Part III Scope of Article 9, Classification of Collateral and Choice of Law
Chapter 6 Choice Of Law
Choice of law rules probably are most important when it comes to perfection of a security interest. Simply stated, the question that arises is in what state should whatever action is required to perfect be taken. Where perfection is by filing the choice of law rule question becomes in which state or states must the creditor file a financing statement. The rules will be revisited when we look at perfection. However, a brief overview of the choice of law rules is in order here.
To begin with you should understand that although the UCC is a uniform law, some states have enacted it with modifications. So, a practitioner always has to be careful to look to the UCC as it has been adopted in the state whose law governs. Further, with enactment of new Article 9 it may be necessary to decide which version of Article 9, former or new, governs the particular transaction.
Former section 9-103 contained the choice of law rules for former Article 9. Those rules underwent repeated revision but difficulties remained. Former section 9-103(1)(b) stated a "situs rule" under which the law of the jurisdiction where ordinary goods were located governed. Former section 9-103(2)(b) provided that the law of the state that had issued a certificate of title covering the goods applied. Under former section 9-103(3)(b), the law of the jurisdiction where the debtor was located governed as to security interests in accounts, general intangibles and mobile goods.
As for new Article 9 because of their complexity it is advisable to leave the choice of law rules applicable to goods covered by a certificate of title to Chapter 17 (Perfection as to Goods Subject to Certificate of Title Legislation). As to other collateral, new Article 9 effects a major change. Thus, the general rule in new section 9-301(1) is that while a debtor is located in a jurisdiction the local law of that jurisdiction governs perfection. There are numerous exceptions to the general rule and a "situs rule" sometimes governs. For example, under new section 9-301(2), the law of the jurisdiction where the collateral is located governs perfection by possession. A detailed discussion of these exceptions is best left to later chapters.
It should be noted that under new section 9-301(3)(C) the law of the jurisdiction where the collateral is located governs the effect of perfection or nonperfection and the priority of nonpossessory security interests in goods and quasi goods. See Official Comment 7 to new 9-301. The focus in this chapter is on the law governing perfection and nonperfection and the law governing perfection and nonperfection generally is the law of the jurisdiction where the debtor is located.
The application of the general rule requires that there be rules for determining where a debtor is located. These rules are found in new section 9-307. New section 9-307(b) provides that except as qualified by later subsections an individual debtor is located at the individual's place of residence and an organizational debtor is located at the place of business unless the debtor has more than one place of business in which case the debtor is located at its chief executive office.
Among the most important qualifications to rules in new section 9-307(b) is that found in new section 9-307(e). Under new section 9-307(e), a "registered organization" is located in the state in which the organization is registered. A registered organization, as defined in new section 9-102(a)(70), is an organization that exists by virtue of having been organized in a state or under federal law. The definition includes, in particular, corporations and limited partnerships.
The essential rules of new sections 9-301 and 9-307 may be appreciated by applying them in the next problem.
Problem 6.1 (interactive)
ABC, Inc. is a consulting business incorporated in Delaware. ABC has offices in Arizona, California and New Mexico but its chief executive office is in Arizona. Second Bank located in New York has taken a security interest in ABC's computers used by ABC in its offices in Arizona, California and New Mexico and in ABC's accounts receivables.
In which state or states would Second Bank file a financing statement to perfect its security interest in the computers under former Article 9? See former 9-103(1)(b).
Where should Second Bank have had to file as to the computers under new Article 9?
Where would Second Bank be required to file to perfect its security interest in the accounts under former Article 9?
Where should Second Bank file to perfect its security interest in the accounts under new Article 9?
As will be seen further in Chapter 13 (Overview of Perfection by Filing), for the most part, parties cannot choose the law governing perfection. Former Article 1, section 1-105(2) so provided. The 2008 version of Article 1, section 1-301(c)(8), which replaces former Article 1, section 1-105(2), is to the same effect. However, new Article 9 introduces a non-obvious wrinkle to this rule. A bank may choose its jurisdiction and thereby choose the law governing perfection of a security interest in a deposit account maintained with the bank. See new 9-304.
The above limitations on the ability of the parties to choose the law determining perfection or non-perfection of a security interest apply only where the Uniform Commercial Code (UCC) governs a transaction. There will be situations in which the UCC does not apply. In particular, in international transactions, involving parties one of which is a resident or national of another country, a law other than the UCC could apply under choice of law principles.
To avoid a law the application of which is deemed to be undesirable, the parties may attempt to choose the governing law in their agreement. In an early version of new section 1-301, in subsection (c)(2), the drafters of the UCC sought to give parties the ability to choose the law of a jurisdiction that bore no relationship to the transaction. However, the attempt met with widespread resistance by the states and the latest version of new section 1-301, Article 1, section 1-301, reverts to the substance of former Article 1, section 1-105(1)), requiring that the law chosen bear a reasonable relationship to the transaction.
A review of state action as to various sections of Article 1, may be found at:
http://www.law.unlv.edu/faculty/rowley/ra1_updates.htm.
The next two problems illustrate the foregoing points.
Problem 6.2 (interactive)
Assume the facts of Problem 6.1.
Could Second Bank avoid the hassle of deciding which state's law governs perfection by entering into an agreement with ABC, Inc. providing that New York law governs?
Does the fact that the secured party is a bank affect your answer?
Problem 6.3 (interactive)
Soft as Silk, Inc. (SaS), a business incorporated in Mexico, is borrowing from Northwestern Bank (NB), a New York corporation. The loan will be secured by an interest in all of SaS’s accounts receivables.
Is it possible for NB to draft a security agreement containing an enforceable provision under which the law of New York would govern perfection and non-perfection of the security interest? Explain your answer.
2009-02-01 update