May 30th, 2014

Updates to Pennsylvania UCC Part II

This is the second in a three-part series highlighting the major changes to Article 9 of Pennsylvania’s Uniform Commercial Code (the “Pennsylvania UCC”), which became effective July 1, 2013.

The first part of our three-part series highlighted significant changes to Article 9 of the Pennsylvania UCC, including the clarification of the use of the public organic record of a registered organization to determine which business entity name to list on a financing statement [13 Pa.C.S.A. §9102(a)]. The amended §9102(a) further broadened the definition of a registered organization to include statutory trusts, thus differentiating them from common law trusts which are not formed by statute. We explained that the location of a federally-organized debtor is the main or home office of the registered entity; this is the state in which a financing statement naming that debtor must be filed [§9307(f)]. In Part I, we illustrated how the previous procedure for Correction Statements has been replaced with Information Statements, which debtors and now secured parties may file (still without legal effect) [§9518]. Additionally, no longer will financing statements be rejected due to the failure to include the debtor’s organization type, jurisdiction and identification number [§9516].

Restrictions on Transfers of Promissory Notes

Prior to the 2010 amendments, §9406 rendered ineffective terms in promissory notes that prohibited, restricted, or required the consent of the person obligated on the promissory note to the assignment, transfer of, or creation of a security interest in the promissory note. Section 9406 was meant to build on common law concepts that had essentially eliminated legal restrictions on assignments of rights to payment as security. However, §9406 permits terms in promissory notes to restrict the sale of promissory notes, allowing such terms to remain effective. [See 13 Pa.C.S.A. §9406(e)].

The pre-amendment §9408 similarly provided that the grant of a security interest in a promissory note was effective notwithstanding terms in the promissory note that prohibited assignments or transfers of the promissory note. However, unlike the broader override of restrictive terms provided for in §9406, §9408(d) provides that if the terms in the promissory note that prohibit or restrict the assignment or transfer would otherwise be enforceable under non-Article 9 law, the transfer would remain valid under §9408(a), but the transferee would not be able to enforce the promissory note directly against the maker of the promissory note.

The 2010 amendments to §9406 leave in place the override on terms restricting the creation of security interests in promissory notes, and extend the override to restrictions on sales of the promissory note pursuant to the enforcement of a security interest in the promissory note in accordance with §9610 (regarding disposition of collateral after a default) and §9620 (regarding the acceptance of collateral in a strict foreclosure). Effectively, the 2010 amendments limit the applicability of the permitted restrictions of §9406(e) to sales not involving the enforcement of a security interest.

Similarly, the 2010 amendments to §9408 leave in place the override on the restrictions on the creation of security interests in a promissory note and extend the override to restrictions on sales of promissory notes, which sales are pursuant to the enforcement of a security interest in the promissory note per §§9610 and 9620. As a result of the 2010 amendments to both §9406 and §9408, buyers at foreclosure sales and assignees in strict foreclosures can enforce their rights under a promissory note directly against the maker of the promissory note.

About the Authors

Attorney Thomas Reilly focuses his practice in the areas of business, banking, and commercial law.

Attorney Nicole O’Hara is a member of the firm’s Business Services Group and Employment Group.

 

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