Kenneth P. Weinberg,
Partner,
CM Law

Come gather ‘round, readers, wherever you roam, and admit that the Uniform Commercial Code (UCC) has grown.

Older readers may remember the substantial revisions to Article 9 of the UCC that were promulgated as the 1998 Amendments and became effective in all states by 2002. At that time, the drafters worked to modernize the UCC in light of the increasing use of technology in secured transactions. For example, statutory provisions were revised to use “medium neutral” terminology, such as the “authentication” of a “record” instead of the “signing” of a “writing.”

Those 1998 Amendments also introduced the concepts of “electronic chattel paper” and “control” that should now be familiar to many readers, especially as the COVID-19 pandemic increased the use of electronic signatures.

The UCC drafters, along with senators and congressmen, have once again heeded the call, providing the most impactful revisions to the UCC in decades. The result, referred to as the 2022 Amendments, focus on “digital assets (controllable electronic records), electronic money, chattel paper, ‘bundled’ or ‘hybrid’ transactions, [. . .] documents of title, payment systems, miscellaneous UCC
amendments, and consumer issues.”¹

At the time this article is circulated, nearly half the states have adopted the 2022 Amendments. The remaining states are also expected to do so.² Even Alabama, one of only three states not having the 1998 Amendments effective in 2001 — instead waiting for 2002 — has already enacted the 2022 Amendments. As Bob Dylan sang, “the slow one now will later be fast.”

Although a change of this magnitude cannot be fully summarized in a short article, the below may help some readers find their bearings as the old road is rapidly aging.

ARTICLE 12
The 2022 Amendments introduce a new Article 12 to the UCC covering certain digital assets like cryptocurrencies and non-fungible tokens (NFTs). The new concept of a “controllable electronic record” (referred to as a CER) provides the foundation of this new framework.

Equipment leasing and finance companies that prefer not to be early adopters, including those that only recently found comfort with electronic chattel paper and eVaults, will be happy to hear that the term “controllable electronic record” expressly excludes an electronic copy of a record evidencing chattel paper, investment property, electronic documents of title and other more traditional assets that could otherwise have been considered CERs, but for which there is an established framework.³

As a writer who loves to prophesize with his pen, all this author says now is that we all need to watch this new and evolving landscape for which the wheels are in spin. Those who are not yet ready can, in the short term, think of Article 12 as the operative law for newer digital assets and related rights that do not clearly fit in existing categories.

CHATTEL PAPER (DEFINITIONAL CHANGES)
Prior to the 2022 Amendments, “chattel paper” consisted of “a record or records that evidence both a monetary obligation and a security interest in specific goods [. . .] or a lease of specific goods.” The 1998 Amendments introduced the new concepts of “tangible chattel paper” and “electronic chattel paper” to differentiate between chattel paper that existed in a tangible medium (for
example, paper) and chattel paper that was stored in an electronic medium (for example, chattel paper stored in an eVault).

The 2022 Amendments go a step further, modifying the definition to refer to the right to payment evidenced by the record, rather than to the record itself. Current readers, who now know better how prior generations must have felt about cars having horsepower, may wonder why the change was made and what impact it may have on current documents and processes.

According to the drafters, the change helps make the rules for chattel paper more consistent with the new rules for CERs. It also helps more clearly address the fact that a specific equipment lease or equipment financing may be evidenced at any given time by both tangible and electronic records.

How will (or should) the change of definition impact existing documents that make careful use of the defined terms “tangible chattel paper” and “electronic chattel paper”? At its most basic level, the drafters address this change in the statutory text themselves simply by replacing references to “electronic chattel paper” with references to the “electronic record evidencing” chattel paper, and
by replacing references to “tangible chattel paper” with references to the “tangible record evidencing” the chattel paper.

One would hope (and we should all, reasonably and in good faith, expect) for counterparties and judges to understand the older contractual references to tangible chattel paper and electronic chattel paper similarly in states where the 2022 Amendments are in effect. However, only time will tell, and people should be mindful of this change when drafting.

CONTROL AND POSSESSION OF RECORDS EVIDENCING CHATTEL PAPER
The concept of control is quite nuanced but can be viewed in a general sense as the functional equivalent for electronic records as having possession of a tangible record. With the later adopters pressed into action by the COVID-19 pandemic, much of our industry is familiar with how to control the authoritative copy of electronic chattel paper pursuant to UCC §9-105, generally through the use of an eVault with carefully crafted documents, policies and procedures.

The 2022 Amendments make substantial changes to the text of that statutory section. Fortunately, the official comments make clear, and parsing through the language confirms, that the general rule and the safe harbor in subsections (a) and (b) of 9-105 are substantially unchanged.⁴ Although the new subsection (c) provides a different description of the control standard, the official comments reassuringly and bluntly state that current systems can be used to satisfy the requirements set forth in the 2022 Amendments, stating that the language in subsection (b), which mirrors the language in effect prior to the effectiveness of the 2022 Amendments, “has been retained out of an abundance of caution and to provide assurances of the continuing viability of pre-2022 systems for control of chattel paper evidenced by electronic records.”⁵

The 2022 Amendments also add a new Section 9-314A addressing situations in which multiple authoritative copies of electronic records and/or tangible records evidencing the chattel paper exist. Although the definitions and official comments in effect before the 2022 Amendments should have yielded the same results, the 2022 Amendments make clear that a security interest in chattel paper can be perfected by taking possession of the authoritative tangible copies, if any, and obtaining control of the electronic authoritative copies, if any, of the records evidencing that chattel paper (even if some records exist in an electronic medium, others exist in a tangible medium and/or a record in one medium is replaced by a record in another).⁶

Again, the clarity offered by treating chattel paper as the right to payment (rather than the record itself) helps in this regard, as there is only one right to payment, but there may be multiple authoritative records evidencing it.

BUNDLED AND HYBRID TRANSACTIONS
The 2022 Amendments also address equipment lease or financing transactions in which the lease or sale of the equipment is also coupled with the provision of services or the sale, lease or license of property other than goods.⁷ These transactions, referred to as hybrid transactions, are addressed throughout various articles of the UCC as amended by the 2022 Amendments, including Article
2 (addressing sales), Article 2A (addressing leases) and Article 9 (addressing secured transactions).⁸ The impact of the new rules is summarized nicely by the drafters, who state three overarching principles:

• Absent the parties’ agreement otherwise, the UCC rules will apply to a hybrid transaction if the sale or lease of goods is the predominant purpose of the transaction.

• If the sale of services or provision of other property predominates, the UCC rules will apply only to aspects of the transaction that involve the sale or lease of goods.

• With respect to a UCC 2A finance lease, the finance lease provisions of Article 2A will apply to the lease of the goods and related aspects of the transaction whether or not the lease of goods aspects of the transaction predominate.⁹

Of course, the devil is in the details, but the drafters provide helpful guidance in these provisions and the official comments. For example, when determining whether the equipment or other goods predominate, the official comments note that relevant factors include the language of the agreement and the portion of the total price that is attributable to the lease of goods, although neither is
determinative.¹⁰ The comments also confirm that an agreed-upon allocation of what portion of a payment relates to the right to possession and use of the goods is ordinarily binding on the parties.¹¹

One more noteworthy point, and yet another area where one can appreciate the clarity offered by treating chattel paper as the right to payment (rather than the record itself), is that these hybrid transactions still constitute chattel paper under the 2022 Amendments.¹²

YOU BETTER START SWIMMIN’ OR YOU’LL SINK LIKE A STONE
Hopefully the above provides a better general understanding of some of the changes made by the 2022 Amendments. Equally as important, the author hopes the above serves as a reminder of the generational nature of these changes. If you hadn’t already, it’s time to start learning the lyrics and catching the rhythm because, the times, they are a-changin’. •

¹ Prefatory Note to UCC Amendments (2022).
² “Countdown to the New Digital Asset UCC Rules: Is Your State on Board?” duanemorris.com.
³ UCC §12-102(a)(1).
⁴ UCC §9-105, Official Comment 2. Note that although the term “purchaser” is now used instead of “secured party,” the term “purchase” is defined in UCC §1-201 to include the taking by sale, lease, discount, negotiation, mortgage, pledge, lien, security interest, issue or reissue, gift or any other voluntary transaction creating an interest in property.
⁵Id.
⁶ UCC §9-101, Official Comment 4(b).
⁷Technically, the proper UCC term would be “goods,” which are defined to be all things that are movable when a security interest attaches, and includes the concepts of equipment and inventory. UCC §9-102(a)(44).
⁸ See e.g. UCC §2-102, UCC §2A-102 and UCC §9-102, Official Comment 5(b).
⁹ Overview of 2022 Amendments to the Uniform Commercial Code — Emerging Technologies, provided by Uniform Law Commission with the enactment materials for the 2022 Amendments.
¹⁰ UCC §2A-102, Official Comment No. 5.
¹¹ Id.
¹² UCC §9-102, Official Comment 5(b).

Kenneth P. Weinberg is a partner at CM Law and practices in the area of commercial finance, focusing on equipment leasing, equipment finance and renewable energy project finance. He has penned Dispatches from the Trenches since 2002.