Clarks' Secured Transactions Monthly

  • February 04, 2020

    Six “What If’s” For The Driver’s License Statute

    In our prior story, we focused on the recent Kansas case which applies a “strict compliance” standard requiring the use of the debtor’s driver’s license name as the name that must be used on an individual debtor’s financing statement. Let’s turn now to six elements of flexibility in the statute.

  • February 04, 2020

    Lien Stripping In A Nutshell

    On June 1, 2015, the United States Supreme Court ruled that a debtor in a Chapter 7 bankruptcy may not wipe out a junior mortgage when the debt owed on the senior mortgage exceeds the present value of the property. The decision, penned by Justice Thomas, was unanimous. The irony of the decision, which could apply to personal property as well as real estate, is that the Court felt compelled to follow a 1992 decision even though it strongly suggested that the earlier decision was flat wrong in its interpretation of the Bankruptcy Code. From a policy perspective, the decision not only respects precedent, but should make second mortgage loans more affordable. Bank of America, N.A. v. Caulkett, 135 S. Ct. 1995, 2015 U.S. LEXIS 3579 (2015).

  • December 09, 2019

    Strict Foreclosure In A Nutshell

    A handy option to holding a UCC foreclosure sale is to retain the collateral in satisfaction of the obligation, as authorized by UCC 9-620 through UCC 9-622. This “strict foreclosure” approach has historical antecedents in the law of real property, particularly the deed in lieu of foreclosure.

  • December 09, 2019

    Assignment Of Letters Of Credit And Proceeds

    In the world of letters of credit, a sharp distinction must be drawn between outright transfer of the letter itself and a collateral assignment of proceeds payable by the issuer upon a conforming draw.

  • December 09, 2019

    Seventh Circuit Okays Incorporation By Reference For Financing Statement Collateral Descriptions

    Does Article 9 of the UCC require a financing statement to contain “within its four corners” a specific description of collateral, or does incorporating a description by reference to a physically unattached security agreement sufficiently “indicate” the collateral? In a recent decision from Illinois, the bankruptcy court had ruled that a financing statement fails to perfect a security interest unless it “contains” a separate and additional description of the collateral. The bankruptcy court ruled that incorporation of the security agreement by reference did not do the job.

  • December 09, 2019

    Strict Foreclosure Of An LLC Membership Interest

    In a notable federal court decision from Oregon, one member of an LLC took a security interest in another member’s membership interest as collateral for a loan. When the debtor defaulted, the lender exercised “strict foreclosure” on the membership interest under the rules of Article 9. The court ruled that the debtor could not later invalidate the strict foreclosure on the ground that the value of the collateral greatly exceeded the debt. The decision seems correct, though it could come out differently in a bankruptcy setting or under the fraudulent conveyance laws of some states.

  • October 25, 2019

    To What Extent Are Governmental Agencies Exempt From The Rules Of The UCC?

    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.

  • October 25, 2019

    Mississippi Court Rules That Construction Surety Has Priority To Retainage Over Claims Of The Contractor’s Secured Lender

    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.

  • October 25, 2019

    Standby Letters Of Credit: Issuer’s Right Of Reimbursement And Wrongful Honor

    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.

  • September 25, 2019

    Other “Proceeds” Scenarios Under Section 552(b) Of The Bankruptcy Code

    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.

  • September 25, 2019

    Postpetition Employers’ Contributions Constitute Property Acquired After The Petition Date

    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.

  • September 25, 2019

    Nebraska Court Rules That A Secured Loan Is Not An “Assignment” For Purpose Of Imposing Liability On An Account Debtor Who Fails To Respond To A Deflection Notice

    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.

  • August 22, 2019

    First Circuit: Maine Common Law, Not Article 9, Governs Perfection Of Security Interests In Business Interruption Insurance Policies And Proceeds

    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.

  • August 22, 2019

    Piecing A Security Agreement Together Under The Collage Doctrine

    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.

  • August 22, 2019

    Displacement And The UCC Statute Of Limitations

    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.

  • August 22, 2019

    Virginia Court Rules That “Full Payment” Check Was A Debtor’s “Gimmick,” Not An Accord And Satisfaction

    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.

  • July 24, 2019

    2019 Security Interest, Lien And Commercial Transactions Update

    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.

  • July 24, 2019

    Consignor’s Interest In Goods Is Superior To That Of Lender With Actual Knowledge Of The Consignment

    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.

  • July 24, 2019

    Debtor Waived Its Right To Notice Of Foreclosure Sale; Sale Of Equipment Was Commercially Reasonable

    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.

  • June 11, 2019

    Bank Regulators Consider Reversing The Madden Decision From The Second Circuit, Which Rejects The "Valid-When-Made" Principle

    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: