These 3 amendments to Uniform Commercial Code will impact equipment finance

Three key amendments to the 2022 Uniform Commercial Code will affect equipment finance transactions related to digital asset financing, true leases and capital markets transactions. 

The Uniform Commercial Code (UCC) is a set of laws that governs commercial transactions in the United States, standardizing business laws across states. Under the code’s amendments, changes to Articles 2 and 9, as well as the creation of Article 12, will shape the equipment finance industry.  

Thirty-six states, including California and Florida, as well as the District of Columbia, will adopt the amendments; six more states, including New York, are in various stages of their adoption, according to legal experts at this week’s Equipment Leasing and Finance Association’s annual convention in Marco Island, Fla. 

But not all 50 states will adopt the legislation and amendments, representing a challenge for equipment lenders that could result in confusion and costly mistakes, Eddie Gross, shareholder with Washington-based business law firm Vedder Price’s global transportation finance team, said during an Oct. 27 panel discussion at the convention. 

“If we have less than 50 states that have a law that impacts your transactions,” he said. 

Article 2 changes 

Article 2 of the UCC addresses tangible and movable property. Article 2A covers true leases, which allow a lessee to use and possess equipment for a set period in exchange for payment, according to the Uniform Law Commission’s website. 

The key Article 2A amendment affecting equipment finance covers hybrid leases, which are transactions that bundle equipment with additional products or services, Gross said. 

“Before they amended the UCC, we weren’t sure whether [a hybrid lease] transaction was covered by Article 2A, and now it’s been made clear that that kind of transaction can be,” he said. “The fact that it’s a lease could dictate that [the lessees] have to pay the entire amount [if there’s a dispute], even the amounts associated with the non-equipment aspect.” 

Article 9 changes 

Article 9 addresses capital markets transactions involving leases and secured financing, according to the Uniform Law Commission. 

The 2022 amendments cover both the right to payment and the rights tied to the underlying equipment, rather than just the physical or electronic “chattel paper” itself, with both being important amid increasing bankruptcy claims, Gross said. Chattel paper represents the legal record documenting the monetary and security interest in an asset. 

When purchasing equipment, it’s essential to confirm clear ownership and ensure no other party, including creditors or a bankruptcy court, can claim any interest in the asset or its financing, Gross said. 

Article 12 creation 

Article 12 was created as part of the 2022 UCC amendments and covers digital assets, like cryptocurrencies, recorded on blockchain or distributed ledger systems. These can function like traditional financial assets if they meet the definition of a controllable electronic record (CER), Barbara Goodstein, partner at Chicago-based financial services law firm Mayer Brown, said during the panel. 

“If I have a CER, I can secure [the equipment] as collateral, for example, through control, and that gives me rights over anyone who has filed the UCC against it just like we have with chattel paper,” she said. “When you have control over chattel paper, you have much better rights than you do if you’re just filing a financing statement against it.” 

To qualify as a CER, a single holder must be able to exclusively control, spend and transfer the digital currency within its system, ensuring clear ownership and transfer rights, Goodstein said. 

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