Article 7 This article, dealing with warehouse receipts, bills of lading, and other documents of title, would replace the Uniform Warehouse Receipts Act as contained in chapters 18 through 22 of title 28 of the District of Columbia Code. Article 7 combines as an integrated unit of legislation the Uniform Warehouse Receipts Act, the Uniform Bills of Lading Act, and those sections of the Uniform Sales Act dealing with the negotiation and transfer of documents of title. It is subject to any treaty or statute of the United States or District of Columbia regulatory statute or tariff, classification or regulation filed or issued pursuant thereto. Accordingly, the Federal Bills of Lading Act (49 U.S.C. secs. 81-124) would continue to control interstate shipments and foreign exports, and the Carriage of Goods by Sea Act (46 U.S.C. secs. 1300-1315) would continue to control ocean bills of lading covering both exports and imports. Since article 7 makes no provisions for criminal penalties, it may be considered advisable to retain or reenact in modified form chapter 21, entitled "Criminal Offenses," of title 28 of the District of Columbia Code. Article 8 This article, dealing with investment securities, would replace the Uniform Stock Transfer Act as contained in chapter 29 of title 28 of the District of Columbia Code. In addition, it deals with bonds now covered by the Uniform Negotiable Instruments Act. As stated in the 1958 official text with comments of the Uniform Commercial Code, article 8 "is neither a blue sky law nor a corporation code. It may be likened rather to a negotiable instruments law dealing with securities." In general, it covers investment securities like stocks and bonds in both bearer and registered form. Part 4 of article 8 is designed to accomplish the same purposes as the Uniform Act for Simplification of Fiduciary Security Transfers now adopted in the District of Columbia. (District of Columbia Code, secs 28-2321-2330) and in 35 States. The sponsors of the Uniform Commercial Code are recommending that, until there are court decisions affirmatively holding that article 8 is just as effective as the Uinform Simplification Act, the UCC should not repeal the act, but should include express provision (sec. 10-104) that the act is not repealed and should control in event of any inconsistency between the act and the UCC. In view of the highly successful results under the Uniform Simplification Act this committee is of the opinion that the recommendation of the UCC sponsors be followed. Article 9 This article, dealing with the field of secured transactions, would replace little of the District of Columbia Code while making great advances in that field. In general, it applies to all transactions which are intended to create a security interest in personal property as well as to sales of accounts receivable, contract rights and chattel paper. Although it does not use the terms "mortgage," "conditional sale" and the like, existing security devices are not abolished and may continue to be used. Article 9, however, does abolish formal distinctions between existing security devices and deals with the interests which the secured creditor may obtain under the code by the same designation; namely, a "security interest" defined (in sec. 1-201 (37)) as "an interest in personal property or fixtures which secures payment or performance of an obligation," which includes "any interest of a buyer of accounts, chattel paper, or contract rights." In general, the term "chattel paper" refers to instruments (like notes and chattel mortgages) used by the owner thereof (like a dealer) to secure his own financing. Article 9 does not apply, among others, to a security interest subject to a statute of the United States, a landlord's lien, a lien given by statute or other rule of law for services or materials (except to state priority of such liens where there is a conflicting security interest), a claim for wages, salary or other compensation of an employee, an equipment trust covering railroad rolling stock, a sale of accounts, contract rights or chattel paper as part of a sale of a business, a transfer of an interest in an insurance policy, and a transfer of an account in a bank, loan association, credit union or like organizations. The security interest under article 9, to be enforceable, must either be a possessory interest (like a pledge) with the secured party in actual possession or be in a writing referred to in the article as a "security agreement." The only requirements of a security agreement are that it be signed by the debtor and contain (sec. 9-203(1)(b)) "a description of the collateral and in addition, when the security interest covers crops or oil, gas or minerals to be extracted or timber to be cut, a description of the land concerned." However, a security agreement may contain the usual provisions now included in existing instruments, like chattel mortgages and chattel deeds of trust, and other agreements of the parties, except a few types of provisions expressly prohibited by the UCC. With several exceptions (sec. 9-302), in order to "perfect" a security interest that would create a lien effective against third parties, the creditor must have possession of the collateral in case of a possessory interest (like a pledge) or the debtor must, in addition to entering into a security agreement, file a "financing statement" in the appropriate office, which in the District of Columbia would be the Recorder of Deeds (sec. 9-303). A financing statement may be a very simple document, being legally sufficient (sec. 9-402) "if it is signed by the debtor and the secured party, gives an address of the secured party from which information concerning the security interest may be obtained, gives a mailing address of the debtor and contains a statement indicating the types, or describing the items, of collateral." A financing statement may be filed before a security agreement is made (sec. 9-402(1)). The security agreement need not be filed to be effective against third persons. However, a security agreement, if it complies with the requirements of a financing statement, may be filed as a financing statement. Thus, in general, secured financing may be placed on a simplified basis or continued with the same type of existing instruments using the same names and containing only a few modifications to conform to the UCC. An important exception to the requirement of filing concerns consumer goods, meaning goods for personal, family or household purposes (not including motor vehicles). Filing is not necessary to make effective against third persons a security interest taken or retained by a seller or other person who finances the actual purchase of consumer goods. The matter of motor vehicle liens would be continued to be handled, as now, under chapter 40 of title 3 of the District of Columbia Code. However, motor vehicles in the hands of a dealer prior to the issuance of a title certificate would be considered as inventory to which the provisions of article 9 would apply. The Part 4 of article 9 provides for the remedies of the creditor upon default, requiring reasonable notification to the debtor and other interested persons of the sale unless the goods are perishable etc., and the return to the debtor of any surplus after payment of the debt and expenses of collection and sale. debtor is also given the right to redeem before disposition of the collateral. Article 9 also provides, among other things, for the allowance of broad after acquired property clauses, the validating of security interests in collateral to secure future advances, and for inventory and accounts receivable financing on a sound basis. The doctrine of Benedict v. Ratner, 268 U.S. 353 (1925), is repudiated (sec. 9-205). A fringe benefit of the UCC would be the elimination of the antiquated and useless nuisance requirement that chattel instruments be acknowledged in order to be recorded. Article 10 This article would provide for the repeal of the superseded legislation. It would also provide for the effective date of the UCC and for protection of the rights under then existing security instruments. Modifications (13), (14), (15) and (16), relating to article 10, of recommendation I of this report are modeled after the New York Uniform Commercial Code. Modification (13), amending section 10-102(1), provides for specific repeal of the superseded parts of the District of Columbia Code. Modification (14), amending section 10-102(2), is intended primarily to provied for the continued effectiveness under the code of recorded chattel instruments which now become void after seven years pursuant to section 42-104 of the District of Columbia Code. The official text of the Uniform Commerical Code (sec. 10-103) provides for the general repeal of all inconsistent legislation. This committee considers that it would be better to state a rule as to which statute governs, as in modification (15), rather than to repeal outright. In view of the wide coverage of the specific repeal section, there should be relatively few inconsistencies between the commercial Code and existing District of Columbia legislation. CONCLUSION As already indicated, the initial decision to be made by this bar association is whether (a) to strive for the enactment as soon as practicable of the UCC modified to conform to the District of Columbia Code, or (b) to conduct a detailed study of the UCC in order to determine its desirability or to perfect it. This committee considers that the advantages to be derived from an early adoption of the UCC in the District far outweight the benefits of continued study prior to adoption, and that the UCC with the modifications recommended in this report will provide a satisfactory and entirely workable statute. This, of course, does not mean a statute satisfactory to all or a perfect statute since it is not likely that the UCC will ever achieve universal approval or reach perfection. The UCC should be the object_of_continued study by this association both before and after its enactment. It is quite likely that faults in a District of Columbia Uniform Commercial Code will be disclosed by the stepped-up study of it after its enactment and by practical problems arising after its effective date. This association should be alert to discover such faults and to endeavor to obtain corrective legislation without delay. The Rip Van Winkle approach to difficulties in the practical application of uniform acts is outmoded. This committee is of the opinion that there should be at least 1 year between the enactment date and the effective date, in order to give all interested members of the District of Columbia community ample time to become thoroughly familiar with the code and to make the necessary adjustments. An educational program undertaken by this association during such year would be extremely beneficial. There will possibly be a strong desire on the part of some to attempt to make substantive or language changes in, or otherwise to tinker with, the UCC as proposed for the District of Columbia. This committee is of the opinion that such changes should be resisted and not made except for extremely sound reason. The UCC represents the results reached by hundreds of lawyers and law professors over a long period of years and after considerable trial and error. It is an integrated statute covering almost the entire field of commercial law. Any change in UCC may very well tend to weaken its effectiveness, lessen its uniformity and destroy its consistency. Until and unless there is good reason to do otherwise, it will be better to make change in the UCC only after the permanent editorial board has had opportunity to review and make its recommendation. Mr. HUDDLESTON. Without objection, I will also include the First Supplemental Report to the Board of Directors of the Bar Association of the District of Columbia, by the Uniform Commercial Code Committee of the Bar Association, dated December 18, 1962. (The material referred to follows:) UNIFORM COMMERCIAL CODE COMMITTEE, FIRST SUPPLEMENTAL REPORT TO BOARD OF DIRECTORS OF BAR ASSOCIATION The initial report of this committee, dated September 26, 1962, contained certain recommendations, all of which were approved on October 5, 1962, by the board of directors. This committee is now in the process of preparing, in accordance with recommendations I, II, and IV, the proposed legislation which is expected to be introduced in the Congress during January 1963. Recommendation III of this committee was as follows: "III "The report (expected in November 1962) of the permanent editorial board for the UCC with respect to recommended amendments should be reviewed with regard to incorporating such recommended amendments in the District of Columbia Uniform Commercial Code." This committee has studied the report of the permanent editorial board referred to in recommendation III as well as suggestions made by members and other committees of the association and by other interested persons and organizations. As a result of this study, it is considered desirable that additional modifications be made in the 1958 official text of the uniform commercial code at the time of its enactment for the District of Columbia For the sake of brevity, the 1962 recommendations for amendment of the uniform commercial code proposed by the permanent editorial board for the uniform commercial code is hereinafter sometimes referred to as the "1962 recommendations"; said permanent editorial board is hereinafter sometimes referred to as the "editorial board"; the uniform commercial code, 1958 official text, is hereinafter sometimes referred to as the "UCC"; the District of Columbia Code, 1961 edition, is hereinafter sometimes referred to as the "D.C. Code”; and section references unless otherwise specified pertain to the UCC. The editorial board in the 1962 recommendations is recommending all the modifications set forth below (except Nos. 8, 9, and 20) for the reasons mentioned immediately following the respective proposals. This committee concurs. Modifications Nos. 9 and 20 set forth below originated in the District of Columbia, and, insofar as the committee knows, were not considered by the editorial board. Each State mentioned below as a source for a proposal means the uniform commercial code as enacted in that State. RECOMMENDATIONS AND COMMENTS This committee recommends that the board of directors approve the following resolutions (the comments and other explanatory statements not being deemed part of the resolution): I Resolved, That the uniform commercial code proposed for enactment for the District of Columbia, in addition to the modifications approved by this board (pp. 602 to 606 of the November 1962 issue of the journal of this association), be subject to further modification for accomplishment of the following: 1. In subsection 1–201(27), add the following additional sentences: "An organization exercises due diligence if it maintains reasonable routines for communicating significant information to the person conducting the transaction and there is reasonable compliance with the routines. Due diligence does not require an individual acting for the organization to communicate information unless such communication is part of his regular duties or unless he has reason to know of the transaction and that the transaction would be materially affected by the information." Comment of the editorial board "The change in subsection (27) clarifies the scope of 'due diligence' as used in the subsection. The New York Clearing House Association expressed the fear that the original subsection would require any large business organization to make an extensive investigation, before purchasing commercial paper or investment securities, as to whether it had notice of an adverse claim. As revised, the subsection removes any basis for the fear, but retains the same standard for financial institutions as for other organizations, and applies equally to protect an organization located in a single place and an organization operating through two or more branches. The change is intended to render unnecessary nonuniform amendments to sections 3-304 and 8-304 enacted in New York and nonuniform amendments to section 4-106 enacted in Massachusetts and New York." 2. In subsection 3-105(1)(c), add after "agreement": "or refers to a separate agreement for rights as to prepayment or acceleration." Comment of the editorial board "Notes very commonly provide that they may be accelerated or prepaid in accordance with the terms of a loan agreement or mortgage of a particular date. Such notes were regarded as negotiable under the NIL, but doubt as to their status under the code has arisen. The additional words are intended to remove these doubts." The source of this proposal is New York. 3. Subsection 3-112(1)(b) should be revised to read as follows: "(b) a statement that collateral has been given to secure obligations either on the instrument or otherwise of an obligor on the instrument or in the case of default on those obligations the holder may realize on or dispose of the collateral; or" Comment of the editorial board "The added language is designed to avoid any possibility that standard crosscollateral provisions found in substantially all bank collateral note forms will render the notes nonnegotiable. That result was never intended." The source of this proposal is Massachusetts. 4. Subsection 3–122(4) (a) should be revised to read as follows: "(a) in the case of a maker, acceptor, or other primary obligor of a demand instrument, from the date of demand;" Comment of the editorial board "Although banks are prohibited by law from paying interest on demand deposits, fear has been expressed that under section 122 interest might run on a certified check or like demand instrument from its date. Opinions differ as to the necessity for the change which, in any event, avoids this unintended result." The source of this proposal is Connecticut. 5. In subsections 3-412(2) and 3-504(4), delete "continental" to take "account of the admission of Alaska and Hawaii as States." (recommended by the editorial board). 6. Add the following additional section as 4-109: "Section 4-109. Process of Posting. "The 'process of posting' means the usual procedure followed by a payor bank in determining to pay an item and in recording the payment including one or more of the following or other steps as determined by the bank: "(a) verification of any signature; "(b) ascertaining that sufficient funds are available; "(c) affixing a 'paid' or other stamp; “(d) entering a charge or entry to a customer's account; "(e) correcting or reversing an entry or erroneous action with respect to the item.' Comment of the editorial board "This section is intended to supply guides to the meaning of the term, 'process of posting," for the purposes of sections 4-213(1)(c) and 4-303 (1) (d), that are more concrete than those that may be readily inferred from the phrase itself The definition will be helpful in determining questions as to payment and priorities arising under those sections in payor banks having centralized or automated bookkeeping procedures, under which the amounts of items are preliminarily posted and the items are then checked for signatures, stop-payment orders any the like. Upon the completion of all steps in the payor bank's usual procedure in this regard, including the recording of the payment, the item will be deemed paid for the purposes of section 4-213(1) and the amount of the item will not be affected by any notice, stop order, legal process or setoff that thereafter becomes effective as contemplated by section 4-303 (1).” 7. Add the following additional subsection to section 4-204: "(3) Presentment may be made by a presenting bank at a place where the payor bank has requested that presentment be made." Comment of the editorial board "The new subsection (3) is intended to make it clear that a presenting bank may make presentment of any item at any place requested by the payor bank, even though that place may not be one of those mentioned in section 3-504. This subsection will thus remove any doubt as to the validity of presentment by a presenting bank at a centralized bookkeeping center or electronic processing center maintained or used by the payor bank." The source of this proposal is the Federal Reserve banks. 8. Delete optional provision subsection 4-212(2). Comment This is a change (recommended by the Law and Legislative Committee of the District of Columbia Bankers Association) in modification No. (5) proposed in this committee's report (November 1962 Journal of the District of Columbia Bar Association; p. 598, 602). In the bank collection process, when a check or other item is not paid by the drawee bank, it is returned to the depositary bank through the same chain of banks by which it came. Subsection 4-212(2) authorizes the drawee bank (as well as intermediary banks in the chain) to make a direct return to the depositary bank of any unpaid item in lieu of sending it back through normal banking channels. However, this practice is not followed in the District of Columbia, and is said by the UCC official comments to be "in the process of developing in a few sections of the country." Direct return of unpaid items would involve problems relating to preservation of endorser liability, timely return, return to the wrong bank, and possibly other matters. In view of such problems and the lack of information regarding the effects of the practice of direct returns, it is now considered desirable not to have such practice authorized in the District of Columbia until it has become much more widespread and has proved to be beneficial. The retention of subsection 4-212(2) in the code would merely encourage occasional direct returns which would give rise to the problems mentioned |