules. Because there is no “transition period” and the new rules are effective immediately, compliance with the new rules should not be delayed.
The New York transition rule will also complicate searches in New York for financing statements filed against debtors, especially individual debtors, because a searcher will not be able to be sure whether a financing statement may have been filed against a debtor relating to a pre-effective transaction. Accordingly, searches will need to be made under both the pre-effective date rules and the new rules for debtor names for the foreseeable future.
Other Conforming Changes
The bill does not contain conforming amendments to other New York statutes that reference the affected UCC provisions. For example, General Obligations Law § 5-1401, which deals with New York choice-of-law clauses, still refers to former § 1-105 rather than the new § 1-301.
Despite the nonuniform provisions, the bill is a significant modernization of New York’s UCC. It may be hoped at some point that New York will adopt the 1990 revisions and the 2002 amendments to Articles 3 and 4 and perhaps revisit some of the nonuniform provisions contained in the bill, so that New York’s UCC will be fully up to date with the UCCs of other states. In addition, it may be hoped that New York will conform other New York statutes whose UCC cross-references are affected by the bill.
If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers: