To what extent are governmental agencies exempt from the rules of Article 9 when they are administering various loan programs authorized by federal statute? In United States v. Kimbell Foods, Inc., 440 U.S. 715 (1979), the Supreme Court held that federal law should control, but concluded that “nondiscriminatory state law” was the most appropriate source of rules for courts dealing with the rights and duties of federal agency lenders. Absent a congressional directive to the contrary, the source of the federal law of secured transactions will be Article 9 as adopted in the state where the transaction takes place.
In a recent decision from Mississippi, a bankruptcy court has ruled in favor of a surety over the construction lender’s perfected security interest in a retainage. The surety’s victory was based on a claim of equitable subrogation, outside the scope of Article 9. The Mississippi case is the latest of a long line of decisions favoring the surety in this important and recurrent priority scenario.
Once the issuer has honored a draft drawn under a standby letter of credit, it has a statutory right of reimbursement from the applicant. UCC 5-108(i). This poses a credit risk for the issuer. Since the statutory reimbursement claim is unsecured, the issuer is unlikely to collect much on its claim if the applicant files bankruptcy. If a commercial letter is involved, this risk is reduced because the issuer can hold the bill of lading until the applicant either pays or arranges for credit.
The prior article focuses on the Puerto Rico bankruptcy and whether bondholders with security interests in employer-contributed funds received post-petition “proceeds” of prepetition assets under Section 522(b) of the Bankruptcy Code. In the present article, we analyze three analogous types of assets: hotel rentals, equipment lease rentals, and license royalties.
Public pensions provide monthly benefits to retired public employees. To raise the money, public pensions invest with contributions from public employees and employers. Another way that a public pension may raise money is by issuing bonds, and a public pension may grant a security interest in its property to those who purchase the bonds. Because one of a pension fund’s most valuable assets is its right to contributions from employers, a pension fund may grant a security interest in those contributions to those who purchase the bonds.
UCC 9-406 provides that an account debtor on an account, chattel paper or a payment intangible may discharge its obligation by paying the assignor until, but not after, the account debtor receives a deflection notice, authenticated by the assignor or the assignee, that the amount due or to become due has been assigned, and that payment is to be made to the assignee. After receipt of the notification, the account debtor may discharge its obligation by paying the assignee and may not discharge the obligation by paying the assignor.
The First Circuit has 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. 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.
The courts usually give secured lenders leeway in finding an enforceable security agreement even though there are no “words of grant”, there is no formal document captioned as a security agreement, and it requires the creation of a collage out of a number of documents. The courts generally focus on function over form. The doctrine usually comes up with respect to secured creditors who are not institutional lenders. A leading bankruptcy case from Kansas provides a good example.
A significant recent decision from North Dakota considers whether the UCC rules displace common law claims with respect to bank liability and whether, in a check fraud case, the three-year UCC statute of limitations bars the plaintiff’s claims. The court ruled that the plaintiffs were time-barred.
The most recent “full payment check” case comes from Virginia, where the court rejects the debtor’s claim of an accord and satisfaction under the UCC Rule, based on a finding of “bad faith” by the debtor in tendering an $890 money order in full payment of a $63,000 mortgage loan.
There have been some interesting legislative developments in 2019 related to UCC Article 9, other liens and commercial transactions. One new initiative that stood out involves the transition of utilities from fossil fuel to renewable energy. The renewable energy bills included special rules for security interests related to the transition funding.
Consignment is a business relationship. Nearly all goods can be sold on consignment—from cars and clothing, to firearms and furniture. To consign is to send goods to an agent to be sold. This relationship is unique because the consignor asks a consignee to sell the goods on its behalf instead of selling them itself. One example is an automobile consignment. Assume you want to sell your car, but you don’t have time to market it and work out the details with prospective purchasers. So you send it to a dealership to sell it for you. To compensate the dealership for its efforts, you provide that it can keep a share of the proceeds. This is a consignment.
In the wake of the Great Recession, litigation continues apace on secured lender compliance with the enforcement rules of the UCC and the lender’s right to recover a deficiency against the borrower and guarantors. In a recent case from Colorado, the key issues were (1) whether the debtor waived its right to notice of a private foreclosure sale, (2) whether the debtor was damaged by lack of notice and (3) whether the sale of the collateral (a monster dredge) was handled in a commercially reasonable manner. The secured lender prevailed on all the issues.
On May 17, 2019, the heads of the OCC and FDIC reported to Congress that they were strongly considering a regulatory fix to the infamous Second Circuit decision, Madden v. Midland Funding LLC, 786 F.3d 246 (2d Cir. 2015). As Law360 put it, the Madden decision shocked bankers and those in the FinTech world "for its apparent inconsistency with a legal doctrine known as valid-when-made." This doctrine dates back to the days of Andrew Jackson. Law360 elaborates:
Last July, we reported that the U.S. Supreme Court granted a petition for certiorari in the case Obduskey v. Wells Fargo, 879 F.3d 1216 (10th Cir. 2018) to consider whether the Fair Debt Collection Practices Act (FDCPA) applies to non-judicial foreclosure proceedings. On March 20, 2019, the Supreme Court issued its decision in the case in favor of the defendant, confirming that a business engaged in only non-judicial foreclosure proceedings is not a “debt collector” under the FDCPA, except for the limited purpose of 15 U.S.C. § 1692f(6), which prohibits non-judicial action if there is no right or intent to take possession of property. This decision resolved a circuit split on the issue, confirming previous holdings by the U.S. Court of Appeals for the Ninth and Tenth Circuits, as well as many district courts, and overruling prior holdings of the Fourth, Fifth, and Sixth Circuits.
The General Motors bankruptcy filed on June 1, 2009 provided the venue for a case in which a small yet crucial error in a UCC filing in Delaware spawned a decade of litigation between hundreds of lenders who thought they were secured creditors and the unsecured creditors committee. The colossal filing error was made when a UCC-3 termination statement was prepared and filed, releasing a security interest in error. By preparing a termination statement for the wrong financing statement number, over $1.5 billion in debt was put at perilous risk of loss.
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.