Clarks' Secured Transactions Monthly

  • May 24, 2017

    The Mortgage Follows The Note: Litigation Continues Apace On Standing To Foreclose Securitized Real Estate Mortgages

    We continue to see a strong flow of securitized real estate mortgages, born of the "mortgage meltdown" and still in the process of foreclosure.  One big lesson coming from this litigation is that the secured lender's right to foreclose is very much dependent on the law of negotiable instruments under Article 3 of the UCC.  That's because the "mortgage follows the note" and any defect in the transfer of notes through the pipeline can knock the creditor out on "standing" grounds.  As illustrative examples, we offer two recent judicial decisions.  The first case, from Florida, involves the "lost note" problem; the second deals with the "allonge" problem.  In both cases, correctly applying the rules of UCC Article 3, the court ruled in favor of the secured lender's standing to foreclose the mortgage.

  • April 26, 2017

    Texas Bankruptcy Court Requires "Cramdown" Of Cross-Collateralized Credit Union Car Loans

    In a notable recent decision, a Texas bankruptcy court has ruled that several motor vehicle loans cross-collateralized with two personal motor vehicles of the Chapter 13 debtors were subject to "cramdown" and were not protected by the "hanging paragraph" found in Section 1325 of the Bankruptcy Code. The key to the court's ruling was that the secured lender (a credit union) was not protected from cramdown because the lender did not have any "purchase-money security interests" based on the cross-collateralization.  In re McPhilamy, 91 UCC Rep. 2d 913 (Bankr. S.D. Tex. 2017). 

  • April 26, 2017

    What’s A Bank? OCC’s Special Purpose Fintech Charter May Test The Limits

    “Is the nation better served when banking products are provided by institutions subject to ongoing supervision and examination? Should a nonbank company that offers banking-related products have a path to become a bank?” On December 2, 2016, the Office of the Comptroller of the Currency posed these questions in a whitepaper entitled, Exploring Special Purpose National Bank Charters for Fintech Companies (the “Whitepaper”). The OCC sought public comment on its proposal to grant special purpose charters to various financial technology (“fintech”) companies that do not fall within the typical definition of a bank and by January 17, 2017 had received over 100 comment letters.

  • April 26, 2017

    Clarification

    The lead story in the February 2017 newsletter suggests that a debtor could waive in a security agreement the prohibition in UCC 9-610(c)(2) on the secured party's purchasing at its own private disposition.  The story points to the absence of 9-610(c)(2) in the list of pre-default, non-waivable provisions found in 9-602.  We should have mentioned that this is not the position taken by the drafters of the 2010 amendments to Article 9.  The reason why 9-610(c)(2) is not mentioned in 9-602 as a non-waivable provision is because a secured party buying collateral at its own private disposition is treated as a "strict foreclosure" under 9-620, and the strict foreclosure provisions are not waivable.  See Comment 3 (last paragraph) to 9-602 and Comment 7 (last paragraph) to 9-610. The bottom line for the Texas case is that the court reached the right conclusion, but for the wrong reason.  We regret that we did not make that point in the story.     

  • April 26, 2017

    In Sports Authority Bankruptcy Saga, Delaware Court Wrestles With Right To "Contract Around" The UCC

    In In re TSAWD Holdings, Inc., 2017 Bankr. LEXIS 610 (Bankr. D. Del. 2017), the court addresses a number of bankruptcy and UCC issues on a motion to dismiss.  The Delaware court denied the Motion because of the existence of a perceived factual dispute over the applicability of Article 9 of the UCC. Though the case discusses issues relating to the scope of the court's constitutional  jurisdiction, consignments under the UCC, and attachment of security interests, the most interesting aspect of this particular case is the ability of parties to contract their way around, into, or out of the scope of Article 9.

  • April 26, 2017

    Mississippi Bankruptcy Court Requires Cramdown On Motor Vehicle Based On "Transformation" Rule

    In our prior story, we featured a recent Texas decision where a motor vehicle financer did not get the benefit of the "hanging paragraph" because of cross-collateral provisions in its secured lending documentation.  In another variation on that theme, a Mississippi court has ruled that a vehicle financer who initially had a PMSI lost that precious status when it refinanced the loan in order to pay off two unrelated unsecured loans.  In reaching that result, the Mississippi court invoked the "transformation rule" and rejected the "dual-status" rule.

  • 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 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

    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 01, 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 01, 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.

  • March 01, 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 01, 2017

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

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

  • 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

    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. 

  • 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.

  • 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?