Delaware poised to join the 8 other states that adopted UCC Article 12

As of July 24, 2023, 8 states have adopted the 2022 Amendments to the Uniform Commercial Code, including Article 12 regarding "Controllable Electronic Records" – Alabama, Colorado, Hawaii, Indiana, Nevada, New Mexico, North Dakota, and Washington. The Delaware legislature passed bill SB157 on June 30, adopting the 2022 Amendments to the UCC, and the bill is under consideration by the Governor. If signed into law, the 2022 Amendments would immediately come into effect in Delaware – triggering the interaction of the choice of law provisions in UCC Article 12 and the choice of law rules in current UCC Article 9.

We previously discussed the potential impact of UCC Article 12 and the concept of establishing priority ownership rights in a “Controllable Electronic Record.” The choice of law provisions included in UCC Article 12 and corresponding amendments to UCC Article 9 are fairly complex. The short version is that, within broad limits, the creator of a Controllable Electronic Record can select the governing law with respect to establishing control and priority of interests, even if the chosen jurisdiction does not have any other relation to the transaction evidenced by the Controllable Electronic Record.

However, absent widespread adoption of UCC Article 12, the effectiveness of choosing a UCC Article 12 jurisdiction to govern perfection and priority of interests in a Controllable Electronic Record is not certain, for two reasons. First, if the chosen jurisdiction has not adopted the UCC Article 12 choice of law provisions and has no nexus with the transaction evidenced by the Controllable Electronic Record, a court in another jurisdiction may not recognize the parties’ choice of law as effective, whether or not such a choice is permitted under UCC Article 12 in the chosen jurisdiction. Historically, some courts in a state with an actual nexus to a transaction have rejected a choice of law agreement between the parties choosing the law of an unrelated state, even though doing so is expressly permitted under the law of the unrelated state.

Second, and more importantly, if UCC Article 12 is not widely adopted, there is a potential conflict between (1) the rules in a jurisdiction that has adopted UCC Article 12, and (2) the provisions of UCC Article 9 in a jurisdiction that has not enacted the 2022 Amendments. Under the choice of law rules in pre-amendment UCC Article 9, whether or not the transaction has a nexus with the chosen UCC Article 12 jurisdiction, the jurisdiction for determining perfection and priority of interests in a range of digital assets (including those that would be recognized as Controllable Electronic Records, Controllable Accounts and Controllable Payment Intangibles under UCC Article 12) is usually the jurisdiction where the current owner of the digital asset is “located.” In the case of business entities, this is the jurisdiction in which the entity is organized. Under pre-amendment UCC Article 9, this rule governing choice of law for perfection and priority is not variable by agreement.

Therefore, since Delaware is the state of organization for so many business entities, adoption of UCC Article 12 in that state makes the UCC Article 12 choice of law rules available to those entities. This would exponentially expand the potential number of transactions to which UCC Article 12 could reliably be applied.

Learn more about this development, and UCC Article 12 by contacting any of the authors.