Clarks' Secured Transactions Monthly

  • March 20, 2017

    Unpaid Cattle Seller's Right Of Reclamation Is Trumped By Security Interest Of Buyer's Financer

    In a well-reasoned decision, the Eighth Circuit Bankruptcy Appellate Panel has ruled that a seller's right to reclaim cattle, delivered to the buyer but not paid for, is subordinated to the security interest of the buyer's financer.  In reaching this conclusion, the court does a good job of harmonizing the priority rules of the UCC with the requirements found in a special state statute dealing with livestock bills of sale.  We think the decision is correct in every way.

  • March 20, 2017

    Oregon Court Wipes Out Secured Lender Who Fails To Perfect Security Interest In Mortgage Note

    One of the enduring principles of secured lending law is that the "mortgage follows the note."  Thus, even though a lender may think it has a perfected security interest in a piece of real estate through a recorded mortgage or deed of trust, failure to perfect against the note itself—by taking possession or filing a UCC financing statement—spells doom for the lender.  That lesson was learned the hard way in a recent bankruptcy case from Oregon.  We think the decision hits the target in the middle.

  • March 20, 2017

    Big-Time Trouble For A Secured Creditor Who Engaged In Foreclosure Misbehavior

    In a notable decision from Texas, the majority partner in a single-asset limited partnership sold the minority partner's interest in a private foreclosure sale, using the debt that was allegedly owed to the partnership by the minority partner as the basis of a credit bid.  The court ruled that such a foreclosure sale was flatly prohibited by UCC 9-610(c)(2), which forbids the secured party from buying the collateral at a private sale unless the collateral is of a kind that is customarily sold on a recognized market or is "the subject of widely distributed standard price quotations."  So a public auction sale was required for disposition of the partnership minority interest.  The majority partner contended that the requirement of a public sale had been waived, but the court found that there was no such waiver.  The court awarded actual damages to the minority partner of $520,278, plus exemplary tort damages of $1,040,576, though it denied recovery of attorney's fees.   It was not a good day for the majority partner/secured lender.

  • March 20, 2017

    Iowa Supreme Court Decides Notable Loan Participation Case

    In a recent decision, the Iowa Supreme Court considered what happens to the interests of participants in a loan when, as part of a Purchase and Assumption Agreement prior to the liquidation of the lead bank, the lead bank sells collateral surrendered voluntarily by the borrower.  The Iowa court ultimately ruled that the participation agreements were "true sales", not secured loans.   

  • March 20, 2017

    A Second Example Of The Outright Sale/Secured Loan Dichotomy For Participations: The Minnesota Case

    In our prior story about the very recent Iowa Supreme Court case, we saw the importance of the outright sale/secured loan dichotomy in litigation involving loan participations.  For a look at the importance of the dichotomy in another jurisdiction—Iowa's next-door neighbor—consider a Minnesota bankruptcy court decision which involves the following question: If Lender A makes a loan to Lender B secured by all of Lender B's assets, does the collateral include amounts owing by Lender B's borrowers on loans in which Lender B acts as lead lender and other parties act as participants? The answer depends on whether the relationship between Lender B and the participants is truly a “participation” arrangement or a loan by the participants to Lender B. In the Minnesota case, the court finds that (1) the arrangements were "true" participations rather than secured loans, and (2) Lenders A and B intended to exclude all participation interests from Lender A's collateral.

  • March 1, 2017

    Indiana Court Upholds "Driver's License" Rule For Individual Debtor Names

    A 2017 Indiana bankruptcy court decision appears to be the first reported case to construe the "driver's license" rule for identifying individual debtors on UCC financing statements.  In doing so, the court correctly construes the 2010 amendments to Article 9 and underscores the advantages of states that have adopted Alternative A to UCC 9-503(a)(4), which makes the debtor's driver's license the gold standard for UCC filing.

  • March 1, 2017

    The Perils Of Commercial Tort Claims As Collateral

    A recent Mississippi bankruptcy court ruling underlines the perils of relying on commercial tort claims alone as a description of contract rights in secured lending.   In re  Mississippi Phosphates Corp., Adv. No. 16-06001-KMS (January 3, 2017).  The case does not involve a security interest in commercial tort claims.  But it involves contract rights based on commercial tort claims which are relevant to taking a security interest in these claims.

  • March 1, 2017

    Factor Of Receivables Failed To Give Adequate Notice Of Assignment To Account Debtor

    Codifying basic contract assignment principles, UCC 9-406(a) provides:

  • March 1, 2017

    Tribal Payday Lending Entities Suffer Setbacks

    Two important decisions—one from the California Supreme Court and one from the Ninth Circuit—have put big dents in tribal payday lending programs and could have far-ranging consequences for tribal sovereign immunity.

  • January 26, 2017

    Ohio Court Rules That The Owner Of A Lost Mortgage Note Is Precluded From Foreclosing

    In a recent case from Ohio, the court ruled that the assignee of a home mortgage (U.S. Bank) was not entitled to enforce the mortgage through a foreclosure action because there was no evidence that the mortgage assignee was in possession of the mortgage note, or was entitled to enforce it in spite of the lack of possession, as allowed by Ohio's version of UCC 3-309.  Since enforceability of the mortgage was dependent upon enforceability of the note, the bank was not entitled to foreclose. The case would have come out differently had Ohio enacted the 2002 amendments to the UCC, which give greater protection to non-holders who seek to enforce lost promissory notes. In any case, we think the Ohio decision is problematic.

  • January 26, 2017

    CFPB Issues Advisory On Best Practices To Enable Financial Institutions To Prevent And Respond To Exploitation Of Elderly And Disabled Customers

    Many banks and credit unions may not be aware of a notable "Advisory" issued in March 2016 by the CFPB and available on its website. The Advisory identifies best practices in dealing with exploitation of elderly and disabled customers by con artists. This is a fast-growing area of banking law that has generated numerous statutes across the country in recent years.  In the introduction to its Advisory, the CFPB describes elder and disabled financial exploitation as "the crime of the 21st century."  Only a small fraction of the incidents are reported.  Older people are attractive targets for con artists because they often have assets and a regular source of income. These consumers may be especially vulnerable due to isolation, cognitive decline, physical disability, health problems, and/or bereavement. Banks and credit unions are uniquely positioned to detect that an elder accountholder has been targeted or victimized, and to take action.

  • January 26, 2017

    Supergeneric Collateral Description In Financing Statement Cures Error In More Precise Description Of Collateral

    In a notable New York bankruptcy decision, the Second Circuit has affirmed the bankruptcy court and the federal district court in ruling that an "all assets" collateral description in a financing statement cured an error that the secured lender made elsewhere in the description.  As a result, the lender's blanket security interest in the debtor's assets could not be set aside as a voidable preference. The decision seems right on target. 

  • December 26, 2016

    Supremes Will Address Whether Proofs Of Claim For Time-Barred Debts Violate The Fair Debt Collection Practices Act

    This term, the United States Supreme Court takes up the issue of whether a “debt collector” who files a proof of claim based on a debt that may no longer be enforced because of applicable statutes of limitation violates the Fair Debt Collection Practices Act (“FDCPA”). 

  • December 26, 2016

    The Food Safety Modernization Act: A Primer For Secured Lenders (Part II)

    As covered in Part I of this Primer published in last month’s newsletter, the Food Safety Modernization Act (FSMA) constitutes the largest overhaul of food safety regulations in over 70 years. With the implementation of this new regulatory food safety framework, there are far-reaching implications for food and feed entities and their secured lenders, ranging from contracting provisions to insurance, underwriting and collateral considerations.

  • December 26, 2016

    Hidden Liens And Sympathetic Victims

    Liens on personal property can arise from many sources, including contracts, judicial orders, and statutes. Article 9 of the UCC does a fairly comprehensive job of addressing personal property liens involving contracts and judicial orders, but is very limited in addressing other statutes. See UCC § 9-109(c)(2) excluding liens created by other statutes, but note the various UCC provisions addressing "agricultural liens" and UCC §  9-333 addressing the priority of "possessory liens" created by other statutes. These other statutory liens are often "hidden liens" in the sense that there is no public notice of the lien. Examples of such liens include environmental liens, attorneys' liens, and landlord liens.

  • December 26, 2016

    State Wage Protection Law Trumps "Perpetual" Standby Letter Of Credit

    Sometimes UCC rules conflict with other state statutes and the courts need to determine which statute controls.  In a recent decision, the West Virginia Supreme Court has ruled that the state's Wage Payment Collection Act (WPCA) preempted the UCC rule that allows standby letters of credit to be designated and enforced as "perpetual."  In reaching its decision, the court employed standard tenets of statutory construction.  We agree with the decision.    The West Virginia case.  In International Union of Operating Engineers v. L.A. Pipeline Construction Co., 786 S.E.2d 620, 89 UCC Rep. 2d 862 (W. Va. 2016), the West Virginia high court was presented with the following certified question: Does a "Perpetual Irrevocable Letter of Credit/Wage Bond obtained pursuant to the Wage Payment Collection Act remain in effect until terminated with the approval of the Commissioner of the Division of Labor, as provided by the WPCA, or does it automatically expire five years from its date of issuance, regardless of whether it has been  terminated with the Labor Commission's approval, as provided by the Uniform Commercial Code?  

  • November 21, 2016

    DC Appellate Court: CFPB's Structure Is Unconstitutional And Enforcement Actions Are Subject To Statutes Of Limitation

    On October 11, 2016, the United States Court of Appeals for the D.C. Circuit issued its highly anticipated opinion in PHH Corp. v.  Consumer Fin. Protection Bureau, _____F.3d_____, 2016 U.S. App. LEXIS 18332 (U.S. Ct. App. D.C. Cir. 10/11/2016), holding that the Consumer Financial Protection Bureau's (CFPB) structure is unconstitutional.  But, surprisingly, that may not be the most significant holding in the opinion because the court also held that the CFPB's administrative enforcement actions are subject to applicable statutes of limitations, which could significantly limit the agency's authority and companies' potential exposure to fines and penalties for alleged offenses.

  • November 21, 2016

    Supreme Court Agrees To Hear Credit Card Anti-Surcharge Case

    On September 29, the U.S. Supreme Court granted review in Expressions Hair Design v. Schneiderman (Case No. 15-1391), a case out of the Second Circuit testing whether New York’s anti-credit-card surcharge statute runs afoul of the First Amendment’s free speech protections. The Second Circuit is one of three circuit courts to have recently considered the constitutional validity of anti-surcharge laws. The Second Circuit and the Fifth Circuit (analyzing a Texas statute) both determined that the laws before them regulated conduct rather than speech and were readily understandable, not unconstitutionally vague. In contrast, the Eleventh Circuit held that Florida’s anti-surcharge law “directly targets speech to indirectly affect commercial behavior.”

  • November 21, 2016

    The Food Safety Modernization Act: A Primer For Secured Lenders (Part I)

    As the largest overhaul of food safety regulations in over 70 years, the Food Safety Modernization Act (FSMA) has long been a topic of discussion in the food and animal feed industries. With the implementation of this extensive new regulatory framework, there are far-reaching implications for food and feed entities and their secured lenders, ranging from contracting provisions to insurance, underwriting and collateral considerations.

  • October 19, 2016

    Strict Foreclosure On Agricultural Equipment Extinguishes Junior Lien Even In Absence Of Notice

    A handy option to holding a foreclosure sale is to retain the collateral in satisfaction of the debt, as authorized by UCC 9-620 through 9-622.  This "strict foreclosure" approach has historical antecedents in the law of real property, particularly the deed in lieu of foreclosure.  From the secured lender's viewpoint, there are many advantages to strict foreclosure: (1) it avoids the extra costs of a foreclosure sale in situations where no deficiency claim is likely to be collected; (2) it insulates the creditor from later attack upon the disposition as "commercially unreasonable"; (3) it can quickly remove property from the debtor's estate, as when bankruptcy is imminent. (4) it can be used for a variety of personal property assets, including intangible collateral such as receivables.  It is sometimes used by blanket secured lenders as a way of maintaining the debtor's business as a going concern; and (5) collateral may be retained in full satisfaction of the debt or, as part of a workout, in partial satisfaction.  If a consumer transaction is involved, retention in partial satisfaction is not allowed.  UCC 9-620(g).