New York is the jurisdiction of choice for a majority of international and interstate financial transactions. Thus, lending lawyers and their clients should pay special attention to Chapter 505 of the New York Assembly Session Laws of 2014 (the “Act”), which amends the Uniform Commercial Code of the State of New York (the “NYUCC”).
Over the past decade, various scholars and practicing attorneys had expressed concerns that the NYUCC was outdated.
In response to such concerns, the Act constitutes a significant modernization of the NYUCC. Nonetheless, the Act fails to completely modernize the NYUCC, as it does not fully adopt the 2010 amendments to Article 9 (Secured Transactions) (the “proposed amendments”) promulgated by the National Commissioners on Uniform State Laws and the American Law Institute. Instead, it contains significant non-uniform departures from the official text of the proposed amendments.
Moreover, to this date, New York remains the only state that has not adopted the 1990 amendments to Article 3 (Negotiable Instruments) and Article 4 (Bank Deposits and Collections). This creates confusion and differences in statutory procedures among different states. Practitioners and clients should be aware of these differences.
This post sets forth the changes to Article 1 (General Provisions), Article 7 (Documents of Title) and Article 8 (Investment Securities) of the NYUCC. Stay tuned for the second part in this series that will address the changes to Article 9 (Secured Transactions) and the problems arising out of the failure to adopt the transition provisions that have been adopted by other states.
NYUCC Article 1 (General Provisions)
Article 1 contains general rules of applicability and defined terms for transactions governed by the NYUCC. It is worth noting that, since the Act renumbers various sections of the NYUCC, certain loan opinion letters and transaction documents may need to be revised to reflect these changes.
- The Act retains the prior subjective “honesty in fact” definition of good faith (known as the “good heart / empty head” standard) instead of adopting the objective definition of good faith that calls for both “honesty in fact” and “observance of reasonable commercial standards of fair dealing”. Even though most NYUCC provisions, as revised, contain their own definitions of “good faith”, this choice means that the subjective good faith test still applies with respect to Articles 3 and 4, since New York retains the older versions of these Articles;
- With respect to the concept of reservation of rights with regard to performance or acceptance of contract terms, Section 1-308 of the NYUCC retains the old reservation of rights language, which means that the old accord and satisfaction law remains in effect; and
- The Act excludes rare coins from the definition of “money” in order to facilitate the perfection of security interests in rare coins collections and inventory.
NYUCC Article 7 (Documents of Title)
Article 7 (Documents of Title) governs documents of title, such as bills of lading and warehouse receipts, which evidence the right to goods in transit or storage. While documents have traditionally been issued in paper form, the digitalization of commerce has led to the creation of various forms of electronic documents. Reflecting this change, the Act introduces a category of documents named “electronic documents.”
The conforming amendments to Article 9 provide that perfection in an electronic document can be achieved by control. The test to establish such “control” is set forth as follows:
a “person has control […] if a system employed for evidencing the transfer of interests in the electronic document reliably establishes that person as the person to which the electronic document was issued or transferred.”
The Act further enumerates a list of criteria which establish “control”. A more detailed discussion on control issues will follow in Part 2 of this series.
NYUCC Article 8 (Investment Securities)
The Act amends Article 8 to overrule the controversial ruling of the New York State Court of Appeals in Highland Capital Management LP v. Schneider, 8. N.Y. 3d (N.Y. App. 2007).
In Highland, the court held that promissory notes not traded on an exchange could, in certain circumstances, constitute securities under Article 8 rather than instruments under Article 3. The court reasoned that since the definition of “security” under Article 8 Section 102(a)(15) includes interest in an issuer or its property “the transfer of which may be registered upon books maintained for that purpose, by or on behalf of the issuer,” and since in that case the maker could maintain such a registry, then the notes would be considered “securities.”
To resolve this issue, the Act clarifies that an interest in an issuer is not a security under Article 8 merely because the issuer maintains records other than for registration of transfer or could but does not in fact maintain books for registering transfers.