Critical Revised Article 9 UCC Issue (June 2006)

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National End of Transition Period June 30, 2006 and Affected Continuation Filings

Carl Ernst who is a publisher of expert materials on UCC Revised Article 9 wrote in a May 2006 Special Report, "June 30, 2006 is fast approaching. In most states, it is the last day of the transition period from former Article 9 to Revised Article 9. ...Part 7 of Article 9 will no longer provide a safe haven for those filers who have not brought their financing statements up to Revised Article 9 standards." Carl is very concerned that lenders and lenders attorneys do not understand what is about to happen and "are still making security-interest killing errors on financing statements-both in the continuation of those from the pre-effective days and those filed since July 1, 2001."

When the language for Revised Article 9 (RA9) of the Uniform Commercial Code was sent to all states for adoption, an effective date of July 1, 2001 was recommended. As UCCs are generally effective for five years and the law allows continued effectiveness of perfected pre-effective date filings, RA9 created a five-year transitional period which was intended to end nationally June 30, 2006 (NOTE: Not all states adopted on 7-1-01 and several do not have 6-30-06 end of transition period dates). RA9 required filers to ensure existing filings were brought into compliance prior to the end of this transition period. UCC Section 9-705(c) provides that financing statements that were effective before the effective date of RA9 cease to be effective no later than June 30, 2006. If action is not taken to continue the effectiveness of an affected financing statement by the end of transition period date, UCC Section 9-705(c) tells us that the effectiveness of the financing statement will cease and, thus, that any later action will be too late to maintain continuity of perfection. With the end of the transition period coming soon for most states, UCC filers may need to take action and more importantly need to be aware of a major issue that has arisen regarding the filing of continuations.

It is clear under RA9 that in certain situations filers must take specific action before the end of transition date to ensure continued effectiveness of their filings. But according to RA9 experts such as Carl Ernst, RA9 does not clearly provide direction regarding maintaining effectiveness after June 30, 2006 for a financing statement filed under former Article 9 where the filing office in which it must be perfected under RA9 does not change. The major interpretational issue mentioned herein does not relate to filings where an "in-lieu of continuation" filing is necessary in another state prior to June 30, 2006 in order to maintain perfection under RA9.

A report issued by the Permanent Editorial Board for the Uniform Commercial Code regarding maintaining perfection beyond June 30, 2006 examines the major interpretational issue regarding the end of transition period. As CorpDirect Agents cannot provide legal advice, we are providing this notice not only to remind filers that all filings must be reviewed for compliance in that the end of transition period is upon us but also to make you aware of the interpretational issue and direct you to material on possible solutions. Please see the links to such material below and study this issue closely. The first posting is probably the most straight forward and helpful.

Presentation to IACA (generally speaking: Secretary of State UCC Administrators) by Neil Cohen and Steve Weise (Considered experts with regard to RA 9 and this issue)

Special Notice from IACA including the Permanent Editorial Board for the Uniform Commercial Code Report Regarding Maintaining Perfection Beyond June 30, 2006

Joint posting by Neil Cohen and Steve Weise on the Heller Ehrman Website

• Presentation to IACA (generally speaking: Secretary of State UCC Administrators) by Neil Cohen and Steve Weise (Considered experts with regard to RA 9 and this issue)
• Special Notice from IACA including the Permanent Editorial Board for the Uniform Commercial Code Report Regarding Maintaining Perfection Beyond June 30, 2006
• Joint posting by Neil Cohen and Steve Weise on the Heller Ehrman Website

Keep in mind that not all states adopted RA9 with the recommended 7-1-01 effective date nor the 6-30-06 end of transition period date. This may impact your considerations. Connecticut’s effective date was 10-1-01. Florida, Alabama and Mississippi have 1-1-02 effective dates. Florida and Connecticut adopted 6-30-06 as the end of its transition period in order to be consistent with other states but Florida recently amended to 12-31-06 by legislative act to give Florida filers more time to respond to the new issue. Alabama's and Mississippi's end of transition period is 12-31-06. Arizona'a end of transition period is 6-30-07 to accomodate its six-year filings.

Carl Ernst makes major contributions to the secured transaction industry and his advice is relied upon for the drafting of this new notice. His opinion is that approximately 4,000,000 UCC filings in the US could be ineffective due to filer mistakes regarding debtor name alone. In a study he performed, one national lender alone had at least a 25% debtor name error rate in their filings. Another major lender has a 30% error rate. In a study in Florida, his staff found that 11% of the filings for a particular day in Florida were in error. The top three errors he pointed to are: 1) Wrong Filing Office 2) Wrong Debtor Name 3) Filing Office Entry Errors. CorpDirect Agents currently sponsors seminars on both Revised Article 9 Filing Basics and Revised Article 9 Transition End. We are currently considering a Florida based seminar with Carl Ernst as the presenter. If you are interested in any of our seminars, please contact us to schedule. If you want to review material on RA9 basics and specifically end of transition issues, you may consider the Transition Requirements section of the following article on our website: Uniform Commercial Code: Revised Article 9 And Its Affect on Florida Transactions.

If you would like to contact Ernest Publishing regarding their UCC Filing Guide and Alerts, you may contact them at (800-345-3822) or via ernstpublishing.com.