Volume 6, Issue 1 (Summer 2010)
Introduction
Welcome again to the Newsletter of the UCC Division of First American Title Insurance Company. As always, we try to stay ahead of the commercial law curve and to keep our readers informed of significant issues in commercial law, especially Article 9 of the Uniform Commercial Code. Our policies shift the attachment, perfection and priority concerns of our insureds to us, so "we" need to be informed.
As with many of our past issues, this issue of the Newsletter will review recent cases on Personal Property Secured Transactions.We want to thank again our good friend Steven O. Weise of Proskauer Rose LLP, Los Angeles office, and his co-author, Teresa Wilton Harmon of Sidley Austin LLP, Chicago, for supplying the case summaries. The case summaries were part of their presentation to the Spring Meeting of the Business Law Section of the American Bar Association titled 2009 Commercial Law Developments.
If you missed any of our prior issues, you can retrieve them from our website's Newsletter Archive.
Also in this Newsletter is the reprint of an article titled Revision Committee Wrestles with Individual Debtor Name Problem by Barkley Clark from Clarks' Secured Transactions Monthly. (By the way, to receive a complimentary issue of Secured Transactions Monthly, or learn about other A.S. Pratt publications by Barkley and Barbara Clark, go to http://www.sheshunoff.com/products/Clarks%27-Secured-Transactions-Monthly.html). This article, better than any other article on the topic of individual debtor name and the machinations of the Review Committee evaluating changes to Article 9, describes the name approaches under contention - primarily the "safe-harbor" and the "only-if" approaches. As Barkley Clark begins: "Next summer, the Joint Review Committee on UCC Article 9 will seek final approval for a significant package of amendments to the statute. The state legislatures will begin to consider this package in late 2010 and early 2011. Most of the proposed amendments are important, but not controversial. The one area that has generated substantial controversy, and taken a huge chunk of the Committee's time, is the problem of how to create a clearer standard for designating the name of an individual debtor on financing statements."
There has been "some" progress on the issue of individual debtor name since this article was published, but again the discussion of the two approaches is useful. The usefulness was dramatized by the eventual agreement at the Joint Review Committee to refrain from selecting between "safe-harbor" and "only-if" in favor of a solution which offers both approaches to the states for decision. So to our readers, consider the alternatives and let your voice be heard in your state legislators as to which approach you prefer. The financial institutions clearly prefer the "only-if" approach as this approach more effectively addresses their priority concerns. A follow-up article in the January 2010, Vol. 26, No. 1, of Clarks' Secured Transactions Monthly more fully discusses this consensus of the Committee.
Also in this issue of the Newsletter is an article by Jennifer Lipton on Disastas Averted. Jennifer is leaving us to move from Springfield to Austin and we want to take this opportunity to wish her and Chris the very best in their new endeavors. She will be missed. Following Jennifer is a brief comment by David Wanetik titled Can Your Secretary of State Tweet?.
Finally, given the current state of the commercial lending market, we want to point out the increasing utility of using UCC insurance to mitigate risk within the bankruptcy context, whether it be in §363 sales, and potentially insuring over a Clear Channel issue, in §364 financings, in plan confirmations, or in any other matter involving consensual liens. Further, we have provided UCC coverage to workout units of financial institutions to retroactively insure their lien status for problem loans. We do not need to insure the lien status of a transaction at the inception of the transaction. We can come in at any time and insure the lender's position in the collateral assets. When loans go bad, our underwriting process can review the problem loan file to determine if the lender's security interest is perfected and in first priority; and, if not, what may need to be done to resolve the lack of senior priority lien status, such as filing a financing statement in the appropriate jurisdiction, with the correct debtor name; or enter into an intercreditor with a creditor in the senior position1 It is better to resolve these problems when the lender has leverage with the borrower/debtor.
This file review process and lender UCC coverage can also take place after the debtor has filed for bankruptcy protection. The information may be useful to evaluate the lender's vulnerability to challenges to its perceived lien position by a creditors' committee, the debtor, or another secured party. The review process and resulting insurance coverage may also serve as expert testimony in a challenge to the priority of the lender's lien, again by a creditors' committee or the debtor. We have proffered our underwriting process in support of a lender's lien priority at a significant lower cost than bringing in an expert witness to review the loan file and opine on the sufficiency of the file to support the lender's lien position claim.
Further, we have insured plan transactions that involve the continuation of a consensual lien by the debtor post confirmation. For example, in one case the debtor was to provide the creditors' committee with a negotiable note evidencing its obligation to pay over time $50,000,000 to the creditors' committee, as collateral agent for the constituent creditors, post confirmation, in settlement of the claims of unsecured creditors. The payment obligation was secured by the equity interests of the debtor in a number of operating subsidiaries. We came in and insured the first position of the lien of the creditors' committee in the pledged securities. We also insured the Protected Purchaser status under Article 8 of the creditors' committee in the pledged assets. Because no opinions from counsel were available and because the debtor, post confirmation, was not sufficiently credit worthy for the lender to rely solely on representations and warranties in the loan agreement, UCC insurance was a cost effective risk management alternative that allowed the confirmation process to proceed.
UCC Insurance covers more of the attendant risks to perfecting the priority of a security interest under Article 9 than the legal opinion of borrower's counsel. Among the additional risks covered by UCC Insurance and not within the scope of a legal opinion are:
- Competing claims of Lien Creditors
- Federal and state tax liens
- Loss of priority due to filing office error, including incorrect indexing and loss of prior Financing Statements
- Risk of loss due to invalidly filed Termination Statements
- Priming filings in the 'gap,' the time period between the search of the UCC central filing office records and the search to reflect the filing of the lender's Financing Statement
- Matching the description of the covered collateral in the Financing Statement against the description of the collateral in the lien granting document, such as the security agreement
- That the security agreement is sufficient to create the security interest
- The accuracy of the debtor name
UCC Insurance is the result of the same realization that occurred in the real property arena over 130 years ago, that the right to sue your own lawyer in negligence is insufficient protection to the secured lender with respect to the perfection and priority of its security interest. Although, given the right fact pattern, UCC Insurance can be cost justified through reduced legal cost, both from counsel for the borrower and counsel for the lender, and from outsourcing certain Financing Statement preparation and filing functions; the fundamental impetus for the product is that UCC Insurance provides indemnity insurance for perfection and priority of the lender's security interest. The lender is not now getting this coverage, although the lender may be deceiving itself by thinking that the circular perfection opinion of borrower's counsel and the malpractice coverage of its own counsel provide comparable protection to the lender. They do not, as was discovered in the real estate arena long ago.
Footnote:
1 We were asked to insure the loan portfolio of the business banking unit of a major money center bank. We randomly selected 30 loans for initial review out of 8000 loans and found that 15% were fatally defective, e.g., wrong debtor name or failure to file in the appropriate jurisdiction. Given early detection, the lender was able to correct most of the errors and perfect its secured creditor position prior to a bankructy of the debtor (and hold on for 90 days) because of the information provided through our underwriting process.
