Most of what’s new in Article 9 is technical and addresses shortcomings perceived in the more comprehensive set of UCC amendments approved in 2001 and subsequently enacted across the country. Nevertheless, the changes are significant given the importance of perfecting security interests, particularly in commercial lending, and the enormous amount of litigation that occurs in matters relating to incorrect information included in UCC financing statements. More precisely, the 2010 Amendments include provisions designed to remove potential ambiguities in naming individuals and organizations (such as corporations, limited partnerships and limited liability corporations) as debtors. Other aspects relate to perfection arising on after-acquired property when a debtor moves to another jurisdiction or is a successor entity resulting from a merger. To learn how you can stay current in today’s rapidly changing banking and financial industries, visit http://www.lexisnexis.com/banking. For more topics that are transforming the legal industry, visit http://www.thisisreallaw.com.

1. Eyes Wide Open: Avoiding Nightmare
Scenarios in Secured Transactions
A LexisNexis® White Paper

2. Highlights
•
Most states have enacted 2010 amendments to Article 9 of the Uniform
Commercial Code (UCC), which governs secured transactions.
•
The amendments are significant given the importance of perfecting
security interests, particularly in commercial lending, and the amount of
litigation that occurs in matters relating to incorrect information included
in UCC financing statements.
•
For lawyers, a malpractice suit is at the extreme end of possible
outcomes when a security interest is challenged.
•
Financial institutions and their legal counsel need to be aware of the
amendments to ensure that they have the strongest possible position
with respect to both perfection and priority of their security interests.
•
Altogether, the Article 9 amendments create a significant new
compliance challenge.
Introduction
The word “nightmare” has an interesting etymology. It derives from the
Old English “mare,” an evil spirit, demon or goblin that rode on people’s
chests while they slept and tormented them with frightening dreams.
However, the mare is also found in a Norse Fornaldarsaga (literally, a “tale
of times past”) from the 13th century, which suggests that belief in such a
creature is much older.1
Mythology aside, a variety of conditions can lead to nightmares.2 An
understandable dislike of them has prompted the habit of referring to events
that are adverse or particularly unpleasant as “nightmare scenarios.” Such
scenarios can take many forms, of course, whether they are personal or
professional and depending on one’s occupation. Their existence is certainly
familiar to those in the legal profession.
For bankers and their legal counsel, some nightmare scenarios are related to
the possibility of seeing a security interest wiped out. Therein lies a serious
concern. Amendments to Article 9 of the Uniform Commercial Code (UCC),
which governs secured transactions, were published in 2010 with an effective
Eyes Wide Open: Avoiding Nightmare Scenarios in Secured Transactions
date of July 1, 2013. Most states have enacted the amendments in one form
or another, but there is a widespread lack of awareness of the changes and
how they affect what financial institutions need to do now to ensure that they
have the strongest possible position with respect to both perfection and
priority of their security interests.
Indeed, the current situation is one that could lead to some very disturbed
nights as dreaded scenarios unfold in unexpected ways.
Taking Stock of the Provisions
Most of what’s new in Article 9 is technical and addresses shortcomings
perceived in the more comprehensive set of UCC amendments approved in
2001 and subsequently enacted across the country. Nevertheless, the
changes are significant given the importance of perfecting security interests,
particularly in commercial lending, and the enormous amount of litigation
that occurs in matters relating to incorrect information included in UCC
financing statements.
More precisely, the 2010 Amendments include provisions designed to
remove potential ambiguities in naming individuals and organizations (such
as corporations, limited partnerships and limited liability corporations) as
debtors. Other aspects relate to perfection arising on after-acquired
property when a debtor moves to another jurisdiction or is a successor entity
resulting from a merger.
There are also some elements connected with electronic chattel paper and
Internet foreclosure sales that Barkley Clark and Barbara Clark—widely
regarded as authorities on analysis and advice for shoring up assets,
enforcing security interests and the effect of bankruptcy law on secured
transactions—say better adapt Article 9 to the digital age, when filing
systems are virtual and foreclosures on the courthouse steps are becoming
an anachronism.
Barkley Clark is a partner at Stinson Morrison Hecker LLP3 in Washington, D.C.,
and an expert on commercial and financial services law. Barbara Clark is a
former federal prosecutor and commercial litigator who is now a partner in
the Commercial Law Institute in Greenwood, VA.

3. Together, the Clarks are co-authors of the definitive national treatise The Law
of Secured Transactions Under the Uniform Commercial Code,4 now in an
updated third edition, as well as several other treatises that are used by
attorneys and financial institutions, and have been cited by many federal and
state appellate courts. They also publish the authoritative Clarks’ Secured
Transactions Monthly,5 a newsletter that identifies and critiques important
developments, including new case law of interest, to those concerned with
perfecting security interests.
In the Clarks’ view, a lot of what is contained in the 2010 Article 9 provisions
will go a long way toward preventing many of the nightmare scenarios that
financial institutions fear most, provided action is taken to comply with the
new laws where they exist (and an awareness of where they have not yet been
enacted is exercised).
The Perils of a Single Oversight
While all of the Article 9 amendments are important, the Clarks acknowledge
that most attention has been given to the new provisions for naming
individual debtors. “It’s crucial, absolutely crucial, that you get the debtor’s
name right,” says Barkley Clark. “If you don’t, your security can become
unperfected and if the debtor goes into bankruptcy, you have a big problem.”
Both the Clarks cite numerous cases in which courts have invalidated
financing statements due to misspelled debtor names, resulting in substantial
losses to financial institutions, and they note the volume of proceedings that
occur in which “unsecured creditors and trustees in bankruptcy are saying
‘no, no, no, you didn’t get the individual debtor’s name right and so you
lose everything’.”
“The cost of those adversary proceedings is just enormous,” Barkley Clark says.
Managing the Risks
Another cost that is hidden and few in the banking industry or legal profession
want to talk about relates to lending lawyer malpractice suits that arise in
relation to secured transactions that are invalidated due to compliance or
other administrative errors. How often do such suits actually occur? “It’s hard
to say,” Barkley Clark responds. “They get filed and they usually get settled.
Eyes Wide Open: Avoiding Nightmare Scenarios in Secured Transactions
But certainly there have been a lot of cases. In fact, the bonding people for
law firms say that one of their biggest concerns is secured lending and the
failure to perfect.”
For lawyers, a malpractice suit is at the extreme end of the spectrum of
nightmare scenarios that can develop when a security interest is challenged.
In fact, there are a variety of risks to be managed, which is why the Clarks offer
practical insights and strategies in their monthly newsletters as well as in the
two-volume treatise on secured transactions. But a worry remains.
“These amendments are enormously complicated, and the subject area is
incredibly complex,” says Barbara Clark. “Secured lenders need to pay
attention to the transition rules, particularly the grace periods established by
the grandfather clauses. The perfection requirements in the new law must be
satisfied or lenders are going to lose their security interests.”
She adds: “Needless to say, this is a huge compliance challenge.”
The Solution for Legal Professionals
Written by expert practitioners and industry leaders, LexisNexis® Banking Law
Solutions offer a comprehensive collection of analytical and practical
guidance, forms, checklists, and internal policies and procedures to
help you keep track of evolving law and regulations, and understand and
evaluate the compliance and legal implications.
To learn how you can stay current in today’s rapidly changing banking and
financial industries, visit www.lexisnexis.com/banking.
For more topics that are transforming the legal industry,
visit www.thisisreallaw.com.

4. This document is for educational purposes only and does not guarantee the functionality or features of LexisNexis® products identified. LexisNexis does not
warrant this document is complete or error-free. If written by a third party, the opinions may not represent the opinions of LexisNexis.
1
Wikipedia contributors, “Mare (folklore),” Wikipedia, The Free
Encyclopedia, http://en.wikipedia.org/w/index.php?title=Mare_
(folklore)&oldid=580147753.
2
Wikipedia contributors, “Nightmare,” Wikipedia, The Free
Encyclopedia, http://en.wikipedia.org/w/index.php?title=
Nightmare&oldid=584882883.
3
Barkley Clark, Partner, Stinson Morrison Hecker LLP, http://
www.stinson.com/barkleyclark/.
4
The Law of Secured Transactions Under the Uniform
Commercial Code, LexisNexis® Store, http://www.lexisnexis.
com/store/catalog/booktemplate/productdetail.jsp;jsessio
nid=861AE144557C46FEF9455285D30295E5.psc1706_
lnstore_001?pageName=relatedProducts&core=&parent=991
&catId=cat4060002&prodId=prod-us-651#sthash.SgM2MkE7.
dpuf.
5
Clarks’ Secured Transactions Monthly, LexisNexis Store, http://
www.lexisnexis.com/store/catalog/booktemplate/productdetail.js
p?pageName=relatedProducts&prodId=prod-us-885.
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