The Uniform Commercial Code is embracing change and adapting to technological updates, such as bitcoin and other virtual currencies. The new Article 12 addresses various complications arising from the effect emerging technologies have had on secured lending. The proposed draft also includes notable changes to Articles 1, 3 and 9 to accommodate the new article. Article 12 and the other proposed amendments, as currently drafted, will go through a final approval process in July 2022 at the annual Uniform Law Commission meeting. Once approved, it will be given to the states for review and adoption. All section references herein are to the current proposed draft.
Article 12 was drafted to be broadly applicable, keeping in mind that the provisions will relate to both intangible assets that already exist and those that have yet to be developed. It specifically focuses on “controllable electronic records” or CERs, though it applies to the records themselves and not the rights associated therewith. Other provisions of the UCC will continue to govern the rights attached to such CERs, except for rights embedded in controllable accounts or controllable payment intangibles.
A CER is “a record stored in an electronic medium that can be subjected to control under Section 12-105.” Note that the definition “does not include a deposit account, electronic copy of a record evidencing chattel paper, electronic document of title, electronic money, investment property, or a transferable record.”
A security interest in a CER can be perfected by either (1) having control of the record or (2) filing a financing statement pursuant to the proposed amendment to Section 9-312(a). A security interest perfected by control is awarded a higher priority than a conflicting security interest perfected by filing. According to Section 12-105, a person has control of a CER if:
- The person has the power to enjoy the benefits of the electronic record; and
- The person has the power to prevent others from enjoying the benefits of the record; and
- The person has exclusive power to transfer control of the CER.
Section 12-104 governs the transfer of rights in CERs. First, this section draws a familiar distinction between a purchaser and a “qualified purchaser.” Section 12-102(a)(2) defines a “qualifying purchaser” as a purchaser who “obtains control of the controllable electronic record for value, in good faith, and without notice of a claim of a property right in the controllable electronic record.” This definition is comparable to the Article 3 definition of a “holder in due course” in relation to a negotiable instrument.
Article 12 applies another familiar principle to CERs in Section 12-104(d): the “shelter” principle. Under this provision, a purchaser “acquires all rights in the controllable electronic record that the transferor had or had power to transfer[.]” Reporter’s Note 4 suggests that this provision should be read broadly to account for situations where the transfer of a controllable electronic record results in a new type or form of CER than as originally transferred. Although the application of the shelter provision is broad, the transfer of rights is still subject to the overall “obligation of good faith” limitation found in Section 1-304.
Another Article 3 provision that has been adopted by Article 12 is the “take-free rule” found in Section 12-104(e). This provision provides that a qualifying purchaser “acquires its rights in the controllable electronic record free of a claim of a property right in the controllable electronic record.” The rights attached to the CER are generally governed by other law.
Article 12 and its accompanying amendments will be a positive shift for secured lenders, providing guidelines and certainty for addressing emerging technologies and new forms of collateral. MPM is proud of John McGarvey, an appointed member of the Uniform Law Commission and the Chair of the UCC Committee, and the work he and his fellow commissioners have done, and will continue to do, to keep the UCC at the forefront of these changing times.