A. Scope of Article 9 and Existence of a Secured Transaction
– South Lafourche Bank & Trust Co. v. M/VNOONIE G, 2017 WL 2634204 (E.D. La. 2017) – Federal law requires that a preferred ship mortgage state “the amount of the direct or contingent obligations.” It is sufficient if the mortgage states the maximum amount that may be secured. Because the mortgage indicated that secured a line of credit up to a maximum principle amount of $900,000, the mortgage was effective.
– In re Climate Control Mechanical Services, Inc., 570 B.R. 673 (Bankr. M.D. Fla. 2017) – A secured party with a perfected security interest in the accounts of the debtor, a general contractor, encumbered the debtor’s right to the amounts withheld but now due to the debtor under a construction contract. The amounts had not been earmarked for payment of a subcontractor.
– In re Johnson, 2017 WL 2399453 (6th Cir. BAP 2017) – A security agreement describing the collateral as “the payment, proceeds, and rights under and related to” the debtor’s contract to play hockey failed to comply with California Labor Code § 300(b), governing assignments of wages. The security agreement failed to state that there was no other assignment in connection with the transaction. Accordingly, no security interest attached.
– Bank of the Pacific v. F/V ZOEA, 2017 WL 823298 (W.D. Wash. 2017) – The federal Ship Mortgage Act preempts a Washington state law that prohibits the creation of a security interest in commercial shellfish and food fish permits. A preferred ship mortgage granted by the limited liability company covered a Dungeness crab permit appurtenant to a vessel attached to the permit. It did not matter that the owner of the company had the permit titled in his own name and later sold the permit. The owner held title in trust for the limited liability company and the preferred ship mortgage attached and had priority over the rights of the buyer.
* We remember our
good friend Jeff
– In re TSAWD Holdings, Inc., 565 B.R. 292 (Bankr. D. Del. 2017) – Because there was a factual issue about whether a retailer was generally known by its creditors to be substantially engaged in selling the goods of others, summary judgment was not appropriate on whether a transaction by which sporting goods were delivered to a retailer for sale was a “consignment” within the meaning of Article 9, and therefore whether the retailer had the power to grant a security interest in the sporting goods. Although the security agreement provided that it covered only property owned by a retailer, that limited language would not necessarily prevent the security interest from attaching to goods subject to an Article 9 consignment.*
–Mellen, Inc. v. Biltmore Loan and Jewelry-Scottsdale, LLC, 247 F.
Supp. 3d 1084 (D. Ariz. 2017), appeal filed, (9th Cir. Apr. 4, 2017) – The owner of a 4-carat diamond left the diamond “on memo” with a jeweler. The transaction was not a consignment under Article 9 because the agreement provided that the jeweler held the goods “only for examination and inspection by prospective purchasers,” and that the jeweler “acquire[d] no right or authority to sell, pledge, hypothecate or otherwise dispose of” the diamond. Consequently, the pawn broker that bought the diamond from the jeweler did not obtain title under UCC § 9-319. Even if the transaction had been a consignment, the pawn broker purchased the diamond not from the jeweler, but from another person who claimed that the jeweler was his agent.
4. Real Property
– Bowling v. Appalachian Federal Credit Union, 2017 WL 461258 (Ky. Ct. App. 2017) – A credit union’s mortgages on a married couple’s land did not encumber the couple’s manufactured home situated on the land because the mortgages did not list the home. The home remained personal property due to the fact that the couple had not filed an affidavit of conversion and surrendered the certificate of title for the home.
–Schroeder v. Haberthur, 401 P.3d 319 (Wash. Ct. App. 2017) – The Washington Deed of Trust Act could be interpreted consistently with Article 9 of the U.C.C., under which timber to be cut is not a “crop.” Thus the debtor’s forest land was not agricultural property exempt from nonjudicial foreclosure.
–In re Gracy, 689 F. App’x 590 (10th Cir. 2017) – A manufactured home that was anchored to piers and slabs by metal strips and connected to utilities through underground lines was a fixture under the common law even though the certificate of title for the home had not been surrendered. The state statute providing that a manufactured home becomes a fixture if placed on a permanent foundation and the certificate of title is surrendered does not prevent a manufactured home from becoming a fixture in other ways.
– In re Smith, 2017 WL 6372471 (Bankr. W.D. Ky. 2017) – The debtor constructed two pole barns on his property using pole barn nails. The nails have ring shanks making removal impossible. The pole barns were permanent fixtures and thus the mortgagee of the real property had a lien on the insurance proceeds resulting from the destruction of the barns. The barns were not personal property and thus the proceeds were not encumbered by a security interest in the debtor’s equipment.*
–Lapalco Village Joint Venture v. Pierce, 223 So. 3d 691 (La. Ct. App. 2017) – A walk-in freezer and a walk-in refrigerator could be immovable property and not a trade fixture.
– Outsource Services Management, LLC v. Nooksack Business Corp., 2017 WL 1315490 (Wash. Ct. App. 2017) – A corporation that operated a casino on tribal land could grant a security interest in revenue of the facility to a secured party that financed without approval of the Secretary of the Interior. Approval is required for agreements that encumber tribal land but the security interest did not encumber the land. The security interest covered non-gaming revenue and all revenue from operation of the facility, even after the casino was closed.
– In re Lexington Hospitality Group, LLC, 2017 WL 5035081 (Bankr. E.D. Ky. 2017) – A mortgage on the debtor’s hotel did not extend to the rents, which are personal property. The lender’s perfected security interest in accounts did not extend to the cash paid by hotel guests because cash is money, for which possession is the only method to perfect unless it is proceeds of other collateral, and guests’ payment up front in cash did not create an account. The lender’s security interest in credit card receivables generated by hotel guests was not perfected because such receivables are payment intangibles, not accounts, and while the security agreement covered both accounts and general intangibles, the lender’s financing statement covered only accounts. Although the financing statement referenced the security agreement, a reference to a document does not describe what is in the document.*
– In re Carr, 2017 WL 6016215 (Bankr. D.C. 2017) – A secured party’s security interest in a closet system, which became a fixture to the debtor’s home, was perfected by the filing of a financing statement.
5. Personal Property Leasing
– In re Jeff Benfield Nursery, Inc., 2017 WL 358591 (Bankr. E.D.N.C. 2017) – A wholesaler of nursery stock’s delivery of trees to the debtor nursery for planting and cultivation on the debtor’s leased property were disguised financing arrangements. The agreements reserved the nursery’s title to the trees and gave the nursery the unilateral right to select the type and number of trees, determine when they would be delivered to the debtor, direct their maintenance and cultivation, and access the debtor’s leased property. The court characterized the arrangements as financing transactions because all of the planting and maintenance costs that the nursery advanced to the debtor were to be repaid in the form of credits when the trees were finally harvested and sold to the nursery and the nursery ultimately purchased the trees from the debtor at the lesser of a capped price for the particular variety or the trees’ market cost, less all amounts advanced to the debtor as planting and maintenance fees. This formula provided the nursery with the equivalent of interest under a more traditional financing agreement. Additionally, at the end of the agreed term, the debtor was required to repay the nursery all costs advanced for any trees the nursery elects not to purchase. As a result, the nursery would recoup all of its advanced costs, in the form of credits or cash payments, for the trees it elected not purchase, while the debtor bears all the risk of loss and must pay all related insurance costs, fees, and taxes.*
– Western Surety Company v. FutureNet Group, Inc., 2017 WL 227957 (E.D. Mich. 2017) – The factoring of $997,500 in receivables for $750,000 would effectively be a loan at a 24.9% interest rate.
– In re Kittusamy, LLP, 2017 WL 957152 (9th Cir. BAP 2017) – A lessee under an equipment lease had the option to purchase the equipment for $1.00 at the end of the lease term. The transaction was a sale with a retained security interest. Consequently, the assignee of the lessor had no administrative expense claim for postpetition rent.
– In re Price, 2017 WL 4119031 (Bankr. E.D.N.C. 2017) – A debtor’s four trailer leases, each of gave the debtor no right to terminate but an option to buy the trailer at the end of the lease term for $1, were sales and secured transactions.
– Cozzetti v. Madrid, 2017 WL 6395736 (Alaska 2017) – A 53-month lease of a mobile home pursuant to which the lessee would become the owner if he made all the payments was a sale and secured transaction. Accordingly, the putative lessor, by representing in a forcible detainer action that the debtor had only a leasehold interest violated the Unfair Trade Practices Act.
– Lyon Financial Services, Inc. v. Illinois Paper and Copier Co., 247 F. Supp. 3d 923 (N.D. 1ll. 2017) – A six-year lease of copier equipment with an option to purchase at the end of the lease term for fair market value was a sale with a security interest, not a true lease, because the value of the equipment at the end of the lease term would be nominal, indicating that the lease term equaled or exceeded the economic life of the goods and that the option price would be nominal consideration. Even if the value of the equipment would not be nominal at the end of the lease term, it would still be less than the cost of relocating the equipment, which the lessee was obligated to pay. Although the lessee, a public entity, had a right to terminate pursuant to a non-appropriation clause, a factor suggestive of a true lease, that right was available only in extremely limited circumstances.
– In re Lasting Impressions Landscape Contractors, Inc., 2017 WL 4127833 (Bankr. D. Md. 2017) – The debtor’s five truck leases were sales with a retained security interest because the lease agreements provided that upon expiration of a lease, if either the lessor or the debtor sells the goods, the lessor must receive an “Assumed Residual”, with the debtor entitled to any surplus and liable for any deficiency. Although the master lease was unclear, the same provision applied if the debtor terminated the lease early or retained the trucks after expiration of the leases. Consequently, the lessor did not retain a meaningful reversionary interest in the trucks. Moreover, these provisions effectively gave the debtor the right to purchase the trucks at the end of the lease term – at which time they would have a useful life of 5-10 years – by paying an amount equal to [5.5% month’s rent].
– In re Johnson, 571 B.R. 167 (Bankr. E.D.N.C. 2017) – A debtor had the right to purchase a leased shed at any time for 65% of the remaining rental payment. Because the debtor had the right to terminate the agreement at any time the transaction failed the bright-line test for a sale and retained security interest under UCC § 1-203(b). Because the debtor provided no evidence about the value of the shed, the court could not conclude that the option price was nominal or that the debtor was building up equity in the shed
– Stanley v. Pawnee Leasing Corp., 2017 WL 2686294 (Ind. Ct. App. 2017) – A finance lease of a screen printer would be treated as a true lease, not a sale and security interest, given that the lessee made no effort to apply UCC § 1-203, such as by arguing that the lease term exceeded the economic life of the goods or that the purchase option was for nominal consideration. Consequently, the lessor was not subject to the stricter notification requirements under Article 9 before selling the printer after the lessee defaulted.
– In re Jack, 2017 WL 3225977 (Bankr. M.D. Fla. 2017) – A rental- purchase agreement for home furniture with an initial term of two months and an option to renew was a true lease because the Florida Rental-Purchase Agreement Act expressly states that an agreement of an individual to lease personal property for household use for an initial period of four months or less is a true lease and is exempt from Article 9, even if the lease is automatically renewed with each rental payment.
– Holland v. Sullivan, 2017 WL 3917142 (Tenn. Ct. App. 2017) – A transaction structured as a sale of an automobile for $30,000 with an option to repurchase, with the putative seller retaining possession and the buyer receiving the certificate of title was really a loan and a secured transaction with the automobile as collateral.*
–In re Voboril, 568 B.R. 797 (Bankr. E.D. Wis. 2017) – The debtor’s assignment of his right to receive renewal commissions was not the assignment of a single account in satisfaction of a preexisting indebtedness, excluded from the scope of Article 9 under UCC § 9-109(d)(7). The agreement stated that it provided “collateral security” for the debtor’s existing and future debts to the secured party, not an outright sale of the account. Accordingly, filing a financing statement was necessary to perfect and, because the secured party did not file, the security interest was unperfected.
– Hemmy v. Midland Funding LLC, 2017 WL 1078632 (D. Haw. 2017) – A consumer debtor had no cause of action under Article 9 against the debt collector that sought to enforce the debt because the assignment to the debt collector was for the purpose of collection only, and thus excluded from Article 9 by UCC § 9-109(d)(5).
– Patterson v. Rough Road Rescue, Inc., 2017 WL 3138002 (Mo. Ct. App. 2017) – An adoption agreement for a dog provided that any noncompliance by the owner “may void this contract” and “could” immediately give the rescue service “the authority to take possession” of the dog. That conditional language rendered the agreement ambiguous as to whether full ownership was transferred to the owner. However because the agreement would be interpreted against the drafter, which was the rescue service, the rescue service retained no interest in the dog.*
– Classic Harvest LLC v. Freshworks LLC, 2017 WL 3971192 (N.D. Ga. 2017) – A factor’s purchase of the accounts of a produce buyer was a secured loan, not a true sale, because even though the recitals in the purchase agreement stated that the transaction was a sale, the agreement limited the factor’s risk of the account debtor’s nonpayment. The factor was entitled to void the purchase of any receivable if, at the time the receivable was created, the produce buyer knew or had received notice of the account debtor’s bankruptcy or insolvency. The factor was entitled to adjust the price paid if the produce buyer knew that an account debtor would be unable to timely pay its obligations within ninety days of the invoice date. The produce buyer also retained the risk if the account debtor disputed the quantity, quality or price of the goods sold to it. Accordingly, the factor’s purchase did not remove the accounts from the PACA trust.
The factor was not a bona fide purchaser for value of the accounts after it received notice of the produce buyer’s breach of the PACA trust and might not have been at an earlier time, depending on when it should have known of the breach, which was a factual issue not ripe for summary judgment.*
– Cherokee Funding LLC v. Ruth, 802 S.E.2d 865 (Ga. Ct. App. 2017) – A litigation financing transaction created no recourse obligation. Thus the financier was a buyer of a portion of the litigation proceeds, not a lender. Thus the transaction was not subject to the Georgia Industrial Loan Act or the Georgia Payday Lending Act.
– Central Bank v. Hogan, 891 N.W.2d 197 (Iowa 2017) – A loan participant acquired an interest in the loan and the collateral securing it and not just a receivable from the originating bank. The buyer of a loan participation thus had an interest in the real property that the originator acquired by foreclosing on the collateral. That interest had priority over the interest of a subsequent buyer of the real property that took by quitclaim deed from the originator because a buyer who takes by quitclaim deed takes subject to outstanding equities, about which the buyer is assumed to have notice.*
– Western Property Holdings, LLC v. Aequitas Capital Management, Inc., 392 P.3d 770 (Or. Ct. App. 2017) – Loan participants had no claim against the originator for breach of contract or negligence arising out of the originator’s foreclosure on the collateral, which allegedly blocked a more lucrative sale of the collateral by the debtor. There could be no breach of the implied duty of good faith because the participation agreement expressly granted the originator the authority to exercise its reasonable business judgment regarding what remedies to pursue to enforce the loan. There was also no special relationship between the participants and the originator.
7. Intellectual Property and Licenses
– Lexmark International, Inc. v. Impression Products, Inc., 137 S.Ct. 1523 (2017) – A patent owner’s sale of the patented product “exhausts” its rights under patent law and any effort to restrict further sales is not enforceable (“… a patentee’s decision to sell a product exhausts all of its patent rights in that item, regardless of any restrictions the patentee purports to impose or the location of the sale.”)
– Design Data Corporation v. Unigate Enterprise, Inc., _ F.3d _ (9th Cir. 2017) – A copyright on a computer program does not extend to program output generated by the program, unless the program does the “lion’s share” of the work and the user’s contribution is “marginal.”*
– Star Athletica, LLC v. Varsity Brands, Inc., _ U.S. _ (2017) – Designs of clothing and other useful articles may be copyright- protected when a qualifying feature incorporated into the design is conceptually separate from the article.
– Elliott v. Google, Inc., _ F.3d _ (9th Cir. 2017) – The word “Google” did not lose trademark protection due to generic use where it was not primarily associated with a good or a service. The use of “google” as a verb did not constitute sufficient generic use.
– Semcon IP Inc. v. Huawei Device USA Inc., 2017 WL 1017424 (E.D. Tex. 2017) – A buyer of patents who granted the seller a security interest in the patents could maintain an action for infringement against a third party without joining the seller- secured party because, even though the buyer could not assign the patents without the seller’s permission, the purchase and sale agreement expressly indicated that the buyer had sole authority to enforce the patents.*
– Milo & Gabby LLC v. Amazon.com, Inc., 693 F. App’x 879 (Fed. Cir. 2017) – A retailer remains the owner of goods sold through Amazon’s fulfillment center, pursuant to which the retailer sends its goods to Amazon, which stores the goods and, upon sale to a customer, pulls the goods off the shelf, packages them, and ships them to the customer. Consequently, Amazon is not the seller and cannot be liable – as a seller – for the copyright and trademark violations of the retailers that sold knock-off goods through Amazon. The transactions were not a consignment within the meaning of Article 9 because the retailers did not deliver goods to Amazon “for the purpose of sale,” but instead for the purpose of logistics and shipping after a sale had been made through the website.*
– Williams v. Gaye, _ F.3d _ (9th Cir. 2018) – There is no scienter requirement for copyright infringement. The alleged infringer will not be liable for alleged infringement, unless it had access to the copyrighted work.
– In re Gabriel Technologies Corp., 2017 WL 6016287 (Bankr. N.D. Cal. 2017) – The lenders that provided financing for the debtor’s unsuccessful tort action against a company did not have a security interest in the subsequent proceeds of a settlement of a malpractice claim against the debtor’s counsel. A malpractice claim is not assignable under California, Nevada, and New York law. Even though the security agreement purported to cover “any successor claim or any claim related to [the funded tort claim], derived therefrom or arising thereunder,” the malpractice claim was not covered by that language and, even if it were, such language does not satisfy the specificity requirement of UCC § 9-108(e).
– Boling v. Prospect Funding Holdings, LLC, 2017 WL 1193064 (W.D. Ky. 2017) – The agreement by which an individual borrowed money at 5% per month, to be repaid out of the proceeds of the individual’s pending tort claim, was illegal champerty under Kentucky law. Although the agreements stated that the funds advanced were for “the necessities of life or medical care,” they also recognized that the funds were needed so the individual would have “time to seek justice through the courts or negotiations,” and the money was explicitly intended to sustain the individual during litigation. The agreements were also usurious.
– In re Designline Corp., 565 B.R. 341 (Bankr. W.D.N.C. 2017) – A transaction by which a bankruptcy trustee sought to obtain financing for three, complex adversary proceedings by selling 25% of the net litigation proceeds – after payment of expenses and attorney’s fees – constitutes champerty and would therefore not be approved because: (i) it does not require the financier to make any advances and instead requires the trustee to request advances quarterly; (ii) requires the trustee to seek the financier’s input and approval of strategic decisions; and (iii) if the trustee’s counsel withdraws, it requires the trustee to consult with the financier regarding substitute counsel.
– In re Mississippi Phosphates Corp., 2017 Bankr. LEXIS 5 (Bankr. S.D. Miss. 2017) – A liquidating trust that purchased all of a bankruptcy debtor’s assets, except commercial tort claims, thereby acquired the debtor’s pending right to a refund of payments for electric utility service after the state supreme court overturned a rate increase approved by the state utility commission. The right to a refund of an overpayment is a general intangible, not a commercial tort claim. Even if the commission had committed a constitutional tort in approving the rate increase, the state supreme court had ordered repayment before analyzing the constitutional issue.
9. Government Debtors
– Department of Transportation v. United Capital Funding Corp., 219 So. 3d 126 (Fla. Dist. Ct. App. 2017) – A non-uniform provision excepted from the scope of Article 9 a transfer by a governmental entity. It applies when the transfer is such that it would otherwise be within the scope of Article 9 – that is, when the governmental entity would be the debtor in a secured transaction – not when the transfer is a payment by a governmental entity that is an account debtor. Accordingly, a state department of transportation that paid the debtor after it received notification that the account owed by the department had been sold and an instruction to pay the factor that had bought the account did not discharge its obligation and remained liable to the factor. Sovereign immunity did not bar the factor’s action against the department.
B. Security Agreement and Attachment of Security Interest
1. Security Agreement
– Jipping v. First National Bank Alaska, 2017 WL 927987 (D. Alaska 2017) – A debtor entered into a security agreement in 2009, which included a security interest in a deposit account. The debtor paid off the secured debt in full the 2009 loan. A 2013 loan from and security agreement with the same secured party did not expressly include the deposit accounts in the collateral. The 2013 security agreement’s integration clause provided that the agreement, “together with any Related Documents, constitutes the entire understanding and agreement of the parties.” The term “Related Documents” did not include existing security agreements.
– Zuklie Investment Firm, LLC v. JDMN, LLC, 2017 WL 1484171 (Conn. Super. Ct. 2017) – A limited liability company purchased the assets of a business and authenticated the security agreement. It did not sign the promissory note, only its member signed as an individual. Thus the LLC had no debt to the seller and the security agreement was void.
– GEOMC Co. v. Calmare Therapeutics, Inc., 2017 WL 3585337 (D. Conn. 2012) –A corporation’s CEO had both actual and apparent authority to enter into a security agreement on behalf of the corporation, and thus the security agreement was notultra vires. Although two years later the corporation’s board of directors declared that the CEO might have acted contrary to the best interests of the corporation and that the security agreement was retroactively “rendered unauthorized, rejected, and void,” that declaration did not affect the validity of the security agreement.*
– Group One Development, Inc. v. Bank of Lake Mills, 2017 WL 2937709 (S.D. Tex. 2017) – Although the borrowers claimed to have been fraudulently induced to enter into a loan agreement by oral representations that the loan was unsecured, the borrowers could not, as a matter of law, have reasonably relied on those representations because they were directly contradicted by the terms of the agreement.
– Cornelius v. Bank of Nova Scotia, 2017 WL 3412202 (V.I. 2017) – A secured party mistakenly: (i) filed a termination statement; (ii) informed the debtor that the loan was paid off; and, apparently, (iii) had its lien released on the certificate of title for the debtor’s car. Nevertheless the debt continued and the security interest survived. Accordingly, the secured party could not be liable in conversion for repossessing the car after the debtor admittedly defaulted.*
– Concealfab Corp. v. Sabre Industries, Inc., 2017 WL 6297672 (D. Colo. 2017) – A prospective borrower against which a financing statement was filed but which never entered into the credit transaction was entitled to an order declaring the security interest invalid even though the prospective secured party had filed a termination statement because there was nothing to prevent the prospective lender from again filing a financing statement.
2. Value and Obligation Secured
3. Rights in the Collateral
– United States v. Myers, 2017 WL 412623 (D.S.C. 2017) – A lender attempted to receive and perfect a security interest in specified farm equipment used on leased land. The equipment was owned by the lessor, who was not the borrower and had not authenticated the security agreement. The evidence was conflicting as to whether the lessor had authorized the borrower to use the equipment as collateral.
– In re Leonard, 565 B.R. 137 (8th Cir. BAP 2017) – A bill of sale provided by the seller of cattle to the debtor did not comply with Colorado law because it was not signed by the debtor and it did not list the address for either party. The debtor nevertheless acquired ownership of the cattle because passage of title is governed by the Colorado UCC, and under the UCC that occurred when the cattle were delivered. Consequently, a lender’s security interest in the debtor’s after-acquired cattle attached to the cattle sold.*
– United States v. NextGear Capital, Inc., 677 F. App’x 366 (9th Cir. 2017) – A secured party had a floating security interest on all of the debtor’s after-acquired collateral. The security interest did not attach to a vehicle that someone else purchased using the debtor’s license to avoid sales taxes. Although the certificate of title identified the debtor as the owner, the debtor did not purchase the vehicle in the ordinary course of the debtor’s business, did not receive delivery of the vehicle, and never held the vehicle on its lot for sale.
– In re Purdy, 870 F.3d 436 (6th Cir. 2017) – A cattle lessor failed to demonstrate that the cattle sold by the debtor were leased cattle. The debtor used one bank account to conduct its dairy operations, commingling proceeds of owned cattle with proceeds of leased cattle and proceeds of milking operations, and then using those commingled proceeds to acquire replacements for leased cattle culled from the herd. Moreover, the court did not err in crediting the debtor’s testimony that the debtor put the lessor’s brand on cattle regardless of whether the cattle were acquired from suppliers paid by the lessor, and thus the brands were not reliable evidence of ownership. A lender’s security interest in the debtor’s existing and after-acquired cattle did attach to all the cattle because the debtor used the commingled funds – which were part of the bank’s collateral – to acquire the cattle. Consequently, the bank, not the lessor, was entitled to the proceeds of the cattle.*
– In re McDougall, 572 B.R. 239 (Bank. D.N.D. 2017) – Although it was unclear whether the individual debtors or the LLC they created owned the cattle that the debtors raised, the weight of the evidence indicated that the LLC owned the collateral that it sold prepetition and the individual debtors owned the collateral remaining when the petition was filed. Accordingly, the agricultural lien of a supplier that provided feed, seed, and supplies to the LLC had priority over the perfected security interest of a bank in the proceeds of the cattle sold by the LLC. The agricultural lien of the lessor of pasture land did not have priority over the bank’s security interest because the lessor did not file notice of its lien within 120 days after the lease began.
– Public Service Commission v. Grand Forks Bean Company, Inc., 900
N.W.2d 255 (N.D. 2017) – A secured party with a security interest in the inventory of a grain warehouse did not have priority over eight bean growers that were non-credit-sale receiptholders of beans they had delivered to the warehouse. Delivery of grain to a public warehouse for an unconverted scale ticket or warehouse receipt is a bailment, and the grain in a warehouse is subject to a first priority lien in favor of outstanding receiptholders. That lien has priority over any lien or security interest in favor of a creditor of the warehouseman, regardless of when the creditors lien attached to the grain. The growers engaged in non-credit sales transactions because a credit-sale contract must be signed by both parties and the growers did not sign anything.*
– Cohen v. Forden, 2017 WL 370909 (N.J. Super. Ct. 2017) – The managing member of a company who had an unperfected security interest in the company’s assets was guilty of fraud and negligent misrepresentation for failing to disclose the security interest to a lender who would not have made the loan had he known of the security interest.*
– FDIC v. FBOP Corp., 252 F. Supp. 3d 664 (N.D. Ill. 2017) – A tax allocation agreement between a bank holding company and its bank subsidiaries (with which it filed a consolidated return) that provided for how a tax refund would be allocated did not clearly alter ownership of the refunds. Consequently, ownership was to be determined based in the default rule, and the FDIC, as the successor to the banks, was entitled to the portion of the refunds attributable to taxes paid by the banks.
4. Restrictions on Transfer
– Magnolia Financial Group v. Antos, 2017 WL 4286126 (E.D. La. 2017) – A lender had a security interest in the debtor’s right to payment under a settlement agreement even though the settlement agreement had language attempting to prohibit assignment without the consent of the counter-party because UCC § 9-406 invalidates that restriction on assignment.*
– Estate of Grimmet v. Encompass Indemnity Co., 2017 WL 5592897 (E.D. Mich. 2017) – Health care providers that received an assignment from a patient of the patient’s rights under a no- fault automobile insurance policy had a cause of action against the insurer in spite of the fact that the policy contained an anti- assignment clause because such clauses violate state public policy and are overridden by UCC § 9-408.*
– In re Woodbridge Group of Companies, LLC, 2018 WL 3131127 (Bankr. D. Del. 2018) — The assignee (buyer) of a note that had an anti-assignment provision could not file a claim in bankruptcy notwithstanding UCC § 9-408, which overrides the anti-assignment provision for purposes of making the sale effective as between the seller and the buyer.
C. Description or Indication of Collateral and the Secured Debt — Security
Agreements and Financing Statements
– In re Wharton, 563 B.R. 289 (9th Cir. BAP 2017) – A promissory note signed by the debtor and stating that “[t]his note is partially secured by 1965 Corvette automobile,” was sufficient to grant the creditor a security interest in the debtor’s corvette.*
– In re Escoto, 2017 WL 1075046 (9th Cir. BAP 2017) – A promissory note that granted a security interest in a dental practice and further pledged “any and all personal possessions holdings and items of value” and granted the lender “the right to remove any and all possessions . . . and to effect garnishment of any paycheck, settlement monies, or other assets without the need of a court order” covered only tangible assets and provided for self-help remedies with respect only to those tangible assets. The collateral did not include the debtor’s rights under a settlement of a lawsuit that the loan was obtained to finance.
– In re Edwards, 2017 WL 6754026 (Bankr. E.D.N.C. 2017) – A security agreement that described the collateral as a mobile home and “all accessions, attachments, accessories, replacements and additions, . . . whether added now or later” but which also provided that “Lender is not granted, and does not have, a non- purchase money security interest in household goods,” did not encumber the stove, refrigerator, washer, dryer, and air conditioning unit that the debtor purchased separately and installed after delivery of the mobile home.
– The Mostert Group, LLC v. Mostert, 2017 WL 4700343 (Ky. Ct. App. 2017) – Although the term “software” might, in other contexts, include source code, the term did not do so in the security agreement that a newly formed limited liability company executed in favor of one of its members. The parties had differentiated “software” from “source code” in a contemporaneously executed agreement under which the individual contributed “software programs and source codes” to the company.
– Ehrlich v. Commercial Factors of Atlanta, 567 B.R. 684 (N.D.N.Y. 2017) – A security agreement covering “all . . . obligations of ours to you, however and whenever created, arising or evidenced, . . . now or hereafter existing or due to become due” was sufficient to
cover the debtor’s obligations to the secured party resulting from the phony invoices the debtor sold to the secured party.*
– In re Hard Rock Exploration, Inc., 2017 WL 6507836 (Bankr. S.D.W. Va. 2017) – Recorded deeds of trust and financing statements that described the land involved and included in the collateral all “Gas System and all Gas Contracts and accounts resulting therefore” and “now owned or hereafter acquired . . . equipment, general intangibles, accounts, contract rights, inventory, fixtures, as extracted collaterals, instruments, [and] proceeds of collateral” were sufficient to create and perfect a security interest in the debtor’s existing and after-acquired contracts relating to the extraction of oil and gas, and the cash proceeds thereof.
2. Certificates of Title
– In re Wharton, 563 B.R. 289, 2017 WL 586427 (9th Cir. BAP 2017) – A secured party’s possession of the certificate of title and keys for a Corvette did not perfect the security interest under Nevada law. To perfect the security interest in a motor vehicle granted by the end user the security interest needs to be noted on the certificate.*
– In re Power, 2017 WL 4158329 (Bankr. D. Idaho 2017) – A secured party that paid off the debtors’ existing car loan. An initial title application was incorrectly completed, resulting in the new title certificate failing to indicate the secured party’s security interest, was not perfected until, at the earliest, it submitted a second, properly completed application for a new certificate of title. Because that was more than 30 days after the refinancing, the transfer occurred when the security interest was perfected, and thus was an avoidable preference under Bankruptcy Code § 547(b).
– In re Guiles, 2017 WL 4838751 (Bankr. W.D. Tex. 2017) – A credit union’s security interest in a motor vehicle that was perfected by notation on the certificate of title did not become unperfected when the debtor borrowed additional funds from the credit union and used a portion of the loan to pay off the original note. Although the credit union did not change the lien date on the certificate, because the security agreement covered future advances, it did not matter that the original note was replaced by a new note. At every moment, the debtor’s obligation was secured by the motor vehicle.
– BMW Financial Services, N.A., LLC v. Felice, 75 N.E.3d 368 (Ill. Ct. App. 2017) – A secured party that had perfected a security interest in a car by having its interest noted on the certificate of title had priority over the buyer that purchased the car after the debtor filed an unauthorized lien release and obtained a duplicate certificate that did not indicate the security interest. Issuance of the duplicate certificate did not cause the car to no longer be covered by the original certificate, within the meaning of UCC § 9-303. Although a buyer who relies on a clean certificate can take free of a perfected security interest under UCC § 9-337, that provision applies only when the new certificate is issued by a different state, which was not what occurred in this case.
– In re Delano Retail Partners, LLC, 2017 WL 3500391 (Bankr. E.D. Cal. 2017) – A secured party did not have a security interest in funds deposited into the trust account of the debtor’s lawyer and then transferred to the debtor’s bankruptcy trustee because, even if the funds were originally proceeds of inventory, the trustee took free of the security interest under UCC § 9-332(b). Moreover, because the funds had been commingled with non-proceeds in the lawyers’ trust account, they were not identifiable proceeds. The secured party did not have a security interest in an account debtor’s post-petition payments on a prepetition lease of equipment because even though the lease itself was chattel paper, the payment stream was not. The payment stream was a payment intangible that was not proceeds of prepetition collateral. Finally, the lender did not have a security interest in the proceeds of the debtor’s liquor license because a liquor license is not property of the licensee under California law, and hence no security interest can attach to it.*
– Vendorpass, Inc. v. Texo Solutions, L.L.C., 2017 WL 444303 (N.J. Super. Ct. 2017) – A secured party that received payment from the debtor after the debtor had received funds from a related entity had no liability to a creditor of the related entity. There was no basis for a claim of constructive trust because the secured party was not unjustly enriched by the repayment of a debt. Even if the transfer of funds to the debtor was a constructive or intentionally fraudulent transfer, the secured party was a good faith subsequent transferee that give value, and hence had a valid defense. Moreover, the secured party took free as a transferee of fungible money.*
– Ericsson Inc. v. Corefirst Bank & Trust, 2017 WL 3053646 (D. Kan. 2017), appeal filed (10th Cir. Aug. 17, 2017) – A secured party with a security interest in a borrower’s deposit account and which debited the account after a $217,000 deposit from the debtor’s employer, had no liability to the employer for unjust enrichment even though the deposit included an overpayment of $122,000. Although the employer was entitled to restitution from the borrower, the bank took free of the restitution claim because it was a bona fide payee: it had no notice of the overpayment. It did not matter that the bank debited the account rather than receiving a voluntary payment from the borrower.*
– Edwards Family Partnership, LP v. Bancorpsouth Bank, 236 F. Supp. 3d 964 (S.D. Miss.), af’d, 2017 WL 4641274 (5th Cir. 2017) – The assignee of a secured party that had a control agreement with a bank had no claim against the bank for allegedly permitting the debtor to make 13 transfers from the blocked account to accounts other than the one to which the control agreement permitted transfer. Even if the assignee could enforce the control agreement, the assignee, through its course of conduct, had waived that restriction in the control agreement because the assignee was aware of numerous transfers to other accounts – including some of its own accounts – yet did not complain and instead relied on the debtor to replenish the blocked account.*
– In re Roselli Moving & Storage Corp., 568 B.R. 592 (Bankr. E.D.N.Y. 2017) – A secured party’s prepetition security interest did not encumber the trustee’s recovery pursuant to a settlement of a fraudulent transfer claim. To the extent that the property transferred by the debtor consisted of funds on deposit, the transferee of those funds took them free of the security interest. Even if the personal property that the debtor had transferred was and remained encumbered by the security interest, that property was not recovered by the trustee.*
– Citizens Bank & Trust v. Piggly Wiggly Alabama Distributing Co., 2017 WL 242534 (Ala. Ct. Civ. App. 2017) – A secured party’s security interest in the debtor’s shares of stock in a corporation was not perfected by the issuing corporation’s possession of the stock certificate, which the issuer had obtained to secure its own security interest. Although the issuer had provided a receipt for the certificate to the debtor, who had in turn delivered the receipt to the bank, the issuer never acknowledged that it had possession for the bank’s benefit. As a result, the bank’s unperfected security interest was subordinate to the judicial lien of a garnishor.*
– In re Westby, 2017 WL 1365999 (Bankr. D. Or. 2017) – A creditor’s security interest in a promissory note secured by a deed of trust was unperfected because the creditor neither filed a financing statement nor took possession of the note. Although the creditor’s security interest attached to the real property that the debtor received by quitclaim deed after the maker of the note defaulted, that interest too was unperfected.
5. Authority to File Financing Statement
– United States v. Jordan, 851 F.3d 393 (5th Cir. 2017) – An inmate who filed a fraudulent UCC financing statement against an assistant U.S. attorney was properly convicted of violating 18 U.S.C. § 1521, which prohibits filing a false lien or encumbrance against the property of a federal official on account of the performance of official duties, even though the $6.54 million contract identified as collateral did not exist.
–State of Connecticut v. Brightly, 2017 WL 1311036 (Conn. Super. Ct. 2017) – The state and a judge were entitled to injunctive relief against a criminal defendant who filed a fraudulent financing statement against the judge that presided over his criminal trial.
– Holland v. Sullivan, 2017 WL 3917142 (Tenn. Ct. App. 2017) – The debtors who had given a lender the certificates of title to their automobiles to secure a debt were liable for both compensatory and punitive damages due to their slander of title and conspiracy to commit slander of title in connection with their actions in obtaining duplicate titles, and then using those duplicates to sell one of the automobiles. It did not matter that the lender’s security interest was unperfected.
6. Financing Statements: Debtor and Secured Party Name; Other
– Fishback Nursery, Inc. v. PNC Bank, 2017 WL 6497802 (Bankr. N.D. Tex. 2017) – The financing statements filed by agricultural lienholders in Michigan and Tennessee were ineffective to perfect agricultural liens in farm products located there because they identified the debtor as “BFN Operations, LLC abn Zelenka Farms” instead of simply as “BFN Operations, LLC,” and an official search in each of those states would not have disclosed the filings. Consequently, a secured party’s perfected security interest in those farm products had priority. The lien notice that one agricultural lienor filed in Oregon was also ineffective because such a notice expires 45 days after final payment is due and while the effectiveness of notice can be extended, the lienholder’s extension was filed after the notice became ineffective. Moreover, the financing statement the lienholder filed in Oregon was not a substitute for a proper lien notice because it lacked some of the required information.*
7. Filing of Financing Statement — Manner and Location
– In re Reckart Equipment, Inc., 2017 WL 943909 (Bankr. N.D. W.V. 2017) – A secured party sent to the secretary of state two financing statements (each naming a different “debtor”) in the same envelope and sent a check in an amount sufficient to cover the fee for one of the financing statements. The filing office treated the financing statements as a single filing with respect to one of the debtors, applied the fee to the combined financing statement, and indexed it under the name of the debtor that the filing office treated as the “debtor”. It turned out that the secured party ended up in a priority dispute with another secured party of the debtor named on the second, “unfiled,” financing statement. The secured party would have had priority if that financing statement had been “filed.” The court held that because the check’s memo line referred to the unfiled financing statement the filing office should have treated that one as “filed”. Thus the secured party was the “first to file” for the unfiled (and unindexed) financing statement and defeated the later-in-time filer. UCC §§ 9-516 and 9-517. In passing, concerning another financing statement, the court also held that the assignment of a “bare” financing statement to a secured party was effective to give that secured party priority as of the filing date of the assigned financing statement.*
– In re Voboril, 568 B.R. 797 (Bankr. E.D.Wis. 2017) – Insurance commissions are “accounts” under Article 9 and a security interest in them must be perfected by the filing of a financing statement. A financing statement was insufficient where the secured party put the individual debtor’s name in the fields for an organization. A search using the filing office’s standard search logic would not disclose the financing statement.*
– In re Nay, 563 B.R. 535 (Bankr. S.D. Ind. 2017) – A filed financing statement that misstated the debtor’s middle name as it appeared in the debtor’s driver’s license – “Ronald Mark Nay” instead of “Ronald Markt Nay” – was ineffective to perfect because the middle name is part of the debtor’s name and a search under that name using the filing office’s standard search logic would not produce the filing. It does not matter that a search could be conducted without using a middle name.
– SEC v. ISC, Inc., 2017 WL 3736796 (W.D. Wis. 2017) – A secured party’s financing statement, which erroneously had a space between the “Inc” and the period that follows it, was insufficient to perfect because a search against the debtor’s correct name using the filing office’s standard search logic did not reveal the filing.
– In re SemCrude, L.P. , 864 F.3d 280 (3d Cir. 2017) – The security interests of the debtor’s oil suppliers were unperfected because: (i) even though the U.C.C. of the suppliers’ states – Texas and Kansas – contained non-uniform language purporting to provide the suppliers with an automatically perfected security interest, the law of the jurisdiction where the debtor was located governs (even pursuant to the choice-of-law rules in the suppliers’ jurisdictions); (ii) that law did not provide for automatic perfection, and (iii) the suppliers did not file a financing statement in the state where the debtor is located. The exception from the scope of Article 9 in § 9-109(c)(3) for security interests “created” by the government did not apply because the non-uniform language merely enabled the debtor to create the security interest by buying the oil.
– Fishback Nursery, Inc. v. PNC Bank, 2017 WL 6497802 (Bankr. N.D. Tex. 2017) – Under UCC § 9-302 the law of the jurisdiction where farm products are located governs the perfection and priority of an agricultural lien on the farm products. Thus the law of Michigan, Tennessee, and Oregon governed, respectively, the priority of the agricultural liens of the farm products shipped to those states, even though the debtor’s contracts with the agricultural lienholders purported to select only Oregon law.
– In re Tam of Allegheny LLC, 575 B.R. 131 (Bankr. W.D. Pa. 2017) – A security interest in a Pennsylvania liquor license – which is a general intangible- was not perfected by the secured party’s fixture filing. To be perfected, a financing statement had to be filed with the Secretary of the Commonwealth.*
– In re: Semcrude LP, _ F.3d _ (3d Cir. 2017) – A state law provided that an oil producer has an automatically perfect security interest in oil sold by the producer. The automatic security interest was not perfected because questions of perfection were governed by the law of the state of the “location” of the buyer, which did not provide for the automatically perfected security interest.
8. Amendments, Termination, Lapse of Financing Statement, and Post- Closing Changes
– Element Financial Corp. v. Marcinkoski Gradall, Inc., 215 So. 3d 1252 (Fla. Dist. Ct. App. 2017), review granted, (Fla. Oct. 10, 2017) – A lender that financed a California debtor’s acquisition of equipment, and who perfected that security interest by filing in California, remained perfected when the guarantor moved the equipment to Florida and sold it because the lender re-filed in Florida less than one year thereafter. A security interest perfected under the law of the jurisdiction in which the debtor is located remains perfected until four months after the debtor moves to a new jurisdiction or one year after the secured goods are transferred to a person located in a new jurisdiction. In this case, the debtor did not move. Instead, the guarantor moved with the secured property. When the guarantor moved the goods from California to Florida, the guarantor became an owner and therefore a debtor and triggered the one-year grace period in UCC § 9-316(a)(3).*
– Farmer’s and Miner’s Bank v. Lee, 2017 WL 4707457 (E.D. Ky. 2017) – An amended financing statement checked the “collateral change” and “delete” boxes, and then listed one of the three items of equipment specified in the original filed financing statement. It referred to the deleted item, not the remaining items, and thus remained effective with respect to the remaining items of collateral described in the initial financing statement. Although the amendment states “[t]his financing statement covers the following collateral,” that language refers to the amendment, not the original financing statement.*
– First Guaranty Bank v. Republic Bank, 2017 WL 5564582 (D. Utah 2017) – The initial assignee of a lease of software that had been determined to be a conditional sales agreement had no authority to terminate the financing statement because it had further assigned the lease.
– In re Wheeler, 2017 WL 6568758 (Bankr. W.D. Ky. 2017) – A secured party’s perfected security interest became unperfected when the bank mistakenly filed a termination statement, even though 10 minutes later the bank attempted to amend the termination by adding itself as the secured party. Although the termination might have been inadvertent, it was authorized because it was filed by a loan processor of the bank that handles financing statements. A result the bank’s security interest became subordinate to another perfected security interest, that previously was junior to the bank’s security interest.*
– In re Gold Digger Apples, Inc., 2017 WL 508209 (Bankr. E.D. Wash. 2017) – Each of the three entities claiming a PMSI in apples sold to an agricultural cooperative had priority over a secured party that had a perfected security interest in the association’s assets because each was a successor in interest to the entity that sold the applies. Although Azzano Farms, Inc. claimed priority even though it was Azzano Orchards, LLC that sold the goods and was named as the secured party in the financing statement, the same individual owned both entities, the entities conducted the same business, and the claimant was the successor to all of the LLCs’ assets and business operations. Although Five Star Orchard asserted a PMSI and was named as the secured party in the financing statement, while R&B Orchard was the seller, both entities were general partnerships with the same general partner and the manager. Moreover, the two partners of Five Star Orchard were two of the three partners in R&B Orchard, the third partner having been bought out by the other two. Although Alvarado Orchards, LLC claimed a PMSI based on goods sold by Miguel Alvarado, who was named as the secured party on the financing statement, the business never changed, merely its name. Although the PMSI claimants did not provide the bank with advance notification of their transactions with the association, the secured party waived that requirement in the parties’ intercreditor agreement, which provided a waterfall with respect to the order of payments.*
1. Lien Creditors
– Granata v. Broderick, 2017 WL 5478364 (N.J. 2017) – A lender that obtained a security agreement covering a lawyer’s right to a contingent fee in a specified pending case had an Article 9 security interest in the lawyer’s account. The lender had priority because that interest was perfected by filing before two judicial liens were created on the right to the fee.
– In re Hutton, 2017 WL 3704526 (Bankr. E.D.N.C. 2017) – Although a judgment creditor had the sheriff levy on two vehicles of the debtor, and thereby obtained a judgment lien on the vehicles, that lien was not perfected because it was not noted on the certificates of title for the vehicles.
2. Statutory Liens; Forfeiture
– In re Schley, 565 B.R. 655, 2017 WL 149944 (Bankr. N.D. Iowa 2017) – A feed supplier’s superpriority, statutory lien on the proceeds of pigs that consumed about half of the feed was not limited to the cost of the feed consumed by the pigs sold. The lien and priority extended to the cost of all the feed supplied to the debtor and consumed by the debtor’s pigs, even those not sold.
– In re Edge Pennsylvania, LLC, 2017 WL 6498039 (Bankr. M.D. Pa. 2017) – A secured party holding a perfected security interest may not have priority over a landlord’s statutory lien under a contractual subordination agreement because the agreement also provided that the secured party had no right to leave the collateral on the leased premises for more than 30 days after the lease terminated. It was unclear whether this provision was a condition to the provision on subordination.
– Dusenbery v. Hawks, 895 N.W.2d 640 (Minn. Ct. App. 2017) – A bailee’s possessory lien had priority over a perfected security interest because UCC § 9-333 grants the possessory lien priority unless the statute creating the lien expressly provides otherwise, and that statute did not so provide. Although the statute did provide that some liens do not have priority over a purchaser or encumbrancer without notice, that portion of the statute did not apply to a bailee’s possessory lien.
– BMIFederal Credit Union v. Charlton, 2017 WL 5903444 (Ohio Ct. App. 2017) – An auto mechanic’s artisan’s lien on a vehicle to secure the cost of repair and storage did not have priority over a security interest in the vehicle previously perfected through compliance with the certificate of title statute because the statute giving priority to artisan’s liens does not apply to motor vehicles and the certificate of title statute for vehicles expressly provides that a security interest noted on the certificate of title has priority over other liens.
– Ally Financial Inc. v. Pira, 2017 WL 6014258 (Ill. Ct. App. 2017) – An auto mechanic was entitled to an artisan’s lien on a car, with priority pursuant to UCC § 9-333 over an earlier perfected security interest. The lien covered detailing and repair charges of $658 but not storage charges of $27,780.
– S & H Packing & Sales Co. v. Tanimura Distributing, Inc., 850 F.3d 446 (9th Cir. 2017), rehearing en banc granted, (9th Cir. June 23, 2017) – A commercially reasonable factoring agreement by a buyer of produce removes accounts receivable from the PACA trust without breaching the trust regardless of whether the factoring transaction is a true sale. Accordingly, the unpaid growers of produce had no claim against the factor that purchased accounts from the produce buyer.
– Farmer’s and Miner’s Bank v. Lee, 2017 WL 4707457 (E.D. Ky. 2017) – A secured party with a perfected secured interest in an item of equipment used by the debtor in its service contract with a mining lessee had priority over a claimed mechanic’s lien of the entities that repaired and stored the equipment after the debtor ceased performing on its contract. There was no mechanic’s lien because the mechanic’s lien statute provides for a lien on the lessee’s property, but the debtor was not the lessee. Even if the claimants did have a mechanic’s lien, the bank’s security interest would have priority because it was perfected long before the mechanic’s lien would have arisen.
3. Buyers and Other Transferees
– In re SemCrude, L.P., 864 F.3d 280 (3d Cir. 2017) – Downstream buyers of oil and gas from the debtors were buyers for value who took free of an unperfected security interest of the debtors’ suppliers under UCC § 9-317(b) because the buyers gave value and did not have knowledge of the security interests. Although the buyers allegedly knew of: (i) the state lien laws that created the security interests, (ii) the identities of some of the suppliers, and (iii) the fact that the suppliers were unpaid, that was insufficient proof of knowledge of the security interests, especially because it is customary for payment not to be made until the month following delivery.*
– Cyber Solutions International, LLC v. Priva Security Corp., 2017
WL 3599578 (W.D. Mich. 2017) – A secured party with a perfected security interest in the debtor’s inventory of computer chips, manufactured pursuant to a licensing agreement, had priority over the buyer/licensor, which had prepaid for the chips. Nothing in the agreements between the debtor and the buyer indicated that the buyer owned the chips.*
– Element Financial Corp. v. Marcinkoski Gradall, Inc., 215 So. 3d 1252 (Fla. Dist. Ct. App. 2017), review granted, (Fla. Oct. 10, 2017) – Even if the buyers of three Bobcat utility vehicles were buyers in ordinary course of the business, they did not take free of a perfected security interest because the security interest was not created by the buyers’ seller.*
– Focarino v. Travelers Personal Insurance Co., 2017 WL 1456967 (N.J. Super. Ct. 2017) – A buyer of a vehicle from a dealer that failed to pay off a lender with a prior perfected security interest in the vehicle took free of the rights of the prior owner’s insurer, which had paid off the lender. The dealer acquired voidable title to the vehicle and could, under UCC § 2-403, convey good title to a good faith purchaser for value.*
– SMS Financial JDC, LP v. Cope, 685 F. App’x 648 (10th Cir. 2017) – A secured party’s security interest in a yacht, which was unperfected due to the secured party’s failure to document the yacht with the Coast Guard, nevertheless had priority over the rights of the debtor’s wife, who had acquired ownership of the yacht. An unperfected security interest is effective against a buyer having knowledge of it. The debtor initially transferred title to a corporation of which he was president. His knowledge of the security interest was imputed to the corporation. The corporation then transferred the yacht to the debtor’s wife, who had “implied actual knowledge.”
– TCP Printing Co. v. Enterprise Bank, 2017 WL 4357378 (E.D. Mo. 2017), appeal filed, (8th Cir. 2017) – A secured party entered into an agreement with a potential buyer of the debtor’s assets, by which the secured party agreed to waive its security interest with respect to any receivables arising during the due diligence period from buyer-funded work. The secured party was not liable to the prospective buyer for breach of contract, unjust enrichment, or conversion for collecting the debtor’s accounts because the buyer breached the agreement, which caused the agreement to expire.*
– Farm Credit of Southern Colorado, ACA v. Mason, 2017 WL 1279716 (Colo. Ct. App. 2017), cert. granted (Colo. Oct. 2, 2017) – Although a secured party with a security interest in the debtor’s crops might have acquiesced to the debtor’s father cultivating and harvesting the crops, the secured party never waived its rights in the crops because such a waiver must be in writing. Consequently, the father was liable in conversion for selling the crops and retaining the sale proceeds.
– Exodus Vision, LLC v. Touchmark National Bank, 2017 WL 951732 (N.D. Ga. 2017) – The owner of equipment that the debtor stored in its warehouse – in a segregated area and specially tagged – stated a claim for conversion against the buyer that purchased it from the debtor’s secured party.*
4. Subordination and Subrogation
– Berkley Insurance Co. v. Hawthorn Bank, 2017 WL 4391774 (W.D. Mo. 2017) – A surety issued a performance bond for a general contractor and later completed the contractor’s obligations on the bonded project. The surety did not have priority in the contractor’s rights to payment for the project over a creditor with a perfected security interest in the contractor’s accounts. Even if the surety was entitled to be equitably subrogated to the contractor’s rights – and even if that would give it priority over the bank – the right to equitable subrogation applies only after complete performance, not on the date the bond was issued.
The secured party did not receive payment after the date performance was completed. Finally, even if the agreement between the contractor and the surety established a valid trust for the benefit of the surety, because the creditor was not a party to that agreement and was not made aware of the agreement until after it had exercised setoff, the creditor had no liability to the surety.
– Prestige Capital Corp. v. United Surety and Indemnity Co., 245 F. Supp. 3d 349 (D.P.R. 2017) – A factor’s perfected security interest in a contractor’s accounts did not have priority in the payment due to the contractor from the owner over the rights of the surety that issued a performance bond and completed the contractor’s work. Under Puerto Rico law, a surety is subrogated to the owner’s and contractor’s rights in contract retainages as a consequence of the surety ‘s performance of the contractor’s obligations. This right is superior to that of an attaching creditor. The fact that the owner had deposited the amount owing in connection with its interpleader action did not make this rule inapplicable.*
– Ameris Bank v. Lexington Insurance Co., 2017 WL 4225629 (S.D. Ga. 2017) – An insurer of equipment paid the owner instead of the secured party, which was named as the loss payee on the casualty insurance policy, and was therefore held liable to the secured party. The insurer did not have a claim against the owner for equitable indemnity, conversion, or unjust enrichment because the insurer made the payment voluntarily.
– In re Ferguson, 2017 WL 3783260 (C.D. Ill. 2017), appeal filed (7th Cir. Sept. 12, 2017) – A creditor with a junior security interest in the debtor’s farming equipment and crop proceeds was not entitled to a marshaling order requiring the senior secured party to look first to its real property collateral because the debtor planned to retain the real property and the delay would prejudice the senior secured party. The junior creditor was not entitled to a marshaling order later, after the real property was sold, because even though the bankruptcy court had, when it first denied marshaling, indicated it would consider revisiting the issue if the real property was sold, at the time of the sale there were no longer two separate sources of funds.
5. Set Off
6. Competing Security Interests
– First Security Bank v. Campbell, 2017 WL 219516 (N.D. Ill. 2017) – A creditor with a security interest in a securities account stated various claims against the debtors for causing entities controlled by the debtors to transfer securities out of the securities account and then diverting the proceeds of the transferred securities for his own personal benefit. These claims included a claim against one of the debtors for tortiously interfering with an agreement under which the entities acknowledged the security interest and agreed to be bound by the terms of the security agreement. The creditor also stated claims against both debtors for conspiring with the entities to defraud the creditor and for unjust enrichment. The creditor, however, failed to state a claim for aiding and abetting the entities’ fraud because the creditor had not specified what misrepresentations were made, to whom, or when.*
– Metabank v. Interstate Commodities, Inc., 2017 WL 5633104 (D.S.D. 2017) – A creditor that by letter agreed to release or subordinate its security interest in crop proceeds to a new crop financier upon receipt of a specified amount had a conversion claim against the financier that purchased the debtor’s crop because the creditor did not receive the specified amount.
7. Purchase-Money Security Interests
– In re Jett, 2017 WL 112525 (Bankr. S.D. Miss. 2017) – The court applied the transformation rule, not the dual-status rule, to a PMSI in consumer goods. Thus a secured party’s PMSI in the debtors’ vehicle lost purchase-money status when the debtors and bank refinanced the debt and included in it two previously unsecured loans. As a result, the secured party’s claim could be modified in the debtor’s bankruptcy proceeding.
– In re McPhilamy, 566 B.R. 382, 2017 WL 435802 (Bankr. S.D. Tex. 2017) – Although each of the two loans that a debtor incurred to acquire two vehicles was secured by a PMSI, five other loans that were cross-collateralized by one or the other of the vehicles were not secured by a PMSI. It did not matter that one of these five loans was contemporaneous with the purchase of the vehicle that secured it and another loan preceded the purchase of the vehicle that secured it because, in each case, the vehicle loan covered the full purchase price and there was no evidence that these other loans were used to acquire either of the vehicles.
– In re Villarreal, 566 B.R. 859, 2017 WL 535283 (Bankr. S.D. Tex. 2017) – Four loans secured by a car that the debtor previously purchased were not secured by a PMSI. An additional, earlier loan secured by the car, which loan the debtor used to pay off a non-PMSI, was also not a PMSI.
– In re Manor, 569 B.R. 764 (Bankr. W.D. Wis. 2017) – A vehicle lender’s PMSI included negative equity in the vehicle that the debtor traded in, as well as the charges for taxes, insurance, and a service contract, because all were value given to enable the debtor to acquire the new vehicle.
– In re Pettit Oil Co., 575 B.R. 905 (9th Cir. BAP 2017) – The consignor of fuel in an Article 9 transaction failed to perfect its interest. Thus it had only an unperfected security interest in the accounts receivable and cash constituting proceeds of the consigned fuel. Although UCC § 9-319 refers only to the consigned goods, not their proceeds, when treating the consignor’s interest as a security interest, that silence does not make all of Article 9’s rules regarding proceeds inapplicable to consigned goods.*
– In re Leonard, 565 B.R. 137 (8th Cir. BAP 2017) – A lender with a perfected security interest in the debtor’s existing and after- acquired cattle had priority over the reclamation rights of the seller of the cattle to whom the debtor had provided checks that were dishonored. Although the bill of sale provided by the seller to the debtor did not comply with Colorado law because it was not signed by the debtor and it did not list the address for either party, industry practices indicated that neither the defects in the bill of sale nor the fact that the lender might not have seen it prevented the lender from acting in good faith.*
– In re Hhgregg, Inc., 2017 WL 6016290 (Bankr. S.D. Ind. 2017) – A supplier that sold goods to the debtor less than 45 days before the petition had no reclamation right because the goods were subject to the perfected security interest of the debtor’s inventory lender.
– Wells Fargo Financial Leasing, Inc. v. Pope, 2017 WL 114408 (S.D. Miss. 2017) – Because the debtor’s secured lender had a perfected security interest in the products and proceeds of the debtor’s poultry houses, compost drum, generator, land, and related equipment of his farming operation, it had a perfected security interest in the proceeds of his poultry flocks. Therefore, the debtor’s assignee, who knew of the money owed to the secured party and that the debt was secured by the land, poultry houses, and equipment of the poultry farming operation, was liable in conversion for failing to remit the proceeds of the flock to the secured party.
– Delaware Trust Co. v. Wilmington Trust NA, _ B.R. _ (Bankr. D.Del. 2017) – The court reaffirmed its earlier decision, following Momentive, that distributions under a plan are not ‘“proceeds of collateral” when … [the creditor] gets stock in the reorganized entity, unless, that stock was paid by a third-party buyer in return for the debtors’ assets comprising the collateral.’ Here, no substitute for the Collateral was received by the TCEH First Lien Lenders through Plan Distributions.”*
– In re Edwards, 2017 WL 6754026 (Bankr. E.D.N.C. 2017) – Although a dealer’s compliance with the state certificate of title statute perfected its security interest in a mobile home and all accessions thereto, it did not perfect the security interest in drapes, smoke detectors, ceiling fans, a set of steps, or a 4’-by-4’ porch, each of which was readily detachable and not, therefore, an accession.
– City of Galveston v. Consolidated Concepts, Inc., 2017 WL 1196213 (S.D. Tex. 2017) – The IRS, which had filed a notice of federal tax lien against a contractor, had priority over the claim of a lender with an earlier perfected security interest in the contractor’s accounts from a specified project. The lender failed to produce sufficient evidence to raise a factual issue that the funds were proceeds of accounts from that project, and the checks previously issued (but not cashed) were made payable jointly to the contractor and a subcontractor.
F. Default and Foreclosure
– Credit Acceptance Corp. v. Lowery, 2017 WL 1191087 (Del. Ct. Common Pl. 2017) – A secured party was entitled to a monetary judgment on the secured obligation even though it had not foreclosed on the collateral.*
– PACCAR Financial Corp. v. Mostoller, 2017 WL 1902898 (Pa. Super. Ct. 2017) – A secured party was entitled to the full amount of secured obligations from the debtor and guarantors even though the defendants contended that the secured party had disposed of some or all of the collateral. The secured party would, however, have to credit the secured obligation for the amount of the disposition proceeds.
– Napoleon v. Strategic Dealer Services, LP, 2017 WL 894540 (Tex. Ct. App. 2017) – A debtor on a car loan: (i) had made payments to one of two assignees of the loan; (ii) received those payments back when the payee determined that the other assignee had priority; and (iii) never paid the assignee with priority. The debtor had no defense or claim against the assignee with priority, which eventually repossessed and sold the car.
Because the debtor conceded that she signed the purchase contract, was obligated to make payments, and that she granted a security interest in the car, she was liable on the assignee’s claim for breach of contract. The fact that the assignee did not possess the original contract was irrelevant because the contract was not a negotiable instrument. Although the debtor claimed that the certificate of title application contained her forged signature, there was no evidence that the assignee had knowledge of this when it repossessed and sold the car.
– Companion Property and Casualty Insurance Company v. Wood,
2017 WL 4168526 (D.S.C. 2017) – A debtor granted a security interest in corporate stock. The security agreement gave the secured party a right to “properties received upon the conversion or exchange thereof pursuant to any merger, consolidation, reorganization, sale of assets or other agreements”. That language, combined with the duty of good faith and fair dealing, precluded the sale of substantially all assets of the pledged entities without delivering the proceeds or benefits of the sales to the secured party.*
2. Repossession of Collateral
– Walhof & Co., Mergers and Acquisitions, LLC v. MCB Holdings I, LLC, 2017 WL 5661589 (Minn. Ct. App. 2017) – A secured party initially had a security interest in the debtor’s membership units in an entity and obtained a judgment and entered into a cash management agreement with the debtor that purported to assign to the secured party all rights to membership units. Although the cash management agreement also required the secured party to transfer the membership units back to the debtor upon payment of the debt, the secured party had no obligation to act in a commercially reasonable manner when selling the membership units.
– Davis v. Toyota Motor Credit Corp., F. Supp. 3d 925 (D. Md. 2017) – A debtor who alleged that a repossession agent battered her in connection with a repossession stated a claim for battery against the repossession company. In the absence of an allegation of agency, the debtor had not stated a claim against the secured party. The debtor’s allegations also failed to state a claim for breach of the peace because there is no such tort, and failed to state a claim for conversion or trespass to chattels because the secured party had a right to repossess the collateral.
– Commerce Bank & Trust Company v. Property Administrators, Inc., F. Supp. 3d 14 (D. Mass. 2017) – A secured party had a security interest in an airplane. The debtor, after default, sold the plane without the secured party’s permission. The debtor had had avionics removed. The secured party was entitled to a temporary restraining order prohibiting the debtor and the buyer from transferring or altering the airplane.
– CNHIndustrial Capital America, LLC v. T & P Farms, LLC, 2017 WL 4448229 (N.D. Miss. 2017) – The assignee of chattel paper was entitled to replevy the underlying goods securing the account debtor’s obligation because the account debtor had agreed not to assert defenses against the assignee and had defaulted by not making payments when due.
– Hartwell v. Lone Star PCA, 2017 WL 2664445 (Tex. Ct. App. 2017) – A secured party was entitled to a preliminary injunction against the debtor transferring collateral because the secured party showed that the debtor was in default and had committed conversion by selling some of the collateral and not remitting the proceeds to the secured party.
– Allied Building Products Corp. v. George Parsons Roofing & Siding, Inc., 2017 WL 2964018 (E.D.N.Y. 2017) – A creditor claiming a security interest in the debtor’s accounts had not demonstrated irreparable harm so as to entitle it to a preliminary injunction prohibiting the debtor from transferring funds outside the ordinary course of business.
– In re Sun City Gun Exchange, Inc., 2017 WL 1968019 (Tex. Ct. App. 2017) – A secured party with a security interest in a defunct gun dealership’s inventory could not enter the residence of the debtor’s president for the purpose of inspecting, photographing and videotaping all firearms located on the property. The president was not a party to the security agreement and had offered to produce for inspection at a neutral location the guns in his possession, which he previously testified once belonged to the debtor.
-Burns v. State, 2017 WL 2819116 (Tex. Ct. App. 2017) – The debtor refused to return the collateral – a truck – to the secured party after default and threatened to conceal and damage the truck. The debtor was guilty of willfully damaging the truck by removing many components in order to hinder the secured party. The debtor was sentenced to incarceration for two years.*
– B.J.’s Auto Wholesale, Inc. v. Automotive Finance Corp., 2017 WL 6045223 (Ind. Ct. App. 2017) – A guarantor who owned and operated the debtor was also liable for the debtor’s conversion of the collateral because the security agreement provided that proceeds were held in trust for the secured party. There was unrefuted evidence that the guarantor exercised control over the proceeds and was aware of a high probability that such conduct was unauthorized.
– State v. Carey, 2017 WL 3412150 (Tenn. Ct. Crim. App. 2017) – A debtor granted a second lien on his vehicle. This was insufficient to convict him of intentionally hindering a secured creditor. There was no indication that the debtor was involved in a fraudulent scheme to prevent the initial secured party from repossessing the collateral or receiving payment on the loan. In fact, payments on the initial secured obligation were being withheld from the debtor’s paycheck when the second lien was created.
– Auto-Site v. Matthews, 2017 WL 5151204 (Ohio Ct. App. 2017) – A secured party repossessed the collateral due to the debtor’s fraud or misrepresentation in the original application. The secured party demonstrated its intention to waive the right to rescind by thereafter restoring possession of the collateral to the debtor. Consequently, when the secured party later repossessed and disposed of the collateral, the debtor remained liable for the deficiency.
– Dupreez v. GMAC, Inc., 2017 WL 6016592 (Md. Ct. App. 2017) – A secured party could charge the debtor for the cost of repossessing the collateral, both under the terms of the security agreement and pursuant to UCC § 9-615(a).
– Connor v. Reilly, 2017 WL 213840 (W.D. Wis. 2017) – A buyer of a car did not have a cause of action under § 1983 against the sheriff that seized the car and then released it to the secured party without first providing the buyer with a hearing. The buyer had acquired the car, indirectly, from an individual who had paid for it with a fraudulent cashier’s check and who, when reselling it, had provided a fake Notice of Lien Release. The secured party retained a security interest in the car that was superior to the rights of the buyer.
3. Notice of Foreclosure Sale
– Kinzel v. Bank of America, 850 F.3d 275 (6th Cir. 2017) – A brokerage house did not breach its agreement with its customers by liquidating, without prior notice, securities in the customers’ securities account and using the proceeds to pay down the customers’ secured obligation to the brokerage because: (i) UCC § 9-611 requires notification only after default, and in this case the brokerage was exercising its contractual discretion to liquidate the collateral in the absence of a default; and (ii) notification is not required when the collateral is traded on a recognized market, and in this case the securities were traded on the New York Stock Exchange, which is a recognized market. The borrower’s agreement with its secured party gave the secured party “ultimate control” and “sole discretion” to liquidate the collateral in the securities account when the stock market crashed, which the secured party did. UCC § 9-611 did not apply because the secured party was not acting upon a “default.” The secured party acted in good faith by taking steps within the “range” of risk assumed by the borrower. In the absence of a standard to exercise the secured party’s discretion, the secured party had to act in a reasonable manner, which it did. A brokerage house did not breach the implied covenant of good faith and fair dealing by liquidating, without prior notice or demand, a couple’s securities account – which at the time consisted principally of stock in one company – when the value of the securities fell. Although the loan-to-value ratio was under 70%, which had been the brokerage’s internal threshold for exercising its contractual discretion to liquidate collateral, nothing about the 70% threshold was actually a part of the parties’ agreement. Although the debtors had taken great strides to pay down the secured obligation and the brokerage was aware of their attempt to obtain a home-equity line of credit and move other assets into the securities account, the brokerage liquidated collateral after the Dow Jones Industrial Average was at a twelve-year low and the securities were at their lowest price since 1991.*
¡ Hamilton v. Muncy, 2017 WL 4712410 (Ky. Ct. App. 2017) – A used car dealer with a security interest in a car sold to a consumer and whose notification of disposition did not comply with UCC § 9-614 was not entitled to a deficiency.
4. Commercial Reasonableness of Foreclosure Sale
– Bruce v. Cauthen, 2017 WL 455578 (Tex. Ct. App. 2017) – A limited partner who had a security interest in another partner’s partnership interest wrongfully purchased that interest at a private sale. Although the partnership agreement expressly acknowledged that a public sale might be impossible due to securities laws, and that a private sale would be commercially reasonable even if it produced less than what a public sale would, it did not expressly modify the prohibition in UCC § 9-610(c) on a secured party buying at a private sale.*
– Volvo Financial Services v. Williamson, 2017 WL 4708136 (S.D. Miss. 2017) – A secured party did not act in a commercially unreasonable manner in failing to recondition two collateralized trucks and selling them for salvage. The secured party had the trucks inspected by an independent appraisal service and the estimated costs of reconditioning were higher than their reconditioned value. Although the salvage buyer was now offering the trucks for sale at a significantly higher price, that was only an asking price, not evidence of current value, and there was no evidence of the amount spent on reconditioning. The secured party also acted in a commercially reasonable manner in selling for $69,010 another truck with an estimated wholesale value of $80,850. The fact that the value of the collateral exceeds the disposition price is insufficient to establish that the disposition was commercially unreasonable. Although the sale might have yielded a higher price if the secured party had first reconditioned the truck, the value took its lack of reconditioning into account.*
– Kosowski v. Alberts, 2017 WL 6604565 (Ill. Ct. App. 2017) – A secured party could not be liable for failing to conduct a commercially reasonable disposition of the collateral because the assignee to whom the debtor made an assignment for the benefit of creditors, not the secured party, conducted the disposition. Because the disposition was approved by the assignee, it is commercially reasonable under UCC § 9-627(c)(4).
– Woods v. Hall, 2017 WL 2645689 (Wash. Ct. App. 2017) – Although a secured party declined to enter the debtor’s leased premises to remove the collateral, due to threatened criminal charges, the debtor was liable in conversion for interfering with the secured party’s right to reclaim the collateral because the debtor refused to deliver the collateral curbside despite the secured party’s demand that the debtor do so.*
– Jones v. Community Bank of Wichita, 2017 WL 840249 (Kan. Ct. App. 2017) – A guarantor granted a security interest in a CD jointly owned with her sister to a bank to secure a loan to the sister’s business. The guarantor had no cause of action for fraud against the sister’s husband for allegedly encouraging the secured party to declare a default and foreclose on the CD because the guarantor did not claim that any of the husband’s statements was untrue. In any event, all the statements were made to the secured party, not to the guarantor. Although the
husband might have mistakenly indicated that there were two $100,000 CDs instead of one $200,000 CD, the guarantor failed to show how that was material or how she had detrimentally relied on that misstatement. The guarantor also had no claim for conversion, unjust enrichment, or civil conspiracy.*
– Wells Fargo Bank, N.A. v. Holdco Asset Management, L.P., _ F.Supp.3d _ (S.D.N.Y. 2017) – A secured party held an auction of collateral. Under NY law the court held that the auction was impliedly with reserve and thus the secured party was entitled to reject the highest offer. In addition, because misrepresentation and conversion claims concerning the collateral were duplicative of the contract claims arising from the auction, the tort claims could not be maintained.
– Ara, Inc. v. Waste Management National Services, Inc., 2017 WL 4857428 (D. Minn. 2017) – A factor that purchased accounts had no private right of action under UCC § 9-404 or UCC § 9-607 against an account debtor for paying the debtor after receiving instructions to pay the secured party.*
– Durham Commercial Capital Corp. v. Ocwen Loan Servicing, LLC, 2017 WL 1196574 (S.D. Fla. 2017) – A factor’s letter to a law firm’s client that identified the firm’s accounts receivable assigned to the factor and instructed the client to pay the factor was effective under UCC § 9-406 even though the notification did not identify the underlying transactions giving rise to the client’s obligation to the firm. Even if the law firm violated the rules of professional conduct by giving the factor access to confidential files, and even if that formed the basis for a claim of malpractice against the firm, the factoring agreement was enforceable. However, there were unresolved issues regarding the client’s defenses and setoff rights that prohibited summary judgment on the factor’s claim against the client.
– CNHIndustrial Capital America, LLC v. Able Contracting, Inc., 2017 WL 4358706 (D.S.C. 2017) – A buyer of several items of equipment agreed not to assert against the seller’s assignee any claim or defense the buyer might have against the seller. The buyer had no defense based on its claim that it “revoked acceptance by returning the equipment” to the assignee. The buyer also could not assert a defense based on fraudulent inducement.
– Mccarthy Improvement Co. v. Manning & Sons Trucking & Utilities, LLC, 2018 WL 3009021 (D.S.C. 2018) – An account debtor that claimed to have overpaid the debtor and the secured party due to the debtor’s inclusion of unauthorized surcharges in its invoices had no unjust enrichment claim against the secured party because § 9-404(b) expressly denies an account debtor a right to affirmative recovery against a secured party. The secured party should be protected from claims that the account debtor has against the debtor, but should not be protected against claims that the account debtor has directly against the secured party (such as overpayment).
6. Effect of Failure to Give Notice, Conduct Commercially Reasonable Foreclosure Sale, or Otherwise Comply with Part 6 of Article 9; Deficiency Judgments
– Cohen v. Forden, 2017 WL 370909 (N.J. Super. Ct. 2017) – A managing member of a company who had an unperfected security interest in the company’s assets was guilty of fraud and negligent misrepresentation for failing to disclose the security interest to a lender who would not have made the loan had he known of the security interest.*
– Pierre v. Planet Automotive, Inc., 193 F. Supp. 3d 157 (E.D.N.Y. 2017) – An assignee of a consumer car loan from the dealership that originated the loan could be liable, under both 16 C.F.R. § 433.2 and the New York Motor Vehicle Retail Instalment Sales Act, for the fraud and false advertising allegedly committed by the dealership.*
– Gay v. Alliant Credit Union, 2017 WL 35704 (E.D. Mo. 2017) – A debtor failed to state a cause of action against a secured party for damages caused by the fact that the collateral – a boat – had sunk because the secured party never took possession of the boat. Although the secured party sent the debtor a notice stating that the secured party had repossessed the boat, the debtor knew that was not true. Although the secured party had indicated an intention to repossess the collateral and had received relief from the automatic stay to do so, that did not justify the debtor’s decision not to winterize the boat and could not be the basis for a promissory estoppel claim.
– Kaiser v. Cascade Capital LLC, 2017 WL 2332856 (D. Or. 2017) – A debt collector’s deficiency action on a car purchase loan, brought after the car was repossessed and sold, was subject to the four-year limitations period applicable to an action relating to a sale of goods, not the six-year limitations period applicable to contracts generally (including actions under Article 9). Accordingly, the debt collector could be liable under the Fair Debt Collection Practices Act for initiating the action.
– Volvo Financial Services v. Williamson, 2017 WL 4708136 (S.D. Miss. 2017) – The one-year limitations period under Mississippi law for an action for a deficiency did not begin to run when the secured party, who held seven notes, each secured by a vehicle, sold the first vehicles because the notes were cross- collateralized. Instead, the limitations period began after the last item of collateral was sold.
– In re Ambrose, 568 B.R. 716 (Bankr. N.D. Ga. 2017) – The Georgia Motor Vehicles Sales Finance Act generally prohibits a secured party that disposes of a motor vehicle from recovering a deficiency unless the secured party notifies the debtor within 10 days after repossession of its intent to pursue a deficiency. The act applies only to sellers and to finance companies that purchase chattel paper from sellers, not to lenders that provide financing directly to car buyers.
– O.F.I. Imports Inc. v. GECC, 2017 WL 6734187 (S.D.N.Y. 2017) – A debtor failed to state a claim against a secured party that failed to file a termination statement or release its interest in the collateral after the debtor paid down to zero its obligation on a revolving line of credit because the security agreement conditioned the secured party’s obligation to do so on the debtor’s deposit of sufficient cash to cover all contingent obligations and execution of a release, neither of which the debtor had claimed to provide.*
– In re House, 2017 WL 2579026 (Bankr. S.D. Miss. 2017) – A secured party was liable for $500 for not returning items allegedly in the debtors’ car at the time of repossession despite testimony that the secured party’s business practice was to inventory and store items of value.
– MBI International Holdings Inc. v. Barclays Bank PLC, 57 N.Y.S.3d 119 (N.Y. Sup. Ct. 2017) – A creditor had a security interest in lease payments due from the Saudi government and allegedly settled by releasing the Saudi government from the lease in exchange for a banking license in Saudi Arabia. The debtor’s claim against the secured party was barred by the statute of limitations, which requires that the action be brought within six years or within two years of when it should have been discovered. The conduct alleged occurred in 2006, the debtor was aware of the settlement by 2008, and the banking license became public knowledge in 2009.
– Cece & Co. Ltd. v. U.S. Bank, 60 N.Y.S.3d 5 (N.Y. App. Div. 2017) NMC Residual Ownership LLC v. U.S. Bank, 60 N.Y.S.3d 110 (N.Y. App. Div. 2017) – A holder of residual interests in a REMIC trust stated a claim for breach of contract against the trustee for selling trust assets to itself at a price below market. Although an indenture trustee does not owe a fiduciary duty to the trust beneficiaries and its obligations are defined by the terms of the indenture agreement, it does owe a duty to avoid conflicts of interest. The court stated there would be no claim if the indenture agreement had expressly given the trustee the right to purchase trust assets at a price below market, but it did not.
The indenture stated that the trustee may terminate the trust by purchasing the remaining trust assets. The agreement obligated the trustee to deposit a specified amount in an account for the beneficiaries, but did not state that this amount is the purchase price.
7. Successor Liability
– US Herbs, Inc. v. Riverside Partners, LLC, 2017 WL 238446 (N.D. Ohio 2017) – An entity purchased assets of the debtor from the debtor and its secured creditors – in lieu of a private foreclosure sale. The buyer was not liable to an existing creditor of the debtor because: (i) the buyer expressly disclaimed liability in the purchase agreement; (ii) there was no de facto merger because the debtor did not immediately or rapidly dissolve; and (iii) and the buyer was not a “mere continuation” of the debtor because there was no continuity of ownership.*
– Wass v. County of Nassau, 60 N.Y.S.3d 339 (N.Y. Sup. Ct. 2017) – An individual injured by an allegedly defective ladder had no product liability claim against the corporation that bought the assets of the manufacturer from the SBA, after the SBA had foreclosed its security interest in those assets. The “mere continuation” doctrine of successor liability did not apply because, even though the corporation employed some of the people who had worked for the manufacturer, there was no sale between manufacturer and the corporation, no continuity of ownership or control, and no corporate reorganization.*
– In re Comprehensive Power, Inc., 2017 WL 6327192 (Bankr. D. Mass. 2017) – A bankruptcy trustee stated a claim for successor liability under both the de facto merger and alter ego theories against the secured party that purchased the debtor’s assets at a public disposition pursuant to a “loan to own” strategy and then hired many of the debtor’s employees to engage in the same business, even though there was no continuity of ownership.*
– Columbia State Bank v. Invicta Law Group PLLC, 402 P.3d 330 (Wash. Ct. App. 2017) – A lawyer’s sole proprietorship was the successor – under the “mere continuation” theory of successor liability – of the professional limited liability company of which he was the sole member and manager and which ceased paying its debts when the lawyer filed for personal bankruptcy protection. The lawyer continued his individual law practice under the sole proprietorship using the same name, location, website, signage, telephone number, employees, and equipment as the PLLC, and represented the same clients. The sole proprietorship also held itself out to the landlord and malpractice insurer as the PLLC or its successor. Because the lawyer, as a sole proprietor, had successor liability for the obligations of the PLCC, the lawyer was also bound by the attorney’s-fees clause in the PLCC’s loan agreement with a bank.
– La Bella Dona Skin Care, Inc. v. Belle Femme Enterprises, LLC, 805 S.E.2d 399 (Va. 2017) – Unlike successor liability based on fraud, which must be proven by clear and convincing evidence, successor liability based on “mere continuation” need be proven only by a preponderance of the evidence.
G. Retention of collateral
2017-2018 Commercial Law Developments
I. PERSONAL PROPERTY SECURED TRANSACTIONS
II. REAL PROPERTY SECURED TRANSACTIONS
IV. FRAUDULENT TRANSFERS AND VOIDABLE TRANSACTIONS
V. CREDITOR AND BORROWER LIABILITY
VI. U.C.C. – SALES AND PERSONAL PROPERTY LEASING
VII. NOTES AND ELECTRONIC FUNDS TRANSFERS
VIII. LETTERS OF CREDIT, INVESTMENT SECURITIES, AND DOCUMENTS OF TITLE
X. OTHER LAWS AFFECTING COMMERCIAL TRANSACTIONS