October 2024 OBA Legal Briefs

• 2024 Oklahoma Legislation – Part III (UCC)
• FAQs regarding account documentation

2024 Oklahoma Legislation – Part III

Uniform Commercial Code Amendments

By Pauli Loeffler

Last legislative session saw the enactment of four Uniform Acts promulgated by the Uniform Law Commission (“ULC”), also known as the National Conference of Commissioners on Uniform State Laws. In the August OBA Legal briefs, I covered the Uniform Special Deposits Act found in the Banking Code. Last month I covered the Oklahoma Uniform Directed Trust Act of 2024 codified in Title 60 O.S. §§ 1201A – et seq. as well as the 2024 amendments to Oklahoma Trust Act which is likewise found in Title 60 O.S. §§ 175.01 – 175.57. This month I will cover the amendments to the Uniform Commercial Code (“UCC”).

Before going into the changes of this last uniform act, I need to plug OBA products we have available to members that will help with all the changes. The OBA has produced both the 2024 Deskbook on Estates & Trusts and the 2024 Uniform Commercial Code. Just click Products and Services on the OBA’s webpage, and it will take you to the order forms.

The Uniform Commercial Credit Code was first adopted in Oklahoma in 1961. It is codified in Title 12A and divided into Articles.

Article 1 contains definitions and general provisions applicable as default rules to transactions covered under other articles of the UCC. It was revised in 2001, and Oklahoma adopted revisions in 2005 that were effective January 2006.

Article 2 governs the sale of goods. Although this article was covered in one of my law school classes, I don’t think I have ever received a question from a banker dealing with this Article. The ULC amended this Article and the 1991 version remains in effect.

Article 2A has provisions regarding leases and leased goods. Like Article 2, it was enacted in 1988 and the ULC amended it. The 1991 version remains in effect. to do with leases. It was enacted in 1988.

While Articles 2 and 2A have little, if any, impact on financial institutions, Article 3 is important. This UCC article covers Negotiable Instruments such as drafts (including checks) and promissory notes that have their own value because their negotiability. An instrument is negotiable if it can be transferred to another person and remain enforceable against the person who made the promise to pay. Article 3 was revised in 1990. It does not apply to money, to payment orders governed by Article 4A of this title, or to securities governed by Article 8 of this title. If there is conflict between Article 3 and Article 4 or 9, Articles 4 and 9 govern. The vast majority of UCC questions I receive involve Articles 3, 4, and 9.

Article 4 of the Uniform Commercial Code governs bank deposits and collections. This Article provides rules for check processing and automated inter-bank collections. Article 4 was completely revised in 1990 and amended in 2002.

Article 4A covers funds transfers and provides a comprehensive body of law on the rights and obligations with regard to such transactions. It was added to the UCC in 1989 and enacted in Oklahoma in 1991. Uniform Commercial Code Article 4A provides a comprehensive body of law on the rights and obligations connected with fund transfers. 2012 Amendments to Section 108 of Uniform Commercial Code Article 4A provide that Article 4A applies to a remittance transfer that is not an electronic funds transfer under the Federal Electronic Funds Transfer Act (EFTA). The amendment was necessary to conform the UCC with the federal law and associated r

Article 5 of the Uniform Commercial Code Article 5 governs letters of credit, which are typically issued by a bank or other financial institution to its business customers in order to facilitate trade. Oklahoma enacted Article 5 in 1961. The ULC updated the Article in 1995 to address advances in technology and modern business practices, and Oklahoma amended the Article 5 effective Jan 1, 1997. I only get a question with regard to letters of credit once or twice a year which always makes me go re-read Article 5’s provisions.

Article 6 which covered bulk transfers was repealed in 1990. Considering that we never covered this when I was in law school (1979-1982), I am not the only one who doesn’t miss it.

Article 7 of the Uniform Commercial Code covers documents of title for personal property, including warehouse receipts, bills of lading, and other documents typically used for commercial trade. Revised Article 7, approved in 2003, updates the original version to provide a framework for the further development of electronic documents of title, and to update the article in light of state, federal and international legal developments. Oklahoma adopted revised Article 7 effective January 1, 2006. Article 7 wasn’t covered in law school Commercial Law classes, and I have never had a question regarding warehouse receipts or bills of lading.

Uniform Commercial Code Article 8 provides a modern legal structure for the system of holding securities through intermediaries. Oklahoma adopted UCC Article 8 in 1961. ULC revised the Article 8 in 1994 revision sets forth rules concerning the system through which securities are held, specifying the mechanisms by which ownership and other interests in securities are recorded and changed, and setting out some of the rights and duties of the parties who participate in the securities holding system. Oklahoma last amended this Article effective February 1, 1996.

Article 9 covers secured transactions. The last major revision occurred effective July 1, 2001. Former OBA General Counsel Charles Cheatham covered the amendments in a series of Legal Briefs: November 2000, January 2001, February 2001, March 2001, May 2001, June 2001, July 2001, August 2001, December 2001. Those Legal Briefs are not available online, but I do have copies of them in what Jeremy Cowan and I call the Way Back files.

Further revisions were made to Article 9 by the UCL in 2010. Legislation was introduced to adopt the 2010 revisions several times, but for various reasons, bills introduced to adopt the revisions were not passed. It wasn’t until the 2015 legislative session that much needed revisions regarding the proper debtor’s name were enacted in Oklahoma. I covered those revisions with an effective date of November 1, 2015 in the August and October 2015 OBA Legal Briefs which are available online.

Article 12 is the 2022 amendment to the UCC. It is an entirely new Article addressing emerging technologies, providing updated rules for commercial transactions involving virtual currencies, distributed ledger technologies (including blockchain), artificial intelligence, and other technological developments. The amendments span almost every article of the UCC. Article 12 addresses certain types of digital assets defined as “Controllable Electronic Records” (CERs). The amendments provide new default rules to govern transactions involving these new technologies and clarify the UCC’s applicability to mixed transactions involving both goods and services. The amendments also contain some miscellaneous revisions unrelated to technological developments but providing needed clarification. I will note that Article 12 has been enacted in 25 states unlike the Uniform Special Deposit Act which has only been enacted in four states and the Uniform Directed Trust Act which has been enacted by 16 states.

Lastly, we have a new Article A containing transitional provisions under for the UCC 2024 Amendments.

FAQs regarding account documentation.

We get questions what is needed to set in order to set up certain specialized deposit accounts. Here are few account types and what is needed to open them.

Insurance Premium Trust Accounts: Checks for premiums will be made payable to the insurance company rather than the agent. The account itself will use the TIN (Tax Identification Number) of the agent or the insurance agency followed by name of insurer Premium Trust. For example, John Brown Insurance Agency, State Farm Premium Trust Account. In the a garnishment is received against John Brown or John Brown Insurance Agency, it won’t attach to the Premium Trust Account. You will also want a copy of the contract with State Farm. A separate account for the operating expenses of the agent or agency should be set up for commissions paid by the insurer. If John Brown is an independent agent for more than one insurer, a separate premium trust account should be set up for each one.

Property Management Security Deposit Accounts: Landlord-tenant statutes require trust accounts to be set up for security deposits. You need a copy of the agreement between the property owner and the management company regarding maintenance of the required account. The account will be set up in the name of the property management company using its EIN but will be denominated Security Deposit Trust Account to prevent the account being subject to levies or garnishments against the property management company.

Medicaid Income Pension Trust: An MIPT is a bona fide trust, and you set the account as you would any other trust. It is irrevocable, but it is one of the exceptions to the general rule that an irrevocable trust has to have its own EIN. You use the SSN of the settlor/beneficiary and title the account “Sally Jones, Medicaid Income Pension Trust.” The settlor/beneficiary cannot be the trustee for this type of trust, so it has to be some other individual. The trustee cannot add an authorized signer, and the account cannot have a POD. The bank has no increased duty to monitor the account. Upon the death of the settlor/beneficiary, the Oklahoma Health Care Authority will send a letter to the trustee requesting the amount of Medicaid expended on behalf of the beneficiary. It will send a copy of the letter to the bank as well. If there are any funds left after payment to OHCA, the funds may be distributed to the beneficiary’s heirs using the Banking Code Sec. 906 Affidavit of Heirs. If the beneficiary has a will, it may be possible to use the Probate Code Sec. 393 Affidavit to disburse the funds without a probate.

Oklahoma Lottery Account: The LLC must provide paperwork from the Oklahoma Lottery Commission, and the account is set up in the form, “ABC LLC, ITF The Oklahoma Lottery Commission.” Your customer is the LLC, and you will complete your CIP and Beneficial Ownership routines on the LLC. The LLC designates the authorized signer(s) on the account. The LLC’s TIN is used on the account.

Part of the packet of Lottery info will be an authorization for the Lottery Commission to periodically charge and credit the account via ACH. Because state law permits tickets sales only for cash or via debit card purchase (no credit cards, no checks), you should not see any checks deposited to the account, other than checks drawn on the customer’s operating account. The lottery account cannot be linked for online transfers to or from that operating account (the lottery account should be “view only” if online access is provided).

Funeral home/burial trust accounts: These accounts generally use the name and EIN of the Funeral Home, Burial Trust, and the garnishment will not be subject to creditors of the funeral home. Most funeral homes use a single trust account, but sometimes the funeral home will set up individual Burial Trust accounts, If the bank receives a garnishment against the individual. If this happens, contact the funeral home, and it will respond to the garnishment and claim the exemption on behalf of the individual.