Number 1550 HB 239-UCC SECURED TRANSACTIONS REPRESENTATIVE LISA MURKOWSKI, sponsor of HB 239, explained that national commissioners have been working on a substantial re-write of Article 9 of the Uniform Commercial Code Secure Transaction (UCC) for about eight years. The re-write was done by some of the greatest minds in the country. It has been accepted unanimously by the commissioners, and HB 239 is an excellent document as far as what has been done with the UCC. This version of Article 9 has been distributed all over Alaska to the parties that will be affected. The comments coming back have all been positive, and it is felt that this re-write brings Alaska into the Twenty-First century. HB 239 modernizes and updates the UCC and allows for a centralized filing system without policy changes. Number 1653 MR. JERRY KURTZ, a member of the Alaska delegation to the National Conference of Commissioners on Uniform State Laws, said he has been to every floor session of the national conference concerning HB 239 which covers Article 9. Article 9 is the most important part of the Uniform Commercial Code; it has been adopted in every state in its present form and it is fast being adopted in its proposed revision. The balance has not been changed by the revision but there are improvements that will save money and improve the flow of commerce. Number 1736 SENATOR DONLEY asked for an explanation of the changes in the definition of "good faith." MR. STEVEN WEISE, American Bar Association advisor to the Drafting Committee of the UCC, said that the definition was changed from a subjective definition to a definition that has a more "commercial reasonableness component." The change means that even if a person was acting honestly, if the action was so out-of-bounds of what is fair, the action would not be considered to be done in good faith. This same definition is in other articles of the UCC over the last 10 years. SENATOR DONLEY asked how good faith affects the consumer. MR. WEISE answered that it runs in all directions. All parties to the transaction, consumer, secured party or non-consumer borrower, are required to act in good faith in their performance and enforcement of their rights under a security agreement or in enforcing rights under Article 9. SENATOR DONLEY said, "So you are going to enforce on consumers now, even if they honestly believe their case is right--some commercial standard that they might not know anything about?" MR. WEISE answered that the primary purpose of it is that secured lenders who are enforcing their rights have to act in good faith. Their ability to contest what the lender has done would be unaffected by that. The good faith standard was brought about because of the concern over lenders not acting in good faith. It puts some constraints on their performance of a contract or enforcement of a contract. CHAIRMAN TAYLOR asked Mr. Weise to give the committee a hypothetical situation. MR. WEISE replied if a lender was seeking to enforce its collateral and honestly believed its method of enforcement was fair, but, when viewed objectively from the outside it was way beyond the range - for example the way notice was given to the borrower, the court could say that the secured party had not conducted its activities in a manner that complied with the requirement. SENATOR DONLEY stated he is more concerned about the impact to the borrower. MR. WEISE maintained that this should not have much of an effect on the borrower or consumer side of such transactions. None of the case law comes up in the context of what the borrower has done but the general notion is that the need to act in good faith applies to all parties in the transaction. For example, a borrower should not be able to hide or damage the collateral if the collateral has been fairly obtained. Part of the tradeoff for the lending community in accepting a tougher definition of good faith was that it apply in all directions. CHAIRMAN TAYLOR remarked that some years ago, a borrower had failed to make the payments on a leased piece of logging equipment located on the side of a hill. The lender had rights to retake the equipment for default under the secured transaction, even though it was a lease purchase agreement. The lender, however was denied access to the road system that would allow him to take the piece of equipment. Under the old definition, the borrower's right to deny access could be exercised. He asked Mr. Weise if that right could not be exercised under the new good faith standard. MR. WEISE said that is a good example. It is the expectation that it will be exceedingly rare where good faith will be an issue concerning the borrower. He added that the entire discussion by the UCC committee with regard to this issue revolved around the conduct of the lender. Number 2080 SENATOR DONLEY wondered how HB 239 will impact an ordinary consumer buying ordinary consumer goods, for example, what types of things a consumer will want to know. MR. WEISE said there was extensive consideration given to consumer interest and a number of provisions have been added for their protection. For example, if a consumer were to default in their secured obligation, they are entitled to special notice (more than a commercial borrower will receive) at the time of a foreclosure, a detailed accounting, etc. There are a string of pro-consumer provisions in the revised Article 9 that are designed specifically to give consumers more protection than they have under current law and more protection than a commercial borrower would have under the new law. A consumer task force, made up of representatives of consumers' unions, legal aid groups from various states, banks and automobile creditors, worked out a series of provisions that all sides signed off on. SENATOR DONLEY asked Mr. Weise if he had anything from consumer groups endorsing HB 239. MR. WEISE said he does not have anything in writing but at the very last meeting of the drafting committee, the Chair asked each of the sides to stand up publicly and state that they were in support of the revision. He said he would fax a Law Review article written by the Chair of that committee that reports that activity. Number 2196 CHAIRMAN TAYLOR asked if the rewrite improves the defensive position of consumers if their credit is transferred or sold to a buyer "in due course." MR. WEISE responded yes it has. The Federal Trade Commission (FTC) has a holder in due course rule which requires that when a consumer obligation is transferred, that the obligation contain a statement, required by the FTC, saying that the buyer of the note is subject to all defenses that the consumer would have had against the original seller or lender. There is a provision in the new Article 9 that says if the FTC statement is not on the obligation, it will be treated as if it were there. So, anyone who buys a consumer obligation is subject to those defenses even if the person who sells the obligation did not comply with the FTC rule. Number 2350 MR. KURTZ said there was a concerted effort by car financiers to change the balance of Article 9. There were battles over the early draft of the bill because of the attempt to shift the balance. The net result is that the balance has been shifted in the opposite direction of what the car financiers wanted. Tape 00-20, Side B Number 000 MR. KURTZ continued. The consumer organizations, with whom they had quite a bit of contact at the various annual meetings and through correspondence, are comfortable with the end result. MS. SHARON YOUNG, State Recorder's Office for the Department of Natural Resources, said that HB 239 will make a drastic improvement of the filing system in Alaska. HB 239 will streamline the system and make it easier for the customer to use. SENATOR DONLEY moved HB 259 from committee with individual recommendations. CHAIRMAN TAYLOR noted he would distribute the article from Mr. Weise prior to moving the bill from committee. With no objection, the motion carried.