I. INTRODUCTION

The 1993 General Assembly passed House Joint Resolution 524 (Appendix 1), continuing a joint subcommittee of the House of Delegates and the Senate reviewing proposed modifications to the Uniform Commercial Code. The joint subcommittee, composed of members from the House Committee on Corporations, Insurance and Banking and the Senate Committee on Commerce and labor, continued the work of its predecessors: examining revisions to the Uniform Commercial Code proposed by the National Conference of Commissioners on Uniform State Laws ("the Conference").

The following General Assembly members were appointed to the joint subcommittee: Delegates Heilig of Norfolk, Woodrum of Roanoke, Forbes of Chesapeake, and Finney of Rocky Mount, and Senators Holland of Arlington and Norment of Williamsburg. Delegate Heilig served as chairman of the joint subcommittee.

The joint subcommittee met in Richmond at the General Assembly Building on December 14, 1993. It received comments on the Conference's proposals to repeal or revise UCC Article 6, the Bulk Transfers Act, from Virginia's Commissioner to the Conference, and from the Chairman of the Virginia Bar Association's UCC Subcommittee. The Article 6 issue was before the joint subcommittee in 1992 when it recommended repeal. A repealer bill was introduced in the 1993 General Assembly session, but was not reported out of committee.

The HJR 524 joint subcommittee recommended that a repealer bill be introduced in the 1994 Session along with a bill substantially amending Article 6, the Conference's alternate proposal. The joint subcommittee concluded that both options should be presently to the General Assembly for its consideration.

The joint subcommittee also received a general overview of UCC Article 8 (Securities) revisions proposed by the Conference. Virginia's Commissioner to the Conference advised the joint subcommittee that the proposed revisions are intended to address an area of significant concern to the federal Securities and Exchange Commission (SEC). The SEC has reportedly indicated its intent, pursuant to the federal Market Reform Act of 1990 (prompted by the stock market crash of 1987 and the demise of Drexel Burnham, a major brokerage firm), to adopt regulations promoting uniform liquidity standards in securities sales clearance and settlement systems -- unless comparable uniform state laws are adopted.

The Article 8 drafting committee, slated to meet in January 1994, may have a draft ready for submission to the American Law Institute in May 1994.Thereafter, the draft will be considered by the Conference at its annual meeting in August 1994. The joint subcommittee was advised, however, that it is uncertain whether a Conference-approved draft will be ready for General Assembly action in1995.

II. UCC ARTICLE 6; THE BULK TRANSFERS ACT

The Bulk Transfers Act (Va. Code § 8.6-101 et seq.) requires merchants to give notice to their creditors prior to selling their business inventory in a single transaction, i.e., a "bulk sale." Bulk sales frequently occur when a business is sold or discontinued. The Bulk Transfers Act ("the Act") is designed to discourage merchants from making bulk sales and failing to pay their creditors. The Act requires notice to creditors before such bulk sales are consummated, empowering creditors to void sales not conforming to the Act's requirements.

The Conference concluded that in today's commercial environment, the Act serves little useful purpose. Near-instantaneous credit checks assist manufacturers and other vendors in assessing the creditworthiness of merchants desiring to purchase business inventory on credit. Additionally, the widespread availability of "long arm" statutes and "uniform recognition of judgment" laws makes it virtually impossible, in most cases, for individuals intent upon defrauding creditors to use interstate movement as a means of evading state courts' jurisdiction or judgments.

Moreover, inventory financing under UCC Article 9 (Secured Transactions) may have displaced Article 6 as the protection of choice for manufacturers and wholesalers who sell inventory on credit. This attitude may be reflected in the decision of at least 16 other states to repeal Article 6. To date, a handful of states have taken the alternate route suggested by the Conference and adopted the Conference's Article 6 revision. A Conference position paper discussing the two options is attached as Appendix 2.

The UCC subcommittee of the Virginia Bar Association's Business Law section did not recommend the revision's adoption when Article 6 was examined by the joint subcommittee in 1992. The Bar committee reiterated its opposition to the revision before the 1993 joint subcommittee, recommending that the General Assembly repeal the article. A more extensive discussion of the Bar committee's position on this issue can be found in the 1992 joint subcommittee's final report (House Document 44 of 1993).

The joint subcommittee reviewed the following options: (i) making no change to existing law, (ii) adopting the Conference's revision to Article 6, or (iii) simply repealing Article 6 altogether. Unable to reach consensus, the joint subcommittee recommended that its staff prepare two bills for introduction in the 1994 Session of the General Assembly: one to repeal and one to amend.

III. UCC ARTICLE 8; SECURITIES.

According to the Conference, revisions to Article 8 are necessary because the article does not adequately deal with the system of securities holding through securities intermediaries that has developed in the past few decades. Article 8's provisions, to a large degree, correlate securities ownership with possession and delivery of actual share certificates. However, most securities transfers today are little more than accounting entries on the books of securities intermediaries, i.e., brokerages and depository institutions.

To bring Article 8 into the modern world of securities trading, the Conference's Article 8 revision incorporates a new concept known as "securities account entitlement" to draw together the rights of investors who hold securities indirectly through financial intermediaries. The draft describes the rights of holders of such "entitlements" and the obligations of financial intermediaries. In another significant revision, rules governing the creation and perfection of security interests in securities have been removed from Article 8 and placed in Article 9. Additionally, a new section has been added in Article 9 providing special priority rules for security interests in securities and securities account entitlements. A Conference summary of the Article 8 issues is attached as Appendix 3.

The Article 8 drafting committee, slated to meet in January 1994, expects to have a draft ready for approval by the American Law Institute in May 1994. Thereafter, it is expected the draft will be considered by the Conference at its annual meeting in August 1994. It could not be determined at the time of the joint subcommittee's meeting whether a Conference-approved draft would be ready for General Assembly action at the 1995 Session.

IV. CONCLUSION

The joint subcommittee had no further business before it and, accordingly, directed that its recommendations and proceedings in 1993 be reported to the Governor and the 1994 Session of the General Assembly.