Volume 6, Issue 1 (Summer 2010)
Cases of Interest
Personal Property Secured Transactions
Scope of Article 9 and Existence of a Secured Transaction
General
SEC v. Byers, 2009 WL 4432587 (S.D.N.Y. 2009)- Two lenders entered into a secured loan with a borrower. The transaction was structured as the first lender making the loan and then selling a participation to the second lender. The second lender then sold the participation to a third party on credit. The third party then made a collateral assignment back to the second lender. The Court held that the second lender was not perfected against the third party. The court characterized the participation as an instrument - not as a payment intangible. The second lender had not filed a financing statement nor did the first lender have possession on behalf of the second lender after the sale. [check]
Kraenzler v. Brace, 773 N.W.2d 481, 69 U.C.C. Rep. Serv. 2d 602 (Wis. Ct. App. 2009)- A clause in a security agreement that provided that the ownership of the collateralized equipment transferred to the secured creditor upon default. The claim was unenforceable because the parties cannot in the security agreement "opt out" of the UCC and waive the debtor's rights to require the secured party to conduct a commercially reasonable disposition and apply the proceeds to the secured obligation. UCC §1-103 and 9-602.
Comment: UCC § 9-602 lists certain debtor rights that cannot be waived prior to a default.
In re St. James Inc., 402 B.R. 209 (Bankr. E.D. Mich. 2009)- Although UCC Article9 does not cover security interests in unearned insurance premiums, creditor did have a security interest in the debtor's rights to cancel the insurance policy and receive a refund of unearned premiums pursuant to a state statute governing insurance premium financing. That security interest was effective upon funding of the policy, not cancellation of the policy. UCC §9-109(d)(8).
Consignments
In re Downey Creations, LLC, 414 B.R. 463 (Bankr. S. D. Ind. 2009)- A putative consignor bears burden of proof on whether transaction fails to qualify as an Article9 consignment because the consignee is "generally known by its creditors to be substantially engaged in selling the goods of others." Because this requires evidence that a majority of creditors - determined by their number, not the amount owed to them - knew that the debtor was substantially engaged in selling the goods of others, and the consignor here was unable to make such a showing, the transaction created a security interest.
Comment: The case underscores the difficulty of proving that an apparent consignment transaction is outside Article 9. In many circumstances, parties should take the precaution of filing financing statements and treating transactions as Article 9 security interests rather than running the risk that they cannot later satisfy this burden of proof.
Fariba v. Dealer Services Corp., 178 Cal.App.4th 156, 100 Cal. Rptr. 3d 219 (Cal. Ct. App. 2009)- A consignor of automobiles to car dealer had priority over dealer's secured creditor because secured creditor had actual knowledge that the dealer was substantially engaged in selling the goods of others, even though the consignor did nor present evidence of either what the dealer's creditors generally knew or that the secured creditor knew of the consignor's arrangement with the dealer. Consignor also won because it had reacquired possession of the automobiles when the debtor separated the cars from the remainder of its inventory and gave the keys to cars to the consignor's personnel.
Comment: UCC §9-102(a)(20) generally requires that to qualify as a consignment, a transaction must involve a merchant who (1) deals in goods of that kind under a name other than the name of the person making delivery; (2) is not an auctioneer; and (3) is not generally known by its creditors to be substantially engaged in selling the goods of others. The conclusion in Fariba that actual knowledge by a single secured creditor satisfied the test simplifies the burden of proof and may lead to equitable results, but is outside the specific language of the UCC.
Royale Pigments & Chemicals LLC v. Bomanite Corp., 2009 WL 800911 (E.D. Cal. 2009)- A seller of goods who, after delivery, agreed with buyer to convert sale contract into a consignment agreement did not have priority over buyer's secured lender because lender's security interest attached to the goods sold and was perfected. The seller neither filed a financing statement nor provided notice to the lender.
Excel Bank v. National Bank of Kansas City, 290 S.W.3d 801, 69 U.C.C. Rep. Serv. 2d 1105 (Mo.Ct.App. 2009) - A consignor that did not perfect its consignment was junior to a secured party of the consignee that had perfected its security interest. The secured party had no duty to check the status of the certificates of title on the consigned vehicles.
Real Property
Baker Const. Co., Inc. v. City of Burlington, 683 S.E.2d 790 (N.C. Ct. App. 2009)- Underground water and sewer lines were ordinary building materials, not fixtures, and thus became part of the real property in which they were installed. As a result, no personal property security interest could attach to them and all rights to them transferred when a mortgage on the real estate was foreclosed.
In re Jones, 2009 WL 4907028 (Bankr. E.D. Ky. 2009)- A secured party's security interest in a mobile home was unperfected because the interest was not noted on the certificate of title and the mobile home did not become part of real estate by filing an affidavit of conversion to real estate and surrendering the certificate of title.
Metro Construction Co., LLC v. Sim Attractions, LLC, 2009 WL 1605558 (Tenn. Ct. App. 2009)- A putative lessor that filed a precautionary financing statement in Wisconsin held a perfected security interest in a multi-ton race car simulator located in Tennessee because the simulator was not a fixture and thus the proper place to file was Wisconsin, the jurisdiction in which the debtor was organized.
In re Troutt, 2009 WL 2905923, 2009 Bankr. LEXIS 2673 (Bankr. S.D. Ill. 2009)- Insulation stapled in attic of house was a fixture and thus a fixture filing or recorded mortgage was needed to perfect, even though the creditor had a PMSI and the insulation was consumer goods.
Leasing
In re Gateway Ethanol, L.L.C., 415 B.R. 486 (Bankr. D. Kan. 2009)- A five-year lease of a $5 million boiler with a $600,000 purchase option at the end of the lease term was a true lease. The transaction failed the bright-line test of former UCC §1-201(37). The option price was not "nominal" because the cost of returning the boiler was only $200,000-$250,000 and the predicted value of the boiler was $600,000. The transaction remained a lease after examining all the facts and circumstances because the boiler had a useful life of 15-20 years and the lessor would have been able to market the boiler had the lessee returned it.
Gangloff Industries, Inc. v. Generic Financing and Leasing, Corp., 907 N.E.2d 1059 (Ind. Ct. App. 2009)- An eight-year lease of a truck for $1,100/month with an option to purchase at the end for $3,200 was not a true lease, but a sale with a retained security interest. Accordingly, entity that had repaired the truck at the lessee's request and which still had possession of the truck had a mechanic's lien on the truck with priority over the lessor's security interest under UCC §9-333.
In re Phoenix Equipment Company, Inc., 2009 WL 3188684 (Bankr. D. Ariz. 2009)- Equipment leases that included an oral option to purchase at the end of the lease term for 10% of the purchase price were security agreements. Although the lessee had not proven that the option price was nominal, and thus the bright-line rule was not satisfied, characterization of the transactions as security arrangements was supported by the fact that: (i) the option price was the same for each lease, regardless of the duration of the lease or the nature or age of the equipment; (ii) the debtor had never failed to exercise an option; and (iii) the debtor needed the equipment to operate its business.
Sales
In re C.W. Mining Company, 2009 Bankr. LEXIS 2372, 69 U.C.C. Rep. Serv.2d 830 (Bankr. D. Utah 2009)- A "buyer" entered into an advance payment agreement with a "seller." The buyer made an "advance payment" to the seller and the seller agreed to sell coal to the buyer immediately upon the seller mining it. The court held that the transaction created a security interest, not a sale, because no price, quantity, or delivery terms were provided and the putative buyer had the right to elect payment in cash or in kind.
Comment: The court rightly analyzed the entire terms of the agreement, not what it called the "gratuitous" contractual statement that the advance payment agreement was a sale.
In re Rome Family Corp., 407 B.R. 65, 69 U.C.C. Rep. Serv. 2d 436 (Bankr.D.Vt. 2009) - A seller of goods retained title to the goods until the buyer paid for them. The court recharacterized this as a "security interest". UCC § 2-401((2). As such, the buyer was the owner of the goods and the goods were part of its bankruptcy estate. The seller had not perfected its security interest.
Intellectual Property
Sky Technologies LLC v. SAP AG, 576 F.3d 1374 (Fed. Cir. 2009)- A secured party acquired patents at a foreclosure sale, a second party then sold the patents to a third party. The court held that third party had standing to bring an infringement action. The court held that state law determines ownership of a patent and that federal law governs the method of "assignment." Under federal law, an "assignment" of a patent must be in writing. However, the foreclosure in compliance with the UCC effected a valid transfer of the patents by operation of law and was not an "assignment" that was required to be in writing.
Shuffle Master, Inc. v. Smart Shoes, Inc., 2009 WL 3336115 (D. Nev. 2009)- The federal courts lack subject matter jurisdiction to determine priority between a secured party and a buyer of a patent.
In re Propex, Inc., 415 B.R. 321 (Bankr. E.D. Tenn. 2009)- If under applicable regulations the debtors do not have property rights in their air quality and storm water discharge permits, no security interest in those permits could have attached to the permits.
Doolim Corp. v. R Doll, LLC, 2009 WL 1514913 (S.D.N.Y. 2009)- A seller manufactured trademarked apparel pursuant to an order from the trademark owner. The seller had an implied license to sell the trademarked goods in order to mitigate its damages after the trademark owner unjustifiably failed to accept or pay for the goods.
Comment: The case highlights an interesting aspect of the intersection between Article 9 and intellectual property laws. The result might have been different had the breaching party been someone other than the trademark owner; a secured creditor of a defaulting merchandiser, for example, might not be able to sell warehoused inventory using its licensed brand name without consent of the licensor.
In re ParticleDrilling Technologies, Inc., 2009 WL 2382030 (Bankr. S.D. Tex. 2009)- An agreement by which the debtor, a patent owner, agreed to pay royalties was not an executory contract because neither party had any unperformed obligations other than the payment of money. The royalty obligation is not a covenant that "runs with" the patent. The language in the agreement purporting to bind future assignees was merely an unperfected security interest. Accordingly, the debtor could sell the patent free and clear of the royalty obligation.
Tort Claims
Goldberg & Connolly v. New York Community Bancorp., Inc., 565 F.3d 66 (2d Cir. 2009)- A debtor granted a security interest in "all sums recovered" from a judgment that the debtor had against a third party. The court interpreted the security agreement not to create a security interest in the judgment itself. Rather, the court held that this created a security interest only in any "money" collected as a result of a judgment. Thus because the "sums" arose later, the debtor did not yet have "rights" in that collateral and the security interest did not attach until the "sums" arose. UCC §9-203. The secured party was not perfected in the money because it did not have possession of the money. UCC §9-312(b)(3). Thus the secured party was junior to a judgment creditor. UCC §9-317(a)(2)(A).
Conley v. Public Safety Group, Inc., 771 N.W.2d 653 (Iowa Ct. App. 2009)- The claims of corporation against former employees for breach of fiduciary duty were commercial tort claims, not contract claims. Therefore a generic reference in the security agreement to "proceeds from any lawsuit due or pending" was insufficient to create a valid security interest in those claims. UCC §9-108(e). Accordingly, a sheriff's sale of those claims to the defendants pursuant to a writ of execution transferred those all of the rights to those claims to the defendants, who then had the right to have them dismissed.
In re American Cartage, Inc., 2009 WL 4780972 (Bankr. D. Mass. 2009)- A security agreement that covered existing and after-acquired general intangibles did not extend to a subsequent commercial tort claim because the security agreement did not describe the claim, the after-acquired property clause is not permitted to cover it, and the claim was not proceeds of other collateral but merely a claim for generalized harm to the debtor's business. UCC §9-204(b)(2). In addition, claims arising out of damage to the collateral are proceeds only "to the extent of the value of the collateral," but here debt had been paid in full and thus there was no value to the collateral despite sale of the collateral.
Conerly Corporation v. Regions Bank, 70 UCC Rep Serv.2d 104 (E.D. La. 2009) - Under other state law, a tort claim could not be assigned until the injured person had filed an action, even though the facts underlying the claim already existed. Article 9 defers to these state rules. UCC § 9-102, Comment 5(g).
Security Agreement and Attachment of Security Interest
Security Agreement
Rich Financial, LLC v. United States, 2009 WL 87606 (D. Utah 2009)- A dragnet clause in security agreement covered amounts owed by related entities and which the debtor orally guaranteed. While the debtor might have a statute of frauds defense to the oral guaranty, third parties do not. Therefore, amount owing on guaranty was secured by accounts in which secured party had a perfected interest that pre-dated a notice of federal tax lien. However, the security interest in the debtor's claim against the state for underpayment of Medicaid services was inchoate when the notice of tax lien was filed. That claim was not clearly proceeds of accounts.
In re Franklin Equipment Co., 418 B.R. 176, 2009 WL 3246790 (Bankr. E.D. Va. 2009)- A security agreement granting a security interest in a life insurance policy to secure "the obligations and liabilities of [the creditor] to [the creditor] pursuant to the [April 23, 2008] Note and the loans evidenced thereby, whether now existing or hereafter incurred" covered the debtor's obligations on 26 separate promissory notes allegedly used to fund the April 23rd note.
In re Covenant at South Hills, Inc., 410 B.R. 426 (Bankr. W.D. Pa. 2009)- A creditor that received assignment of rights from bank that issued letter of credit did not have a security interest in the debtor/applicant's assets because there was no document granting such a security interest to the bank. Although an intercreditor agreement provided that "the Bank and the Trustee shall both have a first lien on and security interest in the Shared Collateral," and the debtor signed the intercreditor agreement and agreed to be bound by its terms, that agreement did not actually grant a security interest.
In re Nacio Systems, Inc., 410 B.R. 38 (Bankr. N.D. Cal. 2009)- A confirmed reorganization plan - which the debtor signed - providing that all the debtor's assets would secure up to $500,000 in post-confirmation financing, could function as a security agreement, but was limited to the $500,000 mentioned, not the greater amount actually loaned, and did not cover after-acquired assets. The security interest was not perfected in registered copyrights.
In re Stearns, 2009 WL 4330832 (Bankr. N.D.N.Y. 2009)- An unsigned loan receipt that described the intended collateral and provided that by endorsing the loan check the borrower agreed to have the described property secure the loan, coupled with endorsed check, were not sufficient as a security agreement in the absence of clear evidence that the borrower negotiated the check with knowledge of the language printed on the receipt or that the parties' course of conduct corroborated the requisite "present intent."
Vanderhorst v. 6105 N. Dixie Drive, LLC, 2009 WL 4893184 (Ohio Ct. App. 2009)- Whether the assignment of membership interest in limited liability company was outright or for security was a factual issue not appropriate for summary judgment.
Comment: Compare to C.W. Mining (above), in which court clearly stated that the four walls of the agreement should provide enough information to determine the characterization of the transfer.
In re Nat. Gas Distributors, LLC, 70 U.C.C. Rep. Serv. 2d 15 (Bankr.E.D.N.C. 2009) - A debtor's direction to an account debtor to make payments to a creditor of the debtor was sufficient to create a security interest in the account.
Rights in Collateral
In re National Gas Distributors, LLC, 70 U.C.C. Rep. Serv. 2d (Bankr. E.D.N.C. 2009)- A supplier of natural gas to a distributor who had the distributor instruct its customer to pay the supplier directly did not thereby create a principal-agent relationship or prevent the receivable from being property of the distributor. The only right the supplier obtained was a security interest in the receivable, which was unperfected and thus subordinate to the distributor's secured lender.
U.S. v. Two Bank Accounts In amount of $197,524.99 at Bank of America, 2009 WL 803615 (D.S.D. 2009)- A corporation granted a security interest in its deposit accounts to secure a debt owed by the corporation's sole shareholder. This violated public policy and was void, as was corporation's guaranty of the debt. Even if the security interest had attached, because it was unperfected, the secured party lacked standing to intervene in a forfeiture action brought by the United States.
In re Courson, 409 B.R. 516 (Bankr. E.D. Wash. 2009)- A boat seller's secured party did not have a security interest in money paid by insurer to secured party of buyer because the money was not payable to either the debtor (now the buyer) or the seller's secured party, and thus the money did not constitute proceeds of the boat.
Credit Suisse Securities (USA) LLC v. West Coast Opportunity Fund, LLC, 2009 WL 2356881 (Del. Ch. Ct. 2009)- An individual who signed in his individual capacity a lockup agreement promising not to pledge "directly or indirectly" certain corporate stock for one year did not thereby prevent LLC which owned the stock and of which he was the sole member and manger from pledging the stock to its broker. While the individual may have breached the lockup agreement, that did not impair the validity of the pledge.
American State Bank v. Van De Nieuwegiessen, 2009 WL 3152927 (W.D. Okla. 2009)- A dairy farmer had sufficient rights for a security interest to attach to cattle and equipment allegedly owned by his mother because he possessed the cattle and equipment at issue, held himself out as the owner thereof, used them in the dairy operation, made all decisions regarding their use, sale, and management, consistently represented to the putative secured party that he was the sole owner of the property, and made no attempt to segregate his cattle from those allegedly belonging to his mother.
Settlement Funding, LLC v. Transamerica Occidental Life Insurance Co., 555 F.3d 422 (5th Cir. 2009)- While the beneficiary of annuity contract may have rights in settlement agreement, beneficiary has no rights in annuity obtained and owned by the federal government (the other party to the settlement agreement) and issued by an insurance company, and thus could not assign the right to annuity payments.
Metropolitan Life Ins. Co. v. Muldoon, 2009 WL 635044 (D. Kan. 2009)- A beneficiary of annuity issued as part of structured settlement had no ownership interest in annuity itself and thus could not grant security interest in future annuity payments so as to bind annuity issuer.
321 Henderson Receivables Origination LLC v. Sioteco, 173 Cal. App. 4th 1059, 93 Cal. Rptr. 3d 321 (Cal. Ct. App. 2009)- UCC §9-408 authorizes the assignment of the right to payment under a structured settlement because such rights are general intangibles and California has not excluded interests in insurance policies from the scope of the California Commercial Code. For this reason, public policy does not prohibit such an assignment. Although the annuity issuer or settlement obligor might be able to enforce the contractual anti-assignment provisions, they may have waived that right by failing to object after receiving notification of the proposed assignment.
Summit Financial Resources L.P. v. Big Dog Enterprises Logistics, LLC, 2009 WL 901159 (S.D. Ill. 2009)- A freight broker who arranged for carriers to transport goods for shippers and paid carriers with funds provided by shippers after retaining a commission, was able to grant a security interest in the receivables due from shippers to cover its commission but not in the remainder of the receivables from shippers if they were held in an express or implied trust, unless the secured party qualifies as a bona fide purchaser without notice of the trusts.
In re M & S Grading, Inc., 2009 WL 2497101 (Bankr. D. Neb. 2009)- A debtor deposited withholding taxes and similar funds in its deposit account. It designated on its books how that money was to be allocated. The funds commingled in debtor's deposit accounts did not become property of the debtor's employees or of taxing authorities by the debtor making the entries on its payroll records showing that tax withholding occurred. Until there was an actual transfer of the monies, the debtor's secured creditor retained a security interest in the funds on deposit.
Description of Collateral and the Secured Debt - Security Agreements and Financing Statements
Kazan v. Dough Boys, Inc., 201 P.3d 508 (Alaska 2009)- A seller of two businesses who refused to amend overly broad financing statement filed against buyer unless paid $60,000 was not liable to return that sum, which the buyer had paid pursuant to a settlement agreement, because he had acted in good faith and the settlement agreement was not unconscionable, and was not liable for other damages because the buyer did not prove that it suffered any.
ProGrowth Bank, Inc. v. Wells Fargo Bank, N.A., 558 F.3d 809 (8th Cir. 2009)- A financing statement described the collateral as "[a]ll of Debtor's right, title, and interest in and to, assets and rights of Debtor, wherever located and whether now owned or hereafter acquired or arising, and all proceeds and products in that certain Annuity Contract No.: LE900015 issued by Lincoln Benefit Life." The collateral description was sufficient even though the annuity in question was issued by another company because the opening phrase covered all assets and was not limited to interests in the described annuity. Even if the phrase was ambiguous, that would be sufficient to serve the notice function of a financing statement.
Comment: UCC §9-502, Comment2 supports this result.
Quad City Bank and Trust Co. v. United States, 2009 WL 2105982 (S.D. Iowa 2009)- A financing statement that described the collateral as: "Assignment of Consulting Agreement Payments. See Attached Exhibit'A'.; whether any of the foregoing is owned now or acquired later," was sufficient to cover payments due under a consulting agreement other than the one attached as Exhibit A because the last phrase encompassed other collateral in the same category.
In re Cascade Grain Products, LLC, 2009 WL 2843365 (Bankr. D. Or. 2009)- A secured party had a security interest in an equity sponsor's contractual obligation to provide further funding to the debtor because the security agreement expressly covered general intangibles, even though the agreement expressly referenced certain project contracts of the debtor, but not the debtor's financing contract with the equity sponsor.
In re TOUSA, Inc., 406 B.R. 421 (Bankr. S.D. Fla. 2009)- A security interest in existing and after-acquired general intangibles attached to the debtor's right to tax refund arising from the carryback of a net operating loss at the end of the taxable year in which the net operating loss arose.
Comment: A later decision in the Tousa proceedings, cited on page 38 of these materials, further analyzes the timing of the tax refund for preference purposes and includes a high profile decision regarding fraudulent transfers.
Charlotte Development Partners, LLC v. Tricom Pictures & Productions, Inc., 2009 WL 4282939 (Fla. Dist. Ct. App. 2009)- A security agreement described the collateral as "Accounts, Chattel Paper, Contract Rights, Inventory, Equipment, Fixtures, General Intangibles, Deposit Accounts, Documents, Instruments, Investment Property and Financial Assets." The collateral description did not cover a cash bond returned by court to the debtor's attorney because the cash bond was money. Even if the security agreement had covered the money, the security interest would not have been perfected by the filed financing statement because the only way to perfect a security interest in money is by possession.
In re U.S. Insurance Group, LLC, 2009 WL 4723466 (Bankr. E.D. Tenn. 2009)- A financing statement described the collateral as "accounts." The financing statement was sufficient to perfect a security interest in the debtor's right to earned insurance commissions and renewal commissions because such rights are expressly included in the Article9 definition of accounts and the security interest is not excluded from Article9 by as an interest in a policy of insurance. Financing statement describing the collateral as "all records of any kind relating to" commission accounts was sufficient to perfect a security interest in the debtor records, which were general intangibles.
In re Lifestyle Home Furnishings, LLC, 2009 WL 1270317 (Bankr. D. Id. 2009)- A security agreement that described the collateral as "All of Grantor's Personal Property [and] The property described in Exhibits (if any) attached hereto" was effective because even though the first clause was overly broad, the second clause encompassed a description in a disclosure statement which defined "All of Grantor's Personal Property" to include, by an express listing, all of the Article9 classifications of collateral.
CNH Capital America, LLC v. Southeastern Aggregate, Inc., 2009 WL 3172353 (S.D. Ga. 2009)- The description in a sale and security agreement of goods as a model "W130" loader when in fact it was model "W130TC" loader did not render the agreement unenforceable, particularly given that the goods had been received and accepted.
In re Excalibur Machine Co., Inc., 404 B.R. 834 (Bankr. W.D. Pa. 2009)- An agreement by which steel supplier consigned steel plate to machine manufacturer was really a security agreement because the parties did not really intended that the steel would be sold to third parties. The security interest in the steel plate did not extend to the machines made therefrom, or the accounts generated from the sale of such machines, because the security agreement did not so provide.
In re Phipps, 68 U.C.C. Rep. Serv. 2d 151 (Bankr. S.D.Ill. 2008) - A description of collateral using an Article 9 type such as "equipment", is a sufficient description. UCC § 9-108.
Perfection
Possession, Control, and Other Non-Filing Perfection Methods
Fifth Third Bank v. Lincoln Financial Securities Corp., 2009 WL 2523444 (W.D. Ky. 2009)- A securities broker that had entered into a control agreement breached the control agreement with a customer's secured party by either: (i) misrepresenting the value of the customer's account by including in the stated value securities purchased with funds from a check that was later dishonored; or (ii) reversing trades after the check was dishonored despite a clause in control agreement by which broker "waive[d] and release[d] all liens, encumbrances, claims and rights of setoff it may have." The control agreement was not rendered unenforceable for lack of consideration or mutuality, mutual mistake, or the customer's fraud.
In re W.B. Care Center, LLC, 2009 WL 3451066 (S.D. Fla. 2009)- A debtor's stipulation to perfection in settlement agreement was unenforceable. The parties may do what they want but their private agreement cannot change the law, and perfection is a legal question. Even if the stipulation were a waiver of the debtor's right to challenge perfection, it would not bind a bankruptcy trustee.
Excel Bank v. National Bank of Kansas City, 290 S.W.3d 801 (Mo. Ct. App. 2009)- A bank that consigned cars to used car dealer and retained the certificates of title, but did not file a financing statement, had only an unperfected PMSI and therefore lost priority to dealer's floor plan financier, which held a perfected security interest in the dealer's inventory.
In re Kanoff, 408 B.R. 53 (Bankr. M.D. Pa. 2009)- A liquor license is a general intangible. Thus, a secured party that had a security interest in the license could not perfect by possession of the license certificate or by "control" over the license through payment of renewal and transfer fees.
Comment: Prior to determining the collateral categorization, one would need to determine whether the license holder had rights in the collateral or the power to transfer rights under applicable law to qualify the license as personal property subject to Article 9 and permit attachment under UCC §9-203.
1st Source Bank v. Best-One Tire of Crossville, Inc., 2009 WL 2170167 (E.D. Tenn. 2009)- The notation on certificates of title, which perfected creditor's security interest in trucks, also perfected its security interest in tire, rims, and lug nuts because such property constituted accessions to the trucks.
In re Hutchins, 400 B.R. 403 (Bankr. D. Vt. 2009), aff'd, 409 B.R. 680 (D. Vt. 2009)- The security interest of a secured party who refinanced debtor's truck loan was unperfected because the interest was not noted on the certificate of title for the truck. Even though the security interest of the creditor whose loan was paid off was still noted on the certificate of title, the refinancing lender was not subrogated to the original creditor's lien because the refinancing lender was not required to pay off the debt to that creditor, the refinancing lender did not take even the most obvious commercially reasonable steps to perfect its lien, and subrogation would harm the unsecured creditors.
In re Drahn, 405 B.R. 470 (Bankr. N.D. Iowa 2009)- A secured party who was listed as the owner, rather than as a lienholder, on the certificate of title for the collateral was perfected.
In re Owen, 2009 WL 2145705 (Bankr. D. Id. 2009)- A secured party that perfected its security interest by compliance with California certificate of title act remained perfected after the debtor moved the car to Idaho and applied for an Idaho certificate of title and the state issued a new certificate noting the security interest, even though the governing law changed when the application was filed and the new certificate was not issued until a week or two later. The secured party was continuously perfected by a combination of the rules of the two states. UCC §§9-303 and 9-316.
In re Green, 410 B.R. 904 (Bankr. D. Idaho 2009)- A secured party who submitted documentation to Department of Transportation to have its purchase money security interest noted on the certificate of title for a financed motorcycle was not perfected because the Department never issued the certificate due to a discrepancy in the odometer reading between what the creditor submitted and what the seller's endorsed certificate of title indicated.
In re Ritchie, 416 B.R. 638 (6th Cir. BAP 2009)- A secured creditor with a mortgage on real estate who acquired a security interest in a replacement manufactured home that debtor purchased after the original was destroyed by fire was unperfected because its interest was not noted on the certificate of title. Neither the creditor's mortgage nor its lis pendens, which specifically referred to the manufactured home, perfected its security interest because the debtor had not complied with state law to convert the manufactured home from personal to real property.
In re Hawaiian Telcom Communications, Inc., 2009 WL 2575663 (Bankr. D. Haw. 2009)- A collateral agent for lender group was not perfected in debtor's deposit accounts because it lacked a control agreement with the depositary bank, even though the depositary was a member of the lender a group.
FTC v. Transcontinental Warranty, Inc., 2009 WL 5166216 (N.D. Ill. 2009)- A clearinghouse's standard agreement with bank and debtor for the processing of credit card charges that required bank to maintain a reserve account and which granted the clearinghouse a security interest in the reserve account did not perfect the clearinghouse's security interest by control, because the agreement did not require the bank to comply with the instructions of the clearinghouse.
Kennedy v. Healthone Staffing, LLC, 2009 WL 281777 (Cal. Ct. App. 2009)- A secured party did not need to file a financing statement because the secured party received an assignment of a single account in satisfaction of a pre-existing debt and thus Article9 did not apply under UCC §9-109(d)(7). Even if Article9 did apply, the security interest would likely have been automatically perfected under UCC §9-309(2).
United States v. Two Bank Accounts Described as: Bank Account In the Amount of $197,524.99 Bank of America Seattle, Washington, 68 U.C.C. Rep. Serv. 2d 382 (D.So.Dak. 2009) - A secured party with a security interest in deposit accounts was subject to the right of the United States to cause the forfeiture of the deposit accounts because the secured party had not perfected its security interest in the deposit accounts by control. UCC § 9-104.
In re Johnson, 407 B.R. 364, 69 U.C.C. Rep. Serv. 2d 575 (Bankr.E.D.Ark. 2009), order reinstated by 2010 WL 308821 (Bankr.E.D.Ark. 2010) - A secured party perfected its security interest in a recreational vehicle by having its security interest noted on the certificate of title. UCC § 9-311(a)(3). When the secured party assigned the secured loan, the assignee remained perfected although it did not have the notation changed to show it as the new secured party. UCC § 9-310(c).
Comment: The court distinguished the much-criticized decision in
Clark Contracting Services, Inc. v. Wells Fargo Equipment Finance, 399 B.R. 789 (Bankr.W.D.Tex. 2008), which had come to the contrary conclusion on the continuity of the perfection of the security interest.
Preparation of Financing Statement
In re C.W. Mining Co., 69 U.C.C. Rep. Serv. 2d 830, 2009 WL 2601246 (Bankr. D. Utah 2009)- A financing statement identified the debtor as "CW Mining Company" instead of "C. W. Mining Company." The financing statement was ineffective to perfect the security interest because a search by the filing office using the filing office's standard search logic under the debtor's registered name did not reveal the filings that lacked the periods and space. UCC §9-506(e).
In re Crystal Cascades Civil, LLC, 415 B.R. 403 (9th Cir. BAP 2009)- A secured creditor with deed of trust on real property had priority over Internal Revenue Service because earlier filed notice of tax lien was ineffective. The notice identified the debtor as "Crystal Cascades, LLC, a corporation," rather than "Crystal Cascades Civil, LLC, a Nevada limited liability company," and while a professional searcher would have discovered the notice using a proprietary title plan, in this locality a reasonable non-professional searcher using the real estate records would not have.
In re EDM Corp., 68 U.C.C. Rep. Serv. 2d 139, 2009 WL 367773 (Bankr. D. Neb 2009)- A financing statement listed the debtor as "EDM Corporation d/b/a EDM Equipment" instead of its registered name, "EDM Corporation." The financing statement was ineffective because it was undisputed that a search under the registered name using the filing office's standard search engine does not reveal the filing.
In re Alvo Grain and Feed, Inc., 2009 WL 1609385 (Bankr. D. Neb. 2009)- The court denied summary judgment on whether a financing statement listing the debtor as "Alvo Grain & Feed, Inc." instead of its registered name, "Alvo Grain and Feed, Inc.," was effective to perfect because there was conflicting evidence of whether a search using the filing office's standard search engine would reveal the filing. Specifically, there was evidence that a search by a filing officer would reveal the filing but an internet search did not.
Metro Construction Co., LLC v. Sim Attractions, LLC, 69 U.C.C. Rep. Serv. 2d 93, 2009 WL 1605558 (Ct.App. Tenn. 2009) - A lessor under a lease that created a security interest noted on its financing statement that the filing was "precautionary". That notation did not make the financing statement "seriously misleading". UCC § 9-502.
Filing of Financing Statement - Manner and Location, Lapse, Changes
In re SemCrude, L.P., 407 B.R. 82, 69 U.C.C. Rep. Serv. 2d 212 (Bankr. D. Del. 2009)- Kansas and Texas law give lessors of mineral rights a perfected, first-priority security interest in certain extracted oil and gas. Those laws were held not to govern this transaction because the debtors were "located" for UCC purposes in Delaware (and their depositary banks were located in Oklahoma). As a result, compliance with the non-uniform rules in Kansas or Texas on attachment and perfection was immaterial and the secured parties who filed in Delaware are entitled to priority.
Comment: The case is a reminder that several states have enacted non-uniform versions of the Uniform Commercial Code; parties who wish to take advantage of non-uniform provisions must be mindful of the application of Article 9's choice of law rules.
In re Trafford Distributing Center, Inc., 414 B.R. 849 (Bankr. S.D. Fla. 2009)- A secured party that had purchased accounts and filed a financing statement against the debtor in Pennsylvania was unperfected because the debtor was incorporated in Florida and thus the financing statement should have been filed there.
In re A.F. Evans Co., Inc., 69 U.C.C. Rep. Serv. 2d 1115, 2009 WL 2821510 (Bankr. N.D. Cal. 2009)- A secured party that authorized an escrow agent to file an amendment to financing statement releasing some collateral, to facilitate the debtor's sale of such collateral, did not authorize the escrow agent to terminate the financing statement, and therefore the secured party's security interest remained perfected. Moreover, because both the termination box and the release of collateral box were checked on the filed amendment, and the latter would be superfluous if the former were intended, the amendment was patently ambiguous. Under the "seriously misleading" standard of UCC §9-506(a), this filing would raise a red flag to anyone conducting a search.
Smith v. Catinella, No. 08-14118, 2009 U.S. Dist. LEXIS 77873, 2009 WL 2843934 (E.D. Mich. 2009) - Michigan corrections system prevented an inmate from reading/sending UCC materials and other correspondence for fear he intended to file bogus liens against his sentencing judge; Court refused a preliminary injunction allowing the inmate's actions to proceed, noting that the injunction "is likely to cause harm to others, since it would inhibit the [Michigan Department of Corrections] from stanching the abusive practice of prisoners filing baseless liens and UCC financing statements for the purpose of harassment and credit impairment of the alleged debtor".
Gruber v. Tilton, No. 1:08-0524-JLS (PCL), 2009 U.S. Dist. LEXIS 94237, 2009 WL 3081829 (E. D. Ca. 2009) - Rejecting habeas petition of prisoner jailed for filing a false/forged instrument in violation of California Penal Code.
In re S.J. Cox Enterprises, 68 U.C.C. Rep. Serv. 2d 761, 2009 WL 939573 (Bankr. E.D. Ky. 2009) - One secured party purported to terminate a financing statement filed by another secured party. The court held that only the secured party of record can terminate a financing statement. As a result of the termination, the secured party that terminated the other secured party's financing statement was liable to the other secured party for damages incurred by the wrongful termination.
Comment: The court seems to hold that the wrongful termination was effective to terminate the financing statement. This is incorrect.
Priority
Priority - Set-Off, Claims of Unsecured Third Parties, Buyers, and Rights of Holders of Non-UCC Liens
Delta Engineered Plastics, LLCv. Autolign Mfg. Group, Inc., 286 Mich. App. 115, 777 N.W.2d 502 (Mich. Ct. App. 2009)- A secured party's perfected security interest in debtor's plastic molds was subordinate to possessory lien created by statute in favor of companies that had contracted with the debtor to use the molds to manufacture auto parts.
Longaberger Co. v. Kolt, 586 F.3d 459 (6th Cir. 2009)- An employer's ERISA lien on a tort recovery for reimbursement of medical expenses paid has priority over lien of the employee's attorney whose work led to the recovery.
TD Bank v. Electrical Wholesalers, Inc., 2009 WL 2603126 (Ct. Super. Ct. 2009)- A secured party had a perfected security interest in a debtor's accounts. The secured party is entitled to recover from the garnishor the collections from an account successfully garnished directly from the account debtor even though the secured party received notification of the garnishment action and failed to object.
Full Throttle Films, Inc. v. National Mobile Television, Inc., 100 Cal.App.4th 1438, 103 Cal.Rptr.3d 560 (Cal. Ct. App. 2009)- A secured party had a control agreement for two deposit accounts, but not a third deposit account. No evidence was presented about whether the judgment creditor had levied on either of the deposit accounts covered by the control agreements. The secured party did not have a control agreement for the deposit account on which the judgment creditor levied. The secured creditor did not have priority under UCC §9-317(a)(2)(B) because its financing statement was filed in Delaware, where the debtor was located, not in California, whose law governed the deposit accounts.
Comment: The case highlights both the evidentiary standard required to establish that a control agreement applies to a particular account and priority rules for lien creditors.
In re Bill Heard Enterprises, Inc., 400 B.R. 813 (Bankr. N.D. Ala. 2009)-A secured party's security interest in all assets of automobile dealer included credit balance with manufacturer but was subject to manufacturer's right of recoupment and setoff.
In re Cumberland Molded Products, LLC, 69 U.C.C. Rep. Serv. 2d 371, 2009 WL 2208582 (Bankr. M.D. Tenn. 2009)- A bankruptcy trustee took free of a secured party's perfected security interest in a deposit account when the depositary bank honored a check drawn on the deposit account and paid the funds to trustee. The secured party instead should have frozen account and exercised setoff.
Comment: The case highlights the risks of holding deposit accounts as collateral - checks drawn on the account may remove funds free of the security interest.
In re Mitkem Technologies, 2009 WL 2843287 (Bankr. D. Mass. 2009)- A bankruptcy trustee did not take free under UCC §9-332(b) of a secured party's perfected security interest in deposit accounts because the trustee had only the rights of a lien creditor, even though the trustee closed the deposit accounts and deposited the funds in a new trustee account. The contractor's bank enforced its security interest against funds in the contractor's deposit account that were designated for payment to the subcontractors. The surety was subrogated to the subcontractors' claim against those funds under the Miller Act.
Safeco Ins. Co. v. Wheaton Bank and Trust Co., 2009 WL 2407740 (N.D. Ill. 2009)- A contractor's surety paid the contractor's subcontractors. The contractor's bank had a perfected security interest in the contractor's deposit account. If the bank knew the source of the funds, the bank held them in trust for the subcontractors. The surety succeeded to those trust claims and that interest would defeat the bank's security interest.
One CW, LLC v. Cartridge World North America, LLC, 70 U.C.C. Rep. Serv. 2d 440, 2009 WL 3055337 (N.D. Ill. 2009)- Although a secured party's perfected security interest in debtor's deposit account had priority over judicial lien of garnishor, Bank could not decline to declare a default and allow the debtor to continue to access the funds. The Bank's failure to freeze the deposit account also operated as a waiver of the Bank's setoff rights.
In re Dorsesy Trailer Co., Inc., 68 U.C.C. Rep. Serv. 2d 335, 2009 WL 764572 (Bankr. M.D. Ala. 2009)- A prepaying buyer of fifteen trailers was a buyer in ordinary course of business that took free of the security interest of the seller's secured party. Even though the seller still had possession of the trailers, because at the time of the sale it was a seller's market, cover would have been impossible, and thus the buyer had a right to specific performance under §2-716. UCC §1-305.
In re Carolina Wine Co., Inc., 69 U.C.C. Rep. Serv. 2d 1052, 2009 WL 2399944 (Bankr. E.D.N.C. 2009)- A prepaying buyer of wine did not take free of a secured party's security interest in the seller's inventory because the seller did not segregate or identify the wine sold, title had not passed, and given that the wine was not unique, the buyers had no right to specific performance.
Indianapolis Car Exchange, Inc. v. Alderson, 910 N.E.2d 802, 69 UCC Rep.Serv.2d 980 (Ind. Ct. App. 2009)- A buyer that purchased a truck from a used car dealer, which in turn purchased the truck from the debtor, another used car dealer, took free of the rights of a secured party with a perfected security interest in the debtor's inventory because both the buyers and their seller qualified as buyers in ordinary course of business. The buyers' knowledge of a financing arrangement did not mean that the buyers had knowledge that the purchase would "violate" the rights of the seller's secured party. UCC §9.320.
In re Sunbelt Grain WKS, LLC, 406 B.R. 918, 51 Bankr. Ct. Dec. 242, 69 U.C.C. Rep. Serv. 2d 281 (Bankr. D.Kansas 2009) - A buyer prepaid for some goods. The buyer did not obtain title to the goods until the seller acquired them and then delivered them to the buyer. As a result the seller's secured party had priority in the goods over the buyer. UCC § 2-401.
Comment: The court did not discuss whether the buyer was a buyer in ordinary course that would take free of the security interest. UCC § 9-320.
In re Jersey Tractor Trailer Training Inc., 580 F.3d 147, 69 U.C.C. Rep. Serv. 2d 748 (3d Cir. 2009) - A secured party did not implicitly authorize the sale of collateral free of a security interest through inaction. UCC § 9-315(a)(1).
Priority - Competing Security Interests
In re Lombardo's Ravioli Kitchen, Inc., 70 U.C.C. Rep. Serv. 2d 418, 2009 WL 3257492 (Bankr. D. Conn. 2009)- A secured party that received an assignment of a security interest in assets of debtor's business did not have priority over another secured party with a similar perfected security interest with respect to restated notes because the assignor had subordinated its security interest.
Woven Treasures, Inc. v. Hudson Capital, LLC, 2009 WL 4980283 (Ala. 2009), attended and superseded 417 BA.R. 214 (Bankr. D. Ver. 2009)- A consignor of carpets consented to a transfer of the consignment from one business entity to another owned by the same individual. The consignor had only an unperfected security interest because the consignor never filed a financing statement against the consignee. The consignor therefore lost priority to a secured creditor of the consignee that sold the carpets and then filed a financing statement covering the proceeds. UCC §9-103(d) and 9-324.
Comment: Revised Article 9 treats consignments like purchase money security interests, and exempts certain consignments involving consumers and other parties who are unlikely to consider the UCC's application to their transactions. See above for additional cases regarding Article 9's rules for consignments.
Settlement Capital Corp., Inc. v. Pagan, 649 F.Supp.2d 545 (N.D. Tex. 2009)- The first purchaser of a single, specified payment under an annuity contract had priority over later purchaser who had obtained a court order authorizing the transaction. The later purchaser did not have standing to raise the effect of the anti-assignment clause in the contract and both parties to the contract had waived the effect of the anti-assignment clause.
In re Jersey Tractor Trailer Training Inc., 580 F.3d 147, 69 U.C.C. Rep. Serv. 2d 768 (3d Cir. 2009)- Court refuses to straighten out an earlier, troubling District Court decision. It accepts the premise that accounts receivable are instruments and that the good faith requirement for the superpriority afforded to purchasers of instruments (UCC §9-330(d)) requires a secured party to search for financing statements. The court holds that a search under a wrong name (which omitted the "Inc." from the debtor's name) was commercially reasonable.
In re Courson, 409 B.R. 516, 69 U.C.C. Rep. Serv. 2d 453 (Bankr.E.D.Wash. 2009) - A secured party with a perfected security interest in collateral did not have a security interest in an insurance payment where the check was payable to an unsecured creditor of the debtor.
In re Montagne, 409 B.R. 685, 69 U.C.C. Rep. Serv. 2d 617 amended and superseded 417 B.R. 214 (Bankr. D. Ver. 2009)- A secured party that filed its financing statement four days before another secured party had priority over the other secured party. UCC § 9-322. The fact that the financing statement filed by the first secured party had a mistake in the debtor's address did not make the financing statement insufficient. UCC § 9-506. Furthermore, it did not matter that the first secured party filed its financing statement two years after the security interest attached to the collateral. The filing was still made before the filing by the other secured party.
Purchase-Money Security Interests
Absolute Machine Tools, Inc. v. Liberty Precision Industries, Ltd., 2009 WL 2858092 (Ohio Ct. App. 2009)- A secured party with a perfected PMSI in large machines acquired by the debtor for customization and resale did not have priority over a secured party with an earlier perfected security interest. The PMSI secured party did not send the earlier secured party notification of the PMSI transaction prior to delivery of the machines. Even though the machines were shipped by the seller directly to debtor's customer - and were never located at the debtor's facility - the debtor had possession. UCC §9-324.
In re EDM Corp., 68 U.C.C. Rep. Serv. 2d 139, 2009 WL 367773 (Bankr. D. Neb 2009)- A secured party whose advances were made directly to the seller who supplied inventory to the debtor had a PMSI in the equipment even though the advances were made under a previously established, but unused, line of credit. The debtor's "obligation" was not "incurred" when the line of credit was created, but when advances were made. The PMSI, which was perfected by a filed financing statement even though the property was subject to a certificate of title statute because the debtor held the collateral as inventory, had priority over a subsequent landlord's lien.
In re Johnson, 68 U.C.C. Rep. Serv. 2d 798, 2009 WL 962193 (Bankr. E.D.N.C. 2009)- A secured party had a PMSI in one item of logging equipment. The loan, as evidenced by the promissory note and the bill of sale was contemporaneous, even though the debtor had possession of the equipment for several months before the loan was made, presumably pursuant to a lease.
In re Ford, 574 F.3d 1279, 69 U.C.C. Rep. Serv. 2d 1044 (10th Cir. 2009)- Negative equity in trade-in vehicle that was financed in connection with purchase of new car is part of the purchase-money obligation.
In re Dale, 582 F.3d 568 (5th Cir. 2009)- Amounts financed to cover negative equity in trade-in vehicle, gap insurance, and extended warranty protection are all part of the purchase-money obligation. UCC §9-103, Comment 3.
In re Mierkowski, 580 F.3d 740, 70 U.C.C. Rep. Serv. 2d 27 (8th Cir. 2009)- Amount financed to cover negative equity in trade-in vehicle is part of the price of the new car and therefore part of the purchase-money obligation.
Comment: See also In re Callicott, 580 F.3d 753 (8th Cir. 2009) (following Mierkowski).
In re Peaslee, 913 N.E.2d 307, 69 U.C.C. Rep. Serv. 2d 315 (Ct.App. NY 2009) - Negative equity on an old vehicle paid off as part of the purchase of a new vehicle was included in the purchase-money obligation. UCC § 9-103.
Default and Foreclosure
Default and Repossession of Collateral
Hardmon v. CCC Van Wert Credit Union, 2009 WL 4895538 (Ohio Ct. App. 2009)- A secured party that peaceably repossessed car after the debtor had paid the secured obligation was liable for conversion but not for intentional infliction of emotional distress because its conduct was not outrageous. At the time the creditor repossessed the car it believed that an outstanding balance remained on the loan, it had informed the debtor the car would be repossessed if he did not pay the debt, and the debtor, who claimed to have thought the debt had been paid, thereafter made two additional payments, further confusing the issue. UCC §9-609.
Johnson v. Americredit Financial Services, Inc., 69 U.C.C. Rep. Serv. 2d 861, 2009 WL 2929396 (M.D. Tenn. 2009)- Forced entry, including unauthorized entry into a closed or locked garage, constitutes breach of the peace. UCC §9-609.
Walters v. M&I Marshall & Ilsley Bank, 2009 WL 2069581 (W.D. Mo. 2009)- Generally, a secured party may exercise remedies "after default." UCC §9-601(a). A debtor was in "default" because the secured party had given the contractually required 30-days notice of its intent not to renew the debtor's line of credit and thus was unlikely to have breached the duty of good faith. Therefore, the secured party could sell the collateral.
North Carolina Mutual Life Insurance Co. v. Employers Direct Health, Inc., 2009 WL 2365444 (N.D. Tex. 2009)- A secured party was not entitled to a temporary restraining order preventing the debtors from transferring collateralized stock because the secured party could not show any irreparable injury from such an action.
Okefenokee Aircraft, Inc. v. Primesouth Bank, 676 S.E.2d 394, 68 U.C.C. Rep. Serv. 2d 576 (Ct.App. Georgia 2009) - A secured creditor in possession of collateral could pursue a personal judgment against the debtor because rights under Article 9 are cumulative. UCC § 9-601.
Albertorio-Santiago v. Reliable Financial Services, 612 F.Supp.2d 159, 68 U.C.C. Rep. Serv. 2d 813 (D.Puerto Rico 2009) - When a secured party conducted a non-judicial repossession and a police officer accompanied the secured party, there was inherently a breach of the peace. If the police are going to be used to assist a repossession, it should be done by following proper judicial procedures. UCC § 9-503 (former Article 9).
Notice and Commercial Reasonableness of Foreclosure Sale
Textron Financial Corp. v. Lentine Marine Inc., 630 F. Supp. 2d 1352, 68 U.C.C. Rep. Serv. 2d 923 (S.D. Fla. 2009)- Although a low price alone does not render a disposition commercially unreasonable (UCC §9-627, Comment2), the debtor's allegation of low price is sufficient to put commercial reasonableness at issue and require the secured party to prove that every aspect of the disposition was reasonable. UCC §9-627. There is also a factual issue about the reasonableness of the notificaÂtion of disposition because the notifications sent to the debtor and guarantors were returned undeliverable and the secured party provided no information about whether it took any other steps to provide notice. UCC §9-611, Comment6 ("second try" suggestion).
Commercial Credit Group, Inc. v. Barber, 682 S.E.2d 760, 69 U.C.C. Rep. Serv. 2d 968 (N.C. Ct. App. 2009)- A secured party failed to comply with the standards included in the security agreement for conducting a commercially reasonable disposition. The security agreement specified that the sale be "upon terms of 25% cash down with the balance payable in good funds within 24 hours." The terms stated in both the advertisement of the sale and at the start of the auction were that the creditor could, in its sole discretion, require full immediate payment. The sale was not commercially reasonable because the creditor sold the goods "as is" and while inoperable without explaining that the goods were covered by a manufacturer's warranty. Further, the advertising for the sale was not commercially reasonable because the goods had a narrow commercial use yet the creditor ran advertisements for the auction in two general circulation newspapers not likely to reach the types of persons interested in the collateral. The advertisements were published two days before and one day after the Christmas holiday. The court held that this advertising for and scheduling of the sale was not designed to enhance competitive bidding.
Atchley v. Pepperidge Farm, Inc., 2009 WL 672986 (E.D. Wash. 2009)- A secured party conducted a commercially reasonable disposition of a distributorship even though the secured party received a low price because it had extensively advertised the distributorship for sale and the debtor had soured the market for the distributorship by making negative comments about it to former customers and prospective buyers.
Hicklin v. Onyx Acceptance Corp., 970 A.2d 244, 68 U.C.C. Rep. Serv. 2d 413 (Del. Super. Ct. 2009)- The fact that a disposition through a private auction grossed over 50% of the collateral's value does not establish that the sale was conducted in a commercially reasonable manner. To establish that, the secured party must either show that every aspect of the sale was commercially reasonable or that one of the safe harbors in UCC §9-627 applies. Even if private auctions generally result in higher sale prices than other methods, the secured party introduced no evidence that the specific auction procedures used (e.g., advertising, location) would likely result in higher prices. The absolute bar rule applies to consumer transactions in this state.
Bremer Bank, Nat. Ass'n v. John Hancock Life Ins. Co., 2009 WL 702009 (D. Minn. 2009)- A secured party conducted a commercially reasonable disposition of an aircraft despite the short time between the acceleration notice and the sale. The fact that the aircraft was unavailable for inspection and the allegedly misleading description of the aircraft to prospective bidders did not make the sale commercially unreasonable because it was understood that any buyer would likely continue to lease the aircraft to the airline that had been leasing it. Moreover, the creditor contacted 448 entities that it thought might be interested in purchasing the aircraft and had follow-up discussions with 31 potential bidders who had submitted inquiries.
Moore v. Wells Fargo Construction, 903 N.E.2d 525, 68 U.C.C. Rep. Serv. 2d 436 (Ind. Ct. App. 2009)- A notification of a public internet sale that includes the web address of the auction and the physical address of the auction company satisfies the requirement that the notice identify the location of the sale.
Moore v. Wells Fargo Construction, 907 N.E.2d 1038 (Ind. Ct. App. 2009)- A disposition of collateral was commercially reasonable because the secured party: (i) conducted research before setting a price; (ii) investigated the condition of the collateral, the cost of necessary repairs, and the cost of transporting it; (iii) performed the repairs necessary to make the collateral minimally operational; and (iv) listed the collateral for sale twice before finding a buyer. UCC §9-627.
Pivnick v. White, Getgey & Meyer Co., LPP, 552 F.3d 479, 67 U.C.C. Rep. Serv. 2d 862 (6th Cir. 2009)- A letter to debtor from the secured party, which stated that secured party reserved the right to take possession of the collateral "for the purposes of resale, either at public auction or by private treaty" if debtor did not pay within two weeks was adequate notification of a private sale conducted two months later. Even if the notification was inadequate, the debtor, who has the burden of proving consequential damages, could not show any damages because the debtor lacked the requisite funds to pay the debt and stop the sale.
Dearborn Capital Corp. v. Bravo, 2009 WL 3013077 (Mich. Ct. App. 2009)- A secured party's settlement - approved by the bankruptcy court - of a priority dispute with another creditor over the proceeds of the collateral amounted to a disposition of the proceeds. Because the secured creditor did not provide the guarantor with advance notification of the settlement/disposition pursuant to UCC §9-611, the secured creditor's claim against the guarantor was barred.
Comment: Revised Article 9 clarified and expanded the list of required recipients of disposition notices; the list includes other secured parties that have filed financing statements and secondary obligors, as well as debtors.
Financial Federal Credit, Inc. v. Wills, 2009 WL 4045136 (D. Neb. 2009)- A guarantor was liable for a deficiency because the secured party disposed of the collateral in a manner that the security agreement expressly provided would be commercially reasonable.
Comment: The opinion did not discuss whether the guarantor agreed to the standards.
Kraenzler v. Brace, 773 N.W.2d 481, 69 U.C.C. Rep. Serv. 2d 602 (Wis. Ct. App. 2009)- A clause in security agreement provided that the ownership of the collateral transferred to the secured creditor upon default. The term was unenforceable because the parties cannot in the security agreement waive the debtor's rights to require the secured party to conduct a commercially reasonable disposition and apply the proceeds to the secured obligation.
Royal Palm Senior Investors, LLC v. Carbon Capital II, Inc., 2009 WL 1941862 (S.D.N.Y. 2009)- A settlement agreement, by which debtor agreed that upon failure to pay the debt by a specified date its previously pledged membership interests in an LLC would automatically transfer to the secured party was enforceable. Thus, the secured party became the owner of the LLC and could assume management of the business.
Comment: Secured parties and debtors may agree, after default, as to specific remedies, including strict foreclosure.
Banc of America Leasing & Capital, LLC v. Walker Aircraft, LLC, 2009 WL 3283885 (D. Minn. 2009)- A secured party was entitled to judgment in the full amount of the accelerated debt even though it had already repossessed the collateral. No double recovery would result because the secured party must apply any proceeds of a disposition to the secured obligation.
Suntrust Equipment Finance & Leasing Corp. v. A & E Salvage, Inc., 2009 WL 3584333 (E.D. Tenn. 2009)- A secured party could maintain action against the debtor and the guarantors for the full amount of the debt even though the secured party had repossessed, but not sold, the collateral. There was no constructive strict foreclosure; the debt will be appropriately credited if the secured party does sell the collateral, and the guarantors will have subrogation rights if the collateral is not sold.
Comment: There is no such thing as a "constructive" strict foreclosure under Revised Article 9, because UCC §9-620 requires the secured party to consent in an authenticated record or to send a proposal to the debtor for strict foreclosure. UCC §9-620, Comment5.
First-Merit Bank, N.A. v. Miller, 69 U.C.C. Rep. Serv. 2d 924, 2009 WL 2940199 (Ohio Ct. App. 2009) - Article 9 requires a secured party that is foreclosing on collateral to "send" a notice to the debtor. Article 9 does not require that the debtor receive the notice.
Pivnick v. White, Getgey & Meyer, Co., LPA, 552 F.3d 479, 67 U.C.C. Rep. Serv. 2d 862 (6th Cir. 2009) - A notice of sale to the debtor said that the secured party would conduct a foreclosure sale "either at public auction or by private treaty". The court held that this constituted sufficient notice.
Lyon Financial Services, Inc. v. Oxford Maxillofacial Surgery, Inc., 69 U.C.C. Rep. Serv. 2d 553, 2009 WL 2170999 (D.Minn. 2009) - A secured party did not prove that it had made a commercially reasonable foreclosure sale by showing that it was in accordance with the commercial practices of dealers in similar equipment. The low price obtained in the private sale (6% of its original value) meant that the court should "scrutinize carefully" the procedures used for the sale. UCC § 9-610 and Comment 10.
Effect of Failure to Give Notice, Conduct Commercially Reasonable Foreclosure Sale, or Otherwise Comply with Part 6 of Article 9
ING Bank, FSB v. Mata, 2009 WL 4672797 (D. Ariz. 2009)- Mortgage lender's claims against loan originator based on amount of defaulted loan were barred by lender's credit bid at the foreclosure sale for the full amount of the debt, but the lender's tort claims against the originator could be maintained.
Ennis v. Nizan, 2009 WL 4685223 (Conn. Super. Ct. 2009)- Article9 does not preempt claims against a secured party and its agent for torts, including conversion and breach of fiduciary duty, arising from allegations that agent, who was hired to manage the debtor's business, failed to pay the secured debt, never informed the debtor, and then secretly repossessed and sold the collateral. See also Ennis Management, LLCv. Ennis Property Management, Inc., 2009 WL 4685259 (Conn. Super. Ct. 2009) (same ruling in related case).
Vengurlekar v. HSBC Bank USA, 2009 WL 362003 (S.D.N.Y. 2009)- A secured party obtained an order against a debtor's dissipation of assets, all of which were proceeds of its collateral. The secured party's representative took possession of the debtor's checkbook, but had no authority to write checks or to direct payment. The secured party was not liable to debtor's employees whose 401k plan contributions went unpaid during this period.
C&J Leasing Corp. v. Beasley Investments, Inc., 767 N.W.2d 420, 68 U.C.C. Rep. Serv. 2d 362 (Iowa Ct. App. 2009)- A secured party who failed to give notice of a disposition was not entitled to any deficiency judgment because it failed to rebut the presumption that, had it given proper notification, there would have been no deficiency.
United States v. Mikell, 344 Fed. Appx. 218 (6th Cir. 2009)- The principals of the debtor were guilty of money laundering and wire fraud. The principals of the debtor sold collateral at substantially below market price - after misrepresenting to the secured party that it would be sold at the market price- to induce the secured party to lift an injunction - repurchased the collateral for their own account from the buyer for slightly more, and then sold the collateral at the market price, thereby reaping most of its value for themselves.
Elvis Presley Enterprises, Inc. v. Passport Video, 334 Fed. Appx. 810 (9th Cir. 2009)- The buyer of the debtor's assets at a foreclosure sale had successor liability because it was a "mere continuation" of the business and the sale was part of a series of fraudulent transfers undertaken to avoid liability to creditors.
Comment: In circumstances involving related parties in which an Article 9 foreclosure sale would not cleanse the assets of earlier liabilities, a 363 sale in bankruptcy may be required.
Bischoff v. LCG Blue, Inc., 67 U.C.C. Rep. Serv. 2d 899, 2009 WL 148519 (Cal. Ct. App. 2009)- A buyer of the assets of a debtor could be liable for conversion to a secured party who held a security interest in all the debtor's tangible and intangible assets. However, there was no liability for assuming the liquor license because under California law no security interest can attach to a liquor license. Moreover, although there could be tort liability for the unauthorized receipt of goodwill, in this case the goodwill was worth nothing because the debtor was not operating and there were no historical profits upon which a capitalized value of goodwill could be calculated.
Collection
Ford Motor Credit Co. v. Dunham, 2009 WL 4981913 (La. Ct. App. 2009)- The assignee of a car loan acted negligently by refusing to suspend collection efforts against a putative co-signer, who claimed her signature was a forgery, unless the co-signer executed an affidavit and filed a police report. The assignee could have examined the loan documents, on which the signatures of the debtor and co-signer appeared to be by the same person, or it could have contacted the dealer, either of which would have informed the assignee that the dealer did not verify the signature of the co-signor.
JD Factors LLC v. Freightco LLC, 70 U.C.C. Rep. Serv. 2d 413, 2009 WL 2509145 (N.D. Ind. 2009)- Regardless of whether secured party had purchased the debtor's accounts or merely made a loan secured by them, secured party was the real party in interest in an action against an account debtor. Therefore diversity of citizenship depends on the secured party's location, not the debtor's location.
In re Delta Mills, Inc., 404 B.R. 95 (Bankr. D. Del. 2009)- A buyer of accounts had generally assumed liability for nonpayment by approved account debtors. Nevertheless, the buyer was permitted to charge back an account owed by an unapproved affiliate of an approved account debtor. Even though the buyer reviewed the financial information of both the approved account debtor and its affiliates and regularly accepted payment from the unapproved affiliate, it never approved the affiliate and was unaware that the debtor had begun selling to the unapproved affiliate. The debtor submitted invoices to the buyer through an electronic data interchange system and used the customer identification number for the approved account debtor even for sales to the unapproved affiliate.
Reliastar Life Insurance Company of New York v. Home Depot U.S.A., 570 F.3d 513, 69 U.C.C. Rep. Serv. 2d 510 (2d Cir. 2009) - Notwithstanding a "hell or high water" clause, a lessee could assert a constructive eviction defense against a good faith assignee of the lessor because the defense was "similar" to the defenses of fraud and duress, which are not subject to such a clause.
