Spring 2005-05 New U.C.C. Article 9 proposed for P.R.
Significant changes in secured transactions
New U.C.C. Article 9 proposed for P.R.
Bill No. 1029, filed with the Puerto Rico House of Representatives on February 15, 2005, proposes a complete redraft of Chapter 9 of the Commercial Transactions Act, to conform it to “New Article 9” of the U.C.C. If passed, it will require Puerto Rico’s legal and financing communities to revise again their commercial financing practices.
Puerto Rico Law No. 208 of August 17, 1995, known as the Commercial Transactions Act, adopted Article 9 of the Uniform Commercial Code. The U.C.C. is a standard set of laws governing commercial transactions, which has been in effect in all states of the United States for decades, with minor variations from state to state. Article 9, in particular, deals with security for commercial transactions covering property and credit rights of diverse types (with the notable exception of real estate).
The Commercial Transactions Act became effective on January 1, 1998, and replaced several antiquated statutes that had diverse and often inconsistent provisions on financing and lien-registration mechanisms. The adoption of Article 9 made Puerto Rico’s law on these matters consistent with the commercial law then applicable in stateside jurisdictions.
In the meantime, a revision committee in the U.S. was busy drafting substantial changes to Article 9, with the intent of reducing transaction and credit costs and bringing greater certainty to financing transactions. The resulting statute (often referred to as “new Article 9”) was adopted by all U.S. states in 2001. The revisions expand the scope of transactions covered by Article 9 and simplify the rules that govern security interests in commercial and consumer transactions. New Article 9 modifies definitions, modernizes the filing process for financing statements, and provides additional methods for perfection as well as some additional priority rules. It recognizes emerging methods of electronic commerce and formulates clearer rules for enforcement of security transactions.
Some of the more notable changes proposed for P.R. are outlined below.
Under New Article 9, a financing statement (the document filed in a public registry to give notice of a secured party’s interest in a debtor’s property or rights) no longer requires the debtor’s signature. New Article 9 provides that the debtor may authorize the creditor, in the security agreement between them, to file a financing statement consistent with the security interest granted by the debtor in the security agreement.
Supporting obligations are secondary obligations, such as letter of credit rights or guaranties, which support payment or performance of another obligation. The New Article 9 provides that a security interest in a payment obligation automatically attaches to the “supporting obligation” related to the obligation. A security interest in collateral automatically perfects the security interest in the supporting obligation for that collateral.
The scope of Article 9 is now expanded to include the sale of payment intangibles. A payment intangible is a monetary obligation secured by a right that lacks physical existence. New Article 9 provides for the automatic perfection of a security interest created upon the sale of payment intangibles (but not upon a security interest given to secure an obligation). This change facilitates securitization transactions, without interfering with the sale of loan participations.
The sale of a promissory note is now considered a “transaction” that may be secured under New Article 9. In other words, a security interest can be constituted upon the sale of a promissory note in the secondary market, as in the case of mortgage notes that are pooled by their originator.
New Article 9 permits the creation of a security interest upon a deposit account as original collateral, except in consumer transactions. A security interest in a deposit account may be perfected by “control,” which means that the intermediary, with the consent of the debtor, has agreed with the secured party that it will follow directions from the secured party without further consent from the debtor. The process is similar to the one that has traditionally been used to perfect a security interest upon securities (book entry stocks and other intangibles held in a securities account).
A security interest can be constituted upon the assignment of a commercial tort claim. Under current Article 9, tort claims in general were excluded from Article 9’s scope. However, Article 9 continues to exclude claims for bodily injury and other non-business tort claims of a natural person.
New Article 9 requires a secured party to give enforcement notices to any existing secondary obligor (sureties) as well as the debtor in order to comply with the requirements of an authenticated notification before the disposition of collateral. Under the current Article 9 enforcement notices were not required.
Under new Article 9, the definition of “accounts,” which means rights to payment of a monetary obligation, whether or not earned by performance, has been expanded to include the receivables listed below, which were not covered by the current Article 9:
credit card receivables,
insurance policies, including health-care-insurance receivables, among others,
licenses of all kinds of tangible and intangible personal property.
Under current Article 9 the term “consumer transactions” was not defined, although it was continually mentioned. New Article 9 clarifies that a security interest is created upon a “consumer transaction” if:
the secured obligation is incurred primarily for personal, family or household purposes, and
the collateral is acquired primarily for personal, family or household purposes.
There is no dollar cap requirement in order to qualify as a consumer transaction.
When a hardware system is the collateral that secures an obligation, the created security interest covers the computer programs embedded in the hardware when:
the software is customarily considered part of the hardware, and
the owner of the hardware has acquired a right to use the software program (license).
However, if the software program maintains its independent status it is considered a general intangible and a security interest on hardware will not attach to it.
The New Article 9 continues the rule that the creditor’s enforcement actions must be “commercially reasonable,” an ambiguous and controversial term, but specifically points out that a low foreclosure sale price will not, by itself, make a foreclosure sale unreasonable, and will not preclude the secured party from establishing that the collection or enforcement process was commercially reasonable.
© 2005 Goldman Antonetti