In 1958 Massachusetts became the second state in the country to
enact the Uniform Commercial Code, the statute that replaced the
patchwork, state-by-state commercial law system that preceded it
and created the uniform legal infrastructure behind the post-war
success of the American economy. Regrettably, despite the
commonwealth's historic leadership, the Massachusetts Uniform
Commercial Code, codified in Chapter 106 of the Massachusetts
General Laws, is years out of date.
Massachusetts, unlike the majority of the other states in the
United States, has yet to enact the revisions to Article 1 dealing
with general provisions, revisions to Article 7 dealing with
documents of title (warehouse receipts and bills of ladings) and
the 2010 amendments to Article 9 dealing with secured transactions
(credit secured by an interest in personal property, such as
equipment, inventory and accounts receivable).
The failure of Massachusetts to update its Uniform Commercial
Code runs the risk of creating greater uncertainty for commercial
transactions in Massachusetts at a critical time when mid-sized and
small businesses are starved for credit necessary to expand and
create jobs. The inevitable response to such uncertainty is a
reduction in the availability of credit and an increase in interest
rates in Massachusetts when the commonwealth and its citizens can
least afford that outcome.
These concerns are particularly acute for the 2010 amendments to
Article 9, because their uniform effective date of July 1, 2013, is
coming up shortly. The failure of Massachusetts to timely enact the
2010 amendments will put Massachusetts at a competitive
disadvantage with respect to its sister states, like Connecticut,
New Hampshire and Rhode Island, that have already enacted these
amendments and that are creating greater certainty for the
extension of secured credit.
House Bill No. 25 would address all of these concerns by
bringing the Massachusetts Uniform Commercial Code up to date and
in line with the law of the rest of the country. In addition to the
Massachusetts Bar Association, the bill is supported by the
Associated Industries of Massachusetts, the Boston Bar Association,
the Massachusetts Bankers Association, the Massachusetts Secretary
of State's office, the International Warehouse Logistics
Association and the Massachusetts Uniform Law Commission. It faces
no opposition, it raises no consumer issues, it does not require
any appropriations by the General Court, and it does not require
any increase in any filing fees or other recording charges. The
bill is good for Massachusetts and its economy and should be
enacted now through the informal session process this year.
Here are some examples of what House Bill No. 25 would do:
THE SOLE PROPRIETOR
Jack runs a bake shop. He needs to borrow money to expand the
business and hire additional employees. His bank, in turn, is
willing to lend the money but only if it receives good collateral
consisting of the assets of Jack's business. That will require that
the bank file a financing statement against Jack in the Secretary
of State's office. The bank needs to know what name for Jack to put
on the financing statement and what name for Jack to use when
searching for other financing statements indicating that other
lenders may be claiming a first position on the collateral.
What name should Jack's bank use to search and file? Jack goes
by many names. He has one name on his birth certificate, a
different name on his driver's license, and still another name of
his credit cards. He also uses a nickname. Jack's bank is reluctant
to make the loan without being certain that it is searching and
filing under Jack's right name.
Current law is unclear as to what name for Jack the bank should
search and what name it should put for Jack on the financing
statement. As a result, the bank is at risk that its loan will be
subordinated or unperfected. House Bill No. 25 would remove this
uncertainty and would allow the bank to rely on Jack's driver's
license when searching and filing financing statements.
Juanita's electronic store needs to order some inventory to be
shipped to Massachusetts. The carrier will issue an electronic bill
of lading for the inventory, and Juanita wants to use that bill of
lading (which gives the holder of the bill the right to the
inventory) as collateral to borrow money to pay for the
Current law does not address electronic bills of lading and
deprives Juanita of an important source of collateral to finance
her business. House Bill No. 25 would address electronic bills of
lading and provide easy-to-use rules for the store's lender to
obtain a security interest in the bill of lading in order to
advance the funds.
THE ASSET-BASED LENDER
Finance Company has a loan to ABC Corp., based in New Hampshire.
The loan is secured by collateral consisting of ABC Corp.'s
existing and future inventory. Finance Company has filed a
financing statement in New Hampshire to perfect its security
interest so that the security interest is good against a creditor
who later obtains a judgment lien against ABC Corp. or, if ABC
Corp. should file for bankruptcy, ABC Corp.'s bankruptcy trustee.
ABC Corp. decides to reincorporate in Massachusetts. Is Finance
Company's security interest in the
inventory protected once the
Current law protects Finance Company's security interest in the
inventory existing on the date of the reincorporation for
a period of a year. Within that year Finance Company would need to
file a financing statement in Massachusetts. Current law, however,
does not protect Finance Company's security interest in
future inventory (i.e., inventory created or acquired
after the reincorporation) unless Finance Company files a financing
statement in Massachusetts at or before the time when the
reincorporation takes place. But Finance Company may not find out
about the reincorporation in advance.
This is a risk factor that Finance Company had to have taken
into account in its original decision to extend credit to ABC Corp.
and in determining the cost for the credit. Finance Company might
also reasonably respond to this risk by requiring in its loan
documents that ABC Corp. to remain in New Hampshire while its loan
is outstanding. House Bill No. 25 would addresses these concerns by
giving to Finance Company a period of four months after the
reincorporation to file the financing statement in Massachusetts in
order for its security interest in the future inventory to be
THE MASSACHUSETTS BUSINESS TRUST
Megan just graduated from college with a degree in business. She
wants to start an investment fund organized as a Massachusetts
business trust. The fund will be leveraged, i.e., it would need to
borrow money in order to purchase investments. But no lender wants
to extend credit to a Massachusetts business trust unless the
lender has possession or control of the trust assets. Protecting
the collateral by the filing of a financing statement is too
uncertain when the borrower is a Massachusetts business trust.
House Bill No. 25 would remedy that problem by providing the
same rules to protect the security interest in assets of a
Massachusetts business trust that are applicable to assets of a
These are just a few examples, but they illustrate the immediate
benefits to Massachusetts in enacting House Bill No. 25 now.
Francis C. Morrissey is a partner in Morrissey, Wilson &
Zafiropoulos LLP and teaches secured transactions at New England
School of Law.
Edwin E. Smith is a partner in
Bingham McCutchen LLP and is a Uniform Law Commissioner for the
Commonwealth of Massachusetts.