On the Money: The New UCC, the Devil Is in the Details

Terry's journey from tractor to bankruptcy identifies him using all these names. In fact, the Terry, Terrance, or Terry J. conundrum caused the John Deere company to be left high and dry when it tried to collect on its loan in bankruptcy court.

What This Means for Co-op Boards

We're not in Kansas, you say. Well, no, but this case and some others rattled the legal and finance communities. No lender wants to make a loan that it can't collect on, and certainly not because of simple name variations on documents. So in 2008 the Uniform Law Commission and the American Law Institute began work to fine tune the Uniform Commercial Code (UCC) statutes, and in December 2014 Governor Andrew Cuomo signed into law significant amendments and revisions to New York's UCC, including Article 9. This is the part that the co-op community will now need to embrace.

Going forward, any purchaser who applies for a co-op loan, or an existing owner who wants to refinance, will have to supply to a lender a non-expired New York State driver's license (or in the case of a non-driver, a New York non-driver photo identification). The UCC financing statement will use the name on the ID provided.

This issue lands in the laps of co-op boards because the co-op corporation provides the stock certificate and proprietary lease when a loan is made. In an ideal world, the name on these corporate documents should match that on the financing statement. The issue can easily become more complicated when one of your existing shareholders wants to refinance, and the name on the stock certificate and proprietary lease doesn't match the name on the current driver's license, which can happen for any number of reasons, including marriage, divorce, or widowhood.

Nevertheless, one of your board responsibilities is to make sure the co-op corporation doesn't impede refinancings or sales, and now name differences might. There are workarounds, of course, and you'll need to check with your lawyer on what to do.

Here Comes Title Insurance

In the world of buying and selling houses and condos (real property), sellers are used to buying title insurance. This type of insurance guarantees clear title to the buyer, and anyone else who may buy the property down the road.

Title insurance is not something that is traditionally bought in the co-op world. But the revisions to Article 9 may now change that.

"If the bank is nervous," says Stanley Simon, a partner at Allen, Morris, Troisi and Simon, "the bank is going to say to the buyer, 'your seller can't produce all their drivers' licenses over the past 30 years. We don't know if there is a UCC out there that we can't discover, and we may be in second lien position. That's not acceptable. So, buyer, you have to buy title insurance.'"

And, Simon continues, the buyer is going to turn to the seller and say, "Hey, I wouldn't have to buy this if, seller, you had all your drivers' licenses. So you should pay for it."

Bottom Line

"Best case scenario," says Simon, "if I were on a board and I wanted to make sure all the owners in my building don't have problems refinancing in the future, don't have to worry about title insurance issues, and won't have problems selling this is what to do. Every time someone submits an application for a refinance loan or a purchase loan, they should also provide a clean, readable copy of their New York State driver's license or New York State non-driver photo ID. And if they don't have one of those, then fill out this form saying this is my first personal name, and this is my surname."

If the co-op keeps that on file, says Simon, when it comes time for an owner to sell, the co-op will have a record of all recognized loan transactions and the accompanying driver's license or non-driver photo ID. Including this requirement in your admissions package would be very helpful, Simon comments, and may prevent problems in future. 

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