Article 9 of the Uniform Commercial Code (the “UCC”) requires a creditor to perfect its security interests against its collateral in order to recover the creditor’s priority in such collateral. Former versions of the UCC that predate 2001 provided that the Article 9’s perfection requirements did not apply “[t]o a transfer by a government or a governmental unit of the state.” This exception was eliminated from the UCC in 2001. Thirty-two states, however, still have versions of the UCC that contain some version of this exception. Within the states that still enforce this exception for governmental units, there are conflicting views as to how to interpret this language in cases where the governmental unit is a creditor.
The language, “transfer by this state or a governmental unit of this state,” does not clearly establish whether the exception to the Article 9 perfection requirement applies when the governmental unit is a creditor or a debtor. While all courts generally agree that the exception applies when the state or governmental unit is the debtor, courts in several states have held that the exception does not apply to governmental unit creditors. Courts in a minority of states, however, have held that the exception applies regardless of whether the governmental unit is the debtor or creditor. The former position is the majority view amongst the states which still employ this exception, while the latter position is the minority view.
This Article will discuss both the majority and the minority view on the governmental exception to Article 9. Part I will discuss the majority view that the exception only applies to governmental unit debtors. Part II will discuss the minority view that the government exception to the UCC applies to government creditors as well as debtors. Part III will discuss the impact of this split of authority.