In our increasingly global marketplace it is becoming more important to know about the rules governing the financing of international trade. One familiar vehicle is the letter of credit, both commercial and standby, which is governed by Article 5 of the UCC and the Uniform Customs and Practices established by the International Chamber of Commerce (UCP No. 600). Most international letters of credit are explicitly made subject to UCP No. 600, which generally is consistent with the UCC rules.
On October 24, 2018, the First Circuit refused to dismiss a consumer’s putative class action against a secured lender that had financed the purchase of her car and, after her default, had repossessed the vehicle and sold it in a wholesale dealer auction. In her complaint, the consumer alleged that the pre-sale and post-sale notices that the lender had sent to her violated the foreclosure rules of the UCC and the Massachusetts Retail Installment Sales Act. The federal district court dismissed the suit against Honda on summary judgment and the consumer appealed.
In the last issue of this newsletter, we discussed the “independence principle” that is a fundamental tenet of letter of credit law. The second important principle governing letters of credit is that the issuer must honor a presentment of documents that appear on their face “strictly to comply with the terms and conditions of the letter of credit.” UCC 5-108(a). Though this rule applies to both commercial and standby letters, it has greater significance for commercial letters of credit because the documents are more numerous and complex than in standby letters. Default on the underlying contract by the beneficiary is irrelevant; the key is strict conformity of the documents to the requirements of the letter. If an issuer refuses to pay a draft accompanied by documents that are conforming in all respects, it will be guilty of wrongful dishonor, with sanctions, under UCC 5-111(a).
In a recent decision from the State of Washington, a bankruptcy court has ruled that, when a consumer buys a car through a dealer installment contract that is assigned to a third-party financer, the purchase of ancillary products such as gap insurance and extended warranty protection are not “purchase-money obligations” that are protected from cramdown in the debtor’s Chapter 13 bankruptcy. In reaching its decision, the court relied heavily on a leading Ninth Circuit case that refused to protect “negative equity” that was financed by the dealer in connection with the debtor’s trade-in on a new vehicle.
Under the rules of Article 9 of the UCC, an assignee of the borrower’s receivables has the right to notify the account debtor to make payments directly to the assignee. If a deflection notice is given and payments to the assignee have already been made, is the assignee required to return those payments to an account debtor who has an affirmative claim against the assignor, or is the account debtor only excused from making further payments to the assignee? That was the jackpot issue in a recent decision from South Carolina. The court ruled that the account debtor could raise the assignor’s misbehavior as a “shield” to making further payments, but not as a “sword” to recover payments already made.
On June 25, 2018, the United States Supreme Court issued its opinion in Ohio v. American Express Co., 138 S. Ct. 2274, 2018 U. S. LEXIS 3845 (S. Ct. 2018). The case involved an antitrust challenge brought by the federal government and several states to “antisteering” provisions in American Express’s merchant contracts. If a merchant wants to participate on American Express’s network it must agree to the antisteering provisions, which prohibit the merchant from discouraging customers (at or near the point of sale) from using an Amex card.
On August 13, the California Supreme Court unanimously ruled that the interest rate on a consumer loan in California can be deemed illegally high under the common-law “unconscionability” doctrine, even if the loan was not subject to the state’s statutory usury cap. De La Torre v. CashCall, Inc., 2018 Cal. LEXIS 5749 (Cal. 2018). Currently, California law sets interest rate caps only on consumer loans of less than $2,500. The defendant in this case, CashCall, Inc., is a nonbank lender of consumer loans to high-risk borrowers. One of CashCall’s signature products was an unsecured $2,600 loan, payable over a 42-month period, and carrying an annual percentage rate of either 96 percent or, later in the class period, 135 percent. The plaintiffs in this case obtained such loans from CashCall and alleged that the high interest rates on these loans violated California’s Unfair Competition Law (UCL). The plaintiffs argued that these high interest rates made such loans unconscionable (and thus unlawful) under the UCL, even though the loans were not subject to the statutory cap because the $2600 principal amount exceeded the $2500 threshold.
Next to employers, depository institutions probably garner more incoming garnishment notices than any other group. Two of the most recurrent issues deal with joint accounts and name discrepancies. Let’s take a brief ride through this landscape.
In the oil and gas industry, a lender will typically record a mortgage that describes both the mineral interests in the ground as well as those same interests “as extracted,” i.e., the mineral interests the moment they are removed from the ground at the wellhead or minehead. The “as extracted collateral” then becomes subject to Article 9 and its continuation statement requirements. The fact that the lender recorded a mortgage and not a UCC-1A financing statement does not excuse the lender from recording a continuation statement. The same holds true for timber to be cut.
In our prior story, we reported that the U.S. Supreme Court will consider whether the federal Fair Debt Collection Practices Act applies to non-judicial foreclosures of collateral. That development reminds of us of another case decided by the High Court some years ago. The issue was whether a foreclosure sale can become a fraudulent transfer under federal bankruptcy law, on the ground that the price fetched at the sale was inadequate consideration.
The U.S. Supreme Court has granted a homeowner’s request to consider whether nonjudicial mortgage foreclosures constitute debt collection subject to the Fair Debt Collection Practices Act (FDCPA). This appeal should resolve a split among federal circuit courts on the issue of whether nonjudicial foreclosures are considered debt collection.
On May 21, 2018, President Trump signed Congressional Resolution S.J. Res. 57 (the “Congressional Resolution”) which repealed the Consumer Financial Protection Bureau’s bulletin of March 21, 2013, which had purported to find that indirect auto lenders were “creditors” under the Equal Credit Opportunity Act, 15 U.S.C. § 1691 et seq. (“ECOA”). In so doing, the Congressional Resolution, with the full backing of the CFPB, narrowed the potential application of the ECOA to indirect auto lending, presumably to protect indirect auto lenders from claims of disparate impact discrimination under ECOA. This action represents an unmistakable step toward limiting the use of disparate impact claims as an avenue for bringing claims of discrimination under the ECOA. What effect it will have on indirect auto lenders, and lenders generally, remains to be seen.
In a case decided on June 5, 2018, the Supreme Judicial Court of Massachusetts has ruled that secured auto lenders are not required to use “fair market retail value” of repossessed cars to calculate the deficiency that the lender can obtain from a defaulting debtor under the Massachusetts Retail Installment Sales of Motor Vehicles Act, Mass. Gen. Laws ch. 255B. The RISA supplements Article 9 of the UCC with respect to secured auto loans. The case is significant in that the plaintiff class was seeking big-time civil penalties under UCC 9-625 and state deceptive trade practice legislation. Williams v. American Honda Finance Corp., 479 Mass. 656, 2018 Mass. LEXIS 351 (Mass. 2018).
Under the familiar rules of the UCC, priority between two lenders will be given to the lender who filed first. UCC 9-322. However, a key exception to the general rule is that a purchase-money security interest has priority over an earlier-filed floating lien so long as the purchase-money lender jumps through the appropriate hoops. UCC 9-324. The rationale is that the PMSI adds value to the pool of collateral by financing the price of goods delivered or enabling the debtor to acquire rights in the collateral. UCC 9-103. In fact, the PMSI has always been a favorite of the law.
In a notable case from Illinois, the court ruled that various replacement items of property used in a bowling alley were “fixtures” rather than “equipment.” As a result, the holder of the first mortgage on the real estate prevailed over the secured purchase-money financer of the replacement items. In reaching that conclusion, the court focused entirely on drawing the proper line between “fixtures” and “personal property” under Illinois case law. The big takeaway from the case is that the financer of the replacement items could have had priority if it had made a fixture filing under Article 9 of the UCC. Alas, the secured lender never took advantage of the priority rules for fixtures of Article 9.
In a recent bankruptcy decision from Florida, the court subordinated the claim of a secured lender to $200,000 in funds that were deposited into the debtor’s account, then paid out to the defendant’s counsel as a retainer. Relying on an important “take-free” rule found at UCC 9-332(b), the court gave priority to the debtor’s counsel over the secured lender. In particular, the court found no “collusion” between the debtor and his counsel in violation of the rights of the secured lender. We think the decision is correct.
Financing statements need not be precise in providing an “indication of collateral.” UCC 9-504 states that “[a] financing statement sufficiently indicates the collateral that it covers if the financing statement provides...an indication that the financing statement covers all assets…” Given this language, one might expect every financing statement to indicate the collateral is “all assets” with no other collateral language of any kind. But secured parties rarely do this, often deciding to add “including but not limited to…” And this leads to problems.
On numerous occasions in this newsletter, we have warned secured lenders of what we call the “triple whammy.” This is consumer protection on steroids. Many secured lenders are totally taken by surprise when they seek to foreclose and draw a counterclaim for huge damages in a consumer class action.
In our prior story, we reported on a recent Pennsylvania case that illustrates some of the risks in exercising self-help repossession. A related question that has come up in repossession litigation is whether the secured party who has repossessed a motor vehicle will be liable for personal property left in the car.
A recent decision from Pennsylvania raises a number of issues for secured lenders who use self-help repossession: When is there a "breach of the peace," which is forbidden under UCC 9-609? To what extent can involvement of law enforcement officers shield the foreclosing creditor from liability? Do law enforcement officers who aid the secured lender face liability for violation of civil rights laws? If a repo by an independent contractor becomes contentious, is the secured lender vicariously liable for punitive damages?