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.
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.
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.
How does a lender perfect a security interest in a borrower's ownership interest in a limited liability company? Businesses today are often organized as limited liability companies, or LLCs as they are commonly known. LLCs offer the limited-liability protection of a corporation with the pass-through tax advantages of a partnership; however, they are much more flexible than traditional pass-through entities.
A recent decision from New Jersey holds that US Bank, as trustee of a securitization trust, had standing to foreclose on a home mortgage, with power to take free of the debtors' defenses, including predatory lending. The New Jersey case is a poster child for the mortgage meltdown which led to the Great Recession.
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?
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 debtor’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.
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.
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 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).
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.
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 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.