Trustees in bankruptcy delight in wiping out security interests under their avoidance powers, particularly the strongarm clause found in Section 544 of the Bankruptcy Code and the voidable preference provision found in Section 547. In a recent decision from Wisconsin, there was no trustee in bankruptcy to exercise avoidance powers, but a receiver flexed its muscles, to the same effect.
In a recent case from New York, the plaintiffs tried to delay a public auction of sophisticated collateral following the debtors' default. The court issued a TRO, but denied the plaintiffs' motion to convert the TRO into a preliminary injunction and ordered the UCC foreclosure auction to proceed in line with the court's directives. Patriarch Partners XV LLC, v. U.S. Bank. N.A., 2017 U.S. Dist. LEXIS 145365 (S.D.N.Y. 2017).
Secured lenders continue to make simple errors on financing statements. If the debtor files bankruptcy, those errors will come back to haunt the secured lender. That's what happened in a recent case from Georgia. In knocking out the security interest on the ground that the debtor's name indicated in the financing statement was erroneous, the court properly applied the rules of the UCC, in a thorough and knowledgeable decision.
In the realm of agricultural lending, many secured transactions involve both a bank and the Commodity Credit Corporation (CCC). As part of the financing, the commercial bank (or other private lender) is asked by CCC to sign a "lien waiver," using a standard CCC form. The big issue that has arisen is whether this form constitutes merely a subordination to the bank's security interest to that of the CCC, or an outright release of the security interest. The issue first surfaced in a 1985 case from a Colorado bankruptcy court, and has resurfaced in the ag lending community in recent months.
In our prior story, we reported on a recent case from New York where the secured lender and its counsel sought to perfect a security interest in a portfolio of life insurance policies by filing UCC financing statements covering the policies. The collateral was clearly "insurance". The lender and its counsel apparently never recognized that security interests in insurance are beyond the scope of Article 9; instead, they should have perfected by directly notifying the insurance carriers.
Article 9 doesn't apply to "a transfer of an interest in or an assignment of a claim under a policy of insurance…." UCC 9-109(d)(8). The filing of a financing statement will not perfect a lender's security interest in the borrower's insurance policies. Instead, the lender will need to turn to the common law of the relevant state, or a relevant non-UCC statute that governs perfection. Comment 7 to pre-Revision UCC 9-104 explains that "[r]ights under life insurance and other policies…are often put up as collateral. Such transactions are often quite special, do not fit easily under a general commercial statute, and are adequately covered by existing law."
Can a liquor license be the subject of an enforceable security interest under Article 9 of the UCC? A recent bankruptcy court decision concludes that a California statute (Business & Professions Code § 24076) prohibits the use of a liquor license as collateral for a loan. In re Delano Retail Partners, LLC, 2017 Bankr. LEXIS 2397, 93 UCC Rep. 2d 472 (E.D. Calif. 8/14/17). The statute states: "No licensee shall enter into an agreement wherein he pledges the transfer of his license as security for a loan or as security for the fulfillment of any agreement." The trustee in bankruptcy sold the debtor's liquor licenses to a court-approved third party for $37,661.
In recent years, legal challenges to automated overdraft programs have centered on posting order to enhance fees, particularly high-to-low debit posting. We now have a good judicial decision from Missouri that involves a class-action where the plaintiffs allege that a state-chartered bank was violating the Missouri usury laws by charging debit card overdraft fees of $25 to $30. The Missouri court of appeals rejected those claims on the ground that debit card overdraft fees were not interest under the usury laws, but statutorily-permitted "service charges" imposed on a deposit account.
On October 16, 2016, a split panel of the D.C. Circuit ruled that the CFPB is unconstitutional because it violates the separation of powers. On January 31, 2018, the full D.C. Circuit reversed the panel and voted 7-3 to affirm the constitutionality of the CFPB, particularly its structure of a single director who can't be fired by the President without cause. PHH Corp. v. CFPB, 2018 U.S. App. LEXIS 2336 (1/31/18). Given the impact of the CFPB on bank deposit products and agreements, the new decision is significant indeed. In this story, we will review the October 2016 ruling, then come back to the full D.C. Circuit decision, primarily in the words of the court.
Background. Sheldon Fong (“Fong”) and his related associates had multiple commercial loan relationships with East West Bank (“Bank”). During the course of these relationships, in order to secure a personal loan obligation running in favor of Bank, he pledged his certificate of deposit in the amount of approximately $1,000,000.00 (“CD”). Additionally, in order to make loan payments or to pay off a loan, he authorized specific transfers from his personal money market deposit account (“MMDA”) or a certificate of deposit over which he had control (referenced by the Court as Fong’s certificate of deposit account registry service and defined as “CDARS”).
Electronic signatures are recognized by United States federal and state law. They can generally be challenged on two grounds: (1) that the parties did not intend to conduct the transaction by electronic means, or (2) that the E-signature was not the act of the purported signatory. If these can be overcome, then the signature is valid.
A Kentucky bankruptcy court recently held that a secured lender did not have a perfected security interest in hotel or restaurant revenue, thereby allowing a debtor to use cash from those operations without restriction. In re Lexington Hospitality Group, LLC, 2017 Bankr. LEXIS 3782 (Bankr. E.D. Ky. November 1, 2017). Yet the secured party had all the loan documents you would expect a secured party to have for this type of loan, and made only a modest, debatable mistake on its financing statement. We think the secured party missed some important points in arguing its position, and the court also missed these points in its analysis.
Every state gives creditors a post-judgment right to garnish a debtor's funds in a bank account. Federal law protects certain federal benefit payments from bank garnishment, but beyond that the states vary considerably in the protections they provide. Generally, the state protections are quite limited.
The holder in due course rule, which dates back centuries, allows a bona fide purchaser of a negotiable instrument to take the instrument free of claims and defenses. A common example is a check given for an underlying obligation such as the sale of goods. The payee of the check deposits it and takes off with the funds before the item has a chance to clear. When the drawer of the check discovers that the goods are defective, it immediately stops payment on the item. The check is dishonored and bounces back to the bank of first deposit, which can't charge it back against the payee's account because the payee has taken off for parts unknown.
In our prior story, we reported on a recent Florida case where a governmental entity was held liable as an account debtor for double payment because it ignored a deflection notice sent by an assignee/factor of accounts receivable. UCC 9-406 was the critical UCC provision. Another recent Florida case applies the UCC 9-406 rules that the deflection notice passed muster under Article 9, but denied summary judgment in favor of the factor because waiver defenses raised issues of fact. Sometimes it seems like litigation comes in clusters.
If a secured lender wants to hold a foreclosure sale of its collateral, often the best practice is to bring some expertise to bear. Following the directions of an expert in the type of collateral that is to be sold could protect the lender's right to a deficiency claim. This is particularly true when the collateral is unusual and the creditor has no experience in the area. A recent case from New York shows the benefit of using experts.
Article 9 of the UCC codifies some ancient contract rules including the rule that, when a merchant assigns its accounts receivable to a factor, the account debtor must begin making payments directly to the factor if it receives a "deflection notice." Failure to deflect payment to the factor can impose big-time liability on the account debtor. But what if the account debtor is a governmental entity? Is it immune from having to pay twice—once to the merchant assignor and then to the factor? In a recent case from Florida, the court imposed double liability on a state agency (account debtor) that ignored the factor's deflection notice. We think the decision is correct, and that a 2005 Ohio Supreme Court decision is wrong.
On October 24, 2017, the United States Senate voted 50-50 to kill the CFPB rule that would ban arbitration clauses containing class-action waivers in consumer financial services contracts. Then, as President of the Senate, Vice President Pence broke the tie. It seems clear that President Trump will sign the disapproval resolution. In the end, it was a highly partisan vote, mirroring the deep divisions in the country as a whole. We suspect, however, that it was the issuance of a 17-page Treasury Department Report the day before the Senate vote that tipped the balance in favor of overturning the CFPB rule. The Treasury Report can be accessed at https://www.treasury.gov/press-center/press-releases/Documents/10-23-17%20Analysis%20of%20CFPB%20arbitration%20rule.pdf.
The GM bankruptcy case is the gift that just keeps on giving. First, there were five years of litigation on whether a mistaken termination statement covering a $1.5 billion secured loan was "authorized" within the meaning of Article 9 of the UCC. Then there was a legal malpractice suit brought by some of the secured lenders/investors against the Mayer Brown law firm which represented GM and whose paralegal made the mistaken UCC filing; the plaintiffs lost on the ground that they had no standing because Mayer Brown was not their counsel. Another interesting twist in the litigation was that, before the Second Circuit ruled that the mistaken termination statement was effect to wipe out the lenders' security interest, the lenders were allowed to receive full payment; thus, the unsecured creditors' avoidance action was transformed into a monstrous claw-back claim.
Securitized real estate mortgages continue to raise "standing" issues for secured lenders seeking to foreclose. The cases illustrate how the law of negotiable instruments under the UCC, including the use of allonges to substitute for indorsements on the note itself, is crucial for determining standing. A recent decision from Ohio illustrates the point. The court holds that allonges may be paperclipped to the note, without stapling. Therefore, the securitization trustee could foreclose on the mortgage. And in a recent case from Connecticut, the court okayed an allonge even though there was space for the indorsement on the note itself.