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Mar 2006
27
March 27, 2006

Commercial Finance Alert

A Glitch in Revised UCC Article 9 May Narrow
the “Window” in Which a Continuation
Statement Must Be Filed to Continue
the Effectiveness of
Certain Financing Statements

By James H. Breay

This Alert describes a problem with the transition provisions of Article 9 of the Uniform Commercial Code (Secured Transactions) that the Permanent Editorial Board for the UCC ("PEB") has described in a Report dated December 19, 2005.  This problem affects a small group of filed financing statements consisting of those filed during the second half of 1996 or during the second half of any fifth year preceding 1996 (1991, 1986, 1981, etc.) and continued during the first half of 2001, where the filing was made in a public office that was the proper office in which to file both under revised Article 9 and under the rules of Article 9 before it was revised effective July 1, 2001.  The PEB Report points out that under one interpretation of the transition rules, a continuation statement for any such financing statement must be filed within a shorter "window" than the usual period of six months before the financing statement expires.  In some cases, the PEB recommendation could result in a window of only one day:  June 30, 2006. This Alert refers to that interpretation as the "conservative interpretation."

There are interpretations of the transition rules of revised Article 9 under which the problem of the shortened window period, as described in the PEB Report and in this Alert, would not exist.  The PEB Report does not take a position on which interpretation is correct.  It does, however, suggest a way of dealing with the problem that should be effective under any of the possible interpretations.  This article assumes that the conservative interpretation of the transition rules is correct, and it describes the PEB's suggested method of addressing the problem.1

Background

Article 9 of the Uniform Commercial Code was substantially revised effective July 1, 2001.  The revision included changes in the rules on the public office in which a secured party must file a financing statement to perfect its security interest.  For example, where the debtor is a "registered organization," such as a corporation, revised Article 9 generally requires the secured party to file in the state in which the debtor is incorporated or organized, rather than the state in which collateral such as inventory or equipment is located or the state in which its chief executive office is located (for collateral such as accounts receivable), as was required by the old rules.  UCC Sections 9-301(1), 9-307(e), 9-102(70).  The new rules do not, however, always result in a change in the public office in which a financing statement is required to be filed.  If, for example, a debtor is incorporated in Michigan and before the Article 9 revision all of the debtor's inventory and equipment and its chief executive office were located in Michigan, then the proper office in which to file to perfect a security interest in the debtor's inventory, equipment and accounts receivable, both under the old rules and the rules of revised Article 9, would be the office of the Michigan Secretary of State.

Revised Article 9 includes transition rules that, among other things, specify how a secured party may continue the effectiveness of a financing statement that was filed before July 1, 2001.  Part 7 of revised Article 9.  Generally, if revised Article 9 did not change the jurisdiction or public office in which the secured party must file in order to perfect, and if the secured party properly filed its financing statement in that office, then the financing statement continues to be effective under revised Article 9 until the earlier of (1) the time when the financing statement would have ceased to be effective under the law of the jurisdiction in which it was filed (typically five years from the date of filing) or (2) June 30, 2006 ("Cutoff Date").  UCC Section 9-705(c).  Revised Article 9 also provides that the effectiveness of such a financing statement may be continued by filing a continuation statement within the time period specified by the law of the state whose law governs perfection.

Effect of the Cutoff Date

It is the Cutoff Date of June 30, 2006, that creates the potential for a shortened "window period" within which a continuation statement may be filed.  This problem exists where the Cutoff Date of June 30, 2006, falls within the six-month period preceding a financing statement's usual expiration date, which is typically five years after the financing statement is filed.  Under the conservative interpretation of the transition rules, UCC Section 9-705(c) shortens the "window period" for filing a continuation statement to a period that begins six months before the normal expiration date of the financing statement and ends on the Cutoff Date of June 30, 2006.  This results from the rule of Section 9-705(c) that a financing statement filed before July 1, 2001 (the effective date of revised Article 9), "ceases to be effective" at the earlier of (1) the time when it would have expired under the law of the jurisdiction in which it was filed and (2) June 30, 2006.

For all but a small number of financing statements, the Cutoff Date is not a problem. For example, suppose that (1) all of the debtor's inventory and equipment was located in Michigan before revised Article 9 took effect, (2) the secured party filed in Michigan on April 1, 1998, to perfect in the debtor's equipment and inventory under the pre-revision rules (which generally required a filing in the state where tangible collateral was located) and (3) the debtor is a Michigan corporation, so that Michigan is also the proper state in which to file under revised Article 9.  Assume that the secured party continued the effectiveness of the financing statement by filing a continuation statement in Michigan on February 1, 2003, which was within the six-month period preceding the expiration date of the financing statement.  Assuming that the continuation statement met the requirements of revised Article 9, its filing continued the effectiveness of the financing statement for another five years to April 1, 2008. In this example, the Cutoff Date of June 30, 2006, did not come into play because the Cutoff Date did not fall within the six months preceding the date on which the financing statement expired.  Put another way, the six-month window period for filing a continuation statement did not "straddle" the Cutoff Date of June 30, 2006.  This is true of the vast majority of financing statements.

Where, however, the Cutoff Date does fall within the window period for filing a continuation statement, the result, under the conservative interpretation of the rules, can be a significant shortening of the window period within which the secured party must file a continuation statement to maintain the effectiveness of its financing statement.  For example, assume that a financing statement was originally filed in the office of the Michigan Secretary of State on December 1, 1996, and that a continuation statement was filed in that office during the six months preceding the five-year expiration date of the financing statement (December 1, 2001) and before July 1, 2001.  That filing would ordinarily extend the effectiveness of the financing statement to December 1, 2006.  As a result, a continuation statement could be filed at any time within the six months preceding December 1, 2006 (i.e., from June 1, 2006, to November 30, 2006).  But Section 9-705(c) says that such a financing statement ceases to be effective upon the earlier of (1) the time when the financing statement would have ceased to be effective under the law of the state in which it was filed (i.e., December 1, 2006) or (2) June 30, 2006 - the Cutoff Date.  Under the "conservative" interpretation of the transition rules:

  • The window period for filing a continuation statement cannot be the six months preceding December 1, 2006, because Section 9-705(c) terminates the effectiveness of the financing statement on June 30, 2006, and Section 9-515 does not permit a continuation statement to be filed after the financing statement has expired.2
  • The window period cannot be the six months preceding the June 30, 2006, Cutoff Date because UCC Section 9-515 provides that a continuation statement may be filed "only within six months before the expiration of the five-year period" after the date on which the financing statement was filed (in the example, the ten-year period after that date because of the filing of a continuation statement in 2001).
  • Therefore, the window period must consist of only one month:  June of 2006.

The most extreme example is where a financing statement was filed on December 30, 1996, and was properly continued by the filing of a continuation statement during the first half of 2001.3 Under UCC Section 9-705(c), the financing statement ceases to be effective upon the earlier of (1) December 30, 2006 (the date on which it would have expired under the usual rules), or (2) June 30, 2006.  As a result, there will be a window period for filing a continuation statement of one day - June 30, 2006, because the six months preceding December 30, 2006, starts on June 30, 2006.

As noted above, the shortening of the window period caused by the June 30, 2006, Cutoff Date in UCC Section 9-705(c) exists only where June 30, 2006, falls within the six months preceding the normal expiration date of the financing statement.  This occurs only where the financing statement was filed during the second half of 1996 or during the second half of any fifth year preceding 1996 (i.e., 1991, 1986, 1981, etc.) and continued during the first half of 2001.  Where the normal period within which a continuation statement may be filed (usually six months) does not straddle June 30, 2006, there is not a risk that this period will be shortened by reason of the June 30, 2006, Cutoff Date.

The problem described in this article only affects a financing statement that was filed in a public office that was the proper place to file both under the Article 9 filing rules that applied before Article 9 was revised and under the rules of revised Article 9.  It does not affect a financing statement that was filed in a public office that was the proper place for filing under the old rules but is not the proper place to file under revised Article 9. In order to continue the effectiveness of such a financing statement, the secured party must file, in the office that is the proper place for filing under revised Article 9, an "in lieu" financing statement that meets the requirements of UCC Section 9-706.  This must be filed at any time before the earlier of June 30, 2006, or the date on which the financing statement expires. Thus, for such a financing statement there is no window period that could be shortened by the June 30, 2006, Cutoff Date.

As noted above, in addition to the "conservative" interpretation of the transition rules that this article describes, there are two other possible interpretations.4 The PEB Report suggests a "safe harbor" way to avoid the problem under any of the possible interpretations of the transition rules: A secured party who wants to continue the effectiveness of an affected financing statement must file a continuation statement no earlier than six months before the normal expiration date of the financing statement and no later than June 30, 2006.5

Summary

The risk of a shortened "window period" during which a continuation statement may be filed exists with respect to any financing statement as to which all of the following apply:

  • The proper public office in which to file the financing statement under the old rules of Article 9 (i.e., the rules that applied before Article 9 was revised) was the same as the office in which it must be filed under the rules of revised Article 9.
  • The financing statement was filed in that office.
  • The financing statement was filed during the second half of 1996 or during the second half of any fifth year preceding 1996 (the second half of 1991, 1986, 1981, etc.).
  • The effectiveness of the financing statement was continued by the filing of a continuation statement during the first half of 2001.

As suggested by the PEB Report, a secured party who wants to continue the effectiveness of an affected financing statement should file a continuation statement no earlier than six months before the normal expiration date of the financing statement and no later than June 30, 2006.

If you have questions, contact Jim Breay, Chair of the Firm’s Commercial Finance Group at 616.752.2114 or jbreay@wnj.com or any of the Group members.

ENDNOTES

1According to the PEB Report, "four states enacted nonuniform versions of §9-701, resulting in effective dates of October 1, 2001 (Connecticut), and January 1, 2002 (Alabama, Mississippi, and Florida)."  The analysis and recommendation in this article may not apply to filings in those states.

2See UCC Sections 9-515(c) ("The effectiveness of a filed financing statement lapses on the expiration of the period of its effectiveness unless before the lapse a continuation statement is filed . . ."), 9-515(d) ("A continuation statement may be filed only within six months before the expiration of the five-year period specified in subsection (a) . . .") and 9-515(a) ("a filed financing statement is effective for a period of five years after the date of filing . . .").

3Subsection (c) of Section 9-705 provides that the June 30, 2006, Cutoff Date applies "except as provided" in subsection (d) of Section 9-705.  Subsection (d) provides that if a continuation statement is filed after revised Article 9 takes effect (i.e., after July 1, 2001) in the proper public office under revised Article 9, then the effectiveness of the related financing statement filed in the same public office before July 1, 2001, continues for the normal period of effectiveness (typically five years).  Thus, the Cutoff Date does not apply to such a financing statement.

4Under one such interpretation, the window period in which to file a continuation statement would not be shortened by the Cutoff Date, and the secured party would be able to file a continuation statement during the entire six-month period preceding the normal, five-year expiration date of the financing statement.  Under another interpretation, the secured party could file a continuation statement during the six months preceding June 30, 2006. 

5As the PEB Report points out, Section 9-705(f) requires that the financing statement filed under old Article 9 and the continuation statement filed under revised Article 9, taken together, must satisfy the requirements for an initial financing statement that are set out in Part 5 of revised Article 9.

Commercial Finance Alert

Editor and Commercial Finance Group Chairman: James H. Breay

This Commercial Finance Alert is published by Warner Norcross & Judd LLP to inform clients and friends of new developments. It is not intended as legal advice.  If you need additional information on the topics in this issue, please contact your Warner Norcross attorney or any member of the Firm's Commercial Finance Group at 616.752.2000.

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