Illinois appears to have a non-uniform UCC provision, providing that Article 9 is not applicable to a transfer by a government or governmental subdivision or agency. It is being argued that a UCC filing against a municipality would be ineffective under this provision. Can you explain the history of this provision and how it should be interpreted?

We believe that Article 9 of Illinois’ Uniform Commercial Code does exclude from its scope any transfers in which a governmental unit (including a municipality) is the borrower. Section 9-109 excludes from coverage “a transfer by a government or governmental subdivision or agency.” While the term “governmental subdivision or agency” is not defined, the definition of “governmental unit” includes a municipality, and we believe that this exclusion is intended to apply to municipalities.

This exclusion for governmental transfers was a holdover from the pre-2000 version of Article 9, which was entirely rewritten in 2000 by the Uniform Law Commission. The ULC’s revised version of Article 9 would have removed the blanket exclusion for governmental transfers, but the exclusion in Section 9-109(d)(13) was reinserted into Article 9 by a non-uniform amendment during the process of passing the amendments in the Illinois General Assembly. This reinsertion may explain why Illinois’ Article 9 includes provisions applicable to “public-finance transactions,” even though Section 9-109(d)(13) excludes such transactions from Article 9’s scope.

For resources related to our guidance, please see:

Illinois UCC, 810 ILCS 5/9-109(d)(13) (“Inapplicability of Article. This Article does not apply to: . . . (13) a transfer by a government or governmental subdivision or agency; . . .”)

Illinois UCC, 810 ILCS 5/9-109(c) (“Extent to which Article does not apply. This Article does not apply to the extent that: . . . (2) another statute of this State expressly governs the creation, perfection, priority, or enforcement of a security interest created by this State or a governmental unit of this State; [or] (3) a statute of another State, a foreign country, or a governmental unit of another State or a foreign country, other than a statute generally applicable to security interests, expressly governs creation, perfection, priority, or enforcement of a security interest created by the State, country, or governmental unit; . . .”)

Illinois UCC, 810 ILCS 5/9-102(45) (“‘Governmental unit’ means a subdivision, agency, department, county, parish, municipality, or other unit of the government of the United States, a State, or a foreign country. The term includes an organization having a separate corporate existence if the organization is eligible to issue debt on which interest is exempt from income taxation under the laws of the United States.”)

Illinois UCC, 810 ILCS 5/9-102(67) (“‘Public-finance transaction’ means a secured transaction in connection with which: (A) debt securities are issued; (B) all or a portion of the securities issued have an initial stated maturity of at least 20 years; and (C) the debtor, obligor, secured party, account debtor or other person obligated on collateral, assignor or assignee of a secured obligation, or assignor or assignee of a security interest is a State or a governmental unit of a State.”)

Illinois Bankers Association, The ABCs of Illinois’ Revised UCC Article 9, J. Mark Fisher (2000) (“Appendix III: Principal Nonuniform Provisions of Revised Article 9 as Enacted in Illinois. . . 2. Municipal Finance Transactions and Medicaid Trusts Excluded. Illinois preserves existing law by excluding transfers from governments or governmental units from the scope of Rev. Art. 9.”)

Illinois Municipal Code, 65 ILCS 5/8-1-3.1 (“Borrowing from financial institutions. . . . The corporate authorities may also borrow money from any bank or other financial institution provided such money shall be repaid within 10 years from the time the money is borrowed. The mayor or president of the municipality, as the case may be, shall execute a promissory note or similar debt instrument, but not a bond, to evidence the indebtedness incurred by the borrowing. The obligation to make the payments due under the promissory note or other debt instrument shall be a lawful direct general obligation of the municipality payable from the general funds of the municipality and such other sources of payment as are otherwise lawfully available. The promissory note or other debt instrument shall be authorized by an ordinance passed by the corporate authorities and shall be valid whether or not an appropriation with respect to that ordinance is included in any annual or supplemental appropriation adopted by the corporate authorities. . . .”)