The Permanent Editorial Board for the Uniform Commercial Code (PEB) acts under the authority of the American Law Institute and the Uniform Law Commission (also known as the National Conference of Commissioners on Uniform State Laws). The PEB has resolved to issue supplemental commentary on the Uniform Commercial Code (UCC) from time to time. The supplemental commentary of the PEB generally will be known as a PEB Commentary, to distinguish it from the Official Comments to the UCC. A PEB Commentary may be denominated a commentary, a report, or otherwise as determined by the PEB.
The Resolution states that:
The underlying purposes and policies of the PEB Commentary are those specified in Section 1-103(a). A PEB Commentary should come within one or more of the following specific purposes, which should be made apparent at the beginning of the Commentary: (1) to resolve an ambiguity in the UCC by restating more clearly what the PEB considers to be the legal rule; (2) to state a preferred resolution of an issue on which judicial opinion or scholarly writing diverges; (3) to elaborate on the application of the UCC where the statute and/or the Official Comment leaves doubt as to the inclusion or exclusion of, or application to, particular circumstances or transactions; (4) consistent with Section 1-103(a)(2), to apply the principles of the UCC to new or changed circumstances; (5) to clarify or elaborate upon the operation of the UCC as it relates to other statutes (such as the Bankruptcy Code and federal and state consumer protection statutes) and general principles of law and equity pursuant to Section 1-103(b); or (6) to otherwise improve the operation of the UCC.
For more information about the Permanent Editorial Board for the Uniform Commercial Code, visit www.ali.org or www.uniformlaws.org.
UCC Section 9-108 provides the rules that determine whether a description of property in a security agreement is sufficient, as required by Section 9-203(b)(3)(A). Section 9-108(a) provides that a description is sufficient if it “reasonably identifies” the collateral. That general rule applies “[e]xcept as otherwise provided in subsections (c), (d), and (e).” For purposes of Section 9-108, must a security agreement seeking to create a security interest in a security entitlement or a securities account satisfy subsection (d), or will the description also be sufficient without satisfying subsection (d) provided that the description does “reasonably identif[y]” the collateral under subsection (a)?
As a general matter, Section 9-108(a)’s “reasonably identifies” standard is satisfied when the description “make[s] possible the identification of the collateral described.” Subsection (a) applies “[e]xcept as otherwise provided in subsections (c), (d), and (e),” which read as follows:
(c) [Supergeneric description not sufficient.] A description of collateral as “all the debtor’s assets” or “all the debtor’s personal property” or using words of similar import does not reasonably identify the collateral.
(d) [Investment property.] Except as otherwise provided in subsection (e), a description of a security entitlement, securities account, or commodity account is sufficient if it describes:
(1) the collateral by those terms or as investment property; or
(2) the underlying financial asset or commodity contract.
(e) [When description by type insufficient.] A description only by type of collateral defined in [the Uniform Commercial Code] is an insufficient description of:
(1) a commercial tort claim; or
(2) in a consumer transaction, consumer goods, a security entitlement, a securities account, or a commodity account.
Each of subsections (c), (d), and (e) is framed as an “exception” to subsection (a)’s general rule, but these exceptions do not each function in exactly the same way. An exception to a rule can expand, limit, or explain the application of the rule. Subsections (c) and (e) limit the general rule of subsection (a) and have the effect of making insufficient descriptions that would otherwise satisfy subsection (a). The exception in subsection (d) functions differently, in that it elaborates on the availability of the general rule of subsection (a) rather than limiting it.
This effect of subsection (d) is best seen by considering its two paragraphs separately. Subsection (d)(1), taken on its own, neither limits nor expands subsection (a), but rather clarifies subsection (b)(3)’s validation of a description by “type of collateral defined in [the Uniform Commercial Code].” Subsection (d)(2) provides in effect that a description that might not satisfy subsection (a) is nonetheless sufficient if it satisfies subsection (d)(2). Thus, taken as a whole, subsection (d) affords an additional method of describing investment property. It eliminates the need to determine whether the kinds of description provided for in subsection (d) satisfy subsection (a).
This reading of the effect of subsection (d) is supported by the text of Section 9-108, the purposes of Section 9-108, and the policies of Article 9.
Textually, when Section 9-108 limits the availability of subsection (a)’s “reasonably identifies” test, it expressly says so. Subsection (c) provides that a supergeneric description “does not reasonably identify” the collateral. Similarly, subsection (e) provides that certain descriptions by type are “insufficient.” By their own terms, those two subsections narrow the application of subsection (a). By contrast, the text of subsection (d) positively states that a description meeting the provisions of that subsection “is sufficient.”
The purposes, too, of subsection (d) differ from those of subsections (c) and (e). Subsection (d) originated as a conforming amendment to Article 9 as part of the 1994 revision of Article 8, which first stated the Code’s concepts for the indirect holding of securities. The 1994 revision represented a new conceptual framework for property rights with respect to indirectly held securities, with an accompanying new nomenclature. The drafters of Article 8 recognized that common and well-established patterns of practice and terminology would doubtless persist despite the amendments. The persistence of these practices was particularly foreseeable in Article 9 transactions, in which Article 8 assets are frequent and important forms of collateral. Accordingly in 1994 and then continuing with subsection (d) in Revised Article 9, the drafters took steps to address directly the potential terminological problem. Viewing the statute against this background confirms that subsection (d)(1)’s purpose is to permit but not require use of the new nomenclature, and that subsection (d)(2)’s purpose is to uphold secured transactions against questions arising from perhaps technically incorrect but otherwise perfectly serviceable collateral descriptions.
Finally, Section 1-103(a) instructs that the Code must be “liberally construed and applied to promote its underlying purposes and policies,” which include “to simplify, clarify, and modernize the law governing commercial transactions.” In the case of investment property collateral, a reading of subsection 9-108(d) that enables parties to use the revised Article 8 terminology—yet does not require them to do so—accords with Section 9-108’s overall purpose of rejecting technicalities.
In the unreported decision of Monticello Banking Co. v. Flener (In re Alexander), the U.S. Court of Appeals for the Sixth Circuit misunderstood subsection 9-108(d) as imposing a “requirement” limiting the availability of subsection (a). The debtor had maintained a securities account with Monticello and thereby participated in a “CDARS” service designed to allocate, as between the debtor and others, interests in CDs issued by third-party banks. In connection with a loan from Monticello the debtor had signed a security agreement describing the collateral, but without using the particular terms stated in subsection (d)(1) and without describing the underlying financial assets (i.e., the CDs issued by the third-party banks) under subsection (d)(2). The court concluded that this language did not sufficiently describe the collateral and a security interest had therefore not attached. The court reasoned that subsections (a) and (d) were “both unambiguous” and that subsection (a)’s reference to subsection (d) as an exception “specifically exempts” the reasonably identify standard when the collateral is investment property. Thus, the court concluded, subsection (d) alone contains “the requirements” for description of a security entitlement. The court conceded that its interpretation of the statute “place[s] technicalities over functionality” and “confuse[s] the customer in a CDARS transaction,” but felt that Section 1-103(a) and related policy considerations could be “given no weight” under what the court found to be “unambiguous statutory language.” The court thus misconstrued subsection (d) as limiting rather than elaborating on the available methods of describing investment property.
The description of collateral in a security agreement seeking to create a security interest in a security entitlement or a securities account is sufficient without satisfying subsection (d), provided that the description “reasonably identifies” the collateral under subsection (a). Properly understood, subsection (d) elaborates on the available methods of describing investment property, while subsections (c) and (e) limit the available methods of describing the collateral to which they apply. Subsection (d)’s language and purpose indicate that the method of describing investment property stated in that subsection satisfies Section 9-108.
The first sentence of Official Comment 4 to Section 9-108 is hereby amended as follows:
4. Investment Property. Under subsection (d)(2), the use of the wrong Article 8 or commodities terminology does not render a description invalid (e.g., a security agreement intended to cover a debtor’s “security entitlements” is sufficient if it refers to the debtor’s “securities”); nor does subsection (d) require the use of the terms “security entitlement,” “securities account,” “commodity account,” or “investment property” if the collateral description is otherwise sufficient under subsection (a). See PEB Commentary No. 28, dated January 16, 2024. The Commentary is available at https://www.ali.org/peb-ucc.
