Case Commentary

 CANINE CASE COMMENTARY

A special bonus feature has been added to the CANINE materials beginning with the 2006 edition.  The special feature is a Case Commentary.  The commentary consists of an informative and sometimes insightful discussion and analysis of selected cases decided after the effective date of new Article 9.  The commentary is being published separately in hard copy.  There also will be an electronic version to which the electronic version of the CANINE materials will be linked.  References to cases of particular relevance to specific chapter or chapters of CANINE have been added at the end of the specific chapter or chapter.  Students will be responsible for the decisions in the Case Commentary only to the extent that they decisions are discussed in class or students are referred to them in a message or posting.


 

Thompson v. First State Bank, 709 N.W.2d 307 (Minn. App. 2006)

This case is one of many raising the issue of what constitutes a breach of the peace that will render self-help repossession unlawful.  The case is, however, one of a more limited number addressing the question of when a self-help seizure of collateral (repossession) is complete such that what happens afterwards cannot somehow render the repossession impermissible.  On the facts, a secured party hired a towing company to repossess a vehicle following a default on the secured loan by the debtor.  The towing company driver went to debtors property, gained access to the debtors property by driving down an alley, backed up to the vehicle, hooked the vehicle to the tow truck and lifted the vehicles wheels off the ground.  The tow truck driver then noticed some personal items in the vehicle and approached to debtor in the debtors home to inquire whether the debtor wished to remove the items.  What happened next is not entirely clear, but apparently the debtor called the secured party and then his attorney and while speaking to the latter apparently protested the repossession.  The tow truck driver noticed some keys hanging above the door inside the debtors home and asked the debtor if they were the keys to the vehicle.  How the debtor replied is not clear, but the driver took the keys and then drove the tow truck to which the vehicle was hooked to a storage facility.  None of the personal items was removed.  The debtor then sued the secured party and towing company for wrongful repossession.

The court considered two issues in somewhat reverse order.  First, it concluded that the repossession was complete when the tow truck driver had lifted the vehicles wheels off the ground.  In so holding the court relied on decisions indicating that a repossession is complete when the secured party gains control of the property and as to the vehicle this happened when its wheels were lifted off the ground.  Although the court does not say so in so many words, the implication of what it did say is that nothing that happened after the vehicles wheels were lifted off the ground, including most notably the driver having entered the debtors home and taking the keys, was material and the repossession was lawful.  One may reasonably wonder why the driver wanted the keys if the repossession was complete.  It may further be asked why the entry of the driver into the debtors home and the drivers taking of the keys were not actionable.

This brings us to the second issue, namely, was entering on the debtors property to hook up the vehicle a trespass that was itself actionable?  The court holds that a non-consensual entry onto a debtors property that otherwise would be a trespass is privileged insofar as the action is consistent with new section 9-609 under which self-help repossession is authorized if it does not involve a breach of the peach.  As is discussed in CANINE Chapter 34 (Getting Possession of the Collateral), there is authority supporting the conclusion that a trespass committed in connection with a repossession done without a breach of the peace, even where it is the property of a third party that is entered, is privileged.  The privilege is not unlimited, however, and if the circumstances of the trespass, such as the hour of the day, are such as to pose a breach of the peace issue independently of the trespass then the repossession may be unlawful despite the privileged non-consensual entry.  Moreover, the privilege would seem to apply to an ongoing exercise of self help repossession, that is, to make what would otherwise be an actionable trespass privileged only as to the extent necessary to effect the repossession.  Therefore, when the towing company driver entered the debtors home and took the keys the driver was trespassing and that trespass was not privileged because the court held the repossession was complete when the vehicles wheels were lifted off the ground.  Perhaps, the debtor was suing for the incorrect wrong.  Even if the repossession as such was not actionable, there was a trespass into the debtors home that should have been actionable (and trespass to real estate is actionable without the need to show damage to the real estate).

There finally is the question of whether the driver had somehow converted the debtors property consisting of the personal items.  As pointed out in CANINE Chapter 34 (Getting Possession of the Collateral), technically, a secured party has no right to take property other than that in which it has a security interest.  Courts have recognized that repossession of collateral, especially vehicles, may incidentally and unavoidably, result in the seizure of property that is not collateral and have given secured parties some leeway as to such seizures.  However, they also have indicated that a secured party should make a prompt inventory of what has been taken and take reasonable steps to return that in which there is no security interest.  Here, the driver recognized the personal items as being other than collateral and once he had the keys he certainly could have returned the items to the debtor.  Absent circumstances suggesting the driver was making haste to avoid a confrontation it is arguable that not returning the personal items was an actionable wrong.  See generally, new section 9-625 and CANINE Chapter 33 (A Secured Partys Options on Default) and Chapter 38 (Remedies for a Secured Partys Failure to Comply with Article 9).


 

Madisonville State Bank v. Citizens Bank, 184 S.W.3d 835 (Tex. App. 2006)

In this case, oversimplifying the facts so as to more easily identify the legal issues, a bank that had provided a contractor with a large line of credit and taken an interest in various collateral and proceeds, consisting principally of accounts receivables, sought to recover funds in a deposit account (general bank account see new section 9-102(a)(29)) maintained at another bank that also asserted a claim to the deposit account.  The dispute arose when the contractor defaulted on the line of credit debt and checks drawn on the deposit account maintained at the other bank were returned because of an alleged check-kiting scheme.  The basis of the claim to the deposit account by the bank at which the account was maintained is unclear from the facts.   The bank that had created the line of credit asserted a security interest in the deposit account as proceeds of its security interest in the contractors accounts receivables.  The lower court granted a summary judgment against the bank whose claim was based on its security interest in accounts receivables on the ground that the deposit account contained commingled funds, funds from sources other than the accounts receivables as well as from the accounts receivables and the bank with the security interest in the accounts receivables had failed to trace funds from the accounts receivables into the deposit account sufficiently to satisfy new section 9-315(a)(2) and new section 9-315(b)(2).

The appellate court affirmed the lower court using the standard that to defeat a motion for summary judgment the opposing party must offer more than a scintilla of evidence, by which it meant that the evidence would lead reasonable people to differ as to the proper resolution of the issue that is the subject of the motion.  It appears that the bank with the security interest in the accounts receivables offered testimony of an official of the contractor that served only to confirm that there was commingling of funds.  That there had been commingling was further evidenced by testimony given by an expert of the bank asserting a claim to the deposit account as proceeds.

Interestingly, the appellate court notes in a footnote that the bank claiming the deposit account as proceeds of accounts receivables did not assert the lowest intermediate balance of proceeds or any other equitable method for tracing the source of the funds in the deposit account.  The failure of that bank to do so is curious at best.  As explained in CANINE Chapter 9 (The Specifics of Enforceability After-acquired Collateral, Future Advances, Transferred Collateral and Proceeds, and the New Debtor Problem), unless a deposit account can be shown to contain only proceeds, it is incumbent on the party asserting a claim to the deposit account as proceeds to identify the deposit account as proceeds.  Doing so is required by new section 9-315(a)(2) and necessitates the employment of a method of tracing, including the application of equitable principles, that is permitted under law other than Article 9 with respect to the commingled deposit account, such as new section 9-315(b)(2) authorizes a secured party to do.  Perhaps the most frequently employed method of tracing is the lowest intermediate balance of proceeds or LIB approach under which it is assumed that the funds withdrawn from a deposit account are assumed first to be those of the debtor and then proceeds of a security interest.  Official Comment 3 to new section 9-315 expressly refers to LIB approach as a permissible equitable method of tracing.  How the LIB approach works in practice is discussed in CANINE Chapter 9, where it is stressed that the burden is on the secured party to prove the existence of proceeds in the deposit account under the LIB approach (or any other approach employed) and that in the context of ongoing deposits and withdrawals meeting the burden of proof can be difficult at best.

A final observation is in order.  As noted above, the facts do not reveal the basis of the claim to the deposit account by the bank at which the account was maintained.  However, there is a passing reference to the possible existence of a security interest in the deposit account.  Assuming there was such a security interest it would be perfected by control under new section 9-104(a)(1), see CANINE Chapter 22 (Perfection as to Deposit Accounts, Letters of Credit Rights and Electronic Chattel Paper).  As explained in CANINE Chapter 29 (Secured Party Versus Secured Party (continued)), under new section 9-327(1) a secured party with control of a deposit account has priority over a secured party who does not have control.  Consequently, even if the bank asserting a claim to the deposit account as proceeds had satisfied its burden to trace fund from the accounts receivables the bank at which the deposit account was maintained would have priority under new section 9-327(1).


 

Ronald V. Odette Family Limited Partnership v. Agco Finance, LLC, 129 P.3d 95 (Kan. App. 2005)

The facts of this case are less than clear, but to the extent they can be sorted out some interesting issues are raised.  It seems that an individual, Ronald Odette engaged in an agricultural operation, purchased a tractor and loader on credit from a dealer and the dealer took a security interest in the tractor and loader to secure the unpaid price.  The tractor and loader were to be used in Odettes agricultural operations.  The security agreement expressly prohibited the sale or transfer of the tractor and loader without the prior written consent of the secured party.  It seems the security agreement also contained a future advance clause that the appellate court refers to as a cross collateral clause.  The security interest was then assigned to Agco Finance.  Subsequently, Odette transferred the tractor and loader to the limited partnership without the permission of secured party.

It is at this point that things get messy but interesting.  At some point Agco Finance obtained a default judgment against Odette.  Rather amazingly, it is not clear whether the judgment was based on a default as to the debt owed on the tractor and trailer, a debt incurred in connection with the purchase of a hay bailer that Odette had acquired separately or some other debt.  As explained below, the appellate court concludes that the basis of the judgment does not matter and its reasoning is one of the things that makes the case interesting.  Agco then obtained a writ of execution pursuant to which the tractor and loader were seized.  There was a dispute about whether the tractor was damaged in the course of the seizure but also as is explained below, the appellate court decided whether or not there was damage to the tractor was immaterial.  Following the seizure of the tractor and loader the limited partnership to whom the equipment had been transferred sued Agco Finance for conversion.

Agco Finance moved to dismiss the conversion claim.  The lower court treated the motion as one for summary judgment and entered judgment for Agco Finance.  The appellate court affirmed.  The essence of the holding was that Agcos security interest continued when the tractor and loader were transferred to the limited partnership.  This holding is supported by new section 9-315(a)(1) under which, as explained in CANINE CANINE Chapter 9 (The Specifics of Enforceability After-acquired Collateral, Future Advances, Transferred Collateral and Proceeds, and the New Debtor Problem) and Chapter 27 (Secured Party Versus Buyer), a security interest continues in transferred collateral unless the secured party authorizes the transfer to be made free of the security interest.  As also explained in Chapter 27, however, a security interest that continues in transferred collateral can be cut off as to certain buyers.  The court properly concludes that the limited partnership could not take free of the security interest as a buyer in ordinary course under new section 9-320(a) because Odette was not a dealer with respect to agricultural equipment as required by the definition of a buyer in ordinary course in revised Article 1, section 1-201(b)(9).  It does not specifically address the possibility that the partnership could take free under new section 9-317(b) that protects buyers other than in ordinary course against unperfected security interests insofar as it makes no mention of whether the security interest was perfected or not.  The court does suggest there was a lack of good faith on the part of the limited partnership, but good faith is an issue as to buyers in ordinary course whereas the protection given by new section 9-317(b) is conditioned on a lack of knowledge of the security interest.

But, assuming the security interest was perfected and the limited partnership did not take free under new section 9-317(b) that is not the end of the story.  As noted earlier, the facts do not reveal the basis of the default judgment that lead to the seizure under a writ of execution of the tractor and loader.  As also noted, the judgment might have been based on a debt incurred in connection with the purchase of a hay baler or it may have been based on a claim having nothing to do with agricultural equipment.  If the judgment was not based on the debt for the tractor and loader the interesting question arises whether Agco Finance was entitled to seize the tractor and loader.  The courts answer to this question was in the affirmative.  It reasoned that the security agreement executed in connection with the tractor and loader contained a provision according to which not only was the debt for the unpaid price of the tractor and loader secured by interests in the tractor and loader but any future indebtedness was also secured by those interests.  Although the court referred to the provision as a cross collateral clause it was really a future advance clause.  Such clauses are discussed in CANINE Chapter 9 (The Specifics of Enforceability After-acquired Collateral, Future Advances, Transferred Collateral and Proceeds, and the New Debtor Problem) where it is noted (despite a comment to new section 9-204 suggesting that new Article 9 rejects court decisions taking the view) that many courts have indicated that a future advance clause should cover only debts contemplated by the parties when the security agreement was executed.

Actually, the tractor and loader was seized pursuant to a writ of execution and to that extent the seizure would be lawful were it a general writ of execution no matter what the basis of the judgment.  However, it was a special writ of execution and normally special writs are issued only to enforce an interest in the property that is the subject of the writ which, likely, was the security interest and there again would be a question of whether the future advance clause extended to the debt that was the basis of the judgment.  But, as the court eventually notes the transfer from Odette to the limited partnership violated the original security agreement and this was a default that would support the seizure of the tractor and loader from either Odette or a transferee who did not take free of the security interest.  Unfortunately, there was some additional muddling of the facts that could undermine this straightforward rationale for the outcome in favor of Agco Finance.  It is not clear that Agco Finance was treating the transfer as a default (or that it had accelerated the balance due on the secured debt).  There was an apparent attempt by Odette to settle the debt that apparently failed because of the possible damage to the tractor when it was seized under the writ of execution.

The court spoke of the attempt at settlement as an attempt at redemption under new section 9-623.  That section, as explained in CANINE Chapter 33 (A Secured Partys Options on Default) requires that the debtor pay the entire secured obligation, including the accelerated balance, but because of possible damage to the tractor it was not known whether it would make sense for the debtor to redeem.  There is even the possibility that the parties were engaging in an attempt at an acceptance of the collateral in satisfaction of the debt, as to which see CANINE Chapter 36 (Acceptance of Collateral in Full or Partial Satisfaction of the Debt), but if they were they did not do so under new 9-620 and the court did not acknowledge the possibility.

Further to the matter of damage to the tractor and loader, the issue was addressed as a matter of negligence liability and the court rejected the claim on the ground that negligence liability requires that there be a duty of care and any duty of care, according to the court, was owed to Agco Finance by the party seizing the property.  However, as explained in CANINE Chapter 15 (Perfection By Possession (including Documents of Title)) under new section 9-207(a) a secured party in possession has a duty of care that runs to those who have an interest in the collateral, including debtors and secondary obligors.

A final point worth commenting upon is that the limited partnership argued that Agco Finance had made no effort to foreclose its security interest and, therefore, its seizure of the tractor and loader were intrusions on the rights of the partnership that supported their conversion action.  However, as the court properly concludes, under new section 9-601 a secured creditor has the option to foreclose its security interest or file a lawsuit and seek to reach the property that constitutes collateral through judicial action.  See CANINE Chapter 33 (A Secured Partys Options on Default).  Of course, Agcos right to take judicial action would be dependent upon its having a secured claim and that raises again the question of what debt supported the default judgment and whether that debt was secured as a future advance.


 

Lister v. Lee-Swofford Investments, L.L.P., __ S.W.3d __, 2006 WL 798005 (Tex. App. 2006)

This case involved a deficiency action brought against the debtor, a used tractor parts company, and a secondary obligor.  The collateral, which consisted primarily of the inventory of tractor parts salvaged from tractors that were no longer serviceable, was sold at auction on the debtors premises by a commercial auction company for $13,644.  After expenses the sale netted $6304.  The debtor and secondary guarantor challenged the disposition as not having been commercially reasonable.  They also asserted counterclaims for damages.  After a bench trial the court entered a judgment of $181,630 judgment against the debtor and secondary guarantor.  According to the appellate court, commercial reasonableness is inherently a fact question.  Neither side requested findings of facts and the appellate court reviewed the lower court judgment on the basis of implied findings of fact.  Its standard of review was whether a reasonable person could not have found the disposition to be commercially reasonable on the basis of the implied findings of fact.

The appellate court began its analysis with the Texas version of new section 9-610(b) requiring that every aspect of a secured party's disposition of collateral after default, including the method, manner, time, place and other terms, must be commercially reasonable.  The court then noted that the issue of the commercial reasonableness having been raised, under new section 9-626(a) the secured party bore the burden at trial to prove that its sale was commercially reasonable and that if the secured party fails to meet its burden then under new section 9-626(a)(3) the liability of a debtor or a secondary obligor for a deficiency may be limited.  The court points to new section 9-627(a) for the proposition that proof that a greater amount could have been obtained for the collateral by its disposition at a different time or in a different method is not alone sufficient to preclude the secured party from establishing the disposition was commercially reasonable but, referring to Official Comment 10 to new section 9-610 and Official Comment 2 to new section 9-627, the court adds that a low sales price suggests the court should scrutinize carefully all aspects of the disposition to insure each aspect was commercially reasonable.

The court notes that the Texas version of new Article 9, new section 9-627(b)(3), provides a non-exclusive list of commercially reasonable dispositions, which include those made in conformity with reasonable commercial practices among dealers in the type of property that was the subject of the disposition and goes on to say that courts have considered any number of factors to evaluate the commercial reasonableness of a disposition of collateral, including whether the secured party endeavored to obtain the best price possible, whether the sale was private or public, the condition of the collateral and any efforts made to enhance its condition, the advertising undertaken, the number of bids received and the method employed in soliciting bids.

The court then engages in a thorough review of the evidence, consisting of the testimony of employees of the auction company and persons who attended the auction and also the advertising of the auction.  The debtor and secondary obligor based their argument that the disposition was not commercially reasonable on what it asserted to be very low prices received for the items sold and on the low number of dealers in used tractor parts and scrap that attended the audience and the fact that the secured party was not a dealer and did not have any expertise with respect to the sale of used tractor parts.  There was testimony that the prices were in fact very low, but the nature of what was sold, used tractor parts and scrap, made a determination of the actual value of property difficult.

The appellate court observes that the the proceeds obtained from the auction seem low, but appeared to be satisfied that the advertising was adequate and states that we cannot agree that [the secured party's] inexperience in disposition of this type of collateral or the failure of many parts dealers to attend the auction despite wide advertising conclusively establishes the disposition of the inventory was commercially unreasonable.  The court then concludes that on the evidence presented that reasonable people could differ in their conclusions concerning the commercial reasonableness of the auction of debtor's inventory, adding that in a bench trial, the trial court is the sole judge of the credibility of the witnesses and the weight to be given their testimony.  The court also concluded that the trial court's implied finding that secured party's disposition of the collateral was commercially reasonable was not so contrary to the overwhelming weight of the evidence as to be clearly wrong and unjust.  It then affirmed the trial courts judgment as being both legally and factually sufficient.

The decision and opinion in the case are noteworthy in a number of respects.  They underscore the important point that a low disposition price, even one that appears very low, may lead a court to more closely scrutinize the disposition, but ultimately may not sway a court in favor of one challenging the disposition.  They also demonstrate, as stressed in CANINE Chapter 35 (Disposing of Collateral to Satisfy a Secured Debt), that judgments about what is commercially reasonable and what is not are very much fact dependent and given the inherently factual nature of a commercial reasonableness inquiry the fact finder will be given great deference.  It is essential that the parties to a disputed disposition understand what facts matter and, specifically, because, in the language of new section 9-610 that every aspect of a disposition of collateral, including the method, manner, time, place, and other terms, must be commercially reasonable, that it is the facts pertaining to each and every one of these considerations that must be mustered.  It is not apparent why the parties to this particular case did not request findings of fact or whether the outcome would have been different had the appellate court been able to know the exact findings, but it would seem advisable for parties who anticipate appealing a judgment to request such findings.  Also, new section 9-625(a) provides for anticipatory relief and a party who is not satisfied with how a disposition is being conducted may seek judicial assistance before the fact rather than after the fact and this route might have served the debtor and secondary obligor in the particular case well.  See Chapter 38 (Remedies for a Secured Partys Failure to Comply with Article 9).


 

Federal National Mortgage Association v. Okeke, 2006 WL 355241 (S.D. Tex. 2006)

This case involved an action by a purchaser of real estate at a trustee sale against the previous owner of the property who had been forcibly evicted from the property and who then filed a UCC 1 asserting a security interest in the property.  The action was filed under a non-uniform addition to new Article 9 as adopted in Texas and also for negligence and gross negligence.

The court described the dispute in the following passage:

In its motion for summary judgment, Plaintiff alleges that Defendant's filing of a fraudulent lien on the Property has precluded Plaintiff from conveying the Property to date. Plaintiff further argues that it has incurred actual damages in the amount of $5,745.79 in the form of property maintenance and preservation costs, utility payments, appraisal fees and costs associated with taking possession of the Property. Specifically, Plaintiff seeks summary judgment as to the following causes of action: 1) fraudulent filing of a financing statement under Texas Business and Commerce Code § 9.5185; 2) negligence or, in the alternative, gross negligence; and 3) injunctive relief. Plaintiff further seeks summary judgment on Defendant's counterclaims, arguing that these claims are barred by res judicata and collateral estoppel. In addition to actual damages in the amount of $5,745.79, Plaintiff seeks exemplary damages as well as attorneys' fees and costs under section 9.5185 of the Texas Business and Commerce Code.

The actions of the evicted previous owner appear to have been entirely groundless and the court granted relief via summary judgment as to both the claim under section 9.5185 and the gross negligence claim.  It awarded both actual and exemplary damages. The court refused to issue a permanent injunction enjoining future fraudulent and groundless filings because the plaintiffs concerns were too speculative.

The matter of appropriate remedies for unauthorized and fraudulent filings has largely been left by the drafters of Article 9 to the courts.  Section 9-518 provides for filing a correction statement but the effectiveness of the challenged filing is not affected.  There is another case in one of the issues discussed in this commentary involving multiple unauthorized filings and the matter gets fuller attention there.


 

Merchant's Bank of New York v. Gold Lane Corporation, 814 N.Y.S.2d 99,

2006 WL 945091 (N.Y. 1st App. Div. 2006)

In this case a bank sought a deficiency allegedly resulting from the fact that the disposition of collateral (jewelry inventory of a jewelry importing firm) did not bring enough to satisfy the secured obligation. At one level, this case involved a straightforward application of the rule that once the commercial reasonableness of a disposition is put in issue the secured party bears the burden of establishing the commercial reasonableness of the disposition and that the secured party in the case had failed to satisfy its burden sufficiently to support a motion for summary judgment in its favor because genuine issues of material fact existed as to the commercial reasonableness of the disposition.  However, a close reading of the majority opinion and a separate concurring opinion illustrate some of the subtleties associated with both the substantive and procedural rules governing recovery of deficiencies.

To begin with, the secured party is a bank and not a dealer in the sale of jewelry.  A secured party who is a dealer has a somewhat easier task insofar as it may (but is not necessarily required) to sell privately to another customer or customers.  A non-dealer secured partys task is somewhat more challenging.  A sale in the usual manner in any recognized market or a sale at the price current in a recognized market at the time of the disposition both are deemed to be commercially reasonable under new sections 9-627(b)(1) and (b)(2), but which, as the court points out, the recognized market rules apply only very limited circumstances where there are external controls on the disposition price, such as a sale of securities on a securities exchange.   More generally, under new section 9-627(b)(3), a disposition is deemed to be commercially reasonable where it is sold in conformity with reasonable commercial practices among dealers in the type of property that was the subject of the disposition.

As is explained in CANINE Chapter 35 (Disposition of Collateral to Satisfy a Secured Debt) and by the concurring judge in Gold Lane, to meet the burden imposed by new section 9-627(b)(3) a secured party must offer evidence of the manner and method of the disposition such as will support a determination that the disposition was in conformity with reasonable commercial practices of dealers in property of the kind involved in the disposition.  Although expert appraisals as to the value of the collateral may be probative on the question of commercial reasonableness, especially where the price obtained at the disposition is challenged as being low relative to some fair market value, they are not evidence regarding the manner and method of the particular disposition.  Likewise, simply reciting that the collateral was sold to other jewelers does not conclusively establish that the disposition was commercially reasonable within the meaning of new section 9-627(b)(3).  The most reliable evidence would be the opinion of experts as to when the manner and method of disposition is in conformity with reasonable commercial practices among dealers and, as the concurring opinion in Gold Lane points out, an affidavit from a bank officer who has no expertise with regard practices among jewelry dealers may not be properly admissible let alone probative on the question of commercial reasonableness.  Of course, battles between experts who are actually qualified on the question are not unknown.

It should be stressed that technically new section 9-627(b)(3) is not the only route to a determination of commercial reasonableness outside the recognized market situation.  Rather, that section provides when a disposition will be deemed to be commercially reasonable essentially as a matter of law (as would a judicial determination as provided for in new section 9-627(c)(1)).  However, it seems the bank in Gold Lane, as will often be the case, invoked new section 9-627(b)(3) as a way to obtain a summary judgment foreclosing debate as to the commercially reasonableness of its disposition.  As a technical matter, new section 9-610(b) requiring that every aspect of a disposition of collateral, including the method, manner, time, place, and other terms, must be commercially reasonable is ultimately controlling and that burden may be met otherwise than by satisfying new section 9-627(b) (or (c)).  See, e.g., Lister v. Lee-Swofford Investments, L.L.P., __ S.W.3d __, 2006 WL 798005 (Tex. App. 2006) (discussed separately in the Case Commentary).

An interesting wrinkle in Gold Lane is that the bank admitted that it had not sold all the collateral surrendered to it by the debtor and that it was still in possession of some of the collateral.  The concurring judge appeared to conclude that this fact alone was enough to deny the bank the right to a deficiency, asserting that a secured party must establish that all of the collateral was disposed of in a commercially reasonable manner.  In support of its position the concurring judge relied on Associates Commercial Corp. v. Liberty Truck Sales & Leasing, 286 A.D.2d 311, 728 N.Y.S.2d 695 (2001), in which the appellate court reversed a grant of a summary judgment on the question of the commercial reasonableness of a disposition under former Article 9, section 9-504, stating that as a matter of law, [plaintiff] failed to meet its burden of showing that all of the collateral seized was disposed of in a commercially-reasonable manner in accordance with UCC [former section] § 9-504(3).

Whether all the collateral held by a secured party must be disposed of actually seems to pose a nice question.  It is certainly reasonable to expect that in the usual case a secured party will dispose of all the collateral, but that it is required to do so is less clear.  New section 9-610(a) provides that a secured party may . . . dispose of any or all of the collateral in its present condition or following any commercially reasonable preparation or processing.  Specifically, as regards recovery of a deficiency, new section 9-615(d)(2) simply states that [subject to qualifications not relevant here] (2) the obligor is liable for any deficiency.   On the other hand, provisions such as new section 9-615(f) and 9-626(a) dealing with the calculation of a deficiency, as to which see CANINE Chapter 35 (Disposition of Collateral to Satisfy a Secured Debt) and Chapter 38 (Remedies for a Secured Partys Failure to Comply with Article 9), and especially new sections 9-626(a)(3) and (a)(4), adopting the rebuttable presumption approach to the calculation of deficiencies in other than consumer transactions, might be understood to contemplate a disposition of all the collateral.

Nonetheless, that a secured party could be entitled to a deficiency calculated by considering the proceeds from a commercial reasonable disposition and giving the debtor due credit for collateral not disposed of at all is at least conceivable.  Of course, the final treatment of collateral not disposed of would itself be an issue and a claim for a deficiency where some but not all the collateral is disposed of presumably would have to be made in conjunction with an acceptance of that collateral disposed of in partial satisfaction of the debt under new section 9-620.  As to acceptance in partial satisfaction of a secured debt, see CANINE Chapter 36(Acceptance of Collateral in Full or Partial Satisfaction of the Debt).  Perhaps the only conclusion that can be made with certainty as to Gold Lane is that actions for deficiencies where all the collateral has not been disposed of are not properly the subject of a summary judgment.


 

Novartis Animal Health Us, Inc. v. Earle Palmer Brown, L.L.C., 424 F.Supp.2d 1358

(N.D. Ga.2006)

In this case the court concludes that an assignment of accounts receivables (a sale of accounts) is covered by Article 9, new section 9-109(a)(3), and that an account debtor may not assert an affirmative claim against the assignee because new section 9-404(b) and a claim against the assignor may be asserted only to reduce the amount the account debtor owes.  The court adds that new section 9-406 does not require that an account debtor be notified of an assignment but rather protects the account debtor who continues to pay the assignor if the account debtor does not receive notification of the assignment.  See generally, CANINE Chapter 37 (Foreclosure as to Intangibles). The court goes on to reject various claims of bad faith and fraud asserted against the assignor.

The message for account debtors is that the assignment rules of new Article 9 do not excuse an account debtor from knowing with whom they are dealing and doing their best to assure that the assignor is reliable and will perform.  Some form of delayed payment or progressive payments is advisable.


 

In re James Baker, __ F.Supp.2d __, 2006 WL 1778203 (D. Colo. 2006)

In this case a federal district court deals with the very important question of exactly when a security interest in a vehicle subject to a certificate of title law is perfected, when a security interest may be set aside as an avoidable preference and to what extent equitable lien doctrine may apply to save a security interest.  The court also addresses but does not decide a 14th Amendment due process challenge based on the fact that state officials may fail to perform their duties in a timely fashion with the result that a creditor is deprived of a security interest in violation of due process (and such a challenge may apply to 9-517?).

The decision involved three bankruptcy cases consolidated and considered together on appeal to the district court.  In each of the cases the bankruptcy courts, noting that perfection of a security interest in a vehicle subject to a certificate of title statute requires compliance with the certificate of title statute, see CANINE Chapter 17 (Perfection as to Goods Subject to Certificate of Title Legislation), had concluded that under the Colorado Certificate of Title Act (CCTA) perfection did not occur until the documents had been filed with the Central Office even though under the act the process began with a filing with the county clerk who then filed with the Central Office.  

In a nutshell, the bankruptcy courts each concluded that because perfection did not occur until there was a filing with the central office and because in each case that filing occurred within the ninety-day preference period of BRA § 547(b) and because the other elements of BRA § 547(b) had been met the security interests in the vehicles were avoidable preferential transfers.  As to the operation of BRA § 547, see CANINE Chapter 30 (Secured Party Versus Trustee in Bankruptcy).  The bankruptcy courts reached their decisions even though the necessary paperwork had been filed with the county clerk outside of the preference period.

In an interesting analysis, the district court agrees that there is perfection under the CCTA when a filing is made with the Central Office (and in so doing appears to essentially equate notation on the certificate with the filing with the central office although it also discusses the date of issuance of a title and that may be later than the filing with the central office).  However, the court engages in a detailed discussion of several provisions of the CCTA and concludes that the inquiry does not end with a determination of when perfection technically occurs under the act.  

Specifically, the court indicates that there is an ambiguity in the CCTA as to the word file.  The court says it is indeed the case under the statute perfection does not technically occur until the documents are filed with central office by the county officer to whom they must first be submitted.  However, another section of the act gives priority among parties claiming competing lien interests in a vehicle according to the time the papers are filed with county office.  Therefore, according to the district court, file or filing means filing with the central office on the technical matter of when a security interest is perfected but those terms also mean filing with the county office insofar as priority is concerned.  The court then concludes that the effect of the priority provision is that perfection relates back to the date that the paperwork is filed with the county office.

As for BRA § 547(b) and the avoidable preference challenge, the court says it is necessary to consider BRA § 547(c)(3), under which a trustee cannot avoid as a preferential transfer a purchase money security interest that is perfected within twenty days of possession of the goods by the debtor.  For a fuller explanation of BRA § 547(c)(3), see again CANINE Chapter 30 (Secured Party Versus Trustee in Bankruptcy).  Unfortunately for the creditors, their security interests could not be saved by BRA § 547(c)(3) because the paperwork was not filed with the county clerk until more than twenty days after the debtors took possession of the vehicles the security interests were still avoidable preferential transfers.  Of course, in a proper case the courts interpretation of the CCTA and BRA 547(c)(3) could help a creditor who delays filing the necessary paperwork and this is the more likely because the twenty-day period in BRA § 547(c)(3) was extended to thirty days effective in October 2005.

It is noteworthy that the analysis focuses on the CCTA and BRA § 547 rather than Article 9.  This is unfortunate because the timing of perfection as to security interests in vehicles subject to lien notation statutes is a matter fraught with uncertainty.  As explained in CANINE Chapter 17 (Perfection as to Goods Subject to Certificate of Title Legislation), some states go so far as to expressly provide that if a creditor applies for a certificate of title with its security interest noted on the title in a timely fashion, such as within ten days after the security agreement is executed, that perfection relates back to the date the security agreement is executed.  Other statutes are essentially silent as to when perfection occurs and the possibilities range from the time the application is made to the time the certificate of title is issued.  The timing issue is complicated insofar as the application may involve a local entity as well as a central office, such as is the case in Colorado.  It also is complicated because in some states the debtor is responsible for making the necessary application and there may be no mechanism by which the creditor may do so, while in others the responsibility is expressly placed on the creditor.

Under new section 9-303 does not in so many words indicate when perfection occurs. New section 9-303(c) provides that perfection, nonperfection and priority are governed by the law of a jurisdiction that has issued a certificate of title covering a vehicle and under new section 9-303(b) goods are covered by a certificate when a valid application for the certificate and any applicable fee are delivered to the appropriate authority.  This language, unfortunately, effectively defers to certificates of title law and, as noted, these laws may differ on the critical question of when perfection actually occurs.  On the other hand, and although it may be a bit of a stretch, new section 9-311(b) provides that compliance with a certificate of title law is the equivalent of filing a financing statement and this could be understood to make application as provided for in new section 9-303 and the controlling certificate of title statute determinative as is the date of filing a financing statement in proper form.  See CANINE Chapter 14 (The Nitty Gritty of Filing).  An Article 9 preference for the date of application for a certificate of title may be reinforced by Official Comment 6 to new section 9-303 in which the drafters note the need to coordinate Article 9 with certificate of title legislation and encourages state legislators to eliminate relation back provisions.

In the end, it is up to the legislatures in the several states to amend their certificate of title statutes to better fit with Article 9 and to achieve consistency and uniformity on such important matters as the time when a security interest in a vehicle subject to a statute providing for lien notation is perfected.


 

Borley Storage and Transfer Co., Inc. v. Whitted, 271 Neb. 84, 710 N.W.2d 71 (Neb. 2006)

This case involves a malpractice action against an attorney who did not file a continuation statement and the filing lapsed.  On December 10, 1982, Borley Storage entered into an agreement to sell its business to Borley Moving and Storage, Inc. (Borley Moving). Borley Moving was a new entity formed by the longtime manager of Borley Storage, Dennis Bauder, and his wife, Wanda Bauder, who were the sole shareholders of the new corporation. Borley Moving had no assets prior to the sale.  The Bauders signed the note executed by Borley Moving.  The seller-financed sale was secured by an interest in the personal property, rolling stock, and accounts receivable associated with the business.  The attorney filed a financing statement on July 12, 1983.  By operation of law, former section 9-403(2), now new section 9-515(a), the financing statement lapsed five years after it was filed because no continuation statement was filed.  As to lapse and its effects, see CANINE Chapter 23 (Continuing Perfection The Need to Reperfect (or Refile).

Borley Moving defaulted on the purchase agreement in 1991, and Borley Storage thereafter attempted to recover by foreclosing on the real estate and recovering the collateral. Borley Moving filed bankruptcy in 1993. The bankruptcy court approved a reorganization plan in 1995, and Borley Storages claim was valued at $308,000. Approximately $140,000 was secured by the real estate and rolling stock. However, because a second creditor had filed a financing statement with respect to the personal property and Borley Storage failed to file a continuation statement prior to the expiration of the 5-year period, Borley Storage lost its priority with respect to the personal property and accounts receivable. Instead, the second creditor received approximately $64,000 based on its secured interest. Borley Storage never sought recovery from the Bauders on the promissory note.  As to the priority between competing security interests, see CANINE Chapter 28 (Secured Party Versus Secured Party).

In the malpractice action Borley Storage alleged that the attorney negligently failed to advise it of the need to file a continuation statement.  The attorney denied being negligent and counterclaimed for the failure of Borley Storage to mitigate damages.  A jury entered a verdict in favor of the attorney.

Borley Storage argued that it was not obliged to sue the Bauders because the lapse as to the filing impaired the security relieving the Bauders of liability under Article 3, section 3-606.  The court, noting a split of authority, sides with the majority view that the impairment of security defense is available only to a surety and not a co-maker.  It then affirms the lower courts decision that the Bauders signed as co-makers and not as sureties because the note described them as makers and there was no evidence that the Bauders would have had a right of recourse against Borley Storage if they had been forced to pay the note.  As to the distinction between debtors, obligors and secondary obligors, see CANINE Chapter 9 (The Specifics of Enforceability After-acquired Collateral, Future Advances, Transferred Collateral and Proceeds and the New Debtor Problem) and Chapter 38 (Remedies for a Secured Partys Failure to Comply with Article 9).

The court then considered whether the lower court had erred in allowing the attorney to assert a mitigation of damages defense and concluded that it had not.  In doing so the court rejected the argument of Borley Storage that it had an option to foreclose its security interest or sue on the debt, that it had chosen to do the former and that the action against the attorney was an extension of its attempt to foreclose.  According to the court, the action under review was a malpractice action based upon negligence and not an action to foreclose its security interest.  It notes that although the issue could be framed in terms of causation, in Nebraska mitigation of damages is an affirmative defense that may be asserted to offset or perhaps bar recovery on a negligence claim.  Consequently, the attorney had the right to try to prove that any loss resulting from the lapse of the filing could have been avoided had Borely Storage sued the Bauders as co-makers of the note.  In this regard, the court also held that the lower court did not err in admitting evidence regarding the financial condition of the Bauders because their financial condition was probative on the question of whether a suit against the Bauders would have been successful.

The court never addresses the question of whether the attorney was actually negligent.  It rather tends to assume that the attorney was negligent although there is no indication as to what the jury actually determined.  Thus, the outcome in the case came down to whether Borely Storage was obliged to sue the Bauders, who had been determined to be makers rather than sureties and, therefore, not relieved of liability under the impairment of security doctrine, so as to mitigate damages.


 

Condrey v. SunTrust Bank of Georgia, 431 F.3d 191 (5th Cir. 2005)

In this case a debtor (an agricultural equipment manufacturer) and secured party (a bank) allegedly agreed that the secured party would take possession of the collateral while the debtor paid down what it owed on the secured obligation and in return the secured party would make further loans to the debtor.  The agreement also allegedly contemplated that the collateral would eventually be sold to a third party who would be designated by the debtor.  In an opinion affirming the grant of a summary judgment to the secured party, the appeals court largely adopts the report of a magistrate that disposes of various fraud, breach of contract and conversion claims on the grounds that the debtor failed to prove a loss because the property had been transferred to the secured party and enforcement of the alleged agreement was barred by the statute of frauds because it was not in writing.

There is no discussion of Article 9 or the possibility that there was what amounted to an Article 9 foreclosure of a security interest without regard to the requirements of Article 9 governing foreclosure.  See CANINE Chapter 4 (Scope of Article 9).


 

In re Lexington Healthcare Group, Inc., 335 B.R. 570 (Bkcy D. Del. 2005)

This case involved an action by the Secretary of Labor against a healthcare organization and an employer who had filed bankruptcy seeking turnover of certain employee 401(k) contributions. An amended complaint was subsequently filed on November 19, 2004, to add Heller Healthcare Finance, Inc. (Heller) and Healthcare Service Group, Inc. (HSG) (collectively the Secured Creditors) and the Trustee as defendants.

The undisputed facts were that the debtors sponsored or participated in a 401(k) plan for their employees. The 401(k) plan was an employee benefit plan subject to the Employee Retirement Income Security Act (ERISA). It allowed participants to have amounts withheld from their wages and contributed to the plan on their behalf. The debtors were responsible for withholding the employees' contributions, segregating them from the debtors' general assets, and transferring them to the plan administrator.

Between January and June of 2003, contributions in excess of $50,000 were withheld from employee paychecks but were never transferred to the 401(k) plan administrator. This occurred both pre and post-petition.

The trustee and the plaintiff disagreed about the scope of the trust imposed by ERISA with the plaintiff arguing that the trust extends to all the employers assets and the trustee arguing that the trust is imposed only on employee contributions (whether paid to the plan administrator or not).  The court rejects the plaintiff's argument that the trust is imposed automatically on all assets of the debtors and concludes that under the controlling Supreme Court decision in Begier v. IRS, 496 U.S. 53 (1990) the plaintiff must show some nexus between the withheld funds and the funds on which it seeks to impose a trust.

The plaintiff argued that there is a nexus between the funds withheld and the debtors' general assets because under an ERISA Regulation the debtors were required to segregate the withheld funds from their general assets. This, the plaintiff asserted, created the required nexus between the debtors' general assets and the withheld funds..

The court rejected this argument because it suggested that the act of commingling the withheld funds with the debtors' general assets itself created the necessary nexus and the controlling Supreme Court decision, Begier, supra, it is the commingling itself that creates the need to show a nexus.

The court discussed the fact that funds had been put into an escrow account and then withdrawn and the applicability of the lowest intermediate balance of proceeds test as a way of tracing the funds that had been commingled with the employers general assets.

The court then addressed the trustees argument that even if the ERISA trust extended to the funds in dispute the plaintiffs claim was primed by the security interests of the secured creditors.  The court rejected the argument on the ground that funds held in trust are not part of the debtors bankruptcy estate under BRA § 541(d).  It reinforced its conclusion by invoking the Article 9 requirement that a debtor must have rights in the property for a security interest to attach and the withheld funds were property of the employees and not the employer.  According to the court the employer was acting as a steward holding the employees contributions until they could be segregated into a separate fund.  The court added that Section 1103(c)(1) of ERISA expressly provides that the assets of a plan shall never inure to the benefit of any employer and shall be held for the exclusive purposes of providing benefits to participants in the plan and their beneficiaries and defraying reasonable expenses of administrating the plan.

The court distinguished the decision in In re Riverside Elec. Co., 211 B.R. 685, 688 (Bankr.E.D.Mo.1997) (precluding 401(k) plan trustees from recovering unsegregated employee contributions from the debtor's account receivables which were subject to a security interest). According to the court, in that case the debtor had severe financial difficulties resulting in negative balances in its accounts at several times between the withholding and the request for payment of the withheld funds and that under tracing principles, the plan trustees could not prevail and the trustees could establish no nexus between the withheld funds and the accounts receivable on which the secured creditor had a lien.  By contrast, says the court, in this case if the plaintiff is able to establish a nexus between the assets currently held by the trustee and the withheld employee contributions to the 401(k) plan then a trust must be imposed under Begier, supra, and where a trust is imposed then the trust funds are not property of the estate and the security interests could not attach to them, citing BRA § 541(d).  Because a material issue remains in dispute (namely whether there is any nexus between the withheld funds and the funds in the hands of the trustee), the plaintiff's motion for summary judgment had to be denied.

The decision implicates the broader questions of the extent to which a federal law such as ERISA can prevent a security interest from attaching in light of new section 9-408 and other sections undertaking to limit the effect of laws purporting to prevent certain transfers, including security transfers, and at what point an employer no longer has sufficient rights in the withholdings to prevent a security interest from attaching.  See Chapter 10 (The Need for Value and Debtors Rights in Collateral) and Chapter 25 (The How and Why of Priority).


 

Wells Fargo Bank v. Robex, Inc., 711 N.W.2d 732 (Iowa App. 2006) (Unpublished opinion)

In this rather unusual case the secured party was suing a corporate debtor in an action for replevin to recover property asserted by the secured party to be collateral for a secured loan.  The debtor corporation resisted the replevin action by arguing that security interest had not attached to the property because the debtor corporation had no rights in the property under new section 9-203(b)(2).  It seems that the loan had been applied for by a husband and wife doing business as individuals and the loan application and original loan documents all referred to property belonging to the individuals.  In connection with making the loan the secured party required the individuals to incorporate, which they did.  However, the security agreement and financing statement named the corporation as the debtor and were signed by the wife who was the sole shareholder and CEO of the corporation.  The security agreement and financing statement described the collateral as that property that the individuals had offered as collateral before the business was incorporated.  The corporate debtor claimed that the property had never been transferred to the corporation and still belonged to the individuals and that the corporation, therefore, did not have rights in the collateral sufficient to allow the security interest to attach.

The court held that the corporate debtor was estopped to deny that the signatures of the wife were effective to create a security interest.  Although the outcome seems fair, it is difficult to understand how the corporate debtor could be estopped to deny rights in collateral belonging to other persons, in this case the husband and wife.  It seems that the husband and wife would have to have behaved so as to be estopped to deny that the property had been transferred to the corporate debtor.  There was evidence of such behavior, especially by the wife, but the husband was not even a party to the replevin action.

The moral of the story is a familiar one.  A creditor must use care to be sure that property offered as collateral by a debtor is owned by the debtor or that the debtor has authority to use the property as collateral and that the debtor therefore has sufficient rights in property to allow a security interest to attach.  When a debtor has sufficient rights in property to allow a security interest to attach is not defined or otherwise spelled out in Article 9.  As explained in CANINE Chapter 10 (The Need for Value and Debtors Rights in the Collateral), the issue of when a debtor has sufficient rights in collateral can arise in a variety of situations and courts have invoked different tests to resolve the issue, such as whether the debtor is a transferor from one who had voidable title or whether the debtor had possession with contingent rights of ownership.  The problem should never have arisen in the Robex case.  When an individual debtor incorporates the individuals business property is not automatically transferred to the corporate entity and it is incumbent on a creditor lending to such a corporate debtor to verify that the transfer has been made.


 

In re Snelson, 330 B.R. 643 (Bkcy E.D. Tenn. 2005)

This case raises the interesting question of the extent to which mistakes made by the motor vehicles department as to information contained on a certificate of title may prevent a security interest in a vehicle (in this case a mobile home) from being perfected.  The issue arose in a proceeding brought by a trustee in bankruptcy to avoid a security interest under BRA § 544.  The secured party had made a proper application containing correct information regarding the parties and the description of the mobile home, including the vehicle identification number (VIN).  However, the motor vehicles office issued a certificate of title containing a VIN number the last two digits of which were incorrect.

The court applied former Article 9 even though the bankruptcy was filed in 2004 and the action by the trustee initiated in that year.  However, an assessment of the courts opinion should be of interest in a case in which new Article 9 is applied, especially because under new section 9-311 perfection issues with respect to vehicles covered by certificate of title legislation are very much governed by the particular certificate of title law applicable to the dispute.  With regard to perfection in this case, the court looks to the Tennessee Certificate of Title statute.  It notes that mistakes in certificate of titles are analogized to mistakes in financing statements and concludes that under the notice filing scheme for financing statements the mistake in the VIN number was a minor error that was not seriously misleading given that the mobile home was otherwise correctly described and the names of the debtor and secured party were correctly stated.

Of interest for future such cases is that the courts conclusion that the error was minor and not seriously misleading is conclusory and the court did not inquire as to how the error might affect a third party conducting a search to discover whether the mobile home was subject to a security interest.  In a footnote the court notes that in Tennessee The Department of Safety indexes certificates of title as follows: (1) numerically, along with all the information required to be set out on the face of the certificate [, including the debtor's name]; (2) by serial or other identifying number; and (3) in any other manner the Department of Safety sees fit.  In another footnote the court states A careful review of the Certified Records from the Department of Safety evidences that the Application for Certificate of Title executed by the Debtors on July 17, 1997, contains the correct VIN. . . .  The mistake in the VIN was apparently made by the Knox County Clerk's office [which in Tennessee act as agents for the Department of Motor Vehicles in receiving an application for certificate of title.].  The court also made much of the fact that the certificate of title had been applied for and issued years before the bankruptcy was filed.

The foregoing points are potentially important, but the court fails to make clear how.  It is crucial to know how certificates of title and liens are indexed.  Generally, by contrast to financing statements that are indexed under a debtors name, certificate of title statutes are indexed according to a vehicles description, especially as captured by the VIN number.  See CANINE Chapter 12 (Perfection Generally) and Chapter 17 (Perfection as to Goods Subject to Certificate of Title Legislation).  However, the indexing scheme of a particular motor vehicle department depends on the governing certificate of title statute and the procedures followed by that department.  More importantly, the procedures employed by a particular department in doing a search to determine whether a vehicle is encumbered is crucial to knowing how mistakes in information contained on a certificate of title will affect whether a search discloses whether a vehicle is encumbered or not.  To carry the analogy to the Article 9 scheme further, as explained in detail in CANINE Chapter 14 (The Nitty Gritty of Filing), under new section 9-506(c), whether a mistake in a financing statement generally comes down to whether a search conducted using the correct information would turn up the financing statement.

In short, generalizations about mistakes in information contained in a certificate of title and assumptions about how they may affect third parties are not adequate to resolving actual disputes where indexing and search procedures may differ from jurisdiction to jurisdiction.  That said, the courts decision in Snelson arguably is correct but for reasons different from those stated.  First of all, the dispute involved a trustee in bankruptcy who is not a purchaser and not a reliance party in the sense that it conducts a search to determine the existence or non-existence of a security interest.  As noted at various points in the CANINE materials, for example, in Chapter 14 (The Nitty Gritty of Filing) and Chapter 23 (Continuing Perfection The Need to Reperfect (or Refile), purchasers are treated more favorably than are lien creditors with respect to failures of secured parties to take required action.  Secondly, again invoking the analogy to Article 9, under new section 9-517, see CANINE Chapter 14 (The Nitty Gritty of Filing), the failure of a filing office to index a record correctly does not affect the effectiveness of a filed record.  In other words, the risk that a properly submitted filing will be improperly indexed by a filing officer is imposed on third party searchers and not filing parties.


 

Vibbert v.PAR, Inc., 224 S.W.3d 317 (Tex. App. March 23, 2006)

(Opinion not released for publication as of July 2006)

In this factually complicated case the controlling issue was whether a provision of the Texas Certificate of Title (CT) statute, according to which a sale of a vehicle not accompanied by a transfer of any CT covering the vehicle was void, was superceded by provisions of Article 2 of the UCC, under which ownership of a vehicle could pass on delivery of the vehicle even though the CT was not transferred.  It was held that because the Texas CT statute expressly provided that in the event of a conflict the provisions of the UCC should govern ownership of the vehicle had passed thereby divesting the seller of title necessary to support an action for conversion.

Obviously, if the CT statute had not expressly provided that the UCC controlled in the event of a conflict the court might have reached a different decision.  But, that the court would have held for the seller is not free from doubt because the court might have decided that the provision in the CT statute at issue had been displaced or amended by conflicting provisions of the UCC.  Although courts generally are reluctant to find such implied amendments or repeals whether or not they will do so depends on the particular statutory provisions involved and the purposes and policies to be served by the conflicting laws.

It should be noted that the problem that arose in Vibbert will arise only where there is an outstanding CT and that will be true only as to used vehicles (meaning vehicles that have been sold by a dealer as distinguished from those sold by a manufacturer to a dealer).  There likely will be a Manufacturers Statement of Origin (MSO) as to a new vehicle that has not yet been sold by a dealer and it may not be possible to obtain a CT covering the vehicle without the MSO, but the Texas provision in the CT statute technically would operate only where the vehicle being sold is covered by an existing CT.  This is not to say that there cannot be problems as to new vehicles because there are.  Because CT problems can arise as to both used and new vehicle sales it is essential that parties to a vehicle sale agree who is to be responsible for obtaining the CT and be sure the responsibility is met.  Because lien notation is necessary to perfecting a security interest in a vehicle covered by a CT, see new section 9-311(b) and CANINE Chapter 17 (Perfection as to Goods Subject to Certificate of Title Legislation), the creditor holding the security interest is the party that should be sure that a CT application is timely and duly made and that a CT indicating the security interest is issued.  Although it is not uncommon for a creditor to rely on the dealer or a buyer from the dealer to take the steps necessary to obtain a CT noting the creditors security interest, doing so exposes the creditor to the risk that its security interest will not be timely perfected.

Because CT statutes vary from jurisdiction to jurisdiction the mechanics of obtaining a CT noting a security interest may differ as well and it is imperative that creditors and their attorneys examine carefully the CT statute that applies in the particular circumstances.  And, of course, as the Vibbert case illustrates, the parties to a vehicle sale and their attorneys should be alert to any impact the applicable CT statute may have on the rights of buyers in disputes involving conflicts between the CT statute and the UCC.  Although in Vibbert the dispute involved provisions of Article 2 of the UCC disputes that more directly implicate Article 9 of the UCC can arise.  For example, the question can arise as to whether a buyer in ordinary course, who under new section 9-320(a) would take free of a security interest created by the buyers seller, actually does take free where what is sold is a vehicle covered by a CT in light of the provisions of the particular CT statute.  See CANINE Chapters 17 (Perfection as to Goods Subject to Certificate of Title Legislation) and 27 (Secured Party Versus Buyer).

It is important to note that the court in Vibbert appeared to read Article 2, section 2-403(2) to have the effect of divesting the non-dealer seller of title to a vehicle and pass the title to a dealer-buyer when the vehicle was delivered to the buyer.  However, as discussed in CANINE Chapter 10 (The Need for Value and Debtors Rights in Collateral) and Chapter 27 (Secured Party Versus Secured Party), section 2-403(2) empowers a person to whom goods are entrusted to pass good title to a buyer in ordinary course and because the seller in Vibbert was not a dealer engaged in the sale of vehicles the dealer-buyer could not be a buyer in ordinary course as defined in Article 1, section 1-201(b)(9) and title would not pass to the dealer-buyer under section 2-403(2).

Nonetheless, there was an entrusting of the vehicle by the non-dealer seller to the dealer-buyer and when the dealer subsequently sold the vehicle to a buyer who qualified as a buyer in ordinary course that buyer would take good title and the sale would divest the non-dealer seller of the ownership interest needed to support a conversion action.  See CANINE Chapter 27 (Secured Party Versus Secured Party).  Alternatively, the dealer may have had voidable title and, therefore, the power to convey good title to a purchaser such as would divest the non-dealer seller of title needed to recover on a conversion claim.  See CANINE Chapter 10 (The Need for Value and Debtors Rights in Collateral).


 

Semmelman v. Mellor, 2006 WL 90094 (D. Minn. 2006)

In this case the court exhaustively considers both the problem of unauthorized financing statements and what can be done about them.  The problem is not unique to Article 9 and extends to misconduct detrimentally affecting title to real property, including improper filing a lis pendens.  See B & S, (cited in Chapter 3), Chapter 13  It is not clear what prompted the filings at issue in the case, but the court had no difficulty concluding that the filings were unauthorized and even fraudulent.  The aggrieved parties never expressly authorized the filings or authorized a security agreement as is necessary under new section 9-509 for a filing to be authorized.  Indeed, the filings appeared to have nothing to do with any actual or contemplated security interest.

As the court observes, improper filings can interfere with the ability to sell or encumber personal property, to obtain title insurance, to borrow, to act as guarantors, cause bad credit ratings and diminish the value of allegedly encumbered property.  Consequently, a quick and effective means of getting rid of the unauthorized filings, redress injuries caused by the filings and to prevent future such filings is very much needed.  Interestingly, as the lengthy opinion demonstrates, the remedial provisions of Article 9 are incomplete and court action based upon law outside Article 9 is necessary.

As the court correctly points out, the starting point for understanding and dealing with the problem is that under new section 9-520(a) a filing officer may reject a filing only for the reasons stated in new section 9-516(b), not including the fact that a filing is unauthorized.  Indeed, at least until a party injured by an unauthorized filing has learned of the wrongdoing and notifies the filing office there is no way for a filing officer to know that a filing is unauthorized.  So, the need is for some means of undoing the wrong and preventing it from happening again.

Under new section 9-518 an aggrieved party may file a correction statement with respect to an indexed record that the party believes is inaccurate or was wrongfully filed and an aggrieved party certainly should do so.  However, as the court notes, under new section 9-518(c) the filing of a correction statement does not affect the effectiveness of an initial financing statement or other filed record.  Official Comment 2 to new section 9-518 indicates that the section is based upon an analogous provision in the Fair Credit Reporting Act that allows a person an opportunity to state the persons position on the public record but the legal effect of the unauthorized filing is not changed.  The correction statement becomes part of the financing statement as defined in new section 9-102(a)(39) but the unauthorized filing continues to be effective.  Official Comment 3 to new section 9-518 states the drafters view that Article 9 cannot provide a satisfactory or complete solution to problems caused by misuse of the public records and a summary judicial procedure for correcting the public record is likely to be more effective and place less strain on the filing system than provisions authorizing or requiring action by filing and recording offices.

The aggrieved parties in the Mellon case attempted to get the filing party to file a termination statement, which as provided for in new section 9-513, is the usual method for putting an end to the effectiveness of a filing but the filing party refused (and responded by filing more unauthorized financing statements).  The aggrieved parties then filed a lawsuit seeking several forms of judicial relief.  The first step was to get a determination that the filings at issue were unauthorized.  On the peculiar facts of the case doing so proved to be easy.  But, of course, there will be situations in which there is a legitimate question as to whether a filing was authorized.  Such would be so, for example, where a secured party files a financing statement before the debtor has authorized a security agreement, such as is permitted by new section 9-502(d), or where there is some bona fide issue as to what property the debtor has agreed is to secure a debt.  Therefore, a determination on the merits will be important.  It might be argued that a judicial determination that a filing was not authorized puts an end to the matter given that new section 9-510(a) states that a filed record is effective only the extent that it filed by a person that may file it under Section 9-509, emphasis added, but perhaps effective was simply a poor choice of words.  In any event, the court proceeded to consider what further relief was needed.

The aggrieved parties argued and the court agreed that only truly effective means of remedying the wrong was to expunge the public record. There is no provision in Article 9 for expunging the record.  The drafters surely contemplated that filings could be removed by a filing office at some point because new section 9-519(g) prohibits a filing office from removing a debtors name from the filing index until one year after the effectiveness of a financing statement naming the debtor lapses under new section 9-515 and Official Comment 6 to new section 9-519 indicates that the time limitation applies to other filings including termination statements as well.  But, perhaps, this provision operated could be understood to prevent a filing office from cleaning up the public record before one year has passed after a filing has ceased to be effective unless ordered to do so by a court.

In any event, the court concluded that expunging the record was appropriate and necessary.  In so doing, the court noted that there were decisions in Minnesota, where the Article 9 filings at issue had been made, supporting expungement of improper recordings in the real estate records.  It further relied on a Texas decision, United States v. Greenstreet, 912 F. Supp. 224 (N.D. Texas 1996), ordering the removal of an unauthorized filing made under former Article 9.  As an important aside, expunging the improper filings required adding the Secretary of State as a party before the requested relief could be given.  As it happened the Secretary of State agreed that expunging the record was appropriate when done pursuant to a court order.  It is not obvious that all Secretaries of State would be so cooperative.  In fact, it is reasonable to ask why the court did not simply order the party who had made the unauthorized filings to file termination statements.  Given that a termination statement is the prescribed method for ending the effectiveness of a filing and new section 9-513(d) expressly states that upon the filing of a termination statement that is itself authorized the financing statement to which it relates ceases to be effective ordering a party who has filed an unauthorized financing statement to file a termination statement is a remedy that is more consistent with the Article 9 filing scheme and would not require action against the Secretary of State or other filing office administrator.

A further important question is what an aggrieved party is to do where there is a credible risk of unauthorized filings in the future.  Separate actions to expunge unauthorized filings as they are made (or for that matter separately ordered termination statements) do not offer an efficient or effective means of dealing with what amounts to an ongoing albeit intermittent injury.  As to such future wrongs what is needed and what the aggrieve parties in Mellon sought and obtained was a permanent injunction barring future unauthorized filings.  Defining the proper scope of an injunction that looks to the future can be challenging, especially where as in the Mellon case the filings were made and might be made in the future against a multiplicity of individual and corporate entities.  The task was easier in Mellon because there was no debtor-creditor relationship between the defendant and the aggrieved parties and there was not likely to be any.  However, to conclude that an injunction is a proper remedy for dealing with future harm does not really answer the question of why expunging the record rather than forcing the defendant to file a termination statement as to unauthorized filings presently on the public record was either necessary or appropriate.

Neither an expungement nor a termination statement can undo the harm already caused by unauthorized filings.  The obvious remedy is damages.  Article 9, new section 9-625(b) provides that a person is liable for damages in the amount of any loss caused by a failure to comply with [Article 9] and that the loss may include that resulting from the debtors inability to obtain or for the increased cost of alternative financing.  But, proving actual damages caused by unauthorized filings often will be a daunting task.  For this reason, new section 9-625(e)(3) provides for statutory damages in the amount of $500 for each unauthorized filing.  The aggrieved parties in Mellon requested and were granted statutory damages.

In what illustrates the utter groundlessness of the filings the court also imposed Rule 11 sanctions including attorneys fees and costs, not to repair the damage done to the aggrieved parties.  This was done to deter baseless court pleadings (as distinguished from extra-judicial actions, such as unauthorized filings) that it is the purpose of Rule 11 to achieve.


 

Integrity Bank Plus v. Talking Sales, Inc., 2006 WL 212193 (D. Minn. 2006)

In this factually complicated case the essential determination was that there were genuine issues of material fact as to whether the plaintiff secured party had an enforceable security interest in property such as to preclude summary judgment against the secured party on its claims for conversion, unjust enrichment and negligence.  The issues of fact were whether there had been a sale of the property claimed by the secured party as collateral such as would give the transferee rights in the collateral under new section 9-203(b)(3) (as opposed to some other arrangement whereby the ostensible buyer actually was merely holding the property for sale at auction), whether the secured party had authorized the sale free of its security interest within the meaning of new section 9-315(a)(1), and whether there had been a sale in ordinary course such that the buyer was a buyer in the ordinary course of business under Article 1, section 1-201(b)(9) and therefore took free of the security interest under new section 9-320(a).  Although the complexity of the transactions make summarizing why there genuine issues of fact as to the foregoing it seems that on remand the trial court would have to decide whether there was more than knowledge of the various transactions such that it could be deemed to have waived its security interest by authorizing a disposition free of its security interest and, on the other hand, even if the security interest continued in the property the buyer knew enough to disqualify it as a buyer in ordinary care either because it had knowledge that the transactions violated the secured partys security interest or because the buyer had not acted in good faith.

So viewed, the case is remarkable only in that it demonstrates that the application of the relatively straightforward propositions in Article 1, section 1-201(b)(9), new section 9-315(a)(1) and new section 9-320(a) can be difficult at best.  Lurking in the case is an issue that none of the parties appeared to recognize, namely, whether there was a so-called Double Debtor Problem requiring the application of new section 9-325.  As explained in CANINE Chapter 29 (Secured Party Versus Secured Party (continued)), the double debtor problem arises when a secured party whose security interest was created by one debtor comes into conflict with a secured party whose security interest created by another debtor.  Assuming there was a sale of the property and that the security interest continued after the sale (i.e., the security interest had not been waived and the buyer had not taken free of the security interest under new section 9-320(a)) the plaintiff secured party had an enforceable security interest created by a seller of farm equipment.  One of the defendants in the action was a secured party who had financed the sale of the some of the farm equipment in which the plaintiff had a security interest.  Therefore, there was a conflict between the plaintiffs security interest, which was created by the seller of the property, and the defendants security interest, which was created by the buyer of the property.

Former Article 9 did not contain rules for dealing with the double debtor problem.  Under new Article 9 section 9-325(a) the plaintiffs security interest would have priority over that of the defendant provided that plaintiffs security interest was enforceable and perfected and defendants security interest would have priority over the plaintiffs security interest under either new section 9-322(a) (the first to file or first to perfect rule) or under new section 9-324 (the purchase money priority rules).  On the facts both the plaintiff and the defendant had perfected their security interests by filing.  Although the plaintiff filed first the defendant had a purchase money security interest and would have priority under new section 9-324(a).  According to Official Comment 3 to new section 9-325, the rationale for the special priority rule in new section 9-325 is that the defendant would have every reason to investigate the source of the property and discover plaintiffs security interest whereas a party situated as was the plaintiff would have no reason to search for filings against someone other than its debtor.  This rationale does not fit the facts of Integrity Bank Plus very well because it appears that the plaintiff knew about the defendant but the case looks very much like Example 1 in Official Comment 3 offered as an illustration of the application of new section 9-325.  See generally, CANINE Chapter 29 (Secured Party Versus Secured Party (continued)).


 

Panora State Bank v. Dickinson, __ N.W. 3d __, 2006 WL 228882 (Iowa App. Feb. 1, 2006)

In this case a bank loan was secured both by real property and by personal property used in a business that consisted of selling livestock supplies and related items, primarily at fairs and shows around the country.  The debtor challenged the banks foreclosure actions on the grounds that the she did not receive notice of the disposition of personal property and that the sales of the property were not conducted in a commercially reasonable manner.  The appellate courts opinion affirming a decision in favor of the bank illustrates the extent to which determinations as to reasonable notification and whether a disposition is commercially reasonable are fact dependent.  It seems that the bank sought to find a buyer for the business as a going concern and failing that sold the personal property in a series of locally advertised private sales over a period of a few months.

The court properly concluded that new sections 9-611 and 9-613 require only that notification in proper form be sent and not that it actually be received.  See CANINE Chapter 35 (Disposing of Collateral to Satisfy a Secured Debt). The court went on, however, to consider whether the bank had an obligation to take additional steps when it became aware that the debtor had not in fact received the notification.  In holding that notice by certified mail as to which the postal service had made three attempts to deliver the notice and then returned it to the bank unclaimed was sufficient the court indicated that whether reasonable notification requires a second try is a matter for judicial resolution based on the facts of each case and concluded that the debtor had refused to accept the certified letter and any lack of notice was due to the debtors actions and not the banks failure to act.

The debtors argument that the dispositions were not commercially reasonable essentially was that the bank should have employed the debtor or a person with specialized knowledge to attempt to sell the collateral at a national livestock show or that the bank should at least have advertised the private sales in a national trade journal.  The court rejected the argument because in its judgment proceeding as the debtor argued it had to do would have required the bank to place unwarranted trust in the debtor or a third party and forced the bank to incur significant additional expenses with little if any certainty that the bank would receive a greater return than it would achieve in a local sale.  To reinforce its conclusion the court invoked the language of new section 9-627(a) to the effect that the fact that a greater amount could have been obtained by [disposition] at a different time or in a different manner from that selected by the secured party is not of itself sufficient to preclude the secured party [from establishing that the disposition was made in a commercially reasonable manner.

Although the courts conclusions as to both reasonable notification and the commercial reasonableness of the disposition appear to be correct on the facts of the case they do illustrate that a secured party, who must decide how to proceed before rather than after the fact and who bears the burden of establishing the reasonableness of its actions when challenged, must understand that its decisions may be subjected to second guessing and unfavorable determinations regarding those decisions.  To a considerable extent the uncertainty is inherent in a scheme that is based on reasonableness rather than specific requirements (a scheme that was intended to provide greater flexibility and free secured parties from the constraints of earlier foreclosure regimes that often produce less than optimal returns).  But, it is important for secured parties and their attorneys to bear in mind that Article 9 provides ways by which the uncertainty can be reduced or even eliminated.

Thus, under new section 9-627(b)(1) and (b)(2) a disposition is deemed to be commercially reasonable if it is made in the usual manner on any recognized market, if it is made at the current price in a recognized market or is otherwise made in conformity with reasonable commercial practices among dealers in the type of property that is the subject of the disposition.  As explained in CANINE Chapter 35 (Disposing of Collateral to Satisfy a Secured Debt) great care should be exercised when relying on the recognized market precondition and it may well be satisfied only in connection with a securities or commodities exchange, but disposing of collateral in conformity with reasonable commercial practices among dealers as provided for in new section 9-627(b)(3) should be possible in many if not most situations and may well have been an option for the bank in the Panora State Bank case.

While some collateral is more specialized than other collateral it is unlikely that it will be so unique that one cannot find similar situations involving dealer practices that would pass muster (or have even been approved of by a court in a reported case).  Of course, the dealer practices must themselves be commercially reasonable and this requirement reintroduces an element of uncertainty.  But judging practices actually engaged in by dealers should be easier than judging actions not enjoying any such point of reference.  Lastly, it should be noted that under new section 9-627(c) advance approval that a method of disposition is commercially reasonable may be obtained from a court or an entity such as a creditors committee.  Although this is a path that would be desirable only where the dollar amounts involved justify the additional expense or where there are special circumstances, such as a bankruptcy, it is an option that should be kept in mind.

Making judgments about what constitutes reasonable notification may be tougher than those with regard to commercial reasonableness of the method chosen for a disposition.  New sections 9-613 and 9-614 specify the contents sufficient to render a notification reasonable and, as explained in CANINE Chapter 35 (Disposing of Collateral to Satisfy a Secured Debt), these sections contain forms that a secured party may employ to be sure that the notification provides sufficient information.  Under new section 9-612(a) when a notification is reasonable as to time is expressly stated to be a question of fact and Official Comment 2 to new section 9-612 indicates that what is reasonable is to be determined according to the extent to which a party entitled to notification has an opportunity to act to protect the partys interest in the collateral.  On the other hand, according to new section 9-612(b), other than in a consumer transaction, a notification is reasonable with respect to time if it is sent ten or more days before the earliest time for a disposition set forth in a notification.

The specific issue in the Panora State Bank case was whether the secured party was obliged to make additional efforts to notify the debtor when the secured party was aware that the debtor had not in fact received the notification.  As the court indicated, although there is no Article 9 requirement that the debtor actually receive notice, under the judicially fashioned second try rule a court may determine that on the particular facts of the case the secured party should have made further efforts to notify the debtor.  Just when a court might so hold is sufficiently uncertain that a secured party would be well-advised to err on the side of caution and make extra efforts the nature, the extent of which would require balancing the amounts at stake and the risk that a court might hold that not enough had been done.

As noted the bank in Panora State Bank had security interests in both personal and real property.  For unexplained reasons, perhaps because it was junior to some other creditor, the bank did not foreclose on the real estate until some time after it had disposed of the personal property.  Although the issue did not come up because it is not uncommon for a creditor to be secured by interests in personal and real property a few words about foreclosure in such situations are warranted.  Under new section 9-604(a)(1) a secured party may proceed under Article 9 against personal property without prejudicing any rights with respect to personal property.  Alternatively, under new section 9-604(a)(2), a secured party may proceed against both the personal property and the real property under applicable real estate law, in which case Article 9 does not apply.  Which course of action a secured party takes will depend on questions of speed, simplicity and economy and the extent to which either route assures the best outcome for the secured party.

The secured party should be aware, as pointed out in Official Comment 2 to new section 9-604, that certain issues are not addressed by Article 9.  For example, in some states there are anti-deficiency statutes that must be considered.  Moreover, there may a one-form-of-action rule (or rule against splitting a cause of action) according to which a creditor who proceeds against real property and does not in the same action proceed against the personal property may lose any rights against the personal property.  The point is that a secured party with an interest in both real and personal property should carefully examine the laws applicable to the particular dispute and act accordingly.


 

In re Clayson, __ B.R. __, 2006 WL 864299 (Bkcy W.D.N.Y March 24, 2006)

This case involves the question of how and when a security interest in collateral, other than certificated securities or goods covered by a document of title, is perfected when the collateral is physically in the possession of a third party.  The creditor had been given an interest in cattle to secure a loan made to a dairy farmer.  The security interest in the cattle was not perfected by filing a financing statement or otherwise.  When the dairy farmer encountered financial difficulties he arranged to have the cattle sold at auction.  He advised the auctioneer of the security interest in the cattle.  Following the sale of the cattle the auctioneer issued a check payable jointly to the creditor and the dairy farmer in the amount received by the auctioneer for the sale of the cattle.  Thereafter the creditor persuaded the auctioneer to issue a check payable only to the creditor.  On the 99th day after the check was issued the dairy farmer filed bankruptcy.  The trustee sought to recover the payment under BRA § 547 as a preferential transfer made within the 90-day preference period preceding bankruptcy.  See CANINE Chapter 30 (Secured Party Versus Trustee in Bankruptcy).  The creditor argued that it had a security interest in the proceeds of the sale of the cattle that was perfected outside the preference period and that payment to the creditor separately was in satisfaction of a perfected security interest and not a transfer avoidable under BRA § 547.

Because the creditors security interest in the cattle was not perfected it had to prove that it had a security interest in the proceeds from the sale of the cattle at auction as proceeds of its security interest in the cattle and that the security interest in the proceeds was perfected more than 90-days prior to bankruptcy.  Under new section 9-315(a)(2) a secured creditor has a security interest in identifiable proceeds of the original cattle.  See CANINE Chapter 9 (The Specifics of Enforceability After-acquired Property, Future Advances, Transferred Collateral and Proceeds and the New Debtor Problem).  What the auctioneer received when the cattle was sold clearly would be proceeds as defined in new section 9-102(a)(64).  Therefore, the creditor had a security interest in what the auctioneer received when the cattle was sold.

At this point the question became whether the creditor had a perfected security interest in the proceeds such as was necessary to defeat the avoidable preference challenge.  The court held that the creditor had a perfected security interest in the proceeds and that perfection occurred before 90 days prior to bankruptcy and the payment to the creditor could not be avoided as a preferential transfer under BRA § 547.  Because the creditor had never filed a financing statement the creditor would have to establish that it had perfected by possession under new section 9-313.  Further, because the auctioneer had possession of the collateral the creditor would have to prove that the requirements of new section 9-313(c)(1) governing perfection of a security interest in collateral other than certificated securities or goods covered by a document of title that is in the possession of someone other than the secured party or an agent of the secured party had been satisfied.  The court concluded that the requirements had been met.

As the court noted notification to a third party in possession of collateral was enough to perfect a security interest in that collateral under former Article 9 but is not sufficient under new Article 9.  New section 9-313(c)(1) requires that the person in possession authenticate a record acknowledging that it holds possession of the collateral for the secured partys benefit.  An authenticated agreement between the third party and the secured party in which the third party agrees that it is holding the collateral for the third party would satisfy new section 9-313(c)(1) a secured party would be wise to obtain such an agreement.  See CANINE Chapter 15 (Perfection by Possession (Including Documents of Title)).  However, there was no such agreement in Clayson.  Therefore, new section 9-313(c)(1) would have to be satisfied in some other way.  The court found that the requirements of new section 9-313(c)(1) were met by the check issued jointly to the creditor and the dairy farmer.

In so holding the court engaged in a careful analysis of the salient elements of new section 9-313(c)(1).  As noted above, there must be an authenticated record that acknowledges that the third party holds for the benefit of the secured party.  The check met the definition of a record in new section 9-102(a)(69) insofar as it constituted information inscribed on a tangible medium (the paper on which the check was written).  Further, the record had been authenticated when it was drawn by the auctioneer because it under new section 9-102(a)(7) authenticate means to sign or to execute or otherwise adopt a symbol, or encrypt or similarly process a record with the present intent of the authenticating person to identify the person and adopt or accept a record.  Finally, says the court, by making the check payable jointly to the creditor and the dairy farmer the auctioneer acknowledged that it held the auction proceeds for the  benefit of the creditor.

Under the decision in Clayson, although an authenticated agreement may be advisable it is not actually necessary under new section 9-313(c)(1) to the perfection of a security interest in collateral in the possession of a third party.  However, the courts (actually the creditors) analysis is incomplete in at least two important respects.  First of all, the court tends to run together the proceeds of the sale of the collateral and the check.  Technically, the check was proceeds of proceeds.  To write a check to the creditor and dairy farmer, the auctioneer would have had to deposit what it received when the cattle were sold (the proceeds of the original collateral) into a checking account.  Unless there was a checking account in which had been deposited only what was received when the particular cattle were sold there would have been commingling of proceeds and non-proceeds.  This in turn would create a tracing problem that could raise doubts about the extent to which the checking account (a deposit account under new Article 9 section 9-102(a)(29)) and, hence, the check, constituted identifiable proceeds under new section 9-315(a)(2).

There are ways of establishing that a deposit account in which proceeds have been commingled with non-proceeds or checks drawn on such an account, including especially the so-called lowest intermediate balance of proceeds approach.  See new section 9-315(b)(2) and Official Comment 3 to new section 9-315.  However, the burden of proving that deposit account or checks drawn on it are identifiable proceeds is on the secured party and that it will be successful in making its case is by no means a sure thing.  See CANINE Chapter 9 (The Specifics of Enforceability After-acquired Property, Future Advances, Transferred Collateral and Proceeds and the New Debtor Problem); Chapter 22 (Perfection as to Deposit Accounts, Letters of Credit and Electronic Chattel Paper) and Chapter 24 (Continuing Perfection Changes as to the Use of the Collateral or in the Location of the Collateral or the Debtor; Security Interests in Proceeds).

Another difficulty overlooked by the court (and the parties) is that insofar as the check was proceeds (as well as the authenticating record needed to satisfy new section 9-313(c)(1)) the question should have been whether the security interest in the check as distinguished from what was received when the cattle were sold was perfected.  Because the check would be cash proceeds under new section 9-102(a)(9) one might be inclined to look to new section 9-315(d)(2) providing for continuing perfection without the need for any action as to identifiable cash proceeds to deal with the problem.  However, new section 9-315(d)(2) actually dictates when a security interest in proceeds that is perfected automatically under new section 9-315(c) continues without the need for further action and there is such automatic perfection under new section 9-315(c) only where the security interest in the original collateral was perfected.  Assuming, as the court did, that the original collateral was the cattle the security interest in the original collateral had not been perfected. See again, Chapter 24 (Continuing Perfection Changes as to the Use of the Collateral or in the Location of the Collateral or the Debtor; Security Interests in Proceeds).

New section 9-315(d)(3), which provides (d) A perfected security interest in proceeds becomes unperfected on the 21st day after the security interest attaches to the proceeds unless: . . . (3) the security interest in proceeds is perfected other than under subsection (c) when the security interest attaches to the proceeds or within 20 days thereafter might be seen as providing a way around the particular perfection difficulty.  

New section 9-315(d)(3) is not an easy provision to understand.  It seems intended to deal with the fact that the same place filing rule of new section 9-315(d)(1) does not apply where the collateral at issue were acquired with cash collateral.  See Official Comment 5 to new 9-315 and CANINE Chapter 24 (Continuing Perfection Changes as to the Use of the Collateral or in the Location of the Collateral or the Debtor; Security Interests in Proceeds).  However, by its terms new section 9-315(d)(3) contemplates perfection achieved independently of the automatic perfection provided for in new section 9-315(c), that is, where perfection is accomplished by taking specific action that is appropriate to perfect a security interest in the type of property that the proceeds constitute.  Moreover, according to the language of new section 9-315(d) where appropriate action has been taken within twenty days after a security interest attaches to the proceeds the perfection is continuing, meaning there is no gap in perfection such as could lead to priority problems.

In Clayson, assuming the creditor was able to surmount the identifiable proceeds obstacle discussed earlier and was able to establish a security interest in the check then what would be needed is action that is effective to perfect a security interest in a check.  A check is an instrument as defined in new section 9-102(a)(47).  Under new Article 9, section 9-312(a), in a change from former Article 9, a security interest in an instrument may be perfected by filing.  Unfortunately, the creditor did not file a financing statement covering instruments.  Perfection of a security interest in an instrument also may be perfected by taking possession of the instrument.  See new section 9-313(a) and CANINE Chapter 15 (Perfection by Possession (Including Documents of Title)).  However, the creditor did not have possession of the check at issue.  It had been delivered to the dairy farmer who turned it over to the trustee when bankruptcy was filed.

Therefore, although the court (and the creditor) exhibited considerable ingenuity in making its new section 9-313(c)(1) analysis regarding perfection of a security interest in the possession of a third party, to the extent that the check was proceeds of proceeds, which it must have been for the creditor to have an enforceable security interest in the check, the security interest was not perfected and the later check made payable to the creditor alone did not represent a satisfaction of a perfected security interest and should have been recoverable by the trustee as a preferential transfer avoidable under BRA § 547.

Of course, had the secured party filed a financing statement covering the cattle a decision in favor of the secured party would have been reached more easily (but the case would have been much less interesting).


 

In re Sabol, 337 B.R. 195 (Bkcy C.D. Ill. February 6, 2006)

As explained in CANINE Chapter 8 (The Specifics of Enforceability A Security Agreement Authenticated by the Debtor or Its Equivalent), there need not be a document labeled Security Agreement for a non-possessory security interest to be enforceable under Article 9.  However, as the opinion and decision in Sabol illustrate, new section 9-203(b)(3) does require that the debtor have authenticated a security agreement and satisfying this requirement may be difficult in the absence of a such a formal document.  The case also illustrates the point that creditors generally understand the advisability of having a formal security agreement but that such a document may not exist because of the failure of the creditor or even the creditors attorney to follow through on an intent that such a document be executed.  As to the latter point, it appears that the bank involved in the case routinely required that a borrower execute a security agreement there was a change in personnel handling the loan and a security agreement was never prepared or authenticated.  The matter of why the absence of such a document spells trouble requires a fuller explanation.

Much of the courts conclusion that the bank had not satisfied new section 9-203(b)(3) is predicated on its belief that because Article 9 has greatly simplified the formalities required for a security interest to be enforceable courts should be reluctant to excuse creditors who fail to satisfy the simple formalities.  The court reinforces its position in favor of strict application of the enforceability provision by stressing the need for certainty and uniformity in commercial transactions.  Although it somewhat inexplicably invokes a comment to former Article 9 section 9-203 in which the drafters insist that because of the relaxation of formalities there is no need for courts to employ equitable principles to save a security interest, the courts points are well taken.

The court assumes that a formal document labeled Security Agreement is not required and then considers whether any of the documentary evidence offered by the bank taken alone or in combination satisfies new section 9-203(b)(3).  Although the court concludes that courts have not indicated whether the composite document doctrine applies in Illinois (whose law governed in the case), it examines a number of decisions in which courts have invoked that doctrine and makes it clear that the banks security interest would not be enforceable even if that doctrine were applied.  The bank argued that a loan application, an application for an SBA guarantee, a promissory note, a letter authorizing a financing statement and a UCC 1 financing statement taken together satisfied new section 9-203(b)(3).  The court examined each document and concluded that these documents whether considered alone or in combination were not enough because in none of them was there sufficient evidence that the debtor had agreed to give the bank a security interest in the property at issue.

The court carefully distinguishes cases in which a document that contained the necessary manifestation of intent to create a security interest was incorporated by reference into or was added to a promissory note or even a financing statement signed or authenticated by the debtor.  Creditors and their attorneys should take special note of the courts treatment of the weight to be given the UCC 1 filed by the bank should be especially troubling to secured parties.

Several courts have relied on the different roles performed by financing statements and security agreements in concluding that a basic financing statement containing no more than a description of the collateral and standing alone cannot satisfy the enforceability requirements of Article 9.  See CANINE Chapter 8 (The Specifics of Enforceability A Security Agreement Authenticated by the Debtor or Its Equivalent) and Chapter 13 (An Overview of Perfection by Filing).  The court in Sabol points to the fact that the UCC 1 filed by the bank almost two weeks after the loan had been made was not signed by the debtor and in all likelihood was never seen by the debtor.  In the courts judgment the debtors letter authorizing the filing of a financing statement did not authorize the filing of the particular financing statement and, consequently, because the UCC 1 it was not shown to be contemporaneous it had no part to play in the Composite Document Rule.

The court acknowledges that under new Article 9 a financing statement need not be signed by the debtor.  See new section 9-502 and CANINE Chapter 13 (Overview of Perfection by Filing).  It also is a fact that even though a filing should be made as soon as possible, see CANINE Chapter 13 (Overview of Perfection by Filing), secured parties sometimes delay filing a financing statement until after a deal has been concluded.  Moreover, courts applying the composite document doctrine have not imposed a requirement that all the documents have been prepared contemporaneously and rather have stressed that what is important is that there be some nexus between and among the documents such as to indicate they are part of the same transaction.  See CANINE Chapter 8 (The Specifics of Enforceability A Security Agreement Authenticated by the Debtor or Its Equivalent).  On the other hand, a debtor must authorize the filing of a financing statement.  The debtor may do so separately or may be deemed to have done so by authenticating a security agreement creating a security interest in the collateral described in the financing statement.  See new section 9-509 and CANINE Chapter 8 (The Specifics of Enforceability A Security Agreement Authenticated by the Debtor or Its Equivalent).  Therefore, the court would appear to be on safe ground in insisting that a debtor have authorized the particular financing statement and not just a financing statement and the point is important as to the effectiveness of filings generally and not just in deciding when they may be considered as part of a composite document analysis.

What is noteworthy about the Sabol case and so many others like it is how much time, energy and expense have been incurred by courts and by creditors with regard to attempts to salvage a security interest where there is no formal security agreement.  The simple lesson is that there should be an authenticated security agreement in every case and commercial creditors should have in place procedures that provide a reasonable degree of certainty that such an agreement is prepared and authenticated by the debtor.


 

The Epicentre Strategic Corporation-Michigan v. Perrysburg Exempted Village School District, 2005 WL 3060104 (N.D. Ohio 2005)

This case involves the not uncomplicated Article 9 rules governing tort claims as collateral.  There are a number of provisions that may have to be consulted.  The focus of decisions regarding the extent to which Article 9 applies to tort claims (or settlements) typically is new section 9-109(d)(12) excluding from the scope of Article 9 an assignment of a claim arising in tort, other than a commercial tort claim, but [including the proceeds of any tort claim].  Thus, Article 9 has no application to the creation of a security interest in a tort claim, other than a commercial tort claim, as original collateral.  Article 9 does apply to security interests in the proceeds of any tort claim.  Applying new section 9-109(d)(12) requires consulting new section 9-102(a)(13) defining a commercial tort claim as a claim arising in tort with respect to which the claimant is an organization or the claimant is an individual and the claim arose in the course of the claimants business or profession and does not include damages for personal injury or death.

There are two other provisions pertaining specifically to security interests in tort claims.  The first is new section 9-108(e)(1) under which a description of a tort claim only by type is insufficient.  According to Official Comment 5 to new section 9-108 the purpose of new section 9-108(e)(1) is to prevent debtors from inadvertently encumbering tort claims but the qualifier only means that a description is sufficient if it reasonably identifies what is described and contains a descriptive component beyond type alone.  The other tort claim-specific provision is new section 9-204(b)(2) under which a security interest does not attach under an after-acquired property clause to a commercial tort claim.  According to Official Comment 4 to new section 9-204 the limitation means that for a security interest to attach to a commercial tort claim the claim must be in existence when the security agreement is authenticated but there is no indication as to the purpose of the limitation.

In the Epicentre case a subcontractor on a school construction project had created a security interest described in the security agreement as Accounts receivable, Inventory, Equipment, [and] Instruments.  Sometime after the security agreement was executed the subcontractor suffered a loss resulting from the tortuous behavior of a project supervisor that gave rise to a commercial tort claim.  On these facts the court could have concluded the security interest did not cover the commercial tort claim because the description of the collateral made no mention of such property and because the claim was not in existence when the security agreement was executed.  Instead the court invoked new section 9-204(b)(2) and held there was no security interest in the commercial tort claim because the claim was not in existence when the security interest was created.

However, after the tort claim arose a Clarification of Continuing Security Interest had been signed by the subcontractor and this document described the collateral as any choses of action, whether in contract or tort, including commercial tort actions, which Debtor could bring at law or in equity.  The court quite properly observes that this document was of questionable legal effect because of its timing and validity, but that if the document was effective the tort claim would no longer be after-acquired property to which a security interest could not attach under new section 9-204(b)(2).  So, the court examines the later document to determine whether the description provided was sufficient.  It held that the description was not sufficient under new section 9-108(e)(1) because it described the tort claim only by type.

What the court did not do (likely because the creditor did not make the argument) and probably should have done was to consider whether the security interest could reach the commercial tort claim as proceeds.  As noted above, under new section 9-109(d)(12), Article 9 applies to all tort claims as proceeds, as distinguished from original collateral.  Determining when a tort claim is proceeds is no mean undertaking.  Official Comment 15 to new section 9-109 states that Article 9 now applies to assignments of commercial tort claims (defined in Section 9-102), as well as to security interests in tort claims that constitute proceeds of other collateral (e.g., a right to payment for negligent destruction of the debtors inventory).

The exact nature of the subcontractors tort claim is not revealed by the courts cursory statement that the supervisor negligently failed to perform its contractual obligations, resulting in significant losses to [the subcontractor.  Successfully arguing that the tort claim was proceeds of collateral consisting of Accounts receivable, Inventory, Equipment, [and] Instruments would be challenging at best, but it is not inconceivable that the tortuous conduct interfered with the ability of the subcontractor to generate or collect accounts receivable and to this extent the tort claim might be viewed as proceeds, especially given the expanded definition of proceeds in new section 9-102(a)(64).  See CANINE Chapter 9 (The Specifics of Enforceability After-acquired Property, Future Advances, Transferred Collateral and Proceeds and the New Debtor Problem).

Another question not addressed by the court is whether the property at issue was technically a commercial tort claim or was some other type of property not within the scope of new section 9-108(e)(1) or 9-204(b)(2).  Official Comment 15 to new section 9-109 states that once a claim arising in tort has been settled and reduced to a contractual obligation to pay, the right to payment becomes a payment intangible and ceases to be a claim arising in tort the point apparently being that a security interest may be taken in a contractual settlement as original collateral (or proceeds) and is not within the new section 9-109(d)(12) exclusion or affected by other Article 9 provisions such as new section 9-108(e)(2) or 9-204(b)(2).

Again the facts do not disclose the status of the tort claim and it is not known whether the claim was in litigation or had been or was in the process of being settled.  On the other hand, the description in the original security agreement does not refer to payment intangibles or general intangibles or any other type of intangible that would include a contractual settlement.  However, the Clarification of Continuing Security Agreement document did cover any choses in action and because a contractual settlement might fit within this description the court would have to decide whether the document was legally effective.

The chances that the creditor could have successfully argued that its security interest covered the subcontractors tort claim under either of the two foregoing theories appear slim at best, but the entire of subject of tort claims as collateral is sufficiently murky that creditors and their attorneys must be alert to the whole range of possible arguments.


 

Pankratz Implement Co. v. Citizens National Bank, 130 P.3d 57 (Kan. 2006)

This case deals with the new section 9-502 requirement that a financing statement contain the debtors name, what name is sufficient under new section 9-503 for an individual debtor and extent to which a filing that does not use a correct name for the debtor can be effective under new section 9-506, matters that have been considered at some length in CANINE Chapter 14 (The Nitty Gritty of Filing).  At root disputes involving these sections raise two main issues.  The first is whether the correct name of the debtor means the debtors legal name or whether it extends to variations on the legal name and even nicknames.  The question arises because new section 9-503(a)(1) expressly requires the use of the legal name for an organization new section 9-503(a)(4)(A) does not specify that only the debtors legal name is sufficient for an individual debtor.  The Kansas Supreme Court affirms a court of appeals decision holding that only the debtors legal name will suffice.  In so doing the court adopts the reasoning of other courts and commentators to the effect that the new Article 9 scheme is intended to take the guesswork out of searching and eliminate fact-intensive inquiries that former Article 9 appeared to countenance.  The basic effect of the conclusion is to place the burden of getting the name right on the filing party and relieve searching parties of the need to consider variations on a debtors name and conduct multiple searches using these name variations.

The second major question is to what extent a filing that does not use the debtors correct name may nonetheless be effective under new section 9-506.  As the court points out, it is necessary to read all of new section 9-506 together with new section 9-503.  Under new section 9-506(a) minor errors or omissions do not render a financing statement that substantially satisfies the requirements of Article 9 for financing statements ineffective unless the errors or omissions make the financing statement seriously misleading.  Under new section 9-506(b), except as provided in new section 9-506(c), a financing statement that fails sufficiently provide the debtors name as required by new section 9-503(a) is seriously misleading.  In Pankrantz the secured party used the name Roger House on a financing statement rather than the debtors actual name of Rodger House.  The secured party argued that the misspelling was a minor error that was not seriously misleading.  The court rejected the argument because new section 9-503(a) required the use of the debtors legal name and because that name had not been used the financing statement was seriously misleading under new section 9-506(b) unless it was saved by the so-called safe harbor provided by new section 9-506(c).

Under new section 9-506(c) if a financing statement using an incorrect name would be found by a searcher who conducted or requested a search under the debtors correct name using the standard search logic of the particular filing office then an error in the debtors name would not render the filing seriously misleading.  It was argued that new section 9-506(c) by its language provides only that if a financing statement would be discovered in a search under the correct name using the standard search logic of the particular filing office then the financing statement is not seriously misleading and does not provide that a financing statement containing an error in the debtors name can be effective only if it would be found in a search under the debtors correct name using the standard search logic of the particular filing office.  The court rejected the argument on the ground that when new section 9-506(c) is read together with 9-503(a) and 9-506(b) (under which an error in the debtors name is deemed to be seriously misleading unless it is saved by new section 9-506(c)) a financing statement is seriously misleading unless it would be found in a search under the correct name using the standard search logic of the particular filing office.  It is fair to say that underlying the courts rejection of the secured partys argument as to the meaning of new section 9-506(c) are the concerns that lead the court to conclude that the correct name for an individual debtor is the debtors legal name, specifically, that the new Article 9 scheme is aimed at certainty and at relieving searchers of the need to conduct multiple searches under variations of the debtors name that a court would have to after-the-fact decide were somehow reasonably required by the particular circumstances.

It is essential to understand that the fact that a financing statement using an incorrect name would be discovered using a search logic employed by other than that of the particular filing office is not enough under new section 9-506(c).  Thus, although the financing statement with the misspelled name at issue in Pankrantz would have turned up in a search of an unofficial data base maintained by the State of Kansas during the period of transition from the effective date of new Article 9 to June 30, 2006 did not prevent the financing statement from being seriously misleading.  Likewise, that the financing statement would have been discovered using an Internet search engine (such as Google) would not render the financing statement effective.  Standard search logic as used in new section 9-506(c) means the official search logic of the particular filing office.

Persons interested in doing so can investigate the search logic used in various jurisdictions by going to a site maintained by the International Association of Commercial Administrators (IACA) at www.iaca.org/node/46.


 

In re Jeans, 326 B.R. 722 (Bkcy W.D. Tenn. June 28, 2005)

In this case the court grappled with several difficult issues associated with secured sales of vehicles and assignments of the sales contract and security interest to a lender.  These issues arose in the context of an attempt by a trustee in bankruptcy to avoid a security interest as an avoidable preference under BRA § 547.

In Jeans the debtor in bankruptcy undertook to purchase a vehicle from a dealer in Tennessee.  She executed a retail installment contract and security agreement containing the terms of the sale and giving the dealer an interest in the vehicle to secure the unpaid price.  She also executed a document entitled Immediate Delivery Agreement allowing her to take immediate possession of the vehicle but indicating a number of conditions, including that a lender accept the contract, and stating that in the event that any one or more of these conditions are not met, the Contract is null and void, and the customer is obligated to immediately return the vehicle to the Dealer.  These documents were executed on February 7, 2004 and the vehicle was delivered on that date.

Because BRA § 547 is aimed at transfers on account of antecedent debts the first question was when the debt arose.  The court concluded that debtor was obligated as of February 7, 2004 and not upon the fulfillment of the conditions precedent stated in the Immediate Delivery Agreement.  The court noted that if the parties intended that the obligation not arise on February 7, 2004 they should have so indicated in the agreement.  The fact that interest began to accrue on February 7th was a factor in the courts determination of the parties intent.  In reaching its decision as to when the debt arose the court had to distinguish a Sixth Circuit decision, In re McFarland, 131 B.R. 627 (E.D. Tenn. 1990), affd, 943 F.2d 52 (6th Cir. 1991), involving somewhat similar facts and also arising in Tennessee.  In doing so, the court noted that there is considerable confusion in Tennessee law as between a conditional contract and a contract subject to a condition and that in the case of a contract subject to a condition the parties may waive the condition and it is only in the case of a conditional contract that no obligation arises until the conditions are satisfied.  In the courts judgment the McFarland case involved a conditional contract (especially because there was an option to purchase rather than an outright purchase) but in Jeans there was a contract subject to conditions (that were ultimately met).

The court also concluded that there were legal differences as between the situation in Jeans and that in McFarland.  One was that turning on the distinction between a conditional contract and a contract subject to a condition, a distinction that determined when a debt arose.  Because the in Jeans there was a contract subject to a condition and, as noted above, the obligation arose immediately on February 7, 2004.  The other principle legal difference, in the courts mind, was that BRA § 547 had been amended in 1994, after McFarland was decided, and the amendments affected the application of section 547.  Here the courts opinion gets a bit murky.  In fairness, the murkiness may be attributable to the changes in the language of BRA § 547(e)(2)(B) and BRA § 547(c)(3) that are anything but readily understandable.  In particular, the exception under which an otherwise avoidable transfer is not avoidable as to a purchase money security interest if the security interest is perfected in a timely fashion in BRA § 547(c)(3)(B) had been changed to provide that perfection is timely when the security interest is perfected within twenty days (now thirty days by virtue of an amendment effective in October of 2005) after the debtor receives possession rather than after the security interest attaches.  The court notes that attachment is no longer a triggering event for perfection; possession is the triggering event.  Just why this change should be important in Jeans (or any other such case) is not clear.

Some explanation of the operation of BRA § 547(c)(3) is in order.  Actually, it is necessary to begin with a discussion of the basic section 547 scheme as BRA § 547(c)(3) is an exception in the sense that a transfer is avoidable under the basic scheme may not be avoidable if the conditions of BRA § 547(c)(3) are met.  It is helpful to understand that BRA § 547 is aimed at transfers on account of antecedent debts but a security interest is a transfer under BRA § 101(54).  The court in Jeans speaks of transfers of security interests which is redundant and makes its analysis more difficult to follow.

BRA § 547(b) provides essentially that a transfer on account of an antecedent debt made within the preference period (normally ninety days prior to bankruptcy) while the debtor is insolvent (which is presumed as to transfers made within the ninety-day period) is avoidable if the effect of the transfer is to prefer the transferee (meaning that the transfer gets more than it would receive in a liquidation bankruptcy had it not received the transfer).  As noted a security interest is a transfer.  In the simplest case, the creation of a security interest after a debt is incurred (for example, where a debt starts out as being unsecured and later is secured) is avoidable if the other conditions of BRA § 547(b) are met.  But, the complete explanation is more complicated.  Although a security interest is a transfer, what is ultimately important to avoidable preference analysis is whether there is a transfer within the meaning of B RA § 547 on account of an antecedent debt.  Under BRA § 547(e)(1)(B) a transfer for purposes of BRA § 547 is made when the transfer is perfected (when the transfer is not vulnerable as against a lien creditor under state law).  However, under BRA § 547(e)(2)(A) if a transfer is perfected within a stated period of time after the actual transfer (the creation of the security interest) then the transfer for purposes of BRA § 547 is deemed to be at the time of the actual transfer.  If there is a delay in perfection beyond the stated period then under BRA § 547(e)(2)(B) the transfer is deemed to be when the transfer is perfected.  See CANINE Chapter 30 (Secured Party Versus Trustee in Bankruptcy).

As for BRA § 547(c)(3), under that section a security interest that is otherwise avoidable under BRA § 547(b) is not avoidable if the security interest is a purchase money security interest and the security interest is perfected within a stated period of time after the debtor receives possession.  The period of time when Jeans was decided was twenty days.  Effective in October of 2005 the period was extended to thirty days and, again, the impact of that extension gets separate attention below.  See CANINE Chapter 30 (Secured Party Versus Trustee in Bankruptcy).

The court in Jeans concluded that the 1994 amendments to BRA § 547 somehow changed the basic scheme described above and, specifically, that as a result of changes to BRA § 547(e)(2)(A) and BRA § 547(c)(3)(B) possession and not attachment determined perfection for purposes of BRA § 547.  The addition of the phrase except as provided in subsection (c)(3)(B) to the end of BRA § 547(e)(2)(A) is curious and exactly what it means is something of a mystery.  Although in a sense it is possession by the debtor that triggers BRA § 547(c)(3), the protection given is still conditioned on timely perfection and perfection requires that a security interest have attached and there is no attachment until the debtor acquires rights in the collateral.  See BRA § 547(e)(1)(B) (according to which a transfer is perfected when it is perfected under state law in the sense that it is not vulnerable to a lien creditor), new sections 9-203(a) and 9-203(b)(2), CANINE Chapter 8 (The Specifics of Enforceability A Security Agreement Authenticated by the Debtor or Its Equivalent) and CANINE Chapter 30 (Secured Party Versus Trustee in Bankruptcy).

In any event, read in its entirety BRA § 547(c)(3) clearly does not address the timing of perfection or of a transfer under BRA § 547 but rather says that a transfer that is otherwise avoidable under BRA § 547 is not avoidable (a trustee may not avoid under this section a transfer) if the conditions of BRA § 547(c)(3) are met.  Interestingly, the courts discussion of the effect of the 1994 amendments seems important only with regard to its attempts to distinguish the McFarland decision referred to above.  To understand how this is so requires a closer examination of the application of BRA § 547 to the facts of Jeans.

As noted above, the court in Jeans concluded that the debtor became obligated that the debt arose on February 7, 2004.  The question as to BRA § 547 was when a transfer for purposes of that section took place.  A security interest is a transfer subject to the special rules in BRA § 547(e).  The starting place is to determine when a transfer was made, i.e., when a security interest was given, or in BRA § 547 terms, when the actual transfer took place.  For the debtor to be able to grant the dealer a security interest in the vehicle the debtor had to have rights in the vehicle.  See new section 9-203(b)(2) and CANINE Chapter 8 (The Specifics of Enforceability A Security Agreement Authenticated by the Debtor or Its Equivalent).  Here the court engaged in some adept analysis requiring that it look to Article 2 of the UCC.  Specifically, the court concluded that under Article 2, section 2-501(1), a buyer obtains a special property and an insurable interest in goods when the goods are identified to the contract of sale.  Because the vehicle in Jeans had been identified to the contract on February 7, 2004, the debtor had the special property and insurable interest provided for in section 2-501(1) as of that date.  In the courts judgment this special property and insurable interest gave the debtor sufficient rights in the vehicle to allow it to grant a security interest in the vehicle to the dealer on February 7, 2004.

In BRA § 547 terms the actual transfer took place on February 7th.  But, the question then was when was the transfer for purposes of BRA § 547.  To answer that question it was necessary to determine when the security interest was perfected.  Because the collateral was a vehicle subject to the Tennessee certificate of title law it was necessary to look to that law to determine when the security interest was perfected.  See new section 9-311 and CANINE Chapter 17 (Perfection as to Goods Subject to Certificate of Title Legislation).  Although new section 9-311 is generally understood to mean that a security interest in goods subject to a certificate of title statute requiring that a security interest be noted on the certificate of title is perfected when the security interest is so noted, see CANINE Chapter 17 (Perfection as to Goods Subject to Certificate of Title Legislation), technically the particular certificate of title statute governs the timing of perfection.

Under Tennessee law perfection occurs when an application for a title with the security interest noted on it is made and any required fee is tendered.  An application was not made in Jeans until March 15, 2004 (and a title issued on March 16).  The security interest was perfected more than twenty days after the security interest was created (February 7, 2004) and because the perfection was outside the twenty-day period provided for in BRA § 547(e)(2)(A) at the time Jeans was decided (actually outside the 30 days) the transfer for purposes of BRA § 547 under BRA § 547(e)(2)(B) took place when the security interest was perfected, namely, on March 15, 2004.  Consequently, there was a transfer on account of an antecedent debt (which arose on February 7, 2004) and within the ninety-day period prior to bankruptcy (that was filed on March 26, 2004).  The security interest, therefore, was avoidable under BRA § 547(b) to the extent the other requirements of that section were met (which, presumably, they were).  The court points out that the problem could have been prevented if the dealer had applied for a certificate of title and the parties had later changed the name of the lien holder from that of the dealer to that of the assignee-lender.

There remained the question of whether BRA § 547 (c)(3) could apply to prevent avoidance of the security interest under BRA § 547(b).  The security interest was purchase money but the security interest was not perfected within twenty days of possession (which was on February 7, 2004) as provided for in BRA § 547(c)(3) at the time of Jeans.  Therefore, BRA § 547(c)(3) would not prevent the trustee from avoiding the security interest.

As noted above, effective in October of 2005, the period provided for in both BRA § 547(e)(2) and BRA § 547(c)(3) has been extended to thirty days.  As enacted in the several states, new section 9-317(e), provides that a security interest that would be subordinate to a lien creditor under new section 9-317(a) has priority over a lien creditor if the security interest is purchase money and the secured party files a financing statement within twenty days after the debtor receives delivery of the collateral.  Under BRA § 546(b) a purchase money party whose security interest would be avoidable under BRA § 544(a) because it was not perfected on the date of bankruptcy is not avoidable if the conditions of new section 9-317(e) have been met.  That is, BRA § 546(b) gives to a secured party in bankruptcy the protection provided in state law under new Article 9.  See CANINE Chapter 26 (Secured Party Versus Lien Creditor; Future Advances; Bankruptcy).  Unless and until new Article 9 is revised to provide for a thirty-day rather than a twenty-day period in new section 9-317(e) it is possible that a security interest could escape a preference challenge where the security interest is perfected outside the twenty-day period but be avoidable under BRA § 544(a) because BRA § 546(b) gives to a security party only that protection that is available under Article 9.


 

Ace Equipment Sales, Inc. v. H.O. Penn Machinery Co., Inc., 871 A.2d 402 (Conn. App. 2005)

Although this case was decided under former Article 9, section 9-307(1), and the pre-revision version of Article 1, section 1-201(9) (now section 1-209(b)(9)).  However, the facts of the case and the courts analysis of the buyer-in-ordinary-course issue provide a useful opportunity to consider changes made the definition of buyer in ordinary course made by revised section 1-201(b)(9).  Moreover, there is an interesting question as to whether the buyer had been coerced to pay twice for the goods (a stone crusher) under duress or had waived any such claim against the secured party.

As to the buyer-in-ordinary-course issue, the court held that the buyer had bought the crusher without actual knowledge of a violation of the secured partys security interest because it had no knowledge of the security interest.  Revised Article 1, section 1-201(b)(9) tracks the pre-revision version of section 1-201(9) insofar as actual knowledge that a sale violates the secured partys security interest is required to deny the buyer the status of a buyer in ordinary course.  To qualify as a buyer in ordinary course, the buyer must take act in good faith and the sale must be in ordinary course.  According to the court good faith requires honesty in fact and the observance of commercial standards of fair dealing.  This is the definition of good faith found in Article 1, section 1-201(b)(20).  The court added that the buyer was under no obligation to do a lien search.  This conclusion is sound in that a search of the records would only provide constructive knowledge of a security interest and it would take extended investigation to learn that the sale violated the security interest.

As for ordinary course the dealer from whom the buyer had bought the crusher did not have possession and the buyer did not take delivery of the crusher.  The court concluded that neither possession by the dealer nor delivery to the buyer was necessary for the buyer to be a buyer in ordinary course.  In so holding, the court relied heavily on a factual stipulation to the effect that because of the prohibitive cost of transporting heavy construction equipment it was customary in the industry that the dealer not have possession of a piece of equipment such as a crusher and not necessary that the buyer take delivery of such equipment.  The revised definition of buyer in ordinary course expressly makes custom and practice in the trade  (or of the dealer) important in determining whether a sale is in ordinary course and to this extent the courts reasoning would be sound under the revised definition.  However, the revised definition provides that only a buyer that takes possession of the goods or has a right to recover the goods from the seller under Article 2 may be a buyer in ordinary course.  The question arises as to how this language would impact the courts decision regarding the need for possession by the dealer or delivery to the buyer.

As explained in CANINE Chapter 27 (Secured Party Versus Buyers), there was some difference of opinion as to whether a buyer had to take delivery of goods to qualify as a buyer in ordinary course.  The better view seemed to be that it was enough that the goods had been identified to the contract sufficiently to give the buyer a special property and insurable interest in the goods under Article 2, section 2-501 and the language of revised Article 1, section 1-201(b)(9) (or has a right to recover the goods from the seller under Article2) may be understood to have codified this view.  Where the dealer does not have possession of the goods it is not entirely clear when goods have been sufficiently identified to a contract as to give the buyer rights to the goods under Article 2.  According to Article 2, section 9-501(1)(a) identification occurs: (a) when the contract is made if it is for the sale of goods already existing and identified.  This somewhat circular proposition would appear to support the buyer on the facts of the Ace Equipment Sales case.  Article 2, section 9-501(1)(b) states that identification occurs: (b) if the contract is for the sale of future goods [other than crops or livestock] when goods are shipped, marked, or otherwise designated by the seller as goods to which the contract refers and could be understood to reinforce the buyers position on the facts Ace Equipment Sales because the crusher existed and was not future goods.

In the final analysis it is important to know to what situation the language regarding possession or right to possession in revised Article 1, section 1-102(a)(9) is intended to apply.  Official Comment 9 to revised section 1-201(b)(9) is not all that helpful in answering the question.  It states that the penultimate sentence [of the provision] prevents a buyer from being a buyer in ordinary course of business and then refers to Article 2 sections that concern when a buyer obtains possessory rights.  The comment then states: However, the penultimate sentence is not intended to affect a buyers status as a buyer in ordinary course of business in cases (such as a drop shipment) involving delivery by a seller to a person buying from the buyer or a donee from the buyer.  The requirement relates to whether as against the seller the buyer or one taking through the buyer has possessory rights.  The comment, therefore, simply reaffirms the earlier point that whether a buyer qualifies as a buyer in ordinary course where the buyer has not taken delivery and the seller does not have possession requires a determination of whether the buyer has a right to possession as against the seller.  It does not do much by way of indicating when a buyer does or does not have such a right.

As pointed out in CANINE Chapter 27 (Secured Party Versus Buyers) it may be that revised section 9-102(b)(9) must be read together with new section 9-320(e) providing that subsections (a) [the successor to former section 9-307(1) under which a buyer in ordinary course took free of a security interest created by the buyers seller] and (b) [the successor to former section 9-301 under which buyers not in ordinary course had priority over unperfected security interests] do not affect a security interest in goods in the possession of the secured party under Section 9-313.  According to Official Comment 8 to new section 9-320, section 9-320(e) is intended to overrule the decision in Tanbro Fabrics Corp. v. Deering Milliken, Inc., 350 N.E.2d 590 (N.Y. 1976).

In Tanbro, a buyer from a seller had left goods in the possession of a creditor for security.  The court held the buyer to be a buyer in ordinary course who was entitled to take free of the security interest of the creditor who was in possession.  The secured party in Ace Equipment Sales had filed a financing statement and was not in possession as a means of rendering its security interest enforceable or perfecting the security interest.  Indeed, the crusher was in the possession of a third party and there was not indication that party was holding it for the benefit of the secured party within the meaning of new section 9-313. As to perfection by possession, see CANINE Chapter 15 (Perfection by Possession (Including Documents of Title)).  In other words, it is necessary to read the definition of buyer in ordinary course in revised Article 1, section 1-201(b)(9) and new sections 9-320(a) and 9-320(e) together and, properly read, a buyer who does not have possession may be a buyer in ordinary course entitled under new section 9-320(a) to take free of a security interest created by the buyers seller so long as the buyer has rights to possession of the goods against the seller under Article 2 subject to the qualification in new section 9-320(e) that the buyer does not take free of a security interest held by a creditor of the seller who is in possession of the goods for the purpose of perfecting its security interest.  The outcome in Ace Equipment, therefore, would be the same under new Article 9.

In Ace Equipment Sales the secured party demanded that the buyer pay an amount equal to what it had already paid the dealer in order to be able to complete a contract under which the buyer had leased the crusher to a third party.  The buyer brought suit against the secured party alleging that it made the payment under duress in that it had to pay to avoid breaching its leasing obligation to the third party.  In rejecting the claim, the court discussed at length when an action for damages for duress was available.  It noted that an important element of the claim is that the party being sued must have acted wrongfully and that there was no indication that the secured party believed otherwise than that it had a right to the payment (perhaps because the dealer had failed to pay the secured party what was owed).  The court added that to be successful the party suing for damages for duress must have had no reasonable option other than to make the payment.  In the courts judgment the buyer could have sued the secured party and sought what would amount to a provisional remedy (replevin prior to a decision on the merits).  As to provisional remedies, see CANINE Chapter 34 (Getting Possession of the Collateral).  The clincher, however, was that the buyer had waited four years to sue the secured party and an action for damages for duress must be brought promptly.


 

ACG Credit Co., LLC v. Gill, 876 A.2d 188 (N.H. 2005)

In this case the court, without much discussion, concludes that an auctioneer did not have a security interest and the transaction rather was a true consignment because the antiques the auctioneer sold and the proceeds did not secure an obligation as required by Article 1, section 1-201(37), now  Article 1, section 1-201(b)(35),for there to be a security interest.

 


Planned Furniture Promotions, Inc. v. Benjamin S. Youngblood, Inc., 374 F. Supp. 2d 1227 (M.D. Ga. 2005)

In this factually complicated case the court deals with a number of interesting issues.  The basic action is an interpleader in which the court must decide who gets how much of the proceeds of a business assets liquidation.  The principal competitors to the funds are a bank and the IRS.  The question was whether the banks security interest in property subject to a federal tax lien had priority over the tax lien.  There appears to have been no question as to after acquired property and the commercial collateral/45-day rule as the property in dispute was in existence at the time the IRS filed its notices of federal tax liens.  As to the 45-day rule, see CANINE Chapter 31 (Secured Party Versus Statutory Liens Including Agricultural Liens and Federal Tax Liens; Banks Right of Set-Off).  Rather, the question was whether the banks interest was superior to that of a lien creditor as required by section 6323 of the Federal Tax Lien Act (26 U.S.C. § 6323) and the definition of a security interest for purposes of the tax lien act.  A security interest is a security interest under section 6323(h)(1) only if it cannot be subordinated to a lien creditor, i.e., is perfected.  That question, in turn, became whether the security interest was perfected under new Article 9 when the tax lien notices were filed.

The opinion could be clearer as to the exact facts, but it appears that the security interest was created by Benjamin and Laura Youngblood and that the Youngbloods operated two furniture businesses at the same location.  The bank filed a UCC 1 naming the two individuals as debtors.  It also appears that the Youngbloods, or at least Benjamin, did business under the name Honey Creek Home Furnishings.  It is clear that the debtors incorporated their business (businesses) as Benjamin S. Youngsblood, Inc. shortly after the security interest was created.  Apparently, as explained later, Benjamin Youngblood, and later the corporation and a poorly described business called Old Salem Furniture did business at the same location as explained later.

The security agreement gave the bank a security interest in All Inventory, Accounts, Furniture, Fixtures, Equipment, All Assets Now Owned or Hereafter Acquired of Old Salem Furniture Located at 3565 HWY 205, Conyers, Ga & Any Other Location Where Business is Transacted.  It is not clear how a reference to property of Old Salem could result in a security interest in property of the Honey Creek and the corporation but the court seemed satisfied that it did.  The court also fails to distinguish the security agreement from the financing statement. But, for purposes of discussion it will be assumed that the financing statement empeloyed the same description of as the financing statement.

Some time after the original loan there was a modification that referenced the earlier financing statement and recited the same collateral except that the new agreement replaced the phrase Old Salem Furniture with Old Salem Furniture AKA Honey Creek Home Furnishings.

The original security agreement, financing statement and modification all were in 1999, but the court without discussion applied new Article 9 to the dispute.

The IRS argued the bank was not perfected for because the financing statement relied on by the secured party did not adequately described the collateral and that the incorporation resulted in a new debtor, triggering the need for a filing against the corporation under new section 9-508 and such a filing was never made.  Again, it seems the dispute was over property in existence at the time of the IRS notices.  It further must have been the case that the property was acquired more than four months after the corporation became bound and after the name change otherwise new section 9-508(b)(1) would not have required a new filing, but there was no discussion of this point.  As to the concept of a new debtor, see new sections 9-102(a)(56) and 9-203(d) and CANINE Chapter 9 (The Specifics of Enforceability After-acquired Collateral, Future Advances, Transferred Collateral and Proceeds, and the New Debtor Problem).  As to the rules governing the need to refile in new debtor cases, see CANINE Chapter 23 (Continuing Perfection The Need to Reperfect (or Refile)).

The first argument was rejected essentially on the ground that both former and new Article 9 employs a notice filing system under which the court says a description in a financing statement it is sufficient if [it] provides such a key to the identity of the property as would enable a person of ordinary business prudence, upon inquiry to discover the actual identity of the property described.  The court observes that more is required of descriptions in security agreements. Curiously, with regard to the description in the financing statement, the court refers to new section 9-108 and the requirement that a description must reasonably identify what is described as if that did not apply to security agreements as well as financing statements, which it does.  See CANINE Chapter 8 (The Specifics of Enforceability A Security Agreement Authenticated by the Debtor or Its Equivalent).

More interesting are the reasons given by the court for finding the financing statement satisfied the inquiry notice requirement.  The IRS argued that the financing statement listed only the assets of Old Salem Furniture and made no mention of assets held by Honey Creek Home Furnishings or the corporation.  As noted earlier, that seems clearly to be so.  However, the court offers two reasons for rejecting the IRS argument.  First, says the court, the description provides the address where the collateral is located. Second, both Honey Creek and the corporation conducted business at the same address provided for Old Salem Furniture 3565 Highway 20 South, Conyers, Georgia. The court summarizes its conclusion as follows: The inclusion in the financing statement of a readily identifiable physical location where the collateral may be found, coupled with the fact that each of the Youngbloods furniture stores [Honey Creek and the corporation?] operated at that location, leads the Court to conclude that the description of the collateral in the financing statement was sufficient under the UCC and the applicable case law.  These two pieces of information provide such a key to the identity of the property as would enable a person [of?] ordinary business prudence, upon inquiry, to discover the actual identity of the property described.

The court seems very solicitous of the bank here.  The inquiry notice test is proper and an address where the collateral is located is certainly a relevant descriptor, see CANINE Chapter 14 (The Nitty Gritty of Filing).  But, it is not apparent how a reference to the assets of Old Salem suffices as to Honey Creek or the corporation (in either the security agreement or the financing statement).  If it was because Old Salem was indistinguishable from the individual debtor or Honey Creek and ultimately the corporation more discussion was in order.

The courts analysis of the name change issue is even more interesting.  As noted above, it must be the case that the property at issue came into existence more than four months after the name change in order for new section 9-508 to require a refiling.  Te court speaks of the need for an amendment to the original financing statement.  As a technical matter, in new debtor as distinguished from simple name change situations, a new initial financing statement rather than an amendment is required.  Compare new section 9-507(c)(2) with new section 9-508(b)(2) and see CANINE Chapter 23 (Continuing Perfection The Need to Reperfect (or Refile)).  In any event, the court notes that for 9-508 to require a refiling the name change must be seriously misleading.  The court refers to new sections 9-506(a) and (c) but does not get into the discovery using the standard search procedure of a particular filing office out a secured party where there are name problems.  It rather says that Benjamin Scott Youngblood (as used in the original financing statement is not sufficiently different from Benjamin S. Youngblood, Inc. as to make the former seriously misleading.  In doing so the court relies again on the reasonably prudent searcher concept.  It discusses cases where business names had been used rather than individual names and vice versa but distinguishes them as being cases where the names were not sufficiently similar as not to be seriously misleading.

As a matter of strict logic the court has a point.  If a name change is not seriously misleading than there is no need to get into new section 9-506(c).  But, it seems that under new section 9-506(b) an error in a debtors name is deemed to be seriously misleading essentially as a matter of law and the filing can only be saved by 9-506(c).  See CANINE Chapter 14 (The Nitty Gritty of Filing).


 

First National Bank v. Lubbock Feeders, L.P., 183 S.W.3d 875 (Tex. App. 2006)

This case involves the application of new section 9-324(d) under which a purchase money security interest in livestock that are farm products is given priority over a holder of a non-purchase money security interest in the same collateral that would have priority under the first to file or first to perfect rule of new section 9-322(a)(1) so long as the purchase money party satisfies certain requirements spelled out in new section 9-324(d).  As to the priority rules governing disputes between and among secured parties generally, see CANINE Chapter 28 (Secured Party Versus Secured Party).  In what is to say the least an interesting opinion, the court concludes that a feedlot that made loans secured by interests in cattle delivered directly to the feedlot and never possessed by the debtor had priority under new section 9-324(d) over a bank that held a pre-existing security interest in all the debtors livestock, existing and after-acquired, even though the bank would have had priority under new section 9-322(a)(1) and some of the special requirements for priority under new section 9-324(d) technically were not met.

The first hurdle for the feedlot was to establish that it had a purchase money security interest (PMSI) in the cattle.  As explained in CANINE Chapter 18 (Perfection by Doing Nothing Automatic Perfection), under new section 9-103 a security interest in goods is a PMSI to the extent the goods are purchase money collateral with respect to the security interest.  Purchase money collateral, under new section 9-103(a)(1) means collateral that secures a purchase money obligation with respect to the collateral.  New section 9-103(a)(2), in turn, defines a purchase money obligation as an obligation incurred as all or part of the price of the collateral or for value given to enable the debtor to acquire rights in or the use of the collateral if the value is in fact so used.  Because the cattle were acquired from a third-party seller it was that part of new section 9-103(a)(2) pertaining to loans that enable the debtor to acquire rights in the collateral that governed.

On the facts of the case, the loans were made anywhere from the day the cattle were delivered to the feedlot to up to eighteen days after delivery.  The bank argued that the loans could not have been used to enable the debtor to acquire rights insofar as the loans were made after the debtor already had acquired rights in the cattle.  The court rejected this argument, relying on cases that hold that it is enough that loans are closely allied to the purchases.  This analysis and conclusion may be within the spirit of new section 9-103 and consistent with the concept of enabling credit, but that the letter of new section 9-103 is satisfied is debatable.

The next problem for the feedlot was that new section 9-324(d)(1) requires that the PMSI be perfected when the debtor receives possession of the collateral.  This requirement also is found in new section 9-324(b) providing for a special priority for holders of PMSIs in inventory.  The purpose of the requirement, which may be contrasted with that provided for in new section 9-324(a) for PMSI in other than inventory and livestock and which requires that the security interest be perfected when the debtor receives possession of the collateral or within twenty days thereafter, is something of a mystery.  Official Comment 3 to new section 9-324 discusses the question of when a debtor has possession, namely, when the goods become collateral, but the comments do not otherwise address the timing of the perfection requirements.  How a requirement that a PMSI be perfected when the debtor receives possession is to be applied where the debtor never receives possession of the collateral is even more of a mystery.

The court in Lubbock Feeders never really answers the question, apparently assuming that if a debtor never receives possession of the collateral the requirement simply does not apply.  The court does address challenges made by the bank to the sufficiency of the feedlots filings by concluding that the feedlot perfected by possession under new section 9-313 and there was no need to consider the challenges to the filings.  As to perfection by possession, see CANINE Chapter 15 (Perfection by Possession (including Documents of Title)).

The fact that the debtor never received possession of the cattle posed an even more challenging obstacle for the feedlot.  New section 9-324(d)(3) requires that the holder of a conflicting security interest receive notification of an impending PMSI within six months before the debtor receives possession of the livestock.  The bank never received notification of the feedlots PMSI (until after the debtor defaulted) and it argued that the feedlot, therefore, did not qualify for the special priority in new section 9-324(d).  The court held that the notification requirement is triggered by possession and where the debtor never receives possession notification is not required.

In so holding the court relied on the Eighth Circuit decision in Kunkel v. Sprague National Bank, 128 F.3d 636 (8th Cir. 1997), an inventory case decided under former Article 9 that also involved livestock and a feedlot.  However, the court in Lubbock Feeders never discusses the purpose of the notification requirement or why the fact that the debtor never receives possession of the collateral should excuse the purchase money party from meeting the requirement.

As explained in CANINE Chapter 28 (Secured Party Versus Secured Party), the reason purchase money parties may qualify for a special priority is to encourage creditors who otherwise would be subordinated to prior non-purchase money security interests to extend credit (to add new value to a debtors estate).  As also explained in Chapter 28, the notification requirement is intended to protect creditors with security interests in existing and after-acquired collateral from extending additional credit that may be at risk because of the supervening priority given to purchase money secure parties.  In the language of Official Comment to new section 9-324 pertaining to inventory

The arrangement between an inventory secured party and its debtor typically requires the secured party to make periodic advances against incoming inventory or periodic releases of old inventory as new inventory is received. A fraudulent debtor may apply to the secured party for advances even though it has already given a purchase-money security interest in the inventory to another secured party.  For this reason [the purchase money secured party must give notification to the holder of a conflicting security interest who filed against the same collateral]. The notification requirement protects the non-purchase-money inventory party in such a situation: if the inventory secured party has received notification, it presumably will not make an advance; if it has not received notification . . . any advance the inventory secured party may make ordinarily will have priority under Section 9-322.

The same rationale presumably supports the notification requirement imposed on a holder of a PMSI in livestock by new section 9-324(d).  Cf. Official Comment 10 to new section 9-324 (explaining that new section 9-324(d) tracks new section 9-324(b) with regard to the notification requirement.

On the other hand, Official Comment 5 to new section 9-324 states that if the debtor never receives possession, the [five-year period imposed as to inventory by new section 9-324(b)] never begins, and the purchase-money security interest has priority, even if notification is not given.  No explanation is given as to why the notification requirement, given its purpose to protect the non-purchase money party, should simply be dispensed with where the debtor does not receive possession.  But, again, the comments statement that there is no requirement of notification where the debtor never receives possession would seem to have equal application to new section 9-324(d) and the special priority given to a holder of a PMSI in livestock.  Of course, the Official Comments are not law and a court could conclude that notification should be required even where a debtor does not receive possession and could fashion a rule that reasonably timely notification must be given.  The fact that possession seems to be more of a way of measuring the time within which notification must be sent more than it does an event of independent significance and because the time period for new section 9-324(b) as to inventory is five-years while that for new section 9-324(d) as to livestock is six months, and no explanation is given for the difference, could reinforce a courts inclination to reach such a conclusion.

However, in the absence of court decisions requiring notification where the debtor does not receive possession of the collateral the critical question of how a holder of non-purchase money security interest in inventory or a bank situated as that in Lubbock Feeders as to livestock is to protect itself against making advances that end up being subordinated to a purchase money party.  A couple of thoughts come to mind.

One way to avoid making advances against collateral as to which a conflicting PMSI may end up having priority is to carefully monitor incoming and outgoing collateral to the end of knowing when a purchase money party has entered the picture.  Doing so may be more easily said than done, especially with regard relatively high volumes of essentially homogeneous items of collateral.  An examination of invoices and bills of sale may be an alternative to inspecting the goods themselves but it may increase the risk as regards a debtor who is encountering financial difficulty or is otherwise inclined to fraudulent behavior.  A complicating factor in a case such as Lubbock Feeders is that the collateral was in the possession of a third party (who had a competing interest) and gaining the cooperation of that party may be necessary and not always readily obtained.

Another option for the non-purchase money secured party requires discussion of a non-obvious reality associated with the notification requirements under consideration.  As is explained in CANINE Chapter 28 (Secured Party Versus Secured Party) there is reason to believe that the notification scheme as to inventory has more theoretical than practical importance and the same concern would apply to the livestock case.  It seems that in practice inventory parties expect their debtors to finance purchases of additional inventory with advances made or with the proceeds from the sale of inventory or to acquire more inventory on an unsecured basis.  They do not contemplate that inventory will be obtained from secured parties on a secured basis.  They may well include in their security agreements a provision according to which any such purchases will constitute a default.  The result is that when an inventory party learns of secured credit purchases from third parties the inventory party will declare a default and foreclose rather than simply cease to make further advances.

Irrespective of actual practice, including in a security agreement a provision that bars purchases of additional collateral on a secured basis without consent is certainly an option for a non-purchase-money lender.  Of course, the ability to invoke such a provision and declare a default depends on learning of the prohibited purchases but it may deter honest debtors from putting the non-purchase money party at risk that it will end up in a subordinate position if financial difficulties arise.  It, moreover, may more accurately reflect actual practice and to that extent make interpretations of the notification requirement such as that in Lubbock Feeders less troublesome than they may at first appear.

Two final points about new section 3-524(d) and Lubbock Feeders are in order.  The special priority conferred by new section 3-524(d) applies only to livestock that are farm products.  As explained in CANINE Chapter 5 (Classification of Collateral), under new section 9-102(a)(34) goods are farm products only when the debtor is engaged in a farming operation.  Under new section 9-102(a)(35) a farming operation means raising, cultivating, propagating, fattening, grazing, or any other farming, livestock, or aquacultural operation.  A feedlot operation fits within this definition, but it may be asked whether a debtor, such as in Lubbock Feeders, who is essentially a seller of cattle through a feedlot is really engaged in a farming operation.  If not, as to this debtor the cattle would be inventory as to which new section 9-324(b) and not 9-324(d) would apply.  As noted above, there still would be a notification requirement issue but, more importantly, there are differences regarding the treatment of proceeds as between the two sections.  See Official Comment 10 to new section 9-324 and CANINE Chapter 28 (Secured Party Versus Secured Party).

There also may be a question of whether a buyer in ordinary course of cattle in such a situation takes free of a security interest under new section 9-320(a) or whether the sale falls within the exception for buyers in ordinary course of farm products.  As to the different treatment given buyers in ordinary course of farm products and other goods (and the possibility of protection for the former under the federal Food Security Act, see CANINE Chapter 27 (Secured Party Versus Buyers).


 

In re Yates, 332 B.R. 1 (10th Cir. BAP 2005)

Without a discussion of the issue of whether a repossessed vehicle is property of the estate, the court affirms a bankruptcy court decision that a creditor who refused to turn over the vehicle on demand violated the automatic stay and because the creditor knew of the stay and because its refusal to turn over the vehicle was intentional, attorneys fees and costs were not only justified but required.

The court discusses and rejects the decision of the 11th Circuit in In re Young, 193 B.R. 620 (Bkcy D.D.C. 1996), holding that BRA § 362(a)(3) bars obtaining possession and not retaining possession and that retaining possession is merely maintaining the status quo.  In so holding, the court says exercising control means to keep others from having access or use.  Turn over under section 542 is mandatory and necessary to prevent the continued exercise of control barred by 362(a)(3).  The only exception is where there is no value to the estate the burden .of proof of which is on the creditor (even though here the vehicle had no engine).  According to the court in Yates, the Young decision upsets the scheme under which the creditor bears the burden of proving lack of equity such as will justify relief from the stay and allows the creditor to unilaterally determine whether there is a lack of equity.

The court noted that a creditor may immediately seek relief from the stay under section 362(f) and Bankruptcy Rule 4001 and attempt to show grounds for relief.  Here the creditor delayed seeking relief for two months and rather refused to turn over the vehicle because it did not see how the debtor could need a vehicle that had no engine.

As to section 362(h), the court concludes that willful does not require specific intent to violate the stay.  Rather, it is necessary only that the creditor know of the stay and intentionally engage in acts that violate the stay (here refusing to turn over the vehicle).  When there is a willful violation damages are required.  Here attorneys fees and costs were required.  There is no discussion of actual or punitive damages.


 

McDonald Mobile Homes, Inc. v. BankAmerica Housing Services, __ S.W.3d __, 2005 WL 3196779 (Ark. App. Nov. 30, 2005)

In this case the court concludes that former Article 9 applies to a transaction in which a dealer who assigns a contract for the secured sale of a mobile subject to recourse (that is, the dealer agreed to hold the assignee/secured party harmless if the buyer of the mobile home did not perform) and the assignee/secured party must comply with the Article 9 rules governing the disposition of collateral.  The court further concludes that the disposition must be commercially reasonable and that the dealer was entitled to reasonable notification.  In so holding, the court relies on Norton v. National Bank of Commerce, 398 S.W.2d 538 (Ark. 1966), overruled on other grounds, First State Bank v. Hallett, 722 S.W.2d 555 (1987).  In the erroneous belief that Article 9 did not apply, the lower court had not made findings regarding advertising, solicitation of bids, the fair market value of the goods and whether the dealer actually received notice of the sale, in contrast to the usual procedures engaged in by the secured party.  The case was remanded to allow the secured party an opportunity to prove it acted in a commercially reasonable manner with instructions that if the secured party failed to so prove it should be denied a deficiency.  The appellate court also rejected a claim that the dealer had waived notice.

Although the case was decided under former Article 9 it is instructive with regard to issues that can arise under new Article 9.  To begin with, an assignment of a secured contract, which would be chattel paper under new section 9-102(a)(11), see CANINE Chapter 5 (Classification of Collateral), is within the scope of new Article 9 under new section 9-109(a)(3), whether the assignment is in the form of a sale or a secured transaction.  See CANINE Chapter 4 (Scope of Article 9).   If the assignment was an outright sale without recourse and the assignor rules governing the obligations of the assignee and the potential liability of the assignor for a deficiency are somewhat different.  See CANINE Chapter 37 (Foreclosure as to Intangibles).

Commercial reasonableness is a question of fact and under 9-610 and 9-627 dealer practices are relevant.  See CANINE Chapter 35 (Disposition of Collateral in Satisfaction of a Secured Debt).  However, new sections 9-611 and 9-614 requires only that the debtor be sent reasonable notification and not that the notification actually be received (except, perhaps, in the case where the creditor knows the debtor did not receive notice).  See CANINE Chapter 35 (Disposition of Collateral in Satisfaction of a Secured Debt).  New section 9-602(7) generally does not allow a debtor to contract away the right to be sent reasonable notification and under new section 9-624 the right may be waived only by an agreement to do so after a default.  See CANINE Chapter 35 (Disposition of Collateral in Satisfaction of a Secured Debt).

Finally, under new section 9-626(a)(3) and (a)(4), in other than consumer transactions, the rebuttable presumption approach applies to situations in which the secured party fails to prove it has acted in a commercially reasonable manner. Under that approach rather than being barred from recovering a deficiency a secured party may prove that a deficiency would have resulted even if the secured party had complied with Article 9.  See Chapter 38 (Remedies for a Secured Partys Failure to Comply with Article 9).


 

Genesee Regional Bank v. Palumbo, 779 N.Y.S.2d 883 (N.Y. Supreme Court 2005)

This case illustrates the extent to which certificate of title statutes affect not only what steps must be take to perfect a security interest in a vehicle subject to a statutory lien notation scheme but also may impact the operation of Article 9 rules offering certain buyers protection against certain security interests.  It further illustrates the point made repeatedly in the CANINE materials, see Chapter 17 (Perfection as to Goods Subject to Certificate of Title Legislation) and Chapter 24 (Continuing Perfection Changes as to the Use of Collateral or in the Location of Collateral or Debtor; Security Interests in Proceeds), that certificate of title statutes can vary in important respects from state to state and underscores the critical need to examine the governing certificate of title statute with great care.  The case also emphasizes the point that creditors taking a security interest in a vehicle covered by a statute requiring lien notation must be sure that the proper steps are taken to assure that a certificate of title noting the creditors lien are taken and that such a certificate is in fact issued.

Insofar as it is possible to glean the operative facts from the opinion, it appears that an auto dealer licensed in New York only to sell used vehicles engaged in a fraudulent scheme whereby the dealer was able to dupe several lenders into making loans to finance not just one but two sales of a new vehicle to the wife of the dealer (actually the wife of the principal shareholder and CEO of the dealership).

A bank (Bank 1) financed the purchase by the dealer of a new vehicle from another dealer and took a security interest in the vehicle to secure its unpaid price.  Bank 1 retained the Manufacturers Certificate of Origin without which under governing New York law it was not possible to obtain a New York certificate of title covering the vehicle.  Bank 1, however, failed to file a financing statement to perfect its security interest, which the court concluded Bank 1 was required to do under the inventory exception to the lien notation scheme in the certificate of title statute and in new section 9-311(d).  As to the lien notation perfection scheme and the exception, see CANINE Chapter 17 (Perfection as to Goods Subject to Certificate of Title Legislation).

The dealer then sold the vehicle to his wife, took a security interest in the vehicle and assigned the security agreement to another bank (Bank 2).  The dealer was responsible for obtaining a New York certificate of title noting Bank 2s security interest but the dealer never did so (and, in fact, could not do so without paying Bank 1 and getting the Manufacturers Certificate of Origin).

Some months later the dealer sold the vehicle to his wife again.  The dealer then assigned to a credit union the security interest previously assigned to Bank 2.  In the meantime, the wife somehow managed to obtain a Maryland certificate of title covering the vehicle and used the Maryland title to obtain a New York title noting the credit unions security interest.

Eventually the dealer defaulted and Bank 1, Bank 2, the credit union and the wife ended up in a priority dispute as to the vehicle.  The court first decided that the wife did not take free of Bank 1s security interest under new section 9-320(a) because under the New York certificate of title statute a transfer of a vehicle was not effective unless accompanied by a transfer of a title covering the vehicle.  In short, the protection given to a buyer in ordinary course by new section 9-320(a) was negated by the requirement in the New York title statute that a transfer of a vehicle was not effective without a transfer of the certificate of title.  Apparently, for reasons not set out in the opinion, the court concluded that the New York certificate of title obtained using the Maryland certificate of title was not sufficient to satisfy the transfer requirement.  But, the court adds that even if there was a transfer for purposes of new section 9-320(a), the wife did not qualify as a buyer in ordinary course because the dealer was not licensed to sell new vehicles in New York and the sale, therefore, was not in ordinary course because it was not made according to the usual and customary practices of the dealer within the meaning of the definition of a buyer in ordinary course in revised Article 1, section 1-201(b)(9).

As for who as between Bank 1, Bank 2 and the credit union was entitled to the vehicle, the court awarded priority to Bank 1.  According to the court, the credit unions security interest was not perfected because, again, there was no effective transfer of the vehicle under New York law and neither the New York certificate of title or the notation of the credit unions security interest thereon required by new section 9-311(b) was effective.  Bank 2s security interest was not perfected because there had been no notation of its security interest on a New York certificate of title, again as required by new section 9-311(b).  But, Bank 1s security interest was not perfected either.  As noted earlier, under new section 9-311(d), Bank 1 was required to file a financing statement as to its security interest in the vehicle and it failed to do so.  Consequently, Bank 1, Bank 2 and the credit union all held unperfected security interests.  However, Bank 1s security interest attached first and it had priority under new section 9-322(a)(3).

As a gesture of consolation, the court observes that if the wife was duped then she has an action against the dealer for breach of contract and for breach of warranty of good title under Article 2, section 2-312 and the wife would be able to assert her defense against the credit union under new section 9-404 according to which defenses and claims an account debtor has against an assignor may be asserted against an assignee.  As to the last point, see CANINE Chapter 37 (Foreclosure as to Intangibles).  The other losers, the court added, had actions for breach of warranty and fraud against the dealer.

For completeness, it should be noted that insofar as Bank 1s security interest was not perfected, the wife might have been able to make a claim under new section 9-317(b) protecting buyers not in ordinary course against unperfected security interests.  However, the wife would have had to prove she had no knowledge of Bank 1s security interest and whether she would be able to do so is not clear.  In any event, the argument apparently was not made.


 

Counseller v. Ecenbarger, Inc., 834 N.E.2d 1018 (Ind. App. 2005)

In this case a secured party with a security interest in all of a debtors property (the security agreement was never produced, but the scope of the security interest was not an issue) filed a FS describing the collateral as [a]ll Debtors presently owned or hereafter acquired assets, including, without limitation, . . . deposit accounts . . . and all products and proceeds of the foregoing.  The debtor owned deposit accounts that were subjected to a garnishment subsequent to the creation of the security interest and filing.  The lower court held that the lien creditors interest was superior.

The appellate court affirmed.  In so doing, it invoked new section 9-312(b)(1) under which a security interest in a deposit account as original collateral may be perfected only by control under 9-104 and the secured party did not have control of the accounts.  The secured party argued that the deposit accounts were proceeds of inventory but did not offer evidence to establish that the deposit accounts were anything more than general business accounts used for paying daily operating expenses and, more specifically, that the deposit accounts contained proceeds of inventory.  There was no discussion of LIB of proceeds approach to reaching proceeds in a deposit account in which proceeds have been commingled with non-proceeds because the secured party failed to offer any evidence that would present a tracing issue under new sections 9-315(a)(2) and 9-315(b)(2).  As to the LIB of proceeds approach, see CANINE Chapter 9 (The Specifics of Enforceability After-acquired Collateral, Future Advances, Transferred Collateral and Proceeds, and the New Debtor Problem).

The secured party also argued that the deposit accounts contained funds from other deposit accounts.  But, the court correctly points out that perfection under 9-315(c) requires that the security interest in the original collateral have been perfected and the secured party did not have control of these other accounts.  As to perfection of security interests in deposit accounts, see CANINE Chapter 22 (Perfection as to Deposit Accounts, Letters of Credit Rights and Electronic Chattel Paper).  As to perfection of a security interest in proceeds, see CANINE Chapter 16 (Perfecting Security Interests in Proceeds and Other Later-Acquired Property) and Chapter 24 (Continuing Perfection Changes as to the Use of the Collateral or in the Location of the Collateral or the Debtor; Security Interests in Proceeds).

As for denying the secured party priority over the lien creditor, the court mistakenly relies on 9-327 rather than 9-317, a mistake made early on under former A9 where courts failed to distinguish lien creditor disputes and disputes between secured parties.  Compare CANINE Chapter 26 (Secured Party Versus Lien Creditor; Future Advances; Bankruptcy) with CANINE Chapter 28 (Secured Party Versus Secured Party).


 

Missouri State Credit Union v. Wilson, 176 S.W.3d (Mo. App. 2005)

This case raises interesting issues regarding a secured partys options on default.  The key section is 9-601 under which a creditor [m]ay reduce a claim to judgment, foreclose, or otherwise enforce the claim, security interest, or agricultural lien by any available judicial procedure.  The case involved a debt for the purchase of a pick up truck and a credit card debt, both of which were secured by an interest in the truck.  The debts were incurred essentially at the same time under an umbrella agreement.  The debtor defaulted on both debts at the same time.  The court says this was essentially a coincidence.  The secured party sent the debtor notice that the truck would be sold in fifteen days but sold it in eleven days.  The parties stipulated that the notice was defective.  The sale resulted in a deficiency.  The secured party sued for a deficiency and for the full amount of the credit card debt in a two-count action.  The lower court denied a deficiency as to the truck debt applying the absolute bar rule without discussion of 9-626.  It entered judgment on the credit card debt in favor of the secured party.

The question on appeal was whether the absolute bar rule should apply to both debts secured by the same collateral.  The debtor relied on 9-615(a) providing that A secured party shall apply or pay over for application the cash proceeds of disposition under [9-610] in the following order to: . . . (2) The satisfaction of obligations secured by the security interest under which the disposition is made.  The secured party argued that the under which the disposition is made language means that the proceeds need only be applied to the loan as to which the foreclosure sale occurred.

The appellate court agreed with the secured party.  It concluded that to hold otherwise would deny a secured party the options available under new section 9-601.  For the court, the two debts were distinct and separate even though they were incurred under the same agreement and were secured by the same collateral.  The court says that for the absolute bar rule to work there must be strict compliance with the notification and that here the notification referred only to the truck debt.  As to the absolute bar rule the court again does not mention 9-626 but says it is based on the fact that deficiencies were unknown at common law and statutes in derogation of the common law must be strictly construed.

The appellate court relied heavily on two Texas courts decided under former Article 9 that presented similar facts.

To the extent that the outcome depended on the courts insistence that the debts were separate even though they were incurred under the same umbrella agreement and secured by an interest in the same collateral, one wonders how the fact that a debt was incurred pursuant to a future advance clause might affect the analysis.  As to future advance clauses, see CANINE Chapter 9 (The Specifics of Enforceability After-acquired Collateral, Future Advances, Transferred Collateral and Proceeds, and the New Debtor Problem)


 

AKA Management, Inc. v. Branch Banking and Trust Co., 621 S.E.2d 576 (Ga. App. 2005)

In this case the basic question in this case was whether it was error for a trial court to rule a disposition to be commercial reasonableness as a matter of law.  The question arose in a suit for a deficiency against guarantors.  The collateral involved was laundry equipment used in a laundry business that failed.  The landlord obtained a writ evicting the debtors from the premises and advised the debtors that the equipment would be tossed on to the street if it was not removed.  Pursuant to a special Georgia law the secured party (a bank) informed the debtors that they had ten days to cure the default.  The debtors failed to do so.  The secured party contacted several laundry professionals seeking offers to buy the equipment.  They received two offers and the bank accepted the highest offer.

The court discusses 9-610 and 9-627 regarding both when a disposition is commercial reasonableness and the role of a low price, but it does not decide the case on the basis of the disposition being deemed commercial reasonableness.  Rather, the court affirms the lower courts ruling that the disposition was commercial reasonableness as a matter of law.  It does so on the ground that although commercial reasonableness is ordinarily a matter of law where the secured party makes out a prima facie case that a disposition is commercial reasonableness the debtor must rebut the case.  Here, the debtors offered only the testimony of one of the guarantors.  The court states that direct testimony as to value is admissible but must be probative.  To be probative, the witness must have some expertise as to the collateral and provide reasons for its conclusions.  Here the witness was an information technology expert who had expertise with regard to sales of computer equipment and not laundry equipment and the formula it used for calculating the value of the equipment was for computer not laundry equipment.

Although the court refers to the limitation in 9-627(b) regarding a low price it appears to believe that had the debtors offered probative evidence that the price was not fair there would at least be a question of fact as to whether the disposition was commercial reasonableness.  The court also appears to be prepared to apply the absolute bar rule contrary to 9-626(a).  The court refused to consider an argument that the acceleration and default were not in good faith because the issue was not raised in the trial court.  There was no discussion of whether the debtors/guarantors had been sent the notification that there would be a disposition after a stated date as required by new section 9-613(1)(E) as to a private sale (which this apparently was).  However, the debtors/guarantors seemed well aware of the disposition and the question may not have been raised.  As to commercial reasonableness and the need for reasonable notification, see CANINE Chapter 35 (Disposing of Collateral to Satisfy a Secured Debt).


 

In re Judith Baker, 430 F.3d 858 (7th Cir. 2005)

The court in this case deals with the complex issues associated with continuing perfection of security interests in vehicles covered by certificates of title.  The debtor bought a vehicle in New Mexico.  The purchase was financed by a lender whose interest was noted on a New Mexico certificate of title thereby perfecting the security interest.  It is not stated in the facts who applied for the title.  Shortly after the purchase the debtor moved to Wisconsin and took the vehicle to Wisconsin.  The debtor registered the vehicle in Wisconsin, but she never applied for a Wisconsin certificate of title.  Apparently, Wisconsin allows a vehicle to be registered even though there is an outstanding title from another jurisdiction covering the vehicle.  Three years after moving to Wisconsin the debtor filed bankruptcy.  The trustee sought to avoid the security interest under BRA § 544.

The trustee argued that new section 9-316(a) controlled and because the lender failed to perfect the security interest in Wisconsin within four months after the debtor had relocated the security interest ceased to be perfected.  The court rejected the argument.  According to the court, new section 9-316(a) applies only to goods other than those covered by a certificate of title and the lenders security interest continued to be perfected in Wisconsin so long as the New Mexico title covered the vehicle.  In reaching this conclusion the court reasoned that the introductory language of new section 9-301(1), the section providing the rules that generally apply for determining the law governing perfection and non-perfection, is subject to new section 9-303 and under new section 9-303(c) the local law of the jurisdiction issuing a certificate of title covering the goods (here New Mexico) governs perfection and non-perfection until the goods cease to be covered by the certificate of title.  The court adds that had a Wisconsin title been issued the result might be different, referring to new section 9-316(d).  The court sought to reinforce its conclusion by opining that it is the owner-debtors responsibility to obtain a new title when the vehicle is moved to another jurisdiction and the secured party does not have any responsibility to keep track of the location of the vehicle or to see that a new title is issued when the vehicle is taken to another jurisdiction.

The opinion and decision in the case are interesting in a number of respects.  To begin with, the courts analysis of the application of new sections 9-303 and 9-316 to security interests in vehicles covered by certificates of title appears to be correct.  See CANINE Chapters 17 (Perfection as to Goods Subject to Certificate of Title Legislation) and 24 (Continuing Perfection Changes as to the Use of the Collateral or in the Location of the Collateral or the Debtor; Security Interests in Proceeds).  However, the outcome may well have been the same even if the debtor had acquired a Wisconsin certificate of title because under new section 9-316(d) perfection obtained by action in another jurisdiction continues in the state issuing the certificate of title until the security interest becomes unperfected under the law of the other state had the certificate of title not been issued.

The unanswered question is whether under New Mexico law perfection would cease when a title is issued by another state (or when the New Mexico title is surrendered or both).  If perfection would continue under New Mexico law even upon surrender of the New Mexico title or issuance of a Wisconsin title then under new section 9-316(d) the security interest would continue to be perfected in Wisconsin even if a Wisconsin title had been issued.  In this regard, as explained in CANINE Chapter 24 (Continuing Perfection Changes as to the Use of the Collateral or in the Location of the Collateral or the Debtor; Security Interests in Proceeds), upon the issuance of the Wisconsin title Wisconsin and not New Mexico law would govern perfection under new section 9-303(c) but new section 9-316(d) is part of Wisconsin law and under that section the perfection obtained by lien notation in New Mexico would continue in Wisconsin.  It should be added that new section 9-316(d) is subject to new section 9-316(e) under which a security interest becomes unperfected against a purchaser and is deemed never to have been perfected against a purchaser if the security interest is not perfected within four months after the goods have become covered by a new certificate of title (or earlier if the security interest would have become unperfected under the law of the jurisdiction issuing the original certificate of title, for example, because of the issuance of the new title).  Thus, under new section 9-316(e) if a Wisconsin title had been issued and the security interest was not noted on the title then the security interest would be at risk against a purchaser in Wisconsin.  However, as also explained in CANINE Chapter 24 (Continuing Perfection Changes as to the Use of the Collateral or in the Location of the Collateral or the Debtor; Security Interests in Proceeds), a trustee in bankruptcy is a lien creditor and not a purchaser so new section 9-316(e) would not apply on the facts of the Baker case.

The courts comments about the responsibility of a secured party to monitor the whereabouts of a debtor and vehicle and to apply for a new title also deserve comment.  According to the courts opinion, if a Wisconsin title had been issued then the secured party would have to worry about the debtor and vehicles location and about perfection in Wisconsin.  It is not apparent why the secured partys need to try to monitor the debtor and vehicles location should depend on whether or not a certificate of title has been issued in a jurisdiction to which the debtor and vehicle have moved.  It may not be terribly realistic to expect a creditor holding hundreds or even thousands of security interests in vehicles subject to certificate of title legislation to learn the whereabouts of a debtor and vehicle in time to act within the time limits imposed by new sections 9-316(d) and (e), but a creditor is nonetheless well-advised to do so to the extent practicable.

For completeness, it is worth noting that under former section 9-103(2) registration of a vehicle in another jurisdiction triggered the four-month period within which a secured party might have to act to protect its interest.  By contrast, as illustrated by the Baker case, under new Article 9 it is the issuance of a new title that is significant for purposes of determining which states law governs perfection and non-perfection.


 

Federal Express Credit Union v. Lanier, 2005 WL 2806638 (Tenn. App. 2005) (slip copy)

The court in this case addresses the question of reasonable notification and, specifically, when sending notification is not enough and a creditor must make additional efforts beyond sending notification when it knows the debtor has not received the notification.  Although the court rejects the debtors argument that notification must be received, the courts opinion comes close to imposing such a requirement.  Although all the events in the case, including the filing of the suit for a deficiency that is the focus of the decision, occurred before the effective date of new Article 9, the court without explanation applies new Article 9.  The court indicates that the reasonableness of notification is a question of fact.  There were a number of disputed facts.  The agreed upon facts that the court looked to in rendering its decision were that the creditor knew the debtor was out of the country when it mailed the notification to the debtors home address and the creditor proceeded with a sale when it had yet to receive a certified mail return receipt indicating that the debtor had or had not received the notice sent to his home address.  The court concluded that on these facts the notification was not reasonable and reversed the trial courts conclusion in favor of the secured party.

The court refers to new section 9-611(b) requiring that persons entitled to notification be sent a reasonable authenticated notification of disposition and on Official Comment 2 to new section 9-611 indicating that a notification must be reasonable as to the manner in which it is sent.  It also relies on Article 1, section 1-201(26) (now section 1-201(b)(26)) providing that a person notifies or gives notice or notification by taking such steps as may be reasonably be required to inform the other person in the ordinary course whether or not such person actually comes to know of it.  The court discusses what it considers a split of opinion as to what efforts a secured party must make but concludes that in Tennessee merely sending notification is not enough and there are cases holding that when the secured party knows the debtor has not received the notification one attempt at notification followed by a sale a short time later does not satisfy the reasonable notification requirement.

The court relies especially on a case where the creditor proceeded to sell the collateral ten days after sending notice and without receiving any indication that the debtor had received the notification.  In Lanier, the creditor sold the collateral seventeen days after sending notification.  As explained in CANINE Chapter 35 (Disposing of Collateral to Satisfy a Secured Debt), under new section 9-612(b) ten days is deemed to be reasonable with regard to the timeliness of notice but the section does not apply in a consumer transaction.  The court reinforced its decision by noting Lanier was a clearer case because the creditor knew the debtor was out of the country.

What is unclear from the courts opinion, as is so as to other such cases, is exactly what extra effort a creditor must make beyond sending notification.  Sending notification return receipt is advisable, but the question then is what must the creditor do if it does not receive an indication as to whether the notification was received or not.  At least in Tennessee, and to be safe, elsewhere as well, a creditor who knows the debtor has not received notification should make some effort to find out why and take such steps as are reasonably necessary given what it learns.

Interestingly, having concluded that the trial court erred as a matter of law in concluding that the notification was reasonable, the court did not hold for the debtor on the question of whether the creditor was entitled to a deficiency.  Rather the court remands for further findings.  In doing so, the court concludes that reasonable notification is but one element of commercial reasonableness and the creditor could meet its burden of establishing that the disposition was commercially reasonable thereby entitling it to a deficiency.  Although, as discussed in CANINE Chapter 35 (Disposing of Collateral to Satisfy a Debt), new section 9-610(b) does require that every aspect of a disposition of collateral, including the method, manner, time, place, and other terms, must be commercially reasonable the elaborate scheme with respect to notification in new sections 9-611, 9-612, 9-613 and 9-614 of new Article 9 indicate that the failure to meet the reasonable notification requirement is of itself enough to render a disposition defective.  Courts under former and new Article 9 have proceeded as if this is so.  See CANINE Chapters 35 (Disposing of Collateral to Satisfy a Debt) and Chapter 38 (Remedies for a Secured Partys Failure to Comply with Article 9).

The court without elaboration indicates that on remand the trial court should determine whether the debtor is entitled to statutory damages under new section 9-625.  New sections 9-625(c) and (d), providing for statutory damages for certain specified failures by a secured party to comply with Article 9, do not include failures to send reasonable notification or dispose of collateral in a commercially reasonable manner.  See CANINE Chapter 38 (Remedies for a Secured Partys Failure to Comply with Article 9).  Presumably then, the court had in mind new section 9-625(c)(2) under which a debtor may in any event recover the finance charge plus ten percent of the cash price where the collateral constitutes consumer goods.  See again, Chapter 38 (Remedies for a Secured Partys Failure to Comply with Article 9).


 

Citicorp Leasing, Inc. v. United American Funding, Inc., 2005 WL 1847300 (S.D.N.Y. 2005) (Not reported in F. Supp. 2d)

This case deals with the liability of guarantors on a secured loan who have signed an unconditional guaranty purporting to waive all defenses with respect to the disposition of collateral and decisions regarding whether to sue the debtor or guarantor or to foreclose under Article 9.  Distinguish waiver of defenses in assignments.  The court first concludes that the guarantors have waived all claims and counterclaims and are liable without qualification but then says they may raise a commercial reasonableness objection as a set off.  The court remands on the question of whether the secured party gave sufficient notice and otherwise disposed of the property in a commercial reasonableness manner.  The facts do not indicate what, if any, notice of the disposition was sent to the guarantors.

Although the suit for the deficiency was after the effective date for new Article 9 the court decides the case based upon former Article 9 and especially former section 9-504.  It says nothing about why.

What is most interesting about the decision is the extent to which the court separates the guarantors liability under the guarantee agreement (the unconditional guarantee) and the Article 9 issues.  There was some question under former Article 9 as to what duties were owed to guarantors by secured parties, but most courts concluded that they were entitled to notification.  Also, the obligation to dispose of collateral in a commercially reasonable manner could not be waived by a debtor under former 9-501(3) and the court in Citicorp Leasing holds that the obligation may not be waived as to guarantors.  As explained below, the treatment of guarantors under new Article 9 would seem to make the type of separation engaged in by the court improper.  

Under new Article 9 the uncertainty about who is a debtor and who has some other relationship to the transaction that existed under former Article 9 has been largely eliminated by the definition of debtor in new section 9-102(a)(28), under which only a person with an interest in the collateral can be a debtor.  See Official Comment 2 to new section 9-102 and CANINE Chapter 8 (The Specifics of Enforceability).  As for guarantors, new Article 9 defines obligor in new section 9-102(a)(59) essentially as a person who owes payment of the obligation.  A debtor can be an obligor and in such a case will the primary obligor.  New Article 9, section 9-102(a)(71) adds a definition for a secondary obligor and under the definition a person whose obligation is secondary (or who has a right of recourse with respect to an obligation) is a secondary obligor.  A guarantor clearly falls within this definition.  According to Official Comment 2 to new section 9-102, secondary obligors are persons who have a stake in the proper enforcement of a security interest because of their obligation to pay the secured debt.  The comment refers to the Restatement (3d) Suretyship and Guaranty § 1 (1996) as containing a useful explanation of the concept of a secondary obligor.  But, the important point is that there is no indication in the new Article 9 scheme that a guarantee agreement can somehow trump the provisions of Article 9 pertaining to secondary obligors.

Under new section 9-602 (7), a debtor or obligor may not waive or vary the rules regarding the disposition of collateral, including those governing notification, except as provided in new section 9-624.  New section 9624(a) allows a debtor or secondary obligor to waive the right of notification of a disposition of collateral only by an agreement to that effect entered into and authenticated after default.  See CANINE Chapter 35 (Disposing of Collateral to Satisfy a Debt).  As noted earlier, new sections 9-602 and 9-624 together mean that a secondary obligor may not waive the requirement of commercial reasonableness even after default.

Consequently, it would seem, that the scope of a guaranty agreement, unconditional or otherwise, is not controlling and rather Article 9 governs the rights and remedies of a guarantor with regard to the right to a commercially reasonable disposition and any remedy for the failure of the secured party to comply with the requirement.  In an important sense the outcome in Citicorp Leasing is consistent with the Article 9 scheme, but the court should have limited its analysis to the protections given to secondary obligors under Article 9 and the Article 9 remedies for a secondary obligor when those protections are not honored.  In particular, as to remedies, the court should have looked to new section 9-626 dealing with the recovery of a deficiency and specifying that the secured party has the burden of proof as to commercial reasonableness once the issue has been raised and also what happens when the secured fails to meet its burden.  As explained in CANINE Chapter 38 (Remedies for a Secured Partys Failure to Comply with Article 9), new 9-626(a) adopts the rebuttable presumption approach to the calculation of deficiencies in other than a consumer transaction but in new section 9-626(b) leaves it to the courts to fashion rules for determining a deficiency in a consumer transaction.

The transaction in Citicorp Leasing appeared to be a consumer transaction as defined in new section 9-102(a)(26) and, therefore, the court should have explicitly addressed the question of how a deficiency should be calculated in such a transaction as required by new section 9-626(b).  As explained in CANINE Chapter 38 (Remedies for a Secured Partys Failure to Comply with Article 9) courts under former Article 9 took essentially three approaches to determining a deficiency when a secured party failed to satisfy the requirement of commercial reasonableness.  One was the absolute bar rule, under which a secured party was denied the right to a deficiency.  A second approach was the rebuttable presumption approach, codified in new section 9-626(a) for other than consumer transaction, and under which a secured party could recover a deficiency to the extent that it could prove that the disposition would have brought no more even if the secured party had complied with Article 9.  The third approach was that a secured party could recover a deficiency but the amount of the deficiency would be reduced to the extent that the debtor (or guarantor) had a claim for damages resulting from the secured partys failure to comply.  Implicitly, the court in Citicorp Leasing adopted the third approach, allowing the debtor or guarantor to offset against any deficiency damages to which debtor or guarantor was entitled as a result of the secured partys failure to comply with Article 9.  However, the court should have resolved the issue of a deficiency by reference to new Article 9, section 9-626(b), and made clear what it was doing.

A final point of interest with regard to the decision in Citicorp Leasing is that the under the terms of the guaranty agreement the guarantors waived their right to a jury trial as to the determination of a deficiency.  Article 9 does not speak to the issue of the right to a jury trial, but given that commercial reasonableness is a fact question except to the extent that reasonable parties could not disagree that the disposition was commercially reasonable or not or because the disposition fell within one of the specific situations spelled out in new section 9-627(b) in which a disposition is deemed to be commercially reasonable and because, as noted above, the rights of a guarantor should be considered under Article 9 and not according the terms of a guaranty agreement, it seems that the court should not have so readily given effect to the waiver of a right to a jury trial in the guaranty agreement.  However, the question is one the answer to which is not all that clear.


 

Orix Financial Services, Inc. v. Thunder Ridge Energy, Inc., 2006 WL 587483 (S.D.N.Y. 2006) (Slip Opinion)

In this case the court deals with the liability of guarantors.  The district court adopts the substantive conclusions of the magistrate.  As did the court in Citicorp Leasing, Inc. v. United American Funding, Inc., 2005 WL 1847300 (S.D.N.Y. 2005) (Not reported in F. Supp. 2d), discussed separately in the Case Commentary, the court held that an unconditional waiver is effective against a guarantor to preclude raising a variety of defenses.  An apparent difference between this and the Citicorp Leasing case is that the party seeking a deficiency against the guarantors was an assignee.  It seems there is what amounts to a waiver of defense clause but there is no mention of new section 9-403.  As to waiver of defense clauses, see CANINE Chapter 37 (Foreclosure as to Intangibles). The court also held that the guarantors waived notification but there is no reference to new sections 9-602 or 9-624.  It is held that the requirement that a disposition be commercially reasonable cannot be waived, but there is no reference to 9-602.  Instead the report of the magistrate says a guarantor cannot be liable for more than the principal.  The inference is that the requirement of commercial reasonableness cannot and was not waived by the debtor.  An interesting feature of the decision is that the security agreement provided when a security agreement is commercially reasonable and this provision was held to make the disposition commercially reasonable because the standards agreed to were not manifestly unreasonable under new section 9-603.  As to the requirement that dispositions be commercially reasonable, see CANINE Chapter 33 (A Secured Partys Options on Default) and Chapter 35 (Disposing of Collateral to Satisfy a Secured Debt).

This decision and the Citicorp Leasing case raise the question of the extent to which a guarantor may waive in a guaranty that rights that may not be waived under Article 9.  As explained in connection with the Citicorp Leasing case it seems that Article 9 ought to control to the extent that liability is affected by the secured partys actions with respect to the collateral.  As noted the difference is that in this case there is an assignment and what amounts to a waiver of defense clause.  According to the decision in Orix Financial Services as to a guarantor a waiver of defense clause may result in liability of a guarantor to an assignee free of defenses available against the assignor, but as is true of a waiver of defense clause where an account debtor is involved the waiver cannot include the right to a commercially reasonable disposition.  See CANINE Chapter 33 (A Secured Partys Options on Default), Chapter 35 (Disposing of Collateral to Satisfy a Secured Debt) and Chapter 37 (Foreclosure as to Intangibles).


 

Knutson v. Walker and Associates, Inc., 2005 WL 1950202 (D. Colo. 2005) (Not reported in F. Supp. 2d)

This case, as do Citicorp Leasing, Inc. v. United American Funding, Inc., 2005 WL 1847300 (S.D.N.Y. 2005) and Orix Financial Services, Inc. v. Thunder Ridge Energy, Inc., 2006 WL 587483 (S.D.N.Y. 2006), discussed separately in the Case Commentary, involves the liability of an unconditional guarantor, but the issue arises in the context of a surrender of collateral that implicate the retention in satisfaction of the debt provisions and also the application of the rules for determining the amount of a deficiency in new section 9-626 where a secured party foregoes foreclosure of its security interest and sues the guarantor directly.  The decision thereby casts some light on the question of the effect of a guarantors agreement that was discussed in the connection with the Citicorp Leasing, Inc. v. United American Funding, Inc., 2005 WL 1847300 (S.D.N.Y. 2005) and Orix Financial Services, Inc. v. Thunder Ridge Energy, Inc., 2006 WL 587483 (S.D.N.Y. 2006) cases.  Knutson also involved the application of new section 9-620 governing acceptance of the collateral in satisfaction of a debt.

In the Knutson case, after default the guarantor voluntarily surrendered to the secured party physical assets the value of which was in dispute.  The guarantor argued that the secured party had accepted the collateral in satisfaction of the debt under 9-620 and failed to comply with the requirements of retention, including especially the need to propose retention and notify certain parties of the intent to accept in satisfaction of the debt thereby triggering the rules regarding a deficiency found in new section 9-626.  As to the acceptance in satisfaction of the debt scheme established by new Article 9, see Chapter 36 (Acceptance of the Collateral in Full or Partial Satisfaction of the Debt).  As to the operation of new section 9-626 and the adoption of the rebuttable presumption approach to calculating deficiencies in other than consumer transactions, see Chapter 38 Remedies for a Secured Partys Failure to Comply with Article 9).

It should be noted that under new section 9-621(b), a secondary obligor (guarantor) is entitled to notification only where an acceptance in partial satisfaction of the debt is sought.  However, it seems this point was not raised by the secured party and the court disposed of the guarantors arguments on different grounds.  As to the argument that the secured party had engaged in an acceptance of the collateral in satisfaction of the debt, the court properly concluded that new Article 9 rejects the view of some courts under former Article 9 that a secured party may involuntarily accept collateral in satisfaction of the debt.  In so doing the court did not expressly invoke new section 9-620(b), under  which a purported or apparent of collateral is ineffective unless . . . (1) the secured party consents to the acceptance . . . and (2) the conditions of subsection (a) [setting forth the procedural requirements of an effective acceptance] are met.  However, the court did refer to Comment 5 to new section 9-620 dealing with the need for the secured partys consent and expressly notes that a debtors voluntary surrender of collateral to a secured party and the secured partys acceptance of the collateral does not, of itself, necessarily raise an implication that the secured party intends or is proposing to accept the collateral in satisfaction of the secured obligation [under new section 9-620].  Presumably, the of itself language indicates that the total circumstances could support a conclusion that the secured party in fact intended or was proposing an acceptance of the collateral in satisfaction of the debt, but such a conclusion could not be drawn from the facts in Knutson.

The courts disposition of the new section 9-626 argument regarding the calculation of a deficiency is of perhaps greater interest in that it sheds light on the extent to which Article 9 exclusively governs the liability of a guarantor (or debtor).  The court notes that the new section 9-626 determination of the amount of a deficiency is rebuttable and there was evidence rebutting the presumption that the collateral was worth the amount of the secured obligation.  But, more importantly, the court concludes that new section 9-626 applies only where the secured party has chosen to foreclose its security interest and where, as in Knutson, the secured party opts instead to sue on the debt and essentially forego its secured claim that section does not apply.  As to the rebuttable resumption approach to calculating deficiencies, see CANINE Chapter 38 (Remedies for a Secured Partys Failure to Comply with Article 9).

The court could have reinforced its judgment by invoking new section 9-601, under which a secured party may a claim to judgment, foreclose, or otherwise enforce the claim and that the rights to do so are both cumulative and may be exercised simultaneously.  Where a secured party chooses to sue on the debt rather than foreclose its security interest a guaranty agreement, the terms of which waive certain counterclaims, could effectively preclude a guarantor from raising those claims as a defense to the secured partys suit or in an effort to obtain affirmative relief.  Thus, for example, Official Comment 8 to new section 9-601 indicates that execution sales are governed by other law and not Article 9 and Official Comment 3 to new section 9-625 states that the principles of tort law supplement the damage relief available under Article 9 (but, to the extent that tort law compensates for the same loss dealt with in Article 9 then there can be only one recovery).  As to the secured partys options on default and the waiver question, see CANINE Chapter 33 (A Secured Partys Options on Default).

It is important to understand that to the extent that a secured party seeks to satisfy its claim out of the collateral Article 9 does apply.  In particular, as noted in the discussion of the previous two cases, under new section 9-602 the requirement that a disposition be made in a commercially reasonable manner cannot be contracted away and under new section 9-624 the right to be sent reasonable notification may be waived only in an agreement entered into after default.  The court in Knutson does not decide how the fact that the secured party took possession of certain collateral should affect the guarantors liability and rather refuses to grant summary judgment on the issue to the secured party on the ground that there were genuine issues of material fact that had to be resolved.  But, whatever the secured party does with the collateral must be done in compliance with the foreclose rules of Article 9 as it has only a lien interest as to that property until the debtors ownership interest is extinguished consistently with the foreclosure rules of Article 9.  See CANINE Chapter 33 (A Secured Partys Options on Default) and Chapter 35 (Disposing of Collateral in Satisfaction of a Secured Debt).


 

Mackela v. Bentley, 614 S.E.2d 648 (S.C. App. 2005)

In this case an owner of a vehicle who wished to buy another vehicle from a dealer placed his vehicle on the dealers lot on the understanding that the dealer would show the vehicle to potential buyers, but although the owner expected he would be compensated if the vehicle was sold there was no agreement providing for any compensation and the dealer did not have authority to actually sell the vehicle.  A secured party holding a security interest in the dealers inventory of vehicles levied on and took possession of the dealers vehicles and also the owners vehicle.  The secured party in Mackela refused a demand by the owner to return the vehicle to the owner on the ground that the vehicle had been delivered on consignment and new section 9-102(a)(12) defines collateral to include goods that are the subject of a consignment.

As discussed in CANINE Chapter 10 (The Need for Value and Debtors Rights in the Collateral), a debtor who is in possession of goods under a consignment has sufficient rights in the goods to create an enforceable security interest in the goods and to allow the security interest to attach to the consigned goods.  However, as also explained in CANINE Chapter 10 a debtor who is a simple bailee and does not have possession and a contingent right of ownership does not have sufficient rights in the goods to allow a security interest to attach.

On the facts of the Mackela case it would seem the conditions under which the dealer had possession of the vehicle not owned by the dealer were such as to preclude a consignment as consignments generally are understood.  New section 9-102(a)(20) defines a consignment essentially as a transaction in which goods are delivered to a merchant engaged in selling goods of the kind for the purpose of sale and, to this extent, there is some uncertainty as to whether the transaction in the case could fall within the definition.  But, new section 9-102(a)(20)(C) specifically excludes goods that are consumer goods immediately before delivery and the vehicle in this case was used or bought for use primarily for personal, family, or household purposes and therefore constituted consumer goods as defined in new section 9-102(a)(23).  As to when goods are consumer goods, see CANINE Chapter 5 (Classification of Collateral).  On the basis of the exclusion in new section 9-102(a)(20) the court concluded that the secured party had no security interest in the vehicle and its refusal to return the vehicle on demand supported a conversion action for damages by the owner.

As stressed throughout the CANINE materials, and especially as discussed in CANINE Chapter 33 (A Secured Partys Options on Default), a secured party has only a lien interest in collateral and may intrude upon the debtors ownership interest only as permitted by Article 9 meaning, in particular, only after a default and that a secured party who interferes with the debtors ownership interest in the absence of a default risks damages for conversion, including punitive damages.  Where the secured party does not have even a lien interest an action for conversion more clearly lies and the risk of punitive damages is even higher.  In Mackela the court upholds a punitive damages award by a jury.  It indicates that under the controlling state law punitive damages are recoverable in conversion cases if the defendants acts have been willful, reckless, and/or committed with conscious indifference to the rights of others.  It adds that the amount of punitive damages is largely within the discretion of the jury.  That the court affirmed the punitive damages award on the facts of Mackela should give secured partys cause.  On the facts, the secured party believed it had a right to the vehicle as having been delivered on consignment.  Under the courts decision it seems that even a good faith belief that the intrusion on the owners rights was justified was not enough to prevent punitive damages.  In short, a mistake of law was not such as to excuse the secured party and secured parties generally should be sure that their actions are actually supported by the law.  See generally, CANINE Chapter 38 (Remedies for a Secured Partys Failure to Comply with Article 9).


 

First National Bank of Izard County v. Garner, 167 S.W.3d 664 (Ark. App. 2004)

This case addresses the meaning of new section 9-204(c), under which a security agreement may provide that a security interest secures future advances, as applied to a situation where three persons executed a security agreement giving the secured party an interest in a tractor owned by one of the parties and containing a future advance clause and where one of the three parties later incurred a debt without the participation of the other two parties and gave the same secured party an interest in the same tractor to secure the debt.  In the documents supporting the first loan I was defined to mean each borrower who [signed] the note.  The security agreement contained a clause providing that the agreement secures the payment of the note and any additional amounts I am or will become obligated to pay you.  When the party who obtained the later secured loan defaulted the secured party sought to collect the debt from the tractor.

The court of appeals affirmed a decision of the trial court that I in the future advance clause meant all three of the original borrowers and that the security interest in the tractor created by the original agreement covered only debts incurred by all three of the original borrowers.  In so holding the court of appeals read new section 9-204(c) to mean that a security interest covered only future debts intended by the parties to be within the scope of the agreement.  However, the court discussed only cases decided under former Article 9 and it made no reference to Official Comment 5 to new section 9-204, wherein the drafters assert that new Article 9 rejects decisions under former Article holding that a future advance is secured only to the extent that it is of the same type as the original advance.  For an evaluation of this assertion by the drafters, see CANINE Chapter 9 (The Specifics of Enforceability After-acquired Collateral, Future Advances, Transferred Collateral and Proceeds, and the New Debtor Problem).

Presumably, the secured party did not bring Comment 5 to new section 9-204 to the courts attention.  Moreover, the decision might be read as turning more on who was the debtor with respect to secured obligations than on whether the later debt was of the same type as the original debt.  Still, the court of appeals seemed quite comfortable with the conclusion that a future advance clause is to be interpreted according to the intent of the parties as determined by all the circumstances.  And, insofar as the terms of the agreement were important in determining the parties intent the court invoked the axiom that ambiguities are to be construed against the party that drafted the agreement.  See CANINE Chapter 8 (The Specifics of Enforceability A Security Agreement Authenticated by the Debtor or Its Equivalent) and Chapter 9 (The Specifics of Enforceability After-acquired Collateral, Future Advances, Transferred Collateral and Proceeds, and the New Debtor Problem).


 

In re Watson, 286 B.R. 594 (Bkcy D. N.J. 2002)

In this case a debtor who borrowed regularly from a credit union on an unsecured basis signed an agreement containing the following provisions:

SECURITY INTEREST--You agree that all advances under this Plan will be secured by the shares and deposits in all joint and individual accounts you have with the credit union now and in the future. Additional security will be required depending on the subaccount under which an advance is requested.... Property given as security under this Plan or for any other loan may secure all amounts you owe the credit union now and in the future.

THE SECURITY FOR THE LOAN--By signing this security agreement in the signature area or under the statement referring to this agreement which is on the back of the check you received for the advance, you give the credit union what is known as a security interest in the property described in the "Security Offered" section....

 

WHAT THE SECURITY INTEREST COVERS--The security interest secures the advance and any extensions, renewals or refinancing of the advance. It also secures any other advances you have now or receive in the future under the LOANLINER Credit Agreement, any other loans you have with the credit union, including any credit card loan, and any other amounts you owe the credit union for any reason now or in the future, except any loan secured by your principal residence. If the property description is marked with two stars (* *), or the property is household goods as defined by the Credit Practice Rule, the property will secure only the advance and not other amounts you owe.

Subsequently, the debtor borrowed from the credit union to purchase a vehicle and gave the credit union a security interest in the vehicle.  When the debtor defaulted on its unsecured and secured debts the credit union attempted to satisfy all the debts out of the vehicle.

The court held in favor of the credit union.  It noted that the debtors argument that a security interest in later-acquired collateral could be barred enforcement by new section 9-204(b), as discussed in Chapter 9 (The Specifics of Enforceability After-acquired Collateral, Future Advances, Transferred Collateral and Proceeds, and the New Debtor Problem) and Chapter 11 (Enforceability and Attachment of Security Interests in Consumer Transactions), but held that although the case involved cross- collateralization the issue was whether both future and past debts could be secured by an interest in the same collateral.  It then read new section 9-204(c) to permit a future advance clause to reach both past and later advances.  For completeness, it should be noted that insofar as an interest secures a past advance there is the possibility of an avoidable preference in bankruptcy.  See Chapter 30 (Secured Party Versus Trustee in Bankruptcy).

Interestingly, the court looks to Official Comment 5 to new section 9-204 but quotes only that part of the comment prior to the statement that this Article rejects the holdings under former Article 9 that applied other tests, such as whether a future advance or other subsequently incurred obligation was of the same or a similar type or class as earlier advances and obligations.  Consequently, the decision does not represent an endorsement of the drafters attempt to accomplish through an Official Comment a change in the meaning of language in a provision that remains substantively the same as it was under former Article 9.  As to this issue, see again, Chapter 9 (The Specifics of Enforceability After-acquired Collateral, Future Advances, Transferred Collateral and Proceeds, and the New Debtor Problem).


 

 

2009-02-01 update