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.
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.
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.
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.
The General Motors bankruptcy filed on June 1, 2009 provided the venue for a case in which a small yet crucial error in a UCC filing in Delaware spawned a decade of litigation between hundreds of lenders who thought they were secured creditors and the unsecured creditors committee. The colossal filing error was made when a UCC-3 termination statement was prepared and filed, releasing a security interest in error. By preparing a termination statement for the wrong financing statement number, over $1.5 billion in debt was put at perilous risk of loss.
Last July, we reported that the U.S. Supreme Court granted a petition for certiorari in the case Obduskey v. Wells Fargo, 879 F.3d 1216 (10th Cir. 2018) to consider whether the Fair Debt Collection Practices Act (FDCPA) applies to non-judicial foreclosure proceedings. On March 20, 2019, the Supreme Court issued its decision in the case in favor of the defendant, confirming that a business engaged in only non-judicial foreclosure proceedings is not a “debt collector” under the FDCPA, except for the limited purpose of 15 U.S.C. § 1692f(6), which prohibits non-judicial action if there is no right or intent to take possession of property. This decision resolved a circuit split on the issue, confirming previous holdings by the U.S. Court of Appeals for the Ninth and Tenth Circuits, as well as many district courts, and overruling prior holdings of the Fourth, Fifth, and Sixth Circuits.
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:
In a notable case from New Jersey, a factoring company (LAF) financed an attorney's lawsuit and filed a financing statement to notify the world of advances it had made. The attorney then went to another financer (Law Cash) and got an unsecured loan to finish the litigation. Which financer had priority to the proceeds of the lawsuit settlement? The court ruled that the unsecured creditor prevailed to the extent that it had received checks drawn on the debtor's deposit account, under the powerful take-free rule of UCC 9-332(b). It made no difference that Law Cash never bothered to check the UCC records. We think the decision is correct.
The healthcare industry has struggled for some time with solving operational weaknesses and cutting expenses to become profitable on Medicare rates. This has created instability and put significant pressure on hospital margins. As lenders evaluate loans made in the healthcare industry, one of the main sources of revenue – and repayment of debts – are reimbursements that healthcare providers receive from the Center for Medicare and Medicaid Services ("CMS"). Many healthcare borrowers include healthcare insurance receivables and accounts in their borrowing bases. This article explores best practices and potential pitfalls for enforcing – not just perfecting – a security interest in these receivables.
On March 26, 2019, a 2-1 split panel of the First Circuit affirmed a lower court decision that dismissed a putative class action brought against Citizens Bank NA, a national bank. Fawcett v. Citizens Bank N.A., 919 F.3d 133 (1st Cir. 2019). The First Circuit panel concluded that the "flat excess overdraft fees" charged by the bank did not qualify as usurious "interest," but were in the nature of deposit account service charges.
If a bank processes ACH debits against its customer’s deposit account when the debits were originated by online payday lenders making loans which the bank allegedly knew were illegal under state law, are there any theories by which the bank can be held liable to the customer? This is a recurrent scenario. Under the ACH payment system, the consumer debtor is the “receiver” of the ACH debits, the consumer’s bank is the “receiving depository financial institution” (RDFI), the payday lender is the “originator” of the ACH debits, and the lender’s bank introduces debit entries into the ACH system in its role as “originating depository financial institution” (ODFI). In two recent cases—one from New York and the other from Pennsylvania—the courts rejected a potpourri of theories used by the receiver to impose liability on its bank as RDFI. This is a big issue for banks, since annual ACH dollar amounts total $39 trillion based on 22 billion transactions.
If a bank makes a loan to a borrower who has won the lottery, does the bank’s security interest in the stream of payments attach in light of a special state statute that prohibits the assignment of lottery winnings? A significant decision from Missouri okays the security interest, based on UCC 9-406 and its free-transferability rule. That’s good news for the Missouri secured lender, but in a time of big-buck lotteries there are many other issues that lurk beneath the surface.
When it comes to perfecting security interests, the line between real estate and personal property can be fuzzy. In a notable decision from the Seventh Circuit, applying Wisconsin law, the court ruled that a real estate mortgage can attach to a vendor’s interest in a land contract, including the stream of payments coming from the vendee. The court also ruled that the secured lender properly perfected its lien on the vendor’s interest by recording its mortgage in the county land records rather than by filing a UCC financing statement with the Wisconsin secretary of state. The Seventh Circuit decision clashes with cases in some other jurisdictions holding that a vendor’s interest in a real estate sales contract is personal property rather than real estate; it is an “account” under Article 9 that requires the filing of a financing statement.
Under pre-UCC law, a consignor of goods was generally not required to record its interest to protect itself against third parties dealing with the consignee. This was true even though the consignor retained a kind of secret lien in the sense that the consignee was clothed with apparent ownership of the goods on hand when they really belonged to another. Under the UCC, however, the duty of filing a financing statement is clearly imposed on the consignor.
In a recent case involving multiple secured lenders claiming priority to two high-end tractors, the Iowa court of appeals has ruled that the tractors were sold “outside an implied course of dealing.” As a result, the original lender’s security interest was not cut off by the sale. The case applies one of the most basic priority rules found in Article 9, UCC 9-315, which provides that a security interest continues in collateral notwithstanding any disposition unless the secured party authorized the disposition free of the security interest. In the Iowa case, the court found that the secured lender had not authorized any cutoff of its security interest.
In our prior story, we analyzed a recent Iowa case where the lender’s perfected security interest in farm equipment could not be cut off by a third party. Now let’s take a broader look at the relevant UCC provision, 9-315(a). That provision can be of great comfort to the secured lender. Unless (1) the purchaser of the collateral qualifies as a buyer in ordinary course, (2) the security interest is lost for failure to perfect, (3) the secured party consents to the transfer, or (4) some other Article 9 exception applies, the transferee takes the collateral subject to the security interest. Upon discovery of the transfer, the secured party may repossess the collateral through a writ of replevin (as occurred in the recent Iowa case), or bring an action in conversion. The secured party may claim any proceeds and the original collateral but may have only one satisfaction.
Several years ago, the First Circuit 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. And 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.
In recent years, we have seen some notable pieces of litigation between “first-priority” real estate mortgages and homeowner associations armed with “super-priority” statutory liens for unpaid assessments. This priority litigation occurs after the owner of a condo or a coop apartment defaults on both the mortgage and the homeowner association assessments on the unit. Mortgagees are now coming to realize that their “first-priority” mortgage may be trumped by the “super-priority” claim of the homeowners association (HOA). Even worse, a non-judicial foreclosure sale by the HOA could wipe out an entire mortgage lien that was recorded long before any HOA assessments were levied. A notable case from the District of Columbia dramatically illustrates this new credit risk for real estate secured lenders.
In a recent decision from the Second Circuit, the court examined the right to offset in the intersection between bankruptcy and a statutory trust created under the Perishable Agricultural Commodities Act, 7 U.S.C. §§ 499a, et seq. (“PACA”).
How does a lender perfect and enforce a security interest in a borrower’s interest in a New York cooperative apartment? The baseline rule is that security interests in real estate are outside the scope of Article 9, yet the courts generally conclude that certificates representing a borrower’s interest in a co-op apartment are personal property governed by the perfection and enforcement rules of Article 9. In a similar vein, if the collateral is a borrower’s rights in an LLP or LLC with real estate as the entity’s sole asset, the courts treat the member’s interest as personal property (a general intangible) within the scope of the UCC.