Clarks' Secured Transactions Monthly : Mealey's : Legal News & Analysis

Clarks' Secured Transactions Monthly

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
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 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:
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.
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
The Food Safety Modernization Act: A Primer For Secured Lenders (Part II)

As covered in Part I of this Primer published in last month’s newsletter, the Food Safety Modernization Act (FSMA) constitutes the largest overhaul of food safety regulations in over 70 years. With the implementation of this new regulatory food safety framework, there are far-reaching implications for food and feed entities and their secured lenders, ranging from contracting provisions to insurance, underwriting and collateral considerations.
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?
December 26, 2016
Supremes Will Address Whether Proofs Of Claim For Time-Barred Debts Violate The Fair Debt Collection Practices Act

This term, the United States Supreme Court takes up the issue of whether a “debt collector” who files a proof of claim based on a debt that may no longer be enforced because of applicable statutes of limitation violates the Fair Debt Collection Practices Act (“FDCPA”).
November 21, 2016
The Food Safety Modernization Act: A Primer For Secured Lenders (Part I)

As the largest overhaul of food safety regulations in over 70 years, the Food Safety Modernization Act (FSMA) has long been a topic of discussion in the food and animal feed industries. With the implementation of this extensive new regulatory framework, there are far-reaching implications for food and feed entities and their secured lenders, ranging from contracting provisions to insurance, underwriting and collateral considerations.
November 21, 2016
Supreme Court Agrees To Hear Credit Card Anti-Surcharge Case

On September 29, the U.S. Supreme Court granted review in Expressions Hair Design v. Schneiderman (Case No. 15-1391), a case out of the Second Circuit testing whether New York’s anti-credit-card surcharge statute runs afoul of the First Amendment’s free speech protections. The Second Circuit is one of three circuit courts to have recently considered the constitutional validity of anti-surcharge laws. The Second Circuit and the Fifth Circuit (analyzing a Texas statute) both determined that the laws before them regulated conduct rather than speech and were readily understandable, not unconstitutionally vague. In contrast, the Eleventh Circuit held that Florida’s anti-surcharge law “directly targets speech to indirectly affect commercial behavior.”
November 21, 2016
DC Appellate Court: CFPB's Structure Is Unconstitutional And Enforcement Actions Are Subject To Statutes Of Limitation

On October 11, 2016, the United States Court of Appeals for the D.C. Circuit issued its highly anticipated opinion in PHH Corp. v. Consumer Fin. Protection Bureau, _____F.3d_____, 2016 U.S. App. LEXIS 18332 (U.S. Ct. App. D.C. Cir. 10/11/2016), holding that the Consumer Financial Protection Bureau's (CFPB) structure is unconstitutional. But, surprisingly, that may not be the most significant holding in the opinion because the court also held that the CFPB's administrative enforcement actions are subject to applicable statutes of limitations, which could significantly limit the agency's authority and companies' potential exposure to fines and penalties for alleged offenses.
October 19, 2016
Louisiana Court Rules That Secured Lender Could Enforce Buyer's Rights Under Purchase Agreement

When a borrower defaults, the secured lender has a right to foreclose on the collateral by public or private sale. With respect to receivables owing to the debtor—accounts receivable, executory contract rights, general intangibles, chattel paper, or negotiable instruments—the secured lender can avoid the pitfalls of a foreclosure sale and collect directly from the account debtors. That's the beauty of being able to step into the shoes of the borrower. For example, if the debtor is a retail dealer, proceeds from the inventory might include accounts receivable (from customers who buy on 30-day open account), chattel paper (from customers who buy on secured installment credit) and promissory notes (from customers who buy on long- term unsecured credit). With respect to direct collection against the third-party obligors, the rights and duties of the secured party are set forth in UCC 9-607. A recent bankruptcy court decision from Louisiana nicely illustrates the power of direct collection in the context of a Chapter 11 bankruptcy.
October 19, 2016
Strict Foreclosure On Agricultural Equipment Extinguishes Junior Lien Even In Absence Of Notice

A handy option to holding a foreclosure sale is to retain the collateral in satisfaction of the debt, as authorized by UCC 9-620 through 9-622. This "strict foreclosure" approach has historical antecedents in the law of real property, particularly the deed in lieu of foreclosure. From the secured lender's viewpoint, there are many advantages to strict foreclosure: (1) it avoids the extra costs of a foreclosure sale in situations where no deficiency claim is likely to be collected; (2) it insulates the creditor from later attack upon the disposition as "commercially unreasonable"; (3) it can quickly remove property from the debtor's estate, as when bankruptcy is imminent. (4) it can be used for a variety of personal property assets, including intangible collateral such as receivables. It is sometimes used by blanket secured lenders as a way of maintaining the debtor's business as a going concern; and (5) collateral may be retained in full satisfaction of the debt or, as part of a workout, in partial satisfaction. If a consumer transaction is involved, retention in partial satisfaction is not allowed. UCC 9-620(g).
October 18, 2016
California Court Confirms Rule Giving Priority To Judgment Creditor As A "Transferee" From The Debtor's Deposit Account

If a debtor has granted a consensual security interest in the funds in its deposit account to a secured lender, does the lender have priority over the claims of a judgment creditor who later levies against the deposit account? In a recent decision from California, the court gives priority to the judgment creditor under the rules of Article 9. The decision is both thoughtful and exhaustive in resolving the priority issue based on the language and policies behind UCC 9-332(b). Yet there's a good argument on the other side.
September 30, 2016
The Perils Of Purdy: Floating Leases Of Livestock

Some readers may recall an article from the September, 2014, edition of this newsletter about a Sixth Circuit ruling that a cattle lease was a "true lease" instead of a financing arrangement. The ruling is one of many in a long line of rulings on this issue. The only notable aspect of the ruling was that the Sixth Circuit held that it was possible to have a "true lease" of a "floating mass" of cattle (i.e. – a lease for a specific number of cattle to be maintained over the life of the lease and returned to the lessor at the end of the lease, as opposed to the specific cattle identified at the commencement of the lease). This was happy news for the lessor who was competing against a prior perfected secured party for at least a portion of the proceeds from the sale of all the lessee's cattle (leased and not leased) after the lessee had filed bankruptcy.
September 30, 2016
Supplier Of Oil To Distributor Learns About UCC Consignment Rules The Hard Way

Although consignments of inventory are not true secured transactions, the drafters of the UCC have brought them within the scope of Article 9. UCC 9-103(d). A classic consignment arrangement is treated as a form of purchase-money security interest in inventory, with the consignor as the secured lender and the consignee as the debtor. As a result, the consignor will be in deep trouble if it fails to file a financing statement before delivery of the goods and to notify prior filers against the consignee of the consignment arrangement. UCC 9-324(b). Failure to jump through the hoops of Article 9 will be fatal as against the consignee's trustee in bankruptcy. This was the lesson learned in a recent case from Washington.
September 30, 2016
New OCC Credit Card Lending Booklet Identifies Risks And Provides Compliance Guidelines For Credit Card Debt

At the end of last year, the Comptroller of the Currency issued a revised “Credit Card Lending” booklet for the Comptroller’s Handbook, replacing a 1996 booklet of the same name. The OCC, part of the U.S. Department of the Treasury, is the prudential regulator for all national banks, federal savings associations, and federal branches of agencies of foreign banks. Part of the OCC’s role involves supervising these institutions to ensure their “safety and soundness.” Thus, as with other booklets, the Credit Card Lending booklet “is prepared for use by OCC examiners in connection with their examination and supervision of national banks and federal savings associations.”