The Uniform Commercial Code (“UCC”) has been adopted as to commercial law in all 50 states. In what is the first major revision to the UCC in almost two decades, a revised Article IX of the UCC goes into effect in most states, including Maryland, on July 1, 2001.

Article IX regulates secured transactions (i.e., regulating security agreements, financing statements, and the like) where financial obligations are secured with liens on personal property.

Here are ten changes to Article IX that will have the greatest impact on owners and operators of real estate:

1. File where the debtor is. Under amended Article IX, financing statements generally must be filed only where the debtor is “located.” A corporation, LLC, limited partnership or other business entity is located in the state where it is organized. Other businesses are located at their “chief executive office;” and, individuals are located at their principal residence.

Under the old law, secured parties must file in every state in which collateral is physically located. This change, such that financing statements are now only required where the debtor is located, is the biggest change that the new law makes.

2. File in a central office. Under the new law, filings generally must now be made in a central filing office within each state (e.g., the Department of Assessments and Taxation).

Currently, in many states including Maryland, filings are made in County offices. So, in Maryland, filings will now only be with the State Department of Assessments and Taxation.

Noting that Article IX only regulates personal property, if a security interest is granted in a real estate fixture, a filing must be made, in the same location as a mortgage or deed of trust (i.e., at the local County office).

3. Old filings are “grandfathered.” Revised Article IX applies even to transactions and liens created before July 1, 2001; but with a few complicated “grandfathering” rules.

Under these rules, a filing under the old law made before July 1, 2001 is effective until its normal “lapse date” (generally, five years after filing). Thereafter, it can be continued by filing a special continuation statement in the state where an initial filing would be required under the new law. This special statement is called an “Initial Financing Statement in Lieu of Continuation Statement.” It must contain specific information about the filing to be continued, including the filing’s date, location, and file number.

These special statements can be filed at any time, even before July 1, 2001, however, they will expire five years after the date of filing.

4. Old security agreements are “grandfathered” for one year.If immediately before July 1, 2001, a security agreement is enforceable under the old law, but not the new law, it remains enforceable until July 1, 2002. If the reason why it is unenforceable under the new law is corrected by then, it is enforceable even after that date.

Likewise, if before July 1, 2001, a security interest is perfected under the old law by a method other than filing, that this perfection is insufficient under the new law, the security interest remains perfected until July 1, 2002.

5. Collateral can be described as “all assets.” In a financing statement, collateral can now be described as broadly as “all assets” or “all personal property.” However, this is not permitted in security agreements, that must describe the lien assets with greater specificity. Under the old law, this was not allowed at all and collateral needed to be specified.

6. Debtors need not sign. Neither the security agreement nor financing statement must now be signed by the debtor. Rather, it’s only necessary that the debtor “authenticate” the security agreement.

Authentication is defined very broadly and can be accomplished by an electronic signature, a mouse click or a verbal assent in a recorded telephone conversation. This is in contrast to the old law, under which a security agreement must be signed.

This change will facilitate electronic filing and searching of business records.

7. Bank accounts can be collateral. The new law allows a security interest to be taken in a non-consumer debtor’s bank account.

The creditor perfects the security interest by getting control of the account. This is accomplished by either an agreement between the creditor, the debtor and the bank or opening an account in the name of the creditor with the debtor’s money in it.

This is a major change from the old law, under which bank accounts generally could not serve as collateral.

8. Financing statements must now be filed for agricultural liens. To perfect a non-possessory statutory agricultural lien, a creditor must file a financing statement and priority of that lien will generally be determined as if the lien were a security interest. This is in contrast to the old law where a financing statement was not required for agricultural liens.

9. Proceeds are defined more broadly. The definition of “proceeds” in the new Article IX includes: (1) “whatever is obtained from the lease or license of the collateral,” (2) “whatever is collected on, or distributed on account of, the collateral,” and (3) “rights arising out of the collateral.”

This includes things like stock dividends, equipment rental receipts, and royalties from the licensing of intellectual property. Under the old law, proceeds were limited to proceeds received from the disposition of the capital.

10. No recording taxes. Many states, including Maryland, charged recording taxes upon the recordation of financing statements. Under the revised Article IX, recordation taxes will no longer apply after June 30, 2001.

In Maryland only a nominal filing fee will be charged. The fee is $20 on UCC documents 9 pages or less and $75 on UCC documents 10 pages or more. Filing of UCC documents may be “expedited” at a cost of $50 per instrument and this expedited service permits filings by facsimile.

In conclusion, and accepting that this article has identified ten important changes to Article IX of the UCC, the revisions are significant and any business that has a transaction secured by a lien on personal property should review the documentation on that lien to determine if it complies with the new provisions of Article IX.