Posting for

Tuesday, October 17, 2000

by: Steven O. Weise

Heller, Ehrman, White & McAuliffe LLP

sweise@hewm.com

EAGLE 9 UCC INSURANCE POLICY/UCC FILINGS/FINANCING STATEMENTS/NEW PRODUCTS

Intro by Bert Rush: Several months ago First American Corporation announced its new "EAGLE 9" insurance policy, covering security interests in personal property created under Article 9 of the Uniform Commercial Code ("UCC"). Last week, the EAGLE 9 was a topic of "chat" on the national e-mail listserv maintained for UCC lawyers by the Washburn University School of Law. Reprinted below is an initial inquiry about the EAGLE 9, followed by a reply from Steven O. Weise, First American's outside counsel who is the primary draftsman of the EAGLE 9 policy form.)

Ken Kettering (New York Law School) wrote:

The website boasts that the title policy gives better coverage than a standard legal opinion -- which is perhaps not saying much.

Has anyone kicked the tires on this product? Aside from cost, turnaround, etc., I'm curious about coverage (e.g., how the policy deals with collateral excluded from Article 9, perfection other than by financing statement, and foreign-flavored collateral and foreign-flavored debtors) and how the policy deals with adequacy of the collateral description.

Reply by Steve Weise (Heller, Ehrman, White & McAuliffe/L.A., CA):

I'm replying to Ken's questions about the First American Article 9 insurance policy. First, full disclosure. I'm outside counsel to First American on the UCC insurance ("Eagle9") project and was the principal author of the policy.

I'll respond to Ken's questions and add a few notes.

For those of you who are not also dirt lawyers, First American is (depending how one counts these things) the country's largest or second largest provider of title insurance and related services.

The policy is, as far as anyone can tell, the first of it's kind. It insures attachment, perfection and priority of an Article 9 security interest. The cost of the policy of course varies with the size of the loan. Anyone used to purchasing real estate title insurance in a loan transaction will find the rates in line. First American also offers a discount in a mixed collateral transaction where the lender purchases both a real property and personal property policy from First American. The rates are available on the First American web page dedicated to this policy: www.eagle9.com

The company expects to issue a commitment within 48 hours of receiving the relevant secretary of state search reports and to proceed extremely promptly in clearing exceptions.

The policy insures that the security agreement is sufficient to create the security interest, including insuring the description of the collateral and the effectiveness of the borrower's signature on the security agreement. That includes both authorization and possible fraud or lack of capacity.

The off-the-shelf policy covers perfection by filing and possession of instruments and certificated securities. This includes the adequacy of the financing statement, including the debtor's name for registered organizations, the collateral description, the debtor's signature (including fraud, etc.), and the filing in the correct state(s).

Finally, the policy covers the priority of the security interest. First American takes the risk of filing office error, including misindexing and loss of prior financing statements. First American is also prepared to insure the "gap" between the last search report and the filing of the financing statement.

First American also has a set of available endorsements to cover other perfection methods (e.g. control agreements, copyright filings, certificate of title perfection, foreign debtors).

As with a real property policy, First American would provide a defense of any claim attacking attachment, perfection or priority.

Finally, First American is prepared to take over the full "back office" of preparation, filing and tracking of financing statements and to track other post-closing events that might affect perfection and priority.

Comment by Bert Rush: Although the EAGLE 9 insures against certain types of fraud, it does not insure against the risk that collateral described in a financing statement does not (and perhaps never did) exist. This is a risk we don't think about in insuring titles to real property, but it is a risk to be considered by a lender relying on personal property as collateral.

Also, not mentioned by Steve (because everyone on this UCC listserv is well aware of it) is the fact that major revisions in Article 9 were announced by the National Conference of Commissioners on Uniform State Laws and the American Law Institute in 1999, with a proposed effective date of July 1, 2001. The revised Article 9 has now been adopted by legislatures of 28 states, and is expected to be adopted in all (or almost all) states by next July.

The revised Article 9 makes great improvements in the former Article 9 (drafted in 1972), especially with respect to filing requirements and contents of filings, but it's expected that changes in the law will bring uncertainty and perhaps confusion (both among UCC lawyers and the employees of state departments of corporations, where financing statements are to be filed and retrieved). The new EAGLE 9 provides great protection against these uncertainties and confusion.

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Following Tuesday's posting, Mike Waiwood (Cleveland) writes:

Just a comment on your tue E-mail statement that whether the collateral actually exists or not is something we normally do not think about when insuring real estate titles, we currently have a claim where, despite a seemingly valid record legal description and a tax parcel number, because of an error by a surveyor many years ago, the parcel our agent insured simply does not exist. There is nothing in the record to disclose that fact and no current survey was done. See, we DO have claims (a number of them) where a current survey would have avoided the claim, and see, I really do read Landsakes.

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Following Tuesday's posting, and Mike Waiwood's reply, Frank Melchior (Iselin, NJ) writes:

Despite Mike's erudition, I am troubled by his statement that the property does not exist. Isn't this really a case of (1) a poor description and (2) overlap with other property? Obviously, without knowing the facts, it is hard to put this together.

Comment by Bert Rush: I wondered, too. I suspect the legal description insured by our policy now can't be located on the ground, and other parties with better legal descriptions are in possession of all lands in the area where ours was last seen.... We had such a claim in Maryland that was the subject of a posting here some months ago--the morbidly curious may search the LandSakes Archive under the name "Ford" and/or "Callow."