учебный год 2023 / Helsen, Security in Movables Revisited. Belgium’s Rethinking of the Article 9 UCC System

purchaser requires that the purchaser take possession of the goods or have a right to recover the goods under Article 2.283

The Pledge law contains an arrangement that is functionally highly similar. As mentioned above, third parties can assume that the sale of goods in the ordinary course of the debtor’s business is authorized. Even when this is not the case, either because the sale was in fact not authorized regardless of its ordinary course of business nature or because the sale did not fall within the scope of the ordinary course of the debtor’s business at all, the purchaser can enjoy protection if he acted in good faith. As long as the purchaser takes possession of the goods and acts in good faith, he will still take the goods free and clear.284 However, under the Pledge law, registration will put professional purchasers on constructive notice of the security interest, destroying their good faith, thereby denying them the benefit of the bona fide purchase.285 Consumers, therefore, are not required to search the register, whether or not the sale occurs in the ordinary course of the business of the seller. This stands in stark contrast with US law, where consumers who buy from other consumers and therefore, by definition, outside of the ordinary course of the business of the seller are nevertheless required to search the register.286 Another important difference is that, under US law, the ordinary course exception only extinguishes security interests created by the buyer’s seller,287 whereas the Belgian protection of Article 2279 CC is conceived as a means of creating property rights for the buyer, no matter who created the security interest, which is extinguished as a consequence.

As the above makes clear, security interests can be extinguished by certain purchases by third parties acting in good faith. This does not necessarily mean, however, that the secured creditor loses all protection. Firstly, both jurisdictions

Transactions (St. Paul, MN: Thomson Reuters 2010), p 360; D. WHALEY, Secured Transactions

(Chicago, IL: Barbri 2002), p 121.

283 §1-201(b)(9) UCC. See §2-502 and §2-716 UCC, which identify the buyers who do not take possession yet can still qualify as ordinary course purchasers. If the secured creditor perfects his security interest by taking possession of the collateral, then that security interest cannot be defeated by an ordinary course of business transaction, see §9-320(e) jo. §9-313 UCC.

284Article 24 Pledge law; J. DEL CORRAL, ‘Belang van openbaar bezit voor de toepassing van artikel 2279 lid 1 BW’, NJW 2014, No. 305, p 565; M.E. STORME, ‘Paritas creditorum, voorrang en roerende zekerheden’, 2. TPR 2006, p 996.

285Article 25 Pledge law; J. BAECK & M. KRUITHOF, Het nieuwe zekerheidsrecht (Antwerpen: Intersentia 2014), p 53.

286This follows from §9-320(b) UCC; L. LOPUCKI & E. WARREN, Secured Credit. A Systems Approach, 7th edn (New York, NY: Wolters Kluwer Law and Business 2012), p 610; L. RUSCH & S. SEPINUCK, Problems and Materials on Secured Transactions (St. Paul, MN: Thomson Reuters 2010), p 372.

287§9-320(a) UCC; L. AHERN, ‘The Law of Debtors and Creditors’, in X, Anderson on the Uniform Commercial Code, 3rd edn, §7-182, lawschool.westlaw.com; L. RUSCH & S. SEPINUCK, Problems and Materials on Secured Transactions (St. Paul, MN: Thomson Reuters 2010), p 369.

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allow the secured party to trace the value given by the third-party purchaser in the hands of the debtor, albeit to a different extent. Under the UCC, the security interest will automatically attach to the proceeds of the disposition.288

Furthermore, that security interest will also remain perfected in the proceeds, if the security interest in the original collateral was perfected, for a grace period of twenty days. On the twenty-first day, this perfection will lapse, unless the initial filing statement can put third parties on notice,289 the proceeds are identifiable cash proceeds, or the security interest in the proceeds is itself perfected within the twenty-day grace period.290 Belgian law allows for a similar concept of value tracing, but its extent is more limited. The Pledge law explicitly confirms the operation of the principle of in rem subrogation, extending the pledge to the debt claims that replace the collateral in the debtor’s estate.291 The proceeds which can be traced are therefore, in the traditional view, limited to the initial debt claim. As soon as this claim is paid and replaced by cash which is commingled in the estate of the debtor, the pledge is extinguished.292 Some scholars, however, would argue otherwise, and it remains to be seen to what extent case law will follow either position.293 The parties can, however, cover this contingency through the terms of the security agreement by defining the object of the pledge in such a way as to create a floating pledge.

Secondly, the unauthorized disposition of collateral to the detriment of the secured creditors can subject the debtor to criminal sanctions. Some US states have passed legislation which makes the sale of collateral without authorization and without promptly remitting the proceeds to the secured creditor a criminal offence.294 The Pledge law also imposes criminal penalties on any fraudulent disposition or relocation of the collateral.295 In addition and more generally, the

288§9-315(a) UCC. On the multiplying effect of this provision on the collateral, see L. LOPUCKI & E. WARREN, Secured Credit. A Systems Approach, 7th edn (New York, NY: Wolters Kluwer Law and Business 2012), p 170.

289The conditions for this first exception are that (1) a filed financing statement covers the initial collateral, (2) the proceeds are collateral in which a security interest can be perfected by filing in that same office, and (3) the proceeds are not acquired with cash proceeds, see §9-315(d)(1) UCC. In this case, should the initial financing statement lapse, due to expiration of its 5-year validity, the security interest become unperfected at the time of expiration of the grace period.

290§9-315(d) UCC.

291Article 9 Pledge law. See also J. BAECK & M. KRUITHOF, Het nieuwe zekerheidsrecht (Antwerpen: Intersentia 2014), p 49.

292M.E. STORME, Insolventierecht in kort bestek (Gent-Mariakerke 2014), p 20, www.storme.be; M.E. STORME, ‘Paritas creditorum, voorrang en roerende zekerheden’, 2. TPR 2006, p 1020.

293J. BAECK & M. KRUITHOF, Het nieuwe zekerheidsrecht (Antwerpen: Intersentia 2014), p 50.

294L. LOPUCKI & E. WARREN, Secured Credit. A Systems Approach, 7th edn (New York, NY: Wolters Kluwer Law and Business 2012), p 170; L. RUSCH & S. SEPINUCK, Problems and Materials on Secured Transactions (St. Paul, MN: Thomson Reuters 2010), p 359.

295Article 22 Pledge law.

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Belgian criminal code outlaws the fraudulent effectuation of one’s insolvency, under which description this kind of transaction can be brought.296

8.3.Issues of Identification of Collateral: Value Tracing

Traditionally, Belgian property law requires that in rem rights, of which pledges are an example, conform to the specialty principle. According to this principle, in rem rights can only have bearing on specific objects, determined and identified ut singuli, as opposed to obligatory rights that pertain to a certain value, without this connection to specific goods in which the value may be stored.297 The consequence of the application of this principle for in rem security interests was that they were lost upon commingling or incorporation into other movable or immovable goods of the collateral, as they were no longer individually identifiable.298

In order to increase the practical scope of assets against which can be borrowed, the Pledge law has relaxed this principle along three conceptual lines.299

The first such relaxation pertains to the incorporation of the collateral into another movable, which I will call ‘processing’. Article 18 of the Pledge law allows the pledger, who remains in the possession of the collateral, to process the collateral unless the parties have agreed otherwise. If this processing results in a new good, then under old law, the pledge would be lost, for lack of compliance with the specialty principle. Under the Pledge law, however, the pledge will encumber this newly created good, unless the parties have agreed otherwise. If this processing also entailed the use of other goods which belonged to third parties and which can no longer be separated as a practical or economic matter, then the pledge will still encumber the newly created good, if the initial collateral was the primary good.300 The third party to whom the other parts belonged will then have an obligatory claim for unjust enrichment.301

296 Article 490bis Belgian Criminal Code. See also I. DELBROUCK, ‘Bedrieglijk bewerken van

onvermogen’, in X., Postal Memorialis. Lexicon strafrecht, strafvordering en bijzondere wetten

(Mechelen: Kluwer) (loosel.), B 35/01–B35/12.

297M.E. STORME, Insolventierecht in kort bestek (Gent-Mariakerke, 2014), p 59, www.storme.be.

298For an application of this principle on the retention of title, see V. SAGAERT, ‘Het “in natura”-vereiste bij eigendomsvoorbehoud: de gevolgen van de bewerking, vermenging en wederverkoop’, TBH 2003, p 774.

299This was one of the express goals of the reform, see Preparatory Works of the New Belgian Pledge Law, Parl. St., Doc. 53, 2463/001, p 14.

300As defined by Art. 567 CC: where the other goods merely decorate, complement, or support the use of the primary good, or alternatively, the good with the highest value.

301Article 18 Pledge law; J. BAECK & M. KRUITHOF, Het nieuwe zekerheidsrecht (Antwerpen: Intersentia 2014), p 15.

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The second strand of relaxation of the specialty principle relaxes the consequences of commingling of the collateral in the Belgian sense. Under the Pledge law, if the collateral is commingled, the pledge simply encumbers any goods in the pool that meet the description of the collateral.302 The pledge therefore no longer has to maintain its connection to the exact, specific goods in which it was initially granted.

US law employs mechanisms similar to these, be it along slightly different conceptual lines. The concept of processing in Belgian law is similar to that of accession in the UCC but moves beyond that and partially into what US law calls ‘commingling’. Accession is defined as goods that are physically united with other goods in such a manner that the identity of the original goods is not lost.303 If the identity of the original good is lost, then the goods are ‘commingled’ in the American sense.304 This concept differs slightly, however, from the Belgian concept of commingling, as it goes beyond the mere bringing together of goods of the same general characteristics so that the original one is no longer identifiable, that is, the Belgian form of commingling, and includes some instances of what under Belgian law would be processing.

Priority in accessions is governed by §9-335 UCC. A security interest that had been perfected before the collateral became an accession remains perfected in the collateral. Except for certificate-of-title collateral, the normal priority rules apply. If the collateral is an accession to a good in which a security interest is perfected by compliance with a certificate-of-title statute, this latter security interest will have priority over the one in the accession.305 Furthermore, the secured party who has priority over all other claimants in the whole has the right to remove the accession which is his collateral, upon default of the debtor.306 If, over the course of this removal, the whole or the other goods suffer damage, the removing creditor will have to reimburse this damage.307

If, on the other hand, the goods that are brought together do lose their identity, they are commingled under US law. A security interest does not exist in commingled goods as such; however, it may attach to the product or mass created by the commingling. If a security interest was perfected in the goods before commingling, it remains perfected in the product or mass. If this is the case for

302Article 20 Pledge law.

303§9-102(a)(1) UCC.

304§9-336(a) UCC; L. AHERN, ‘The Law of Debtors and Creditors’, in X, Anderson on the Uniform Commercial Code, 3rd edn, §7:203, lawschool.westlaw.com; E. SMITH, ‘Overview of Revised Article 9’, 73. American Bankruptcy Law Journal 1999, p 35.

305§9-335(d) UCC; L. AHERN, ‘The Law of Debtors and Creditors’, in X, Anderson on the Uniform Commercial Code, 3rd edn, §7:201, lawschool.westlaw.com.

306§9-335(e) UCC.

307§9-335(f) UCC; L. AHERN, ‘The Law of Debtors and Creditors’, in X, Anderson on the Uniform Commercial Code, 3rd edn, §7:202, lawschool.westlaw.com.

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multiple security interests, they rank equally according to the ratio that the cost of the goods to which each interest originally attached bears to the cost of the total product or mass.308

The third and last digression from the specialty principle by the Pledge law is connected to the incorporation of the collateral into an immovable asset and was discussed above. Where the secured creditor would, under old law, be relegated to a general unsecured creditor, the Pledge law accords him priority in the proceeds of the real estate in which his collateral was incorporated.309 The UCC, on the other hand, requires that the secured creditor do a separate fixture filing in the relevant office in order to maintain perfection.

While these relaxations brought about by the Pledge law are obviously inspired by the will to accommodate commercial practices, one could argue that they do so at the expense of the coherence of the system of in rem rights.

9.Conclusion

The Pledge law set out to bring the Belgian system of movable collateral into the twenty-first century. In order to accomplish this, the drafters looked at a number of sources, including the DCFR and the UNCITRAL legislative guide for secured transactions. The closest point of comparison that is actually a functioning, applied legal system, however, is the American system laid down in Article 9 UCC. Given the rather compact nature of the Pledge law, many questions remain as to its practical application. The Belgian executive is currently in the process of setting up the practical components of the register, which is the cornerstone of the reform. Once that work is complete, the Pledge law will go into effect and will need to be applied and interpreted by the judiciary. In order to get a head start, this paper has compared the two systems step by step, along functional lines, in order to raise questions and propose answers to support this application of the Pledge law.

On a more general level, the basic principles of the system are often stronger in the Pledge law, partly due to the benefit of hindsight and partly due to the less complicated institutional structure. This has allowed Belgium to start with a single register, designed digitally, and administered online. The system therefore follows current technical possibilities and reality, for instance by allowing for electronic signatures and modern means of communication in concluding the security agreement.

When we zoom in to a more detailed level, however, the UCC system is much more elaborate and better equipped to deal with the myriad intricacies of

308 §9-336(a) to (f) UCC; L. AHERN, ‘The Law of Debtors and Creditors’, in X, Anderson on the Uniform Commercial Code, 3rd edn, §7:203, lawschool.westlaw.com; E. SMITH, ‘Overview of Revised Article 9’, 73. American Bankruptcy Law Journal 1999, p 35.

309 Article 19 Pledge law.

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practice. This is where the Belgian system can learn a great deal from the detail and experience of the UCC. Some of the more salient lessons will be repeated below.

When movable collateral is incorporated into an immovable, US law requires a fixture filing to put third parties on notice of the continuing security interest in the movable collateral. Belgian law also provides for continuing priority, however without any form of specific notice to the purchaser or mortgagee of the immovable. It would therefore be advisable that Belgian law would create a similar type of fixture filing or that practitioners be aware of this risk and perform a search of the register as part of their due diligence, leading up to a purchase or mortgaging of the real estate in question.

The standards used in both systems for the sufficiency of the description of the collateral are very similar: the description must reasonably allow for identification. The UCC explicitly excludes supergeneric descriptions, and it seems safe to say that these will also be rejected by the Belgian courts. In determining where along the spectrum from specific identification to supergeneric description the line should be drawn, the many factual decisions in the US could be highly instructive. Furthermore, in order to increase legal certainty, Belgian case law and doctrine would be well advised to develop safe harbour descriptions similar to those defined in the UCC. The inclusion of after-acquired collateral in the coverage of the pledge or security interest is, as a principle, possible in both jurisdictions. The question remains, however, which type of language the security agreement must contain for such inclusion. Again, the development of safe harbour clauses, such as ‘inventory’ or ‘business’, would be helpful. A clear line can be drawn as to the interpretive value of the parties’ course of dealing. Since the legitimacy of security interests is a function of their public nature, such course of dealing, which is difficult to observe, is to be rejected as an interpretive factor, at least to the extent that this might affect the position of third parties.

In case the debtor’s name changes, the UCC allows for a four-month grace period during which the secured party can renew its filing. Such a grace period will not likely be developed under Belgian law, as there is no legal basis for it, and it would violate the principle of public notice. When the filing statement is about to expire, it can be renewed seamlessly in both jurisdictions. As a practical matter, US law required the renewing party to wait until the six-month window before expiration before it can file a continuation statement. It seems advisable that the Belgian system would require a similar waiting period.

The starting point of any execution is default by the debtor. US law grants the parties more explicit leeway in negotiating what exactly will constitute default in their relationship. This freedom should be accepted under Belgian law as well. The disposition of the collateral at the end of the execution process can be performed in a variety of ways. Even though the Pledge law mentions only selling and leasing, it would be more in tune with the underlying philosophy of the

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reform to interpret this as an enumeration referring to the broader concept of ‘disposition’, as it is used under US law. The collateral does not necessarily need to be disposed of, as the creditor can also appropriate it in satisfaction of the debt. One question that remains under the current formulation of the Pledge law is to what extent the creditor’s acceptance of the collateral in satisfaction of the debt can be deduced from the parties’ actions. As it stands, this determination will have to be based on the general law of obligations, as the Pledge law provides no specific guidelines. Under the UCC, however, such deduction is excluded, as acceptance can only be based on an authenticated record. This latter rule has the benefit of clarity and legal certainty.

During the procedure of execution, the creditor will be required to notify the debtor and the other creditors who enjoy a security interest in the same collateral or have levied on it before disposition or appropriation of that collateral. Practically speaking, the creditor will need to search the register and the Central Database of Property Seizures and then notify the interested parties. The UCC allows for a ten-day cut-off period, during which the creditor can search the register and notify. Belgian practice will need to develop a similar rule, although the cut-off period could be shorter given the easy access to both registers.

If the debt is fulfilled without incident, title to the collateral will need to be cleared by the secured party in both jurisdictions. In the case of consumer goods, the UCC arms this provision with a one-month deadline, shortened to twenty days if the debtor actually asks for such termination.

Finally, there is the issue of value tracing upon sale of the collateral in the ordinary course of business of the debtor. The UCC allows for rather far-reaching value tracing but has encapsulated this in the notice system. Under the traditional view of in rem subrogation in Belgium, value tracing is much more limited. The competing, more open view of subrogation would allow for a system of value tracing that more closely resembles that of the UCC, however without notice, which would violate one of the underlying principles of the reform. Therefore, practitioners would be better off developing a way to file their continued interest in the traced value in order to strengthen their position.

The Belgian reform shows great promise and, in its desire to be an example to the rest of Europe, has set a high bar for itself. Many questions remain, however, as to its implementation and practical application. By looking at one of the main inspirations for the reform, we can pre-empt many problems and provide solutions before they are needed.

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