Disruptive dinnertime calls, downright deceit, and more besides drew Congress’s eye to the debt collection industry. From that scrutiny emerged the Fair Debt Collection Practices Act, a statute that authorizes private lawsuits and weighty fines designed to deter wayward collection practices. So perhaps it comes as little surprise that we now face a question about who exactly qualifies as a “debt collector” subject to the Act’s rigors.
A New York bankruptcy case decided in 2014 has begun to draw the attention of secured lenders who routinely use supergeneric collateral descriptions, such as "All Personal Property Now Owned or Hereafter Acquired by the Debtor," in their financing statements. The New York case holds that the consignor of a $9.5 million dollar Botticelli painting had priority to the masterpiece over the consignee's secured lender who claimed it as collateral. (The lender had assigned its secured position to the consignee's trustee in bankruptcy.)
The law governing UCC continuation statements is pretty straight-forward. Let's take a quick look at the rules governing continuation statements. This is an area that has generated little litigation. The biggest issue involves "retroactive lapse" if the secured lender fails to comply with the Article 9 rules after the debtor has taken bankruptcy.
Over the last eight years, this newsletter has included numerous stories about the colossal filing error that inadvertently terminated the perfected status of a $1.5 billion secured loan. The saga began with an error made by a paralegal at the Mayer Brown firm, which was counsel to the borrower, General Motors. Drafts of the closing documents (which terminated the wrong loan) were circulated and reviewed not only by Mayer Brown, but also by counsel for JP Morgan (Simpson Thacher), the lead lender in the syndicate. After much litigation regarding whether the erroneous filing of a termination statement was "authorized" and effective under Article 9 of the UCC, the Second Circuit (nudged by the Delaware Supreme Court) ruled that the filing was in fact authorized even though it mistakenly referred to the wrong loan.
In our prior story, Andrew Muller reported on a recent Supreme Court decision in which a dominant debt collector, Midland Funding, LLC, persuaded the High Court that proofs of claim for time-barred consumer debt don't violate the federal Fair Debt Collection Practices Act. That's a good victory for Midland Funding and other consumer-debt buyers. Interestingly, Midland Funding made another recent visit to the Supreme Court, with less satisfying results.
Perhaps the most famous Article 9 case in history is the case of the $1.5 billion erroneous termination statement arising out of the 2009 General Motors bankruptcy. For UCC/bankruptcy aficionados, it's the case that keeps on giving. The most recent issue, now playing out in the New York bankruptcy court, is whether the GM assets that were lost as collateral were "equipment" or "fixtures" under Article 9. If they qualify as "equipment," their value goes to the unsecured creditors because of the filing error; if they qualify as "fixtures," by contrast, local fixture filings and real estate recordings were probably sufficient to keep the bank security interests perfected. Let's review the case, including the equipment v. fixtures issue.
On May 15, 2017, the U.S. Supreme Court issued its much-anticipated opinion in Midland Funding, LLC v. Johnson, 2017 U.S. LEXIS 2949 (U.S. May 15, 2017). At issue was whether filing a time-barred proof of claim in bankruptcy violated the federal Fair Debt Collection Practices Act. When we previewed the Midland Funding case in the November 2016 issue of this newsletter, we noted that the Court could potentially reach several results on this issue, including a ruling that the Bankruptcy Code completely preempted the FDCPA, a ruling that filing a time-barred proof of claim was an FDCPA violation, or a ruling that there was nothing inherently misleading about an untimely claim.
A buyer in ordinary course of business takes free from a perfected security interest only if it was created by "the buyer's seller." UCC 9-320(a). This is the reverse of the shelter rule that one can't transfer better title than one has.
In a recent case from West Virginia, the secretary of state mis-indexed a financing statement filed by Creditor A, which created a priority dispute with Creditor B who filed later after doing a UCC search which did not reveal the mis-indexed financing statement. Both creditors then sought damages in negligence against the secretary of state, leading to issues of governmental immunity. The court ruled that Creditor A had priority over Creditor B because A had "filed" its financing statement irrespective of filing officer negligence. Creditor B was allowed to pursue its tort claim against the secretary of state.
A significant recent decision from the Sixth Circuit tests the power of a trustee in bankruptcy to avoid allegedly fraudulent transfers of funds from the now-bankrupt debtor (Teleservices) to its depository/lending bank. Meoli v. The Huntington National Bank, 848 F.3d 716 (6th Cir. 2017).
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.
In the world of consumer financial services, few issues have generated more controversy than the validity of consumer arbitration agreements that contain a waiver of the right to bring a class action. It was back in 2011 when the U.S. Supreme Court ruled on the issue. In a 5-4 decision written by Justice Scalia, the High Court held that class action waivers are enforceable under the Federal Arbitration Act, which preempted California's judicial rule that such waivers are unconscionable as a matter of state contract law. The case involved a mobile phone contract, but its rationale clearly applies to other consumer financial products, from secured installment loans to bank deposit agreements. AT&T Mobility LLC v. Concepcion, 131 Sup. Ct. 1740 (2011).
A Wisconsin bankruptcy court has ruled that an "assignment" of insurance renewal commissions was a security interest rather than an outright sale of the commissions, so that the bank's failure to file a UCC financing statement allowed the customer's trustee in bankruptcy to avoid the assignment. The court also ruled that the bank's security interest in a third-party promissory note was unperfected because, although the bank made a UCC filing, the bank checked the wrong box on the financing statement and thus designated the debtor as an "organization" rather than an individual. All in all, it was not a good day for the bank.
In a recent New York case, the court ruled that a check stated by the drawer to be in "full payment" of a disputed debt did not constitute an accord and satisfaction when it was cashed by the payee because the payee had indorsed the check "without prejudice" before depositing it. Under New York law, that indorsement trumped the "full payment" designation contained in a letter written by the drawer. Significantly, the New York rule has recently been changed by New York's long-delayed adoption of amendments to the UCC that eliminate the effect of a "without prejudice" indorsement and thus encourage the use of "full payment" checks as a form of alternative dispute resolution. New York was very slow in adopting these amendments, but it seems clear that they would overturn the recent judicial decision, bringing New York into alignment with the other states on this important issue.
“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.
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.
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.
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.
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).
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.