On July 1, 2024, the Commonwealth of Pennsylvania joined twenty-three other states in adopting Uniform Commercial Code Article 12 and the accompanying amendments to the Pennsylvania Uniform Commercial Code.

The Business Law Section of the Pennsylvania Bar Association (PBA) established a UCC Article 12 Adoption Task Force, made up of practitioners and professors from across Pennsylvania, in December 2022 chaired by Beverly Weiss Manne of Tucker Arensberg, P.C. . The task force set about making sure that the new Article 12 and amendments were consistent with other Pennsylvania law and working on the proposed law that had been approved by the American Law Institute in May 2022 and by the Uniform Law Commission in July 2022. 2022. However, unlike the ULC proposed amendments, the Pennsylvania adoption does not include a definition of “electronic money” which deals with digital currency as banks and governments are experimenting with those things. The PBA Task Force did not believe it was necessary to address electronic money issues given the current state of uncertainty over central bank digital currency (CBDC) and the difference of opinion of many people on the propriety of such provisions. The elimination of that provision did not weaken or substantively modify the 2022 Amendments. 

On July 1, 2024, the Governor of Pennsylvania signed Act 41 of 2024 which provides for Amendments to various Articles of the Uniform Commercial Code (“UCC”) and for the adoption of new Article 12. The “effective” date of Act 41 is 60 days after enactment (Section 39 of Act 41) – or Friday, August 30, 2024. The Act was sponsored in the Pennsylvania Senate by Senators Rothman, Dush, and Pennycuick and had been introduced on March 22, 2024 as Senate Bill 1084 of 2024.

Act 41 brings the Pennsylvania UCC into the digital age by providing commercial law rules for a new category of transactions: the transfer and leveraging of virtual currencies and certain other digital assets. Digital assets are ethereal in nature and since digital assets are intangible and you cannot exercise physical dominion over a digital asset; pre-amendment UCC (which relied, in many cases, on possession) was a poor fit and required workarounds by courts and counsel.

New Article 12 (referred to as Division 12 under the PA statutory protocols but which is universally referred to as “Article 12”) governs “controllable electronic records” (CER) that, in turn, include various electronic assets such as non-fungible tokens, virtual currencies, and electronic accounts and payment obligations. The incorporation of this new classification of property necessitated UCC-wide changes; almost every article of the PA UCC was amended to incorporate the provisions of Division 12. Act 41 accommodates emerged and emerging technologies such as distributed ledger technology (a type of which is known as “blockchain”), and artificial intelligence.

There are transition rules and postponed effective dates for certain provisions that will ease in changes to the status of records that previously would have been considered general intangibles and now come within the definition of a CER.

What is UCC Article 12?

Act 41, containing new Article 12, amends Title 13,“Commercial Code,” of Pennsylvania’s Consolidated Statues (13 PA.C.S.). Article 12 covers certain intangible digital assets, by classifying these assets as CERs, “controllable accounts,” and “controllable payment intangibles” (“CER Assets”). New Article 12 provides rules for the control of CERs, the transfer of CERs and enabling good faith purchasers to assume CERs free of competing property claims. Adopting a new classification of property required changes across almost every other Division of the UCC, and almost every article of the UCC is being amended to incorporate and adapt to the provisions of Article 12. Prudently, new Article 12 was drafted to be technology neutral so, if and when technology changes, updates will not be needed to keep the law relevant.

Application of Article 12 – the concept of “control.”  

The cornerstone of Article 12 is the ability to “control” the digital asset. So for Article 12 to apply, the asset must fall within the definition of a CER: a record that is stored in an electronic medium and that can be subjected to “control.” 12-102(a)(1). “Control” is a key concept, which requires a person to have the power to avail substantially all of the benefits of the electronic record, prevent others from enjoying substantially all of the benefits, transfer control, and readily identify themselves as having control. Notably, Article 12 excludes many other existing categories such as chattel paper, deposit accounts, and certain general intangibles. Article 12 governs just a subset of electronic records, i.e., the CER. Section 12-105 instructs parties on how to take “control” of a CER.

Transfers and Qualifying Purchasers: The Take Free Rule.

The second most important concept in Article 12 is the “qualifying purchaser.” A qualifying purchaser is a purchaser who obtains control of a CER: for value; in good faith; and without notice of a property claim to the CER. These rules make controllable electronic records negotiable. Like the holder in due course under Article 3 and the protected purchaser under Article 8, Article 12 provides special rights for a “qualifying purchaser.”  A purchaser of a CER acquires all rights that the transferor had. But a “qualifying purchaser” – the innocent party who has bought or been paid in CERs – takes free of any property claims to the CER.

Security Interests.

Article 9 is amended to establish rules for when CER Assets will be collateral in a secured transaction. The Article 9 rules for attachment continue to apply to security interests in CERs: a debtor has rights in the collateral; a security agreement is authenticated granting a security interest; and value is given. A security interest in CER Assets may still be perfected by the filing of a financing statement, BUT the filing of a financing statement is NOT notice of a property claim to a CER. The special uniform rules for CER Assets provide that perfection in a CER can now also be achieved by obtaining control of the CER. (§12-105). A security interest in a CER perfected by control has priority over a conflicting security interest perfected only by filing or by another method other than control. §9-326. Secured parties may take free of competing property interests or receive protections and benefits as qualifying purchasers who acquired whatever right the transferor had or had the power to transfer. §12-104(e).

Tethered Assets.

Some digital assets may not have intrinsic value. Blockchain records for cryptocurrency have value because people believe they have value. Other records evidence rights that arise from or exist in other assets, and those are referred to as tethered assets because their value is tied to the other asset’s value. The rights in that other asset are controlled by other law. The take-free rules apply only to the CER, not to any payment right or property right evidenced by the CER, unless another law provides otherwise. Exceptions are Controllable Accounts and Controllable Payment Intangibles.

Governing Law.

Since intangible assets have no physical location, §12-107 provides that the governing law for CER Assets will be the local law of the CER’s jurisdiction, unless the record is a controllable account or controllable payment intangible. If the CER (or the system in which it is recorded) has not provided for or identified its particular jurisdiction, then its jurisdiction will be determined after application of a waterfall of rules. If none apply, the jurisdiction will be the District of Columbia. Because so many corporations are formed in Delaware, it is important to point out that Delaware has adopted Article 12.

Transition Rules.

Article 12 contains transition rules that apply to both Articles 9 and 12. They refer to an “Adjustment Date,” which in Pennsylvania will be August 30, 2023. There is also a transition period where a secured party’s priority that exists as of enactment is preserved for a period of time so it can act to ensure its lien remains perfected.