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Bankruptcy
University of Connecticut School of Law
Marrion, Thomas S.

Professor Thomas Marrion
Bankruptcy
Spring 2011
 
Article 9 of U.C.C.:
 
About security interests in personal prop (means not real estate)
 
Security Interest
·         What it does: 1-201(35)
Provides priority to secured party: first in time, whomever received security interest first on same piece of collateral
Provides enforceability: Gives secured party rights to seize collateral and sell to use proceeds to pay off debt.
Provides encumbrance: SI stays with asset, even if D sells the collateral.  The buyer is out of luck. 
 
A9 addresses 4 things: consensual SI
·         (1) creation of SI ; (2) perfection of SI; (3) priorities of SI ; (4) enforcement of SI
·         Creation: (how can factory grant SI to the collateral?) à Deals/establishes relationship bw D and SP
o   UCC §9-203: 3 Step Process:   
§  (1) Signed or authenticated SA
·         Sign security agreement
·         Deliver collateral to SP by possession or control
§  (2) value: from SP to D
·         SP has to give value to D; this is consideration
·         Ex. Loan, promise to pay money in the future; future advances
§  (3) D needs right in collateral to grant SI
·         D has ownership, or right to exclusive control/possession, right to sell goods, K to purchase
·         Perfection: gives C rights against the world;
o   an unperfected SI will be valued as between D and S/P, but will be invalid against certain third parties
o   S/I can be perfected 3 ways:
§  (1) filing FA
·         Most common; FA is filed in central filing office FA has to identify the D; make sure name is correct. Disclose the collateral that is subject to SI
§  (2) S/P takes possession of the collateral
·         Permitted for anything tangible; §9-3-13
·         Req for $$; anything else tangible possession is a permitted method
o   But possession is impractical for some types of collateral (machinery, bc factory cant use it if SP has it)
§  (3) control
·         3 party concept
o   ex. To perfect SI in bank account is to sign control agreement and this agreements gives SP control over the account
o   ex. Brokerage account
§  (4) automatic perfection – for PMSI: in consumer goods §9-301
·         Priority: General rules
o   SI (perfected or unperfected) prevails over unsecured C§9-322-a2
§  Better to have a SI even if its not perfected
§  Better to have a perfected SI then unprotected
o   Bad to have a unperfected security  interests; unperfected SI loses to the lien C§ 9317a2 à better to be lien C
§  Lien Ccan grab the SI if the SI is unperfected
§  In bankr, bankr T has powers of a lien creditor à Means: anytime a D files a bankr, an unperfected SI is wiped out bc Bank Thas  powers of lien creditor
o   If you get there first you win: if everyone is perfected, the one who perfected first wins!
§  Exception: PMSI 9-324-a; factory/D can purchase new machine and grant a PMSI and this PMSI will prevail over the banks SI
·         Interest that is granted to seller of asset (Joe’s Shop, not bank)
o   PMSI is granted to 3rd party lenders; aka PMSI “with enabling loan”
o   BUT the SA can have a provision against PMSI
o   PMSI often granted in times when D would normally not be able to get the loan;
 
Who Prevails against an Unperfected Interest: §9-317:
**Trustee Acting as Lien Creditor** §544
PMSI
……
Lien Creditor (important for §544 Strong Arm Clause) – includes judicial liens – this is a person who the debtor assigns all his property to for the benefit of creditors
 
Pre judgment remedies and post judgment remedies:
·         Usually for those who do not have a secured interest.  So, if a P files tort, a P can seek a prejudgment remedy.  Statutory concept, governed by state statutes.  No uniform statute.
·         A9 governs consensual actions àGranting of SI to SP from D
·         Pre and post judgment: away from Ds and SP, here we are in  Ds and C; this is not consensual;No secured parties here;
·         Prejudgment remedies:
o   Available at beginning of lawsuits to give remedies at beginning of lawsuit
§  Ex. Factory gets unsecured loan; bank sues and wants to be sure that if it wins the lawsuit it has done everything it can that there is some prop there to satisfy it
o   Types of prejudgment:
§  Attachment: seizure of D’s prop/asset
·         Constructive or actual
·         Intended to deprive D during pendency of lawsuit from using or disposing of the asset so that Ccan ensure that asset is there at conclusion of lawsuit
·         Involves 2 parties
§  Garnishment
·         Involves 3 parties: P Δ and garnishee (recipient of writ of garnishment: lawsuit pending, I understand you owe Δ money but don’t give Δ that money bc the court is telling you to hold on to the asset)
o   Ex. Bank account; π Δ bank (garnishee); bank is Held: prop of the D Δ; means: 3rd party owes a debt to the Δ;
·         Garnishee can assert defenses relating only to its relationship to defendant (ex: bank says defendant actually owes it money and therefore the money in account goes to bank).  Garnishee cannot claim that P doesn’t have a good claim against D.
§  Lis pendens: means pending lawsuit
·          A notice of lis pendens can be filed at beginning of lawsuit that is intended to affect the real estate; puts world on notice that there’s a lawsuit pending so buyer beware bc lawsuit is intended to affect the real prop someone might buy
·         Post judgment remedies:
o   Csues D and obtains judgment, Cstill needs to collect on judgment;
o   Discovery
§  Find out where assets are and what assets are
o   Judgment lien:
§  Passive encumbrance; lien placed on judgment D’s prop and sits there until judgment Cdoes something about it
§  Judgment Ccan have it sit for years or can foreclose on it
§  Low cost way of obtaining security
§  Judgment lien can relate back to date of attachment
·         Cstarts lawsuit in 03/08; lawsuit completed 11/10; in 08 π gets attachment; in 10 judgment Cgets judgment lien; if Cdoes this properly, priority of judgment lien can go back to when it was attached in 08;
o   So if in 06/09 ABC Bank got lien on real estate and in 09/10 XYZ Bank gets another lien on real estate à π here would prevail over everyone…
§  This is passive (cf execution)
o   Garnishment
§  Same deal as prejudgment, except that prop is not held but actually seized.  Can also garnish wages, cannot do this prejudgment.
·         Prejudgment garnishment holds assets
·         Postjudgmement-Ccan go to employer and have emplr give % of wages to creditor;
o   Execution
§  Affirmative, aggressive
§  Post judgment seizure of prop by sheriff/marshal with nearly immediate sale.
§  Judgment Cbecomes a lien Cfor purpose of UCC (for purposes of priority C(*holder of attachment, garnishment, execution prevail over unperfected security interests)
·         Common features to pre and post:
o   Create lien à entitles Cpriority and allows enforceability by diff methods
o   Once judgment lien, execution lien, etc. is established, subsequent liens are subordinate to these leins.
 
NON bankr Exemptions (state law exemptions):
·         Fit into pre and post judgment remedies
·         Exemptions: allow Ds to retain certain prop even if Ds cant repay the debts bc even these Ds need to have some prop to support themselves…prevents Ds from becoming wards of state
·         Varies state by state
·         3 types of exemptions:
o   By type of prop: Ex. In FL homestead is exempt (no matter whether bungle or castle)
o   By  type and amount: CT homestead up to 75K per person
o   Amount cap: Any prop up to $2500K
·         Examples: Pensions, 401K; Household goods; Jewelry; Autos
·         General rules:
o   1) exemptions prevent only nonconsensual liens!!!**
§  Means: so in FL a lender can still get a mortgage bc this is a consensual lien
o   2) So D can grant a security interest or mortgage in asset that would otherwise be exempt
§  Ds cant waive exemptions in most states
o   3) Just bc asset is exempt doesn’t mean D can keep asset; If D has equity in prop that exceeds exemption, then prop may still be sold:
§  Ex: house exempt up to 75K.  house worth 600,000, 1st mortgage 400,000; means 200K of equity in prop.  Car sold for 8K, D receives $2,500, C get the rest.
§   Exemption therefore does not prevent sale of asset. Cant prevent Cfrom getting house as long as there is enough equity to get 7

nses
A→B→C→D
*transferee:person to whom prop is transferred
*transferor: One who conveys a title or property to the transferee
o   §8(a) àA good faith transferee from the D who gave REV for the property is fully protected
§  A bad faith transferee from the D is given no protection against the creditor à even if the transferee gave value that value is NOT deductible
o   §8(d)àeven if tx is voidable, GF transferee is entitled, to the extent of the value given the D for the tx, to (1) a lien/rt to retain any interest in the asset transferred; (2) enforcment of any obligation incurred; (3) reduction in the amount of liability on the judgment
§  Ex. 600K house, sell house to friend to 350K; friend if GF, can get lien for 350K, he is not out for 350, he either has to give asset back or make estate whole
 
·         Protection for the Subsequent Transferee §8(b)(2) defenses:
o   §8(b)(2)A subsequent transferee who acquired the property in GF and for value is fully protected à
§  *** i.e. do not need REV just need value
§  A sub. transferee, whether or not in GF, is sheltered under the rights of a prior GF transferee à 1 GF transferee cuts off the chain of recovery
§  A subsequent transferee who did not act in GF and did not derive rights through a good faith transferee has no protection à subject to avoidance or $ judgment and has NO offset for value given
·         Defenses for INSIDERS:
o   §8(d) (above)
o   § 8(f) à (1) insider gave new value (2) if made in ordinary course of business OR (3) made in GF effort to rehabilitate the D & tx secured PV given for that purpose as well as antecedent debt to the D.
 
Statute of limitations:
·         §9 = 4 years for everything other then insider preference
·         §5(b) Insider preference recipient = 1 yr period
 
LBO’S and Fraudulent Transfers
§  Two Kinds of LBO’s should be ok:
o    Maintain Equity:where the assets used to support an LBO do not exceed the net equity of the business and the business retains enough equity to be solvent and enough cash flow to operate
o   Cash: If cash flow remains stable enough to pay off debt.
·         Bay Plastics 1995 UFTA
RULE: Not all LBO’s are Fraudulent Transfers. Collapse LBO’s when there is evidence that the parties knew or should have known that the transaction would deplete the company’s funds.
o   Facts: Trustee is trying to avoid a LBO under §544/UFTA Constructive Fraud. Claim is that an LBO resulted in a fraudulent transfer b/c the $ used to buy out the company was paid to the shareholders of Bay Plastics, not to the corporation.  As part of the sale the buyer went to another creditor, showed them a rigged balance sheet w/ goodwill, that demonstrated after the LBO Bay Plastics would have equity. As a result of this the C released its S/I.  So when Bay Plastics filed Bankruptcy it no longer had a S/I and had to split the assets 50/50 with the LBO peeps.
o   Issue:  Was this constructive fraud?
o   Reasoning: Constructive fraud must prove 4 elements:
§  Transfer or obligation: In making the loan the D undertook a 3.95m obligation AND transferred a security interest in all its assets but got $0 in return.
§  Lack of REV: No REV if Collapse
·         Collapse: parties knew or should have known the transaction would deplete the assets of the company
§  Which Rendered Debtor Insolvent: The LBO rendered the D insolvent (A