If a bank processes ACH debits against its customer’s deposit account when the debits were originated by online payday lenders making loans which the bank allegedly knew were illegal under state law, are there any theories by which the bank can be held liable to the customer? This is a recurrent scenario. Under the ACH payment system, the consumer debtor is the “receiver” of the ACH debits, the consumer’s bank is the “receiving depository financial institution” (RDFI), the payday lender is the “originator” of the ACH debits, and the lender’s bank introduces debit entries into the ACH system in its role as “originating depository financial institution” (ODFI). In two recent cases—one from New York and the other from Pennsylvania—the courts rejected a potpourri of theories used by the receiver to impose liability on its bank as RDFI. This is a big issue for banks, since annual ACH dollar amounts total $39 trillion based on 22 billion transactions.
The healthcare industry has struggled for some time with solving operational weaknesses and cutting expenses to become profitable on Medicare rates. This has created instability and put significant pressure on hospital margins. As lenders evaluate loans made in the healthcare industry, one of the main sources of revenue – and repayment of debts – are reimbursements that healthcare providers receive from the Center for Medicare and Medicaid Services ("CMS"). Many healthcare borrowers include healthcare insurance receivables and accounts in their borrowing bases. This article explores best practices and potential pitfalls for enforcing – not just perfecting – a security interest in these receivables.
In a notable case from New Jersey, a factoring company (LAF) financed an attorney's lawsuit and filed a financing statement to notify the world of advances it had made. The attorney then went to another financer (Law Cash) and got an unsecured loan to finish the litigation. Which financer had priority to the proceeds of the lawsuit settlement? The court ruled that the unsecured creditor prevailed to the extent that it had received checks drawn on the debtor's deposit account, under the powerful take-free rule of UCC 9-332(b). It made no difference that Law Cash never bothered to check the UCC records. We think the decision is correct.
On March 26, 2019, a 2-1 split panel of the First Circuit affirmed a lower court decision that dismissed a putative class action brought against Citizens Bank NA, a national bank. Fawcett v. Citizens Bank N.A., 919 F.3d 133 (1st Cir. 2019). The First Circuit panel concluded that the "flat excess overdraft fees" charged by the bank did not qualify as usurious "interest," but were in the nature of deposit account service charges.
If a bank makes a loan to a borrower who has won the lottery, does the bank’s security interest in the stream of payments attach in light of a special state statute that prohibits the assignment of lottery winnings? A significant decision from Missouri okays the security interest, based on UCC 9-406 and its free-transferability rule. That’s good news for the Missouri secured lender, but in a time of big-buck lotteries there are many other issues that lurk beneath the surface.
Under pre-UCC law, a consignor of goods was generally not required to record its interest to protect itself against third parties dealing with the consignee. This was true even though the consignor retained a kind of secret lien in the sense that the consignee was clothed with apparent ownership of the goods on hand when they really belonged to another. Under the UCC, however, the duty of filing a financing statement is clearly imposed on the consignor.
When it comes to perfecting security interests, the line between real estate and personal property can be fuzzy. In a notable decision from the Seventh Circuit, applying Wisconsin law, the court ruled that a real estate mortgage can attach to a vendor’s interest in a land contract, including the stream of payments coming from the vendee. The court also ruled that the secured lender properly perfected its lien on the vendor’s interest by recording its mortgage in the county land records rather than by filing a UCC financing statement with the Wisconsin secretary of state. The Seventh Circuit decision clashes with cases in some other jurisdictions holding that a vendor’s interest in a real estate sales contract is personal property rather than real estate; it is an “account” under Article 9 that requires the filing of a financing statement.
In a recent case involving multiple secured lenders claiming priority to two high-end tractors, the Iowa court of appeals has ruled that the tractors were sold “outside an implied course of dealing.” As a result, the original lender’s security interest was not cut off by the sale. The case applies one of the most basic priority rules found in Article 9, UCC 9-315, which provides that a security interest continues in collateral notwithstanding any disposition unless the secured party authorized the disposition free of the security interest. In the Iowa case, the court found that the secured lender had not authorized any cutoff of its security interest.
In our prior story, we analyzed a recent Iowa case where the lender’s perfected security interest in farm equipment could not be cut off by a third party. Now let’s take a broader look at the relevant UCC provision, 9-315(a). That provision can be of great comfort to the secured lender. Unless (1) the purchaser of the collateral qualifies as a buyer in ordinary course, (2) the security interest is lost for failure to perfect, (3) the secured party consents to the transfer, or (4) some other Article 9 exception applies, the transferee takes the collateral subject to the security interest. Upon discovery of the transfer, the secured party may repossess the collateral through a writ of replevin (as occurred in the recent Iowa case), or bring an action in conversion. The secured party may claim any proceeds and the original collateral but may have only one satisfaction.
Several years ago, the First Circuit decided a matter of first impression at the federal appellate level: whether Article 9 of the UCC governs the taking and perfection of a security interest in a right to payment arising under an insurance policy. Affirming two lower courts, the First Circuit concluded that Article 9 did not govern perfection in such collateral. Instead, Maine common law governed. And since the secured lender did nothing more than file a UCC financing statement, the debtor’s trustee in bankruptcy got the insurance proceeds under the strongarm clause.
In recent years, we have seen some notable pieces of litigation between “first-priority” real estate mortgages and homeowner associations armed with “super-priority” statutory liens for unpaid assessments. This priority litigation occurs after the owner of a condo or a coop apartment defaults on both the mortgage and the homeowner association assessments on the unit. Mortgagees are now coming to realize that their “first-priority” mortgage may be trumped by the “super-priority” claim of the homeowners association (HOA). Even worse, a non-judicial foreclosure sale by the HOA could wipe out an entire mortgage lien that was recorded long before any HOA assessments were levied. A notable case from the District of Columbia dramatically illustrates this new credit risk for real estate secured lenders.
In a recent decision from the Second Circuit, the court examined the right to offset in the intersection between bankruptcy and a statutory trust created under the Perishable Agricultural Commodities Act, 7 U.S.C. §§ 499a, et seq. (“PACA”).
How does a lender perfect and enforce a security interest in a borrower’s interest in a New York cooperative apartment? The baseline rule is that security interests in real estate are outside the scope of Article 9, yet the courts generally conclude that certificates representing a borrower’s interest in a co-op apartment are personal property governed by the perfection and enforcement rules of Article 9. In a similar vein, if the collateral is a borrower’s rights in an LLP or LLC with real estate as the entity’s sole asset, the courts treat the member’s interest as personal property (a general intangible) within the scope of the UCC.
Revised Article 9 has been the law of the land for some years now, but not everyone appreciates the subtle changes it’s made to the rules governing liens on fixtures. Financing fixtures can be tricky business. Lenders or lessors who finance fixtures often cross paths with mortgage lenders who finance the underlying real estate. Here’s a quick refresher course on financing fixtures, and how things have changed under Revised Article 9.
A wholesaler sells goods to a distributor on open account. The distributor resells the goods to retailers on open account, but fails to pay its bill to the wholesaler. The distributor’s financer has a perfected security interest in the distributor’s receivables. Who has priority to the distributor’s receivables generated by resale of the goods? The normal commercial law rule is that an unpaid, unsecured supplier of goods can’t recover the receivables generated by their resale, as against the buyer’s secured lender. That’s because a secured creditor trumps an unsecured creditor. UCC § 9-201(a).
What duty does a secured lender have to sell collateral such as securities if the market is falling and the debtor is in default on its secured loan? The key UCC provision is Section 9-207. That provision imposes a duty of care with respect to pledged collateral, both before and after default. In construing it, the courts have differed as to whether the secure creditor breaches its duty of care by failing to sell pledged securities falling in value.
UCC financing statements are effective for five years. Failure to file a continuation statement within six months before the five-year deadline renders the lender’s security interest unperfected. UCC 9-515(d). So what happens if the debtor files bankruptcy before the original financing statement lapses? In a notable bankruptcy decision from Maryland, the court ruled that post-petition lapse of a senior security interest financing statement did not alter the senior’s position because the filing of the debtor’s Chapter 11 bankruptcy petition “froze” the priority status of the senior lender as of that time.
Can a seller of corn under a requirements contract retrieve the corn (or its proceeds) from a buyer that has gone bankrupt if the seller never perfected a security interest in the corn? In a notable decision from North Carolina, the bankruptcy court ruled that the seller’s “reservation of title” in the sales contract gave it nothing more than an unperfected security interest under Article 2 of the UCC. Failure to perfect that security interest enabled the buyer’s bankruptcy trustee to claim the $4.8 million in proceeds from a subsequent sale of the corn as property of the estate. The trustee had the power to avoid the seller’s unperfected security interest under the “strong arm” clause. Not a good day for the seller.
The most heavily litigated section in the entire UCC is 1-103, which states: “Unless displaced by the particular provisions of this Act, the principles of law and equity . . . shall supplement its provisions.” The purpose of the section is to allow the courts to fill gaps in the statute with recognized principles of law and equity. Because no statute can cover every point, the section makes good sense. In most cases, the courts are careful to use supplementary principles only as gap-fillers, not to “displace” the rules of the UCC. However, we have a number of horrible decisions under Article 9 where clear priority rules are obliterated in the name of “equity.” In this story, we offer a sampler of outrageous cases where the Article 9 priority rules were mangled by overuse of equitable principles imported through UCC 1-103.
In handling a secured transaction under Article 9 of the UCC, the secured lender must make sure that it uses the correct categories of collateral. Different categories often require different methods of perfection. For example, a security interest in a “deposit account” may only be perfected by “control,” while a “securities account” may be perfected by either control or filing a financing statement. In a leading bankruptcy decision from Pennsylvania, the court carefully distinguished between the two categories and concluded that the collateral at issue (a brokerage account and subaccounts the debtor maintained at Charles Schwab) was a “securities account” rather than a “deposit account,” so that filing was a permissible method of perfection. Since the secured lender had filed in the right office, with an adequate description of the collateral, the debtor’s trustee in bankruptcy could not avoid the lender’s security interest under the strongarm clause.