This report is provided by the Legislative Review Subcommittee of the Uniform Commercial Code (UCC) Committee of the Financial Institutions and Commercial Law (FICL) Section of the OBA. The report reviews and summarizes (along with one possible nonuniform amendment) the 2022 amendments to the uniform text of the UCC (the amendments are also known as the Uniform Commercial Code and Emerging Technologies amendments) and their possible impact on Oklahoma law if enacted.

Citations to the “present” UCC reference the uniform text or the Oklahoma UCC prior to the 2022 amendments. Citations to the UCC reference the uniform text unless otherwise noted.

ARTICLE 1

The 2022 amendments to UCC Article 1 bring consistency as to terminology, cross-references and choice of law provisions in light of the new Article 12 and corresponding amendments elsewhere in the UCC regarding controllable electronic records. For example, various definitions in Section 1-201 are slightly revised to accommodate electronic records. The amendments to Article 1 do not have any apparent adverse effect on existing Oklahoma law. The amendments to Section 1-201(b) are as follows:

• The present definition of “conspicuous” in Subsection (10) provides examples of terms deemed conspicuous in (A) and (B). The amendment redefines “conspicuous” to apply more broadly to terms in both tangible and electronic agreements by deleting (A) and (B) and adding a “totality of the circumstances” standard, thus clarifying that the assessment of whether or not a term is conspicuous is to be made on a case-by-case basis.
• Amended Subsection (15) updates the definition of “delivery” for consistency within Article 9 with respect to records that evidence chattel paper and with the new rules for controllable electronic records.
• Amended Subsection (16A) adds a new definition of “electronic” for consistency with respect to the rest of the UCC.
• Amended Subsection (21) updates the definition of “holder” to bring (C) into harmony with the remainder of the UCC regarding controllable electronic records.
• Amended Subsection (24) updates the definition of “money” to clarify that government-regulated mediums of exchange, whether electronic or tangible, fall within the definition. The amendment further clarifies that preexisting virtual currencies, like bitcoin, are not “money” for purposes of the UCC.
• Amended Subsection (27) updates the definition of “person” to clarify that a “protected series,” g., a series LLC, is a person for UCC purposes.
• Amended Subsection (36) updates the definition of “send” for consistency with other provisions of the UCC that substitute the term “record” for “writing” and for further consistency with the rest of the UCC regarding transmission of electronic records.
• Subsection (37) is updated. The present definition of “sign” is amended to give “sign,” “signed,” “signing” and “signature” consistent meanings. The substance of the definition is updated to include electronic signatures.
• The amendment to Section 1-204 adds the new Article 12 to the list of exclusions from the default rule of Section 1-204 for determination of whether value has been given.
• The present Subsection (b) of Oklahoma’s Section 1-301 provides that this section is subject to specific choice of law provisions contained in other UCC articles that apply to the extent a transaction falls within the scope of one of those provisions. The amendment adds the new Article 12 choice of law provision (Section 12-107) to the list of choice of law provisions in the uniform text and creates a new paragraph (8) in Section 1-301(b) of the uniform text.
• Amended Section 1-306 is revised for consistency with the updated definition of “sign” in Section 1-201(b)(37).

ARTICLE 2

If applied in Oklahoma, the amendments to Section 2-102 will modify existing case law in Oklahoma by recognizing “hybrid transactions” and applying portions of Article 2 to such transactions. A hybrid transaction is defined in amended Section 2-102 as one involving a sale of goods, as well as “(a) the provision of services; (b) a lease of other goods; or (c) a sale, lease, or license of property other than goods.”

In the absence of these amendments, under present Oklahoma law, the courts have adopted the “predominate purpose” test and will “consider[ ] the transaction in its entirety and determine[ ] whether the goods or services aspect of the contract predominates.”[1] If the “non-goods” aspect of the contract predominates, the court will conclude that Article 2 does not apply to any part of the transaction.[2]

By recognizing a hybrid transaction as such under Article 2, the amendments allow application of those provisions of Article 2 that relate primarily to the sale-of-goods aspect of a transaction – even when those aspects do not predominate. In such a case, provisions of Article 2 relating to the transaction “as a whole” will not apply.

When the sale-of-goods aspect of a transaction does predominate, Article 2 will apply to the transaction, but the amendments do not preclude application of other laws to any “non-goods” aspects of the transaction. The amendment provides for application of other laws “in appropriate circumstances,” which should allow a court flexibility when applying the most suitable law to the sale of a unique product.

Amendments to Sections 2-201, 2-202, 2-203, 2-205 and 2-209 provide for replacement of the term “writing” with “record” to eliminate the impression that a transaction must be memorialized on paper – this will recognize electronic documents and transactions.

ARTICLES 3, 4 AND 4A

The amendments to Articles 3, 4 and 4A are modest and few and relate primarily to the transmission of electronic check images and the impact of choice of law provisions in a negotiable instrument. Most of the new text is in the official comments, which generally are not enacted by the states and do not become part of the statute but, nonetheless, are persuasive authority.

Among the statutory changes, Section 3-104 is amended to make more clear that a choice of law clause does not render an instrument nonnegotiable. Amended Section 3-105 clarifies the issuance of an electronic image of an item. Existing Subsections 3-401(b) and 3-604(c) are deleted as unnecessary in view of the amended definition of “sign” in Article 1. Subsection 3-604(a) is amended to make clear that the destruction of a check in conjunction with a truncation or imaging process does not discharge the obligation to pay the instrument.

In Article 4A, the definition of “payment order” in Section 4A-103 is revised slightly to substitute the modern UCC term “record” in place of the more cumbersome present language. There are similar minor amendments (using the term “record”) in Sections 4A-202, 4A-203, 4A-211 and 4A-305 (and in various official comments). Section 4A-201 is amended slightly to clarify the requirements for a security procedure.

The proposed amendments to Articles 3, 4 and 4A do not have any adverse impact on present Oklahoma law and primarily are clarifications consistent with present law.

ARTICLE 5

Present Section 5-104 permits “authentication” by a manner agreed to between the parties or by “standard practice.” The amendment requires the letter of credit be “signed” as that term is defined in Section 1-201(b)(37). This brings Article 5 into harmony with the balance of the UCC.

For choice of law rules, liability is determined by the “location” of the issuer, nominated person or adviser. Present Section 5-116 deems the issuer to be “located” at the address on the undertaking or if more than one address is indicated, the address from which the undertaking was issued. Branches are considered separate entities. The amendments add a new Section 5-116(d), making clear that the location of a branch is determined by the same rules as those that govern the location of the issuer.

ARTICLE 7

The definitions of “record” and “sign” in Section 7-102(a) are deleted in the amendments. They are redundant in that both terms are now defined in Section 1-201.

The amendment to Section 7-106 provides a more fulsome description of the system of control of electronic documents and is the functional equivalent of the changes to Section 9-105 (electronic chattel paper) and the addition of Section 9-105A (electronic money). It provides system requirements, the meaning of exclusivity and the method of obtaining control through a third person.

ARTICLE 8

The proposed amendments to UCC Article 8 are minimal and designed to bring Article 8’s control provisions into harmony with the correlating provisions under Article 9 and the new Article 12. The amendments to Article 8 do not have any adverse effect on existing Oklahoma law and are primarily clarifications.

Amended Section 8-102(a)(6) broadens the application to electronic records; the amendment updates the definition of “communicate” by replacing the word “writing” with “record.”

In amended Section 8-102(b), the list of definitions from other articles, which also apply to Article 8, is expanded to include the new definitions in Article 9 for “controllable account” and “controllable payment intangible” and the new Article 12’s definition of “controllable electronic record.”

The amendment adds a new Subsection 8-103(h) to clarify that digital assets generally are not financial assets unless they fit the definition of Section 8-102(a)(9)(iii) (part of the definition of “financial asset” regarding arrangements for property to be held by a securities intermediary and credited to a securities account).

Present Subsection 8-106(d) specifies the three mechanisms by which a purchaser obtains control of a security entitlement. The proposed amendment revises Subsection 8-106(d)(3) to clarify the procedure for a purchaser obtaining control through another person’s control and acknowledgment of control.

The amendments add a new Subsection 8-106(h) to clarify that a person meeting the test for “control” does not have a duty to acknowledge it has control on behalf of a purchaser.

A new Subsection 8-106(i) is added to clarify that, unless otherwise required by contract or by Articles 8 or 9, a person acknowledging it has or will have control on behalf of a purchaser generally does not owe a duty to the purchaser and is under no obligation to confirm the acknowledgment to any other person.

Regarding choice of law, the amendments add a new Subsection 8-110(g) requiring matters noted in Subsection (a) or (b) to be governed by the local law of the issuer’s or the securities intermediary’s home jurisdiction, even if the matter bears no other relation to the jurisdiction.

The amendments strike the unnecessary clause at the beginning of the present Subsection 8-303(b).

ARTICLE 9

Conforming changes relating to terminology or section references in Section 9-102(a) are as follows:

• Amended Subsection (2) updates exclusions from the definition of “account” for clearly unrelated terms, such as in “statement of account.”
• Amended Subsections (7A) and (7B) add definitions of “assignee” and “assignor” to clearly include 1) secured parties and debtors and 2) purchasers and sellers of certain intangibles.
• Amended Subsection (11) updates the definition of chattel paper to separately address secured loans and leases of goods.
• Amended Subsections (27A) and (27B) add definitions of “controllable account” and “controllable payment intangible” to mean an account or a payment intangible evidenced by a controllable electronic record.
• Amended Subsection (31A) adds a definition of “electronic money” as money in an electronic form.
• Amended Subsection (42) includes “controllable electronic records” in the definition of general intangibles.
• Amended Subsection (47) makes clear that “instrument” does not include a writing evidencing chattel paper.
• Amended Subsection (53A) makes clear that “money” does not include deposit accounts or electronic money.
• Amended Subsection (61) makes clear that “payment intangible” includes controllable payment intangibles.
• Amended Subsection (79A) makes clear that “tangible money” is money in a tangible form.
• Under amended Section 9-104, control of a deposit account would be possible by a third party’s obtaining control for the secured party.
• Present Section 9-105 provides for control of electronic chattel paper and sets forth system requirements. The amendment carries forward those system’s requirements as applicable to “an electronic copy of a record evidencing electronic chattel paper.” It also adds provisions relating to more than one authoritative copy, what it means to have “exclusive control” and how to obtain control through another person.
• Amended Section 9-105A confirms that perfection of a security interest in money is by possession. The amendment provides the control method for perfection in electronic money. It is consistent with the methods for control of other electronic collateral.
• Amended Section 9-107A adopts the control provisions of Section 12-105 to apply to a controllable electronic record, a controllable account or a controllable payment intangible.
• Amended Section 9-203 extends perfection by control to the new categories of electronic records. Control of chattel paper is pursuant to amended Section 9-314A.
• Amended Section 9-204(c) makes clear that a security interest can attach to commingled goods, consumer goods and commercial tort claims as proceeds.
• Amended Section 9-207 provides conforming changes as to terminology or section references.
• Amended Section 9-208 provides conforming changes as to terminology or section references and imposes on the secured party in control of electronic collateral the same duties as if the collateral was tangible.
• Amended Section 9-209 provides conforming changes as to terminology or section references.
• Amended Section 9-210 provides conforming changes as to terminology or section references.
• Amended Section 9-301 provides conforming changes as to terminology or section references. This amendment specifies that the law of the jurisdiction, in which tangible documents, goods, instruments or tangible money is located, will determine the law governing the perfection of security interests in such collateral.
• Amended Section 9-304 clarifies that the local law of a bank’s jurisdiction governs the perfection of a security interest in deposit accounts “even if a transaction does not bear any relation to the bank’s jurisdiction.”
• Amended Section 9-305 provides that the local law of issuers, security intermediaries and commodity intermediaries govern issues related to perfection “even if a transaction does not bear any relation to that jurisdiction.”
  • A new Section 9-306A provides the following amendments regarding choice of law:1) Perfection or nonperfection and priority as to chattel paper evidenced by an electronic copy are to be governed by the jurisdiction of the chattel paper itself.
    2) The “jurisdiction of the chattel paper” is determined by applying a “waterfall” provision that determines jurisdiction as follows:

a. Any choice of law provision in the chattel paper is given first consideration for determining which law governs;
b. If the chattel paper is recorded, the state’s law where it is recorded will govern;
c. Any choice of law provision in records associated with the chattel paper will govern, and such state’s law will govern; and
d. If no choice of law provision is provided, the laws of the jurisdiction where the debtor is located will govern.

3) If chattel paper is only evidenced by a tangible authoritative record, the law of the jurisdiction where the chattel paper is located governs for perfection and priority.

4) Notwithstanding the above provisions governing perfection by possession, the local law of the jurisdiction where the debtor is located governs perfection of a security interest in chattel paper by filing.

• A new Section 9-306B provides that the law governing priority and perfection of controllable accounts, controllable electronic records and controllable payment intangibles is determined by Article 12 Subsections 12-107(c) and (d); however, the law where the debtor is located will govern perfection in such items of collateral by filing and in cases of automatic perfection where a controllable payment intangible is created by the sale of a controllable payment intangible.
• Amended Section 9-310 provides conforming changes as to terminology or section references.
• Amended Section 9-312 provides conforming changes as to terminology or section references. Subsection 9-312(a)(4) provides that a security interest in electronic money may be perfected only by control.
• Amended Section 9-313 provides conforming changes as to terminology or section references.
• Amended Section 9-314 provides conforming changes as to terminology or section references. The official comments provide an expanded discussion of the concept of shared control of certain controllable records.
• A new Section 9-314A provides that perfection by possession and control of chattel paper occurs once a secured party takes possession of each authoritative tangible and electronic copy of the record. Ongoing possession and control of the chattel paper is required to maintain perfection. When showing possession and attempting to prove what copies are “authoritative,” the official comments provide that parties should be afforded considerable flexibility in outlining the procedures for determining what versions of records are “authoritative.”
• Amended Section 9-316 provides conforming changes as to terminology or section references.
• Amended Section 9-317 provides as follows:

1) Buyers of chattel paper take free of a security interest if, without knowledge of the previous security interest, they receive delivery of each authoritative tangible copy of the record and take control of all authoritative electronic copies of such chattel paper.
2) Buyers of electronic documents take free if, without knowledge of prior interests, the buyer receives control of each authoritative electronic document.
3) Buyers of controllable electronic records take free of prior security interests if the buyer gives value and obtains control of the controllable electronic record.
4) Buyers of controllable accounts and controllable payment intangibles take free of prior security interests if the buyer gives value and obtains control.

• Amended Section 9-322 provides conforming changes as to terminology or section references.
• Amended Section 9-323 modifies that section to expand the exceptions to the priority rules of Section 9-322 to additionally allow buyers and lessees in ordinary course of business to take collateral securing future advances free of such security interest to the extent such advances are made after the earlier of the time the secured party acquires knowledge of the purchase or 45 days after the purchase. Under the amendment, buyers in ordinary course of business seeking to take collateral securing future advances free from such security interest will take the collateral subject to or free of the existing security interest to the same extent as all other buyers if the buyer or lessee does not meet the requirements of Section 9-320 or 9-321. Sections 9-320 and 9-321, which specifically outline instances where buyers or lessees in ordinary course of business are exempt from taking property subject to existing security interests, still serve to pass the collateral free and clear to those buyers and lessees.
• Amended Section 9-324 provides conforming changes as to terminology or section references.
• Amended Section 9-326A provides that a security interest in a controllable account, controllable electronic record or controllable payment intangible held by a secured party having control of the account, electronic record or payment intangible has priority over a conflicting security interest held by a party without control.
• Amended Section 9-330 provides conforming changes as to terminology or section references in an effort to emphasize the importance of taking control of the authoritative copy of records evidencing chattel paper where there are competing claims to the chattel paper by secured parties. These changes are meant to align the new definition of chattel paper with existing priority rules.
• Amended Section 9-331 provides conforming changes as to terminology and section references to incorporate the terms controllable accounts, controllable electronic records and controllable payment intangibles into the priority rules previously governing instruments, documents and securities under other articles. This rule coordinates the UCC with the Uniform Electronic Transactions Act (UETA) and Electronic Signatures in Global and National Commerce Act (ESIGN).
• Amended Section 9-332 updates the treatment of priority rules with regard to the transfer of money. The rules regarding “tangible money” are largely unchanged, and a new section concerning the receipt of “electronic money” largely mirrors the tangible money rules and conditions the “takes free” rule on the transferee’s receipt of control of the electronic money. The official comments to this section provide an expanded distinction between possessing a security interest in a deposit account (the right to payment by a depository) and a security interest in electronic or tangible money.
• Amended Section 9-334 provides conforming changes as to terminology or section references.
• Amended Section 9-341 provides conforming changes as to terminology or section references.
• Amended Section 9-404 provides conforming changes as to terminology or section references.
• Amended Section 9-406 clarifies that the term “promissory note” includes negotiable instruments that are not an instrument solely because they are a writing that evidences chattel paper. Further, Subsection (l) of the amendments excludes Subsections (a) through (c) from applying to controllable accounts or controllable payment intangibles. Note that Oklahoma did not include Subsections (j) and (k) of the uniform text in its previous enactment.3
• Amended Section 9-502 provides conforming changes as to terminology or section references.
• Amended Section 9-508 provides conforming changes as to terminology or section references.
• Amended Section 9-509 provides conforming changes as to terminology or section references.
• Amended Section 9-513 provides conforming changes as to terminology or section references.
• The FICL subcommittee suggests inserting the following (italicized) language into Oklahoma Section 1-9-515(g)4:

(g) A record of a mortgage that is effective as a financing statement filed as a fixture filing under subsection (c) of Section 1-9-502 of this title remains effective as a financing statement filed as a fixture filing or as a financing statement covering as-extracted collateral or timber to be cut until the mortgage is released or satisfied of record or its effectiveness otherwise terminates as to the real property.

• Amended Section 9-516 provides conforming changes as to terminology or section references.
• Amended Section 9-601 provides conforming changes as to terminology or section references.
• Amended Section 9-605 provides that a secured party owes no obligation to an unidentified debtor or obligor. The amendment adds a duty to unidentified debtors or obligors when the secured party knows the identifying information is missing from the record.
• Amended Section 9-608 provides conforming changes as to terminology or section references.
• Amended Section 9-611 provides conforming changes as to terminology or section references.
• Amended Section 9-613 updates the language used in the notice of disposition.
• Amended Section 9-614 updates the language used in the notice of plan to sell property.
• Amended Section 9-615 provides conforming changes as to terminology or section references.
• Amended Section 9-616 provides conforming changes as to terminology or section references.
• Amended Section 9-619 provides conforming changes as to terminology or section references.
• Amended Section 9-620 provides conforming changes as to terminology or section references.
• Amended Section 9-621 provides conforming changes as to terminology or section references.
• Amended Section 9-624 provides conforming changes as to terminology or section references.
• Amended Section 9-628 provides that, as with amended Section 9-605, the secured party owes no obligation to an unidentified debtor or obligor. The amendment adds a duty to unidentified debtors or obligors when the secured party knows the identifying information is missing from the record.

ARTICLE 12

The new Article 12 adds a new article to the uniform text of the UCC in response to concerns about the lack of clear commercial law rules relating to digital assets.

Article 12 does not adversely impact existing Oklahoma law and instead provides much-needed clarity surrounding a new category of assets referred to as “controllable electronic records,” which includes cryptocurrency (such as bitcoin and ethereum), non-fungible tokens and other electronic payment rights.

Section 12-102 creates a new definition of a “controllable electronic record,” which is a record stored in an electronic medium that can be subjected to control under the new Section 12-105.

Section 12-103 provides that if there is a conflict between Article 12 and Article 9 of the UCC, Article 9 governs. Also, an Article 12 transaction is subject to a different rule for consumers, if any, such as a rule under the Uniform Consumer Credit Code or the Consumer Protection Act.

Section 12-104 establishes the rights acquired by a transferee of a controllable electronic record, including whether a transferee takes free of third-party claims. Specifically, if the transferee of a controllable electronic record is a “qualifying purchaser,” the transferee acquires its interest free from any competing property claims to the controllable electronic record. A “qualifying purchaser” is a purchaser that obtains control of the controllable electronic record for value, in good faith and without notice of a property claim to the controllable electronic record. These provisions are consistent with provisions in other articles of the UCC that protect innocent parties acquiring an interest in property, such as negotiable instruments.

Section 12-105 introduces the concept of “control” as it applies to controllable electronic records. Thus, Section 12-105, in conjunction with the amendments to Article 9, facilitates the use of controllable electronic records as collateral for loans and credit sales. Under the present version of Article 9, there is no effective method for a creditor to perfect or ensure the priority of its security interest in digital assets. Section 12-105 establishes what it means to “control” a controllable electronic record, which generally is the power to transfer the controllable electronic record, prevent others from using the controllable electronic record and be positively identifiable in some manner, such as the use of a cryptographic key. In conjunction with the proposed amendments to Article 9, a secured party with “control” of controllable electronic records will have a perfected security interest with priority over the interests of other creditors who do not have “control.”

Section 12-106 deals with controllable electronic records that represent a right to payment (specifically, a controllable account or a controllable payment intangible), such as an electronic promissory note, and provides that the person having control of the controllable electronic record has the right to derive the benefit of the digital asset, including requiring that any payments be made directly to the person with control of the controllable electronic record.

Section 12-107 provides the choice of law rules for Article 12 and generally states that the law of a controllable electronic record’s jurisdiction governs matters covered by Article 12. If a controllable electronic record expressly states its jurisdiction, then that jurisdiction is the controllable electronic record’s jurisdiction. If the controllable electronic record does not state its jurisdiction, then its jurisdiction is the jurisdiction whose laws govern the system in which the controllable electronic record is recorded. If neither the controllable electronic record nor the system states a jurisdiction, the controllable electronic record’s jurisdiction is deemed to be Washington, D.C. However, if Washington, D.C., has not enacted Article 12, then the official text of Article 12 promulgated by the Uniform Law Commission will apply. The rationale for choosing Washington, D.C., as the jurisdiction of last resort, is that the district is likely to enact Article 12 in a timely fashion, and it does not favor the laws of one state over another. This concept is similar to 12A Okla. Stat. Section 1-9-307(c), (f)(3) and (h), which also provides for Washington, D.C., to be the default location of a debtor under certain circumstances.

The 2022 amendments to the uniform text, including the new Article 12, bring much-needed clarity to the transactional rules in the uniform text, especially with respect to digital assets, and in some cases should be of persuasive authority even if a state does not enact the amendments.

Author’s Note: The author would like to recognize the members of the Legislative Review Subcommittee as co-authors of the article. The subcommittee members are Kaitlyn Chaney, Dudley Gilbert, Andrew Harrell, Whitney Humphrey, Eric L. Johnson, Bob Luttrell, Jonathan Rogers, Jeff Vogt, Ashley Warshell and Moira Watson.

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ABOUT THE AUTHOR

Alvin C. Harrell is a professor emeritus at the OCU School of Law and president of the Home Savings & Loan Association of Oklahoma City. He is the co-author of a dozen books, including The Law of Modern Payment Systems and Notes.

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ENDNOTES

[1] See, e.g., Fairchild v. Swearingen, 377 P.3d 1262, 1264 (2013).

[2] See Fairchild, id. at 1266.

[3] This raises some issues relating to Subsection (j) of the uniform text in order to preserve the superiority of this section. To the extent there are contrary provisions of law (and a more thorough review of Oklahoma statutory law may be necessary to locate such contradictions), these issues may need to be considered to ensure there is no express contradiction. For example, many states provide exceptions to the subordination of these account debtor rules to compensate for injuries or sickness under federal law or the right to receive benefits under federal special needs trusts or the right to receive lottery prize winnings. One other state has adopted the following language: “(j) This section prevails over any inconsistent provision of an existing or future statute, rule or regulation of this state unless the provision is contained in a statute of this state, refers expressly to this section and states that the provision prevails over this section.”

[4] The underlined language is not included in the 2022 uniform text amendments to the UCC but would provide a substantial benefit to practitioners and align the treatment of as-extracted collateral filings and timber-to-be-cut filings with the treatment of fixture filings, which exist as substantially similar categories of collateral. This amendment mirrors the adoption of similar provisions by oil-and-gas-producing states, such as Texas and West Virginia.