Perfection of Nonpossessory Security Interests Under Revised Aritcle 9: Consequences of the Practical and Conceptual Incompatibility of US and English Secured Transactions Law

Chicago Journal of International Law Chicago Journal of International Law

Volume 3 Number 1 Article 21

4-1-2002

Perfection of Nonpossessory Security Interests Under Revised Perfection of Nonpossessory Security Interests Under Revised

Aritcle 9: Consequences of the Practical and Conceptual Aritcle 9: Consequences of the Practical and Conceptual

Incompatibility of US and English Secured Transactions Law Incompatibility of US and English Secured Transactions Law

Jeanette L. Goldsberry

Follow this and additional works at: https://chicagounbound.uchicago.edu/cjil

Recommended Citation Recommended Citation

Goldsberry, Jeanette L. (2002) "Perfection of Nonpossessory Security Interests Under Revised Aritcle 9:

Consequences of the Practical and Conceptual Incompatibility of US and English Secured Transactions

Law,"

Chicago Journal of International Law

: Vol. 3: No. 1, Article 21.

Available at: https://chicagounbound.uchicago.edu/cjil/vol3/iss1/21

This Article is brought to you for free and open access by Chicago Unbound. It has been accepted for inclusion in

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Perfection

of

Nonpossessory

Security

Interests

Under

Revised

Article

9:

Consequences

of

the

Practical

and

Conceptual

Incompatibility

of

US

and

English

Secured

Transactions

Law

Jeanette

L.

Goldsberry*

Article

9

of

the

Uniform

Commercial

Code

("UCC"),

governing

secured

transactions,

was

recently

revised,

changing

the

way

in which

nonpossessory

security

interests

are

perfected.'

All

fifty

states

have

approved

the

revision,

which

became

effective

in most

states

as

of

July 1,

2001.

The

changes

affect

foreign

debtors

differently

depending

upon

whether

their

laws

are

compatible

with

revised

Article

9.

Given

the

sizeable

amount

of

money

that

US

banks

loan

to

UK

banks

and

corporations,

English

secured

transactions

law

is

particularly

significant.

This

paper

focuses

on

the

incompatibility

of

English

law

with

revised

Article

9.

The

paper

first

examines

the

basics

of

where

to

file

financing

statements in order

to

perfect

nonpossessory

security

interests

under

revised

Article

9,

contrasting

the

simplicity

of

determining

the

location

of

US

debtors

with

the

complexity

of

determining

the

location

of

foreign

debtors.

The

paper

then

examines

English

law

for

compatibility

with

Article

9,

because

compatibility

affects

the

method

of

determining

the

location

of

English

debtors.

Both

practical

incompatibility

under current

English

law

and

possible

conceptual

incompatibility

under

future

English

law

are

considered.

Finally,

the

paper

highlights

why

filing

must

take

place

in

the

District

of

Columbia,

notwithstanding the

potential

risks

if

a

duplicate

filing

is

not

made

in

England.

I.

DETERMINING

DEBTOR

LOCATION

FOR

PURPOSES

OF

FILING

A

FINANCING

STATEMENT

UNDER

REVISED

ARTICLE

9

An

overview

of

the

perfection

of

nonpossessory

security

interests

under

revised

Article

9

is

necessary

in order

to

understand

the

added

complications

with

foreign

debtors.

Most

nonpossessory

security

interests

are

perfected

by

filing

a

financing

*

BM

1994,

University

of

Texas

at

Austin;

JD

candidate

2003,

University

of

Chicago.

1.

A

security

interest

is

perfected

when

it

becomes

enforceable

vis-1-vis

third

party

creditors.

The

date

of

perfection

generally

governs

the

priority

of

secured

creditors when

the

debtor

is

bankrupt

or

insolvent.

ChicagoJournafof

Internationa(Law

statement

in

the

location

of

the

debtor.

2

Registered

US

organizations

are

located

in

their

state

of

registration.

Foreign-registered organizations

do

not

generally

qualify

for

location

based on

state

of

registration

because

revised

Article

9

requires

that

the

state

of

registration

be

part

of

the United

States

The

foreign-registered

debtor

may

possibly

be

located

at

its

"chief

executive

office,"

but

neither

the

original

nor

revised

Article

9

defines

this

term.

4

The

case

law

pertaining

to

the

original

Article

9,

which

varies

by

jurisdiction,

still applies

in

determining the

location

of

the

chief

executive

office

of

a

foreign

corporation.

There

are generally only

one

or

two

possibilities

for

the

location

of

the

chief

executive

office,

even

under

the

varying

case

law

standards.

If

the

foreign

debtor's chief

executive

office

always

determined

its location

for

filing

purposes,

the

inquiry

under

the

current

case

law

would

be

relatively

straightforward.

The

problem

is

that

the

foreign

debtor

is

located in

the

place

of

its

chief

executive

office

only

if

the

secured

transactions

laws

of

the

foreign

jurisdiction

are

equivalent

to

the

Article

9

notice

filing

system.'

If

the

foreign

law

proves

unsatisfactory,

the

financing

statement

must

be

filed

in

the

District

of

Columbia

for

the

security

interest

to

be

perfected

under

revised

Article

9.7

This

necessitates

an

analysis

of

the

secured

transactions

law

of

the

foreign

jurisdiction

to

determine

if

filing

in

the

District

of

Columbia

is

required.

II.

PRACTICAL

INCOMPATIBILITY

OF

ENGLISH

LAW

WITH

REVISED

ARTICLE

9

English

law

is

incompatible

with

revised

Article

9

because

English

law

does

not

require notice

filing

of

security

interests.

Article

9

generally

requires

the

filing

of

financing

statements

to

give

notice

of

the

creditor's

specific

nonpossessory

security

interests

in

the

debtor's

property.

England

does

have

a

corporate

secured

transactions

registration

system,

but

the

English

system

varies

significantly

from

revised

Article

9.

The

English

corporate registration

system

is

based

on

the

registration

of

transactions

2.

See

UCC

§

9-301(1)

and

cmrt

4

(ALl

1999).

But

see

UCC

§

9-301

cmt

5

(listing

some exceptions

to

the

general

rule).

3.

UCC

§

9-307(e),

§

9-102(70), and

§

9-102(76).

4.

See

UCC

§

9-307(c)

and cmt

2.

5.

Hans

Kuhn,

Multi-State and

International

Secured

Transactions Under

Revised

Article

9

of

the

Uniform

Commercial

Code,

40

VaJ

Intl

L

1009,

1044-45

(2000)

(setting

forth

the

different

tests in Tatelbaum

v

Commerce

Investment

Co,

262

A2d 494

(Md

1970);

Aoki

v

Shepherd

Machinery

Co

(In

reJ.A.

Thompson

&

Son,

Inc),

665

F2d

941

(9th

Cir

1982);

Jarboe

v

United

Bank

of

Denver

(In

re Golf

Course

Builders

Leasing,

Inc),

768

F2d

1167,

1170-71 (10th Cir

1985);

Chase

Manhattan

Bank

v

Nemko

(In

re

Nemko),

209

Bankr

590,

601-12

(Bankr

EDNY

1997)).

6.

See

UCC

§

9-307(c).

7.

Id.

VA0

3

N0.1

Perfection

of

Wfonpossessory

Security

7nterests

"Under

'tevised.Artice

9

rather

than

the

filing

of

financing

statements.

8

Registration

of

transactions

after

the

fact

creates

a

risk

that

a

subsequent

creditor

will

not

have

adequate notice.

9

More

significantly,

English

law

does

not

generally

require

notice

filing,

except

in

relation

to

corporations

and

certain

special

types

of

security

interests.'

°

Nor

does

English

law

generally

condition

perfection

on

notice

filing,

as

required

for compatibility

with

revised

Article

9.

Therefore,

filing

in

the

District

of

Columbia

is

required.

III.

CONCEPTUAL

INCOMPATIBILITY

OF

ENGLISH

LAW

WITH

REVISED

ARTICLE

9

It

is

possible

that

English

law

will

eventually

adopt

a

more

universal

notice

filing

system.

However,

English

law

contains

one

major

element

that

makes

conceptual

compatibility

with

Article

9

unlikely:

the

floating

charge.

The

floating

charge

enables

a

debtor

to

handle

assets

that

are

subject

to

a security

interest

without

interference

from

the

creditor,

until

such

time

as

the

debtor's

management

powers

come

to

an

end,

either

as a

result

of

financial

difficulties

or

the

occurrence

of

an

event

under

the

provisions

of

the

charge

instrument."

Although

Article

9

does

not

permit

the

equivalent

of

the

English

floating

charge,

it

does

permit

a

"floating

lien"'

The

floating

lien

is

similar

to

the

floating

charge

in

that

it

gives

the

debtor

the

ability

to

freely

dispose

of

collateral

without

interference

from

the

secured

party.

A

floating

lien

under

revised

Article

9

can

lose

priority

to

competing

interests

notwithstanding

notice

filing,

operating

in

the

same

way

as

the

English

floating

charge.

But

loss

of

priority

under

Article

9

occurs

only

in

very

limited

circumstances:

for

example,

when

a

third-

party

buyer

purchases

inventory

in

the

ordinary

course

of

business."

A floating

lien

is

limited

to

categories

of

property

that

are

capable

of

being

subject

to

nonpossessory

security

interests

under

revised

Article

9,

which

excludes

such

things

as

money,

deposit

accounts,

and

letter-of-credit

rights.'

4

The

floating

charge

is

much broader,

8.

See

Philip

R.

Wood,

World-Wide

Security-Classification

of

LegalJurisdictions,

in

Joseph

J.

Norton

and

Mads

Andenas,

eds,

Emerging

Financial

Markets

and

Secured

Transactions

43

(Kluwer

1998).

See

also

A.L.

Diamond,

A

Review

of

Security

Interests

in Property

§§

11.2.1-11.2.2

at

55

(HMSO

1989).

9.

See

UK

ST

1989

ch

40

pt

IV

§ 95

(requiring

registration

within

twenty-one

days

of

the

charge's

creation

or

date

of

acquisition).

10.

See

Diamond,

A

Review

of

Security

Interests

in

Property

§ 10.6

at

51

(cited

in

note

8);

Iwan

Davies,

Floating

Charges

and

Reform

of

Personal Property

Legislation,

9

Comp

Law

47

(1988).

11.

See

R.M.

Goode,

Legal Problems

of

Credit

and

Security

48-51,

59

(Sweet &

Maxwell 2d

ed 1988).

12.

UCC

§

9-205 cmr 2.

13.

See

Douglas G.

Baird,

Thomas

H.

Jackson,

and

Randal

C.

Picker,

Security

Interests

in

Personal

Property

156

(unpublished

draft

2001)

(describing

the

effects

of

UCC

§

9-320(a)).

14.

See

UCC

§

9-205

cmt

3

and

§

9-312(b)(1-3).

Spring

2002

gofds6erry

CbicagoJourna(

of

InternationalLaw

potentially

covering

"all

the

property

of

the

debtor,

in

all

countries

of

the

world.""

The

breadth

of

the

floating

charge

makes

it

incompatible

with

revised

Article

9.

Another

similarity

is

that

the

English

floating

charge,

like

the

floating

lien

under

UCC

§

9-205,

must

be

registered

in

order

to

be

perfected.

6

The

requirements

for

initial

registration

of

English

floating

charges

are

in

some

ways

more

detailed

than

the

revised

Article

9

registration

requirements.

17

There

are,

however,

some

major

conceptual

differences

that

make

registration

of

the

floating

charge

fundamentally

different

from

registration

of

the

floating

lien.

Under

Article

9,

a

floating

lien

must

have

already

attached

in

order

to

be

perfected.

Attachment

generally

occurs

when

the

creditor

and

debtor

execute

a

security

agreement.

Once

the

combination

of

notice

filing

and

attachment

perfects

the

floating

lien,

priority

is

generally

determined

by

the

date

of

the

notice

filing.

In

contrast,

a

floating

charge

"is

not

a

real

right

unless

and

until

it

'crystallises

....

This

creates

an

"intermediate

state

of

perfected

but

non-specific

or

floating"

prior

to crystallization

of

the

floating

charge,

which

is

not

accommodated

within the

Article

9

notice

filing

system.

9

Crystallization

occurs

when

the

debtor

company

goes

into

liquidation

or

receivership,

or when

its

powers

under

the

charge

instrument

come

to

an

end.'

°

Crystallization

may be

automatic

upon

occurrence

of

one

of

these

events

and

does

not

require

registration

beyond

the

initial

registration

of

the

floating

charge.

2

'

The

secured

creditor

with

a

crystallized

floating

charge

is

protected

from

"an

execution

creditor

who

fails

to

complete

his

execution

before

crystallisation

of

the

floating

charge

...

even

if

he

proceeds

to complete

the

execution

without

notice

of

the

fact

that

15.

George

L.

Gretton,

Mixed

Systems:

Scotland,

in

Norton

and

Andenas,

eds,

Emerging

Financial

Markets

and

Secured

Transactions

at

289

(cited

in

note

8)

(describing

the

English

floating

charge, which

has

been

incorporated

into

Scottish

law).

16.

UK

ST

1989

ch

40

pt

IV

§

93.

See

also

Goode,

Legal Problems

of

Credit

and

Security

at 22-23

(cited

in

note

11);

Philip

R.

Wood,

Comparative

Law

of

Security

and

Guarantees 117

(Sweet

&

Maxwell

1995).

17.

See

Wood,

Comparative

Law

of

Security

and

Guarantees

at

114

(cited

in

note

16)

("In

the

US

UCC

states

and

in

the

English-based

systems,

only

particulars

of

the

security

appear

on

the

file,

although

in

English-based

systems

the

charge

itself

must

be

submitted

for checking

and

return.").

See

also

Diamond,

A

Review

of

Security

Interests in

Property

§

11.2.4

at

55

(cited

in

note

8):

The

registration

of

transactions

[in

England]

gives

more

information

than

notice

filing

[under

the UCC],

and

in

particular

tells

a

searcher

that

a

security

agreement

has

in

fact

been

entered

into....

But

it

does

not

reveal

whether

any

of

the

debt

has been

repaid, and

unless

it

is

compulsory

to

register

the

satisfaction

of

debts

the

charge

shown

may

have

ceased

to

exist.

In

most

cases,

therefore,

detailed

enquiry

is

necessary.

18.

Gretton,

Mixed

Systems:

Scotland

at

286

(cited

in

note

15).

See

also

Davies,

9

Comp

Law

at

50

(cited

in

note

10)

quoting

Evans

v

Rival

Granite

Quarries

Ltd,

2

KB

979,

999

(1910)

("A

floating

security

is

not

a

specific

mortgage

of

the

assets,

plus

a

licence

to

the

mortgagor

to

dispose

of

them

in

the

course

of

his

business,

but

is

a

floating

mortgage

affecting

any

item

until

some

event

occurs

or

some

act

on

the

part

of

the

mortgages

is

done

which

causes

it

to

crystallise

into

a

fixed

security.").

19.

Davies,

9

Comp

Law

at

48 (cited

in

note

10).

20.

See

Goode,

Legal Problems

of Credit

and

Security

at

50-51,

59

(cited

in

note

11).

21.

See

id

at

69.

cO0!

3

WO.1

Perfection

of

'onpossessory

Security

7nterests

'Under

'AevisedArticle

9

there

is

a

charge

which

has

crystallised."

22

Automatic

crystallization

does

not

provide

adequate

notice

of

post-perfection

attachment

to

other

creditors,

which

creates

incompatibility

with

revised

Article

9

notice

requirements.

However,

Article

9

does

not

necessarily

disqualify

a

foreign

secured

transactions

system

that

permits

automatic

perfection

in

limited

circumstances.

23

It

is

not

clear

whether

similar

leeway

exists

for

automatic

attachment.

Regardless,

the

prevalence

of

the

floating

charge

in

the

English

system

makes

it

far

from

a

limited

exception.

Attachment

based

on

the

time

of

crystallization

leads

to

unpredictability

and

conceptual

incompatibility

with

the

notice

regime

of

Article

9.

The

floating

charge

not

only prejudices

other

creditors,

but

often

fails

to protect

its

own

holder

from

loss

of

rights

in

the

collateral.

Prior

to

crystallization,

the

floating

charge

is

often

unenforceable

notwithstanding

the

notice

provided

by

registration.

24

Priority

may

be

lost

vis-5-vis

a

"ien

creditor"

or

"claims

given

a

statutory

preference

in

liquidation.""

The

floating

charge

thus

runs

counter

to

one

of

the

major

objectives

of

the

Article

9

drafters,

which

is

"to

create

a security

interest

that

survives

attack

by

the

bankruptcy

trustee."

The

fact

that

a

floating

charge

enables

the

creation

of

subsequent

superior

interests

in

the

collateral

threatens

the

"conceptual

unity

of

the

first-to-file

scheme

as

a

method

of

resolving

priority

disputes."2

The

prevalence

of

the

floating

charge

in

the

English

legal

system

probably

prevents

it

from

being

compatible

with

revised

Article

9.

IV.

CONCLUSION

Given

the

differences

between

the

English

system

of

secured

transactions

and

revised

Article

9,

registration

in

the

District

of

Columbia

is

required

to

perfect

a

security

interest

in

the United

States.

However,

it

is

not

clear

that

revised

Article

9

takes

the

best

approach

to

perfecting

security

interests

over

foreign

debtors.

The

English

system

does

not

require

registration

in

all

circumstances,

but

nonetheless

offers

equivalent

protection

in

many

instances

if

that

protection

is

desired

by

a

US

22.

Id

at

90.

23.

UCC

§

9-307

cmt

3.

24.

See

UK

ST

1986

ch

45

pt

VI

§

245.

See

also

Goode,

Legal

Problems

of

Credit

and

Security

at

40

(cited

in

note

11)

("[R]egistration

does

not

guarantee

priority

against

subsequent

interests.

This

is

so

even

where

registration

constitutes

notice

of

the

charge,

for

notice

is

not

in

all cases

a

determinant

of

priority.").

25.

Baird,

Jackson,

and

Picker,

Security

Interests

in

Personal

Property

at

157

(cited

in

note

13).

See

also

Goode,

Legal

Problems

of

Credit

and

Security

at

40

(cited

in

note

11)

("Priority

of

competing

charges

is

governed

by

common-law

rules

....

not

by

the

order

of

registration.").

26.

Peter Winship,

Selected

Security

Interests

in

the

United

States,

in

Norton

and

Andenas,

eds,

Emerging

Financial

Markets

and

Secured

Transactions

at

268

(cited

in

note

8).

27.

Davies,

9

Comp

Law

at

50

(cited

in

note

10).

Spring

2002

go(Mserry

Chicago

Journa

of

internationa(Law

creditor

who

wishes

to

register

in

England.'

The

English

system

does

not

offer

protection

as

complete

as

that

of

the

UCC

notice

filing

system,

but

it

is

perhaps

unwise

to

invalidate

filing

in

England

on

the

basis

of

its

failure

to

precisely

match

US

legal

standards.

In

some

instances,

registration

in

England

will

eventually

be

required

if

the