Lawyers Journal

Why Massachusetts should update its Uniform Commercial Code by enacting House Bill No. 25

In 1958 Massachusetts became the second state in the country to enact the Uniform Commercial Code, the statute that replaced the patchwork, state-by-state commercial law system that preceded it and created the uniform legal infrastructure behind the post-war success of the American economy. Regrettably, despite the commonwealth's historic leadership, the Massachusetts Uniform Commercial Code, codified in Chapter 106 of the Massachusetts General Laws, is years out of date.

Massachusetts, unlike the majority of the other states in the United States, has yet to enact the revisions to Article 1 dealing with general provisions, revisions to Article 7 dealing with documents of title (warehouse receipts and bills of ladings) and the 2010 amendments to Article 9 dealing with secured transactions (credit secured by an interest in personal property, such as equipment, inventory and accounts receivable).

The failure of Massachusetts to update its Uniform Commercial Code runs the risk of creating greater uncertainty for commercial transactions in Massachusetts at a critical time when mid-sized and small businesses are starved for credit necessary to expand and create jobs. The inevitable response to such uncertainty is a reduction in the availability of credit and an increase in interest rates in Massachusetts when the commonwealth and its citizens can least afford that outcome.

These concerns are particularly acute for the 2010 amendments to Article 9, because their uniform effective date of July 1, 2013, is coming up shortly. The failure of Massachusetts to timely enact the 2010 amendments will put Massachusetts at a competitive disadvantage with respect to its sister states, like Connecticut, New Hampshire and Rhode Island, that have already enacted these amendments and that are creating greater certainty for the extension of secured credit.

House Bill No. 25 would address all of these concerns by bringing the Massachusetts Uniform Commercial Code up to date and in line with the law of the rest of the country. In addition to the Massachusetts Bar Association, the bill is supported by the Associated Industries of Massachusetts, the Boston Bar Association, the Massachusetts Bankers Association, the Massachusetts Secretary of State's office, the International Warehouse Logistics Association and the Massachusetts Uniform Law Commission. It faces no opposition, it raises no consumer issues, it does not require any appropriations by the General Court, and it does not require any increase in any filing fees or other recording charges. The bill is good for Massachusetts and its economy and should be enacted now through the informal session process this year.

Here are some examples of what House Bill No. 25 would do:

THE SOLE PROPRIETOR

Jack runs a bake shop. He needs to borrow money to expand the business and hire additional employees. His bank, in turn, is willing to lend the money but only if it receives good collateral consisting of the assets of Jack's business. That will require that the bank file a financing statement against Jack in the Secretary of State's office. The bank needs to know what name for Jack to put on the financing statement and what name for Jack to use when searching for other financing statements indicating that other lenders may be claiming a first position on the collateral.

What name should Jack's bank use to search and file? Jack goes by many names. He has one name on his birth certificate, a different name on his driver's license, and still another name of his credit cards. He also uses a nickname. Jack's bank is reluctant to make the loan without being certain that it is searching and filing under Jack's right name.

Current law is unclear as to what name for Jack the bank should search and what name it should put for Jack on the financing statement. As a result, the bank is at risk that its loan will be subordinated or unperfected. House Bill No. 25 would remove this uncertainty and would allow the bank to rely on Jack's driver's license when searching and filing financing statements.

THE IMPORTER

Juanita's electronic store needs to order some inventory to be shipped to Massachusetts. The carrier will issue an electronic bill of lading for the inventory, and Juanita wants to use that bill of lading (which gives the holder of the bill the right to the inventory) as collateral to borrow money to pay for the inventory.

Current law does not address electronic bills of lading and deprives Juanita of an important source of collateral to finance her business. House Bill No. 25 would address electronic bills of lading and provide easy-to-use rules for the store's lender to obtain a security interest in the bill of lading in order to advance the funds.

THE ASSET-BASED LENDER

Finance Company has a loan to ABC Corp., based in New Hampshire. The loan is secured by collateral consisting of ABC Corp.'s existing and future inventory. Finance Company has filed a financing statement in New Hampshire to perfect its security interest so that the security interest is good against a creditor who later obtains a judgment lien against ABC Corp. or, if ABC Corp. should file for bankruptcy, ABC Corp.'s bankruptcy trustee. ABC Corp. decides to reincorporate in Massachusetts. Is Finance Company's security interest in the 
inventory protected once the reincorporation occurs?

Current law protects Finance Company's security interest in the inventory existing on the date of the reincorporation for a period of a year. Within that year Finance Company would need to file a financing statement in Massachusetts. Current law, however, does not protect Finance Company's security interest in future inventory (i.e., inventory created or acquired after the reincorporation) unless Finance Company files a financing statement in Massachusetts at or before the time when the reincorporation takes place. But Finance Company may not find out about the reincorporation in advance.

This is a risk factor that Finance Company had to have taken into account in its original decision to extend credit to ABC Corp. and in determining the cost for the credit. Finance Company might also reasonably respond to this risk by requiring in its loan documents that ABC Corp. to remain in New Hampshire while its loan is outstanding. House Bill No. 25 would addresses these concerns by giving to Finance Company a period of four months after the reincorporation to file the financing statement in Massachusetts in order for its security interest in the future inventory to be protected.

THE MASSACHUSETTS BUSINESS TRUST

Megan just graduated from college with a degree in business. She wants to start an investment fund organized as a Massachusetts business trust. The fund will be leveraged, i.e., it would need to borrow money in order to purchase investments. But no lender wants to extend credit to a Massachusetts business trust unless the lender has possession or control of the trust assets. Protecting the collateral by the filing of a financing statement is too uncertain when the borrower is a Massachusetts business trust.

House Bill No. 25 would remedy that problem by providing the same rules to protect the security interest in assets of a Massachusetts business trust that are applicable to assets of a corporation.

These are just a few examples, but they illustrate the immediate benefits to Massachusetts in enacting House Bill No. 25 now.

FRANCIS C. MORRISSEY is a partner in Morrissey, Wilson & Zafiropoulos LLP and teaches secured transactions at New England School of Law.
EDWIN E. SMITH is a partner in Bingham McCutchen LLP and is a Uniform Law Commissioner for the Commonwealth of Massachusetts.

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