Uniform Commercial Code Summary

According to Kubasek, Browne, Dhooge, Herron, and Barkacs (2016), the Uniform Commercial Code (UCC) was created in 1952 and all fifty states, as well as the District of Columbia and the U.S. Virgin Islands, have adopted it either in part or in whole. The UCC becomes the law for any state that adopts all or portions of it, becoming the commercial code for that state. It comes with 11 sections, called articles. The articles cover a wide range of business transactions ranging from sales contracts to bankruptcies, to secured transactions. The UCC is vitally important to sales law, particularly for businesses that conduct transactions in multiple states (Kubasek, et al., 2016, p. 174).

UCC Articles

The UCC contains 11 articles, with Article 1 containing general provisions, essentially providing definitions and various general provisions. Article 2 contains provisions regarding sales, and Article 2A contains provisions covering leases. Article 3 contains provisions regarding negotiable instruments. Article 4 contains provision regarding bank deposits, Article 4A contains provisions regarding wire transfers, and Article 5 contains provisions regarding letters of credit. Article 6 contains provisions regarding bulk sales, auctions, and

liquidations of assets, while Article 7 contains provisions regarding warehouse receipts, bills of lading, and other documents of title. Article 8 contains provisions regarding investment securities, and finally, Article 9 contains provisions regarding secured transactions, for personal property, agricultural liens, promissory notes, consignments, and security interests.
Contracts, Sales and Leases
UniformLaws.org points out that UCC 2A was largely derived from UCC Article 2.

As noted above, Article 2 covers contracts, specifically regarding sales contracts. UCC 2A, like Article 2, is the rules of contract for lease contracts. The rules in both articles are functionally the same, with 2A language adapted to apply to the lease transaction. Both articles address basic contract rules and provisions, “including rules for offer and acceptance of a contract, statute of frauds, warranties, assignment of interests, risk of loss and remedies upon breach of contract” (www.UniformLaws.org, para. 3). Clearly, sales and lease contracts are significant to commerce, and thus, so too is the role of both of these UCC

articles.
Negotiable Instruments
A negotiable instrument is a legally regulated and controlled piece of paper that is designed to be passed between people, or merchants, and can be exchanged for money. Negotiation represents its ability to be passed from one party to another, while instrument represents the fact it is legally exchanged for money. The check, for example, is one of the most common and widely used negotiable instruments. Article 3 of the UCC contains numerous, strict provisions regarding negotiable instruments. A promissory note is another commonly used negotiable instrument. Promissory notes are often used to get a business line of credit, for example.
The UCC defines two specific types of negotiable instruments: drafts and notes. A note is a promise to pay money, whereas a draft is an order to pay money. According to Steingold (2013), a negotiable instrument is required, per Article 3, to meet five additional requirements. The promise or order must be unconditional; the amount of money must be a fixed amount; the instrument must be payable to bearer or payable to order; the promise or order must be payable on demand or at a definite time; and, it must not state any other “undertaking or instruction by the person promising or ordering payment to do any act in addition to the payment of money” (Steingold, 2013).
Steingold (2013) writes, “In practice, of course, and especially when it comes to checks, it is usually fairly easy to comply with all these requirements and create a check that will work as a negotiable instrument. However, checks, as well as notes, are sometimes prepared in atypical ways. With that in mind, the UCC provides a great deal of additional detail regarding each of these five requirements.” All of these Article 3 negotiable instrument requirements are designed to protect both the consumer and the merchant, which is extremely important to the conduct of commerce.
Secured Transactions and Bankruptcies
Article 9 of the UCC contains the provisions governing any transaction, a lease excepted, that connects a debt with a lender’s interest in a borrower’s property. A common term for this is lien. If the borrower defaults on their loan, the lender has legal recourse, up to and including repossessing the property, and then selling the property in order to satisfy some or all of the debt. The lender’s interest is called a "security interest." Article 9 covers most transactions that have any granting of a security interest, and contains two key concepts regarding secured interests. These two concepts are attachment and perfection.
According to UniformLaws.org, attachment generally occurs when the security interest is effective between the creditor and the debtor, and that usually happens when their agreement provides that it take place. Perfection occurs when the creditor establishes his or her "priority" in relation to other creditors of the debtor in the same collateral (www.UniformLaws.org, para. 3). Article 9 also delineates how a lender with "priority" may use the collateral, or lien, to satisfy the borrower’s obligation when there is a default, or bankruptcy, before other lenders in subsequent priority may do so. Additionally, Article 9 relies on the public record because it provides the means for creditors to determine if there are any preceding security interests (www.UniformLaws.org, para. 4). The UCC’s Article 9 standardized the rules and procedures for taking, preserving, renewing, and releasing security interests.
CT Corporation Analysis
In the CT Corporation white paper, a GM bankruptcy proceeding from 2008-09 is discussed. During the proceeding, GM’s legal team inadvertently filed a termination statement, and the secured party, inadvertently, agreed to the termination statement. This was an unintentional termination of secured interest, by both parties, of a $1.5 billion debt. The court actually discovered the mistake, brought it to the attention of both parties, and both parties acknowledged their intent was not to relinquish any security interest in that particular debt.
The court weighed in on two issues with regard to these errors. First, they weighed if the secured party’s intent should be considered and, secondly, they weighed the relation between a secured party’s authorization to file and an unintended filing made under that authorization.
Carmody, Malchone, and McBride (2013) write that, “The crux of both decisions is that a subsequent secured lender cannot take a prior lender’s recorded satisfaction of a mortgage or termination of a UCC financing statement at face value. Instead, the secured lender must inquire of the prior lender whether it actually authorized the termination of its interest and confirm that the termination of record is not a result of fraud or mistake. This will likely require lenders to change their closing checklists and their procedures for extending credit.” They go on to inform that, “The best way for a secured lender to protect its lien priority under these circumstances is to obtain a de novo estoppel letter or other written verification from the previous lender confirming that the release or termination was authorized” (Carmody, Malchone, & McBride, 2013).

Conclusion
In short, the court found, on both legal questions regarding the security interests in the GM $1.5 billion loan, that the security interest termination must be processed/honored. The court found that the burden rests with the parties doing their due diligence, mitigating these types of costly mistakes. Business, and not the court, is responsible to ensure it has completed its due diligence by whatever means necessary to ensure they have protected their own, prior placed interests. Essentially, through the court’s decision, it reaffirmed its strict adherence to the rules, processes, and procedures detailed in Article 9 of the UCC, irrespective of any parties intent.