Electronic Records Under the Commercial Code

California’s Commercial Code, in Division 12, deals with controllable electronic records. Section 12101 names this division as the “Uniform Commercial Code—Controllable Electronic Records.”

Section 12102 defines the following terms: “controllable electronic record,” “qualifying purchaser,” “transferable record,” and “value.” In addition, the definitions in Division 9 (commencing with Section 9101) of “account debtor,” “controllable account,” “controllable payment intangible,” “chattel paper,” “deposit account,” “electronic money,” and “investment property” apply to this division. And, Division 1 (commencing with Section 1101) contains general definitions and principles of construction and interpretation applicable throughout this division.

Section 12103 specifies that, if there is conflict between this division and Division 9, then Division 9 governs. Also, a transaction subject to this division is subject to three additional types of statutes or regulations.

Section 12104 provides that this section applies to the acquisition and purchase of rights in a controllable account or controllable payment intangible in the same manner this section applies to a controllable electronic record. To determine whether a purchaser of a controllable account or a controllable payment intangible is a qualifying purchaser, the purchaser obtains control of the account or payment intangible if it obtains control of the controllable electronic record that evidences the account or payment intangible.

A purchaser of a controllable electronic record acquires all rights in the controllable electronic record that the transferor had or had power to transfer, except that a purchaser of a limited interest in a controllable electronic record acquires rights only to the extent of the interest purchased. A qualifying purchaser acquires its rights in the controllable electronic record free of a claim of a property right in the controllable electronic record.

Section 12105 provides that a person has control of a controllable electronic record if the electronic record, a record attached to or logically associated with the electronic record, or a system in which the electronic record is recorded, satisfies each of the specified conditions. A power of a person is not shared with another person and the person’s power is not exclusive if each of the specified conditions is satisfied.

In addition, a person has control of a controllable electronic record if another person, other than the transferor to the person of an interest in the controllable electronic record or a controllable account or controllable payment intangible evidenced by the controllable electronic record, satisfies either of the specified conditions.

Section 12106 allows an account debtor on a controllable account or controllable payment intangible to discharge its obligation by paying either of specified individuals. However, the account debtor cannot discharge its obligation by paying a person that formerly had control of the controllable electronic record if the account debtor receives a notification that meets all of the five specified conditions.

After receipt of a notification, the account debtor may discharge its obligation by paying in accordance with the notification and cannot discharge the obligation by paying a person that formerly had control. Note that notification is ineffective if any of three specified conditions apply. A person furnishes reasonable proof that control has been transferred if the person demonstrates that the transferee has the power to do all of the four specified tasks.

Section 12107 specifies that the local law of a controllable electronic record’s jurisdiction governs a matter covered by this division. For a controllable electronic record that evidences a controllable account or controllable payment intangible, the local law of the controllable electronic record’s jurisdiction governs a matter, unless an effective agreement determines that the local law of another jurisdiction governs. There are five main rules that determine a controllable electronic record’s jurisdiction under this section.