The Easy Road for Article 9 in Florida

Summer is upon us, a good reminder that the effective date of Revised Article 9 is coming in just a year (the "Revision"). Of course, one of the main issues within Article 9, which gave rise to the Revision, was the lack of specificity in the way in which a secured party should provide the name of an individual debtor on a financing statement. To resolve this problem, a joint review committee was appointed by the American Legal Institute (ALI) and the Uniform Law Commission (ULC). The joint review committee produced two alternatives from which states would be free to choose. Alternative “A” sets up a hierarchy for individual names which requires a creditor to use the name on the most recent driver’s license, if the debtor has one. While Alternative “B” allows the creditor more flexibility in listing the individual debtor’s name, allowing the creditor to identify the debtor on the financing statement by the individual name, the surname and personal name, or the name on the debtor’s most recent driver’s license. See, What's in a Name. 

As I am getting ready to teach a Commercial Law Survey course, I know that the students will ask about the Revision and its progress here in Florida. Perhaps indicative of the easy road the Revision will have, the status of Article 9 in Florida has already been decided. Florida has enacted the 2010 amendments to UCC Article 9 through House Bill 483 (HB 483). The law provides Alternative “A” for individual debtor names in Section 9-503(a)(4) and takes effect on July 1, 2013, right on schedule. The bill was presented to the Governor on March 23, 2012 and was subsequently signed into law on April 6, 2012. The only small departure from the official text of the Article 9 amendments is a non-uniform version of Section 9-521. Under HB 483, the Florida version of Section 9-521 directs the secretary of state to develop or approve forms.

While Florida is neither the first, nor the last state to consider the Revision, its pathway with little resistance is a good sign for its fate going forward. Let's just hope that the Revision proves successful in its treatment of outstanding issues like debtor names that have provided much litigation.

-JSM

What About Amending UCC Article 2?

What?  Amend UCC Article 2?  You might think I am joking, as it is April Fool's Day.  But, indeed, I am not.  We've successfully amended UCC Article 9 a number of times in recent time.  Why not UCC Article 2?  Yes, the last attempt at this feat lasted a long time and ultimately failed.  There are many reasons why the Article 2 Amendments failed, though.  See Symposium on Revised Article 1 and Proposed Revised Article 2, 54 Southern Methodist Law Review 469 (2001).  The fact remains that Article 2 is still cumbersome, disorganized and plain out difficult to follow.    Might a smaller revision of the type used with Article 9 have success in an Article 2 revision?

As Professor Neil Cohen, Brooklyn Law, commented at the International Conference on Contracts KCON9, a code should be written in a comprehensive, systematic, and preemptive manner.  Professor Cohen observed that Professor Linda Rusch's work on revising the remedies portion of Article 2 accomplished the goals of a good code and had much to commend them. Professor Larry Garvin (Ohio State) concurred with much of what was said, particularly with the clarity, simplicity and power of the language of the draft remedies provisions.  Here's the video from the Plenary Session at KCON9.



So, despite this being April 1, perhaps sometime in the future when we all are sufficiently recovered from the trauma of having a failed Article 2 revision in the first place, we might consider moving toward a modest revision centered on some of the work that held a greater consensus.  Remedies anyone?

- JSM

What is in a Name? Revised Article 9's Treatment of Individual Debtor Names

While Article 9 of the UCC is one of the most recently amended articles of the UCC having just undergone revision in 2001 (the “2001 Revision”), the complexity of the code and changing practices in commerce have necessitated further revision. The ALI and ULC have now approved amendments which the states will now adopt toward an effectiveness date of July 1, 2013 (the Revision). All is well on the adoption front, but what does this really mean on key issues? As I am teaching a Commercial Law Survey Spring 2012, I've started to think about what hurdles the the Revision will set up for our students and practicing attorneys.

One of the issues that led to the Revision was disagreement about how a creditor should best specify the name of the debtor on the financing statement, with states such as Texas passing non-uniform amendments to address the problems. See, e.g., TEX.. BUS. & COM. CODE ANN. § 9.503 (2011); TENN. CODE ANN. § 47-9-503 (2011). Section 9-503 generally provides that a financing statement is not seriously misleading if it lists the name of the debtor indicated on the public record or the debtor’s jurisdiction for organizations or simply the name of the individual debtor. The model form provided in section 9-521 added merely that this be the “exact full legal name.” While this might initially appear sufficient guidance, it became apparent that issues remained, such as the inclusion of trade names and how to identify an individual’s name where the individual is commonly known as more than one name. Creditors who incorrectly identified the debtor soon found that their financing statement was ineffective because it was seriously misleading. Quite simply, these name errors can be fatal to the creditor’s attempted filing of a security interest. See, e.g., Peoples Bank v. Bryan Bros. Cattle Co., 504 F.3d 549 (5th Cir. 2007)(Cornerstone Bank obtained a security interest in the cattle, but failed to file a financing statement in the legal name of the debtor, “Brooks L. Dickerson,” having instead named “Louie Dickerson” as the debtor on the financing statement.)

To alleviate this problem with respect to individuals, the rules of the Revision allow for two alternatives. Revision § 9-503(a)(4)-(5) (2011). Alternative “A” sets up a hierarchy for individual names which requires a creditor to use the name on the most recent driver’s license, if the debtor has one. In the event the debtor has no driver’s license, then the creditor can use the individual name or surname and first personal name. Alternative “B” allows the creditor more flexibility in listing the individual debtor’s name, allowing the creditor to identify the debtor on the financing statement by the individual name, the surname and personal name, or the name on the debtor’s most recent driver’s license. Under this alternative, no one name designation takes precedence. Comment 2(b) explains that when driver’s license is required, but contains an error, the creditor must still use the name on the license in full when it is required, despite the error. The challenge that creditors which operate in more than one state will now face with individuals is getting the rules correct such that if the state uses Alternative A, the creditor must use the driver’s license if the individual has one and should not rely on the other manners in which names might be equally acceptable in Alternative B states.

Irrespective of Alternatives A or B for individuals, the use of the most recent driver’s license in the state where the financing statement was filed does not eliminate the potential pitfalls for creditors. First, has the debtor indeed provided the most recent driver’s license, rather than a replaced or expired one? Will creditors be able to search the driver’s license records to make sure the name is the most recent? Second, the name on the driver’s license may not in fact even be the debtor’s correct name, such as errors on the driver’s records or in the case of persons who change their name for marriage or other reasons. This may lead to confusion when later creditors search records. Third, driver’s license names are changed from time to time by the individual. Tying debt records to driving status may not be the most hassle free solution for creditors. Will creditors have to inquire into the marital status of women frequently to guard against name changes that either have or have not been made in driving records? For individuals that don’t have driving records, the Revision has not really changed the rules to address nicknames and similar issues.

When it comes to individuals, it seems that Alternative A and B would pose a potential pitfall for creditors operating in more than one state, unless the creditor simply makes it a practice to use a driver’s license in all instances. The challenges of ensuring that the creditor has the debtor’s correct drivers licenses may pose problems to ensuring a valid filing. Even under Alternative B, determining the debtor’s name and surname can pose difficulties, particularly with surnames comprised of multiple names. Creditors should not attempt to automatically rely on the name on a birth certificate, as the debtor may have changed names and foreign birth certificates sometimes contain different ordering of names. Moreover, filings for unincorporated business entities that are debtors will have the same issues as those for individuals. The pitfalls for individuals is heightened here as creditors will have to get the name correct (often the driver’s license of multiple individuals). Choosing the correct name for a financing statement is not a mechanical task. See, Revision 9-503 cmt. d.

Whether the Revision will ultimately alleviate a substantial amount of litigation in this area over time is uncertain, but the new rules will help resolve some outstanding issues regarding debtor names. Despite any criticisms of the Revision regarding debtor names, the rules at least give some further guidance that should eliminate some of the litigation in this area.

-JSM

Testing Secured Transactions Part II

My exams are all taken and graded now, so I wanted to report back my observations from my earlier post on Testing Secured Transactions. I ended up using a three hour examination with 30 true/false questions and five short answer essays. I actually offered up six short answer essays with the students getting to pick five to answer. The true false questions included all the basics of creating and perfecting security interests and priority. Topics on the short answer essays included: double debtors; new debtors; powers of the bankruptcy trustee; PMSI’s and general collateral descriptions in preexisting financing statements; and priority, proceeds, accounts and chattel paper. I must have had old-time television on my mind, as many of the hypos involved Gilligan's Island, Green Acres and Spiderman. Oh, and a little bit of politics thrown in too. After all, it was the "season" in Pennsylvania as I was drafting this exam.

The exam certainly was hard and rigorous from a time perspective. That said, I am a big believer in law school examinations serving the dual purpose of testing and teaching. I would certainly use this format of examination again. The true false gave me coverage of differing fact patterns, as did the short answer. The students had many situations to contend with, but also had to draft some short essays (typically about a page each) and cite to the appropriate code provisions. As for student performance, with a few exceptions, the students tended to do about the same on each part of the examination. The students who did well on the true/false mostly did about the same on the short answer essay.

Overall, I was also pleased with the quality of the answers given by the students. The rules of double debtors and new debtors probably gave the students the most trouble, but this did not surprise me. I find that the rules of 9-325 and 9-326 are hard for students to grasp (even with the examples in the code). But I did give the students a hint in the review session that these rules might appear on the examination. The next time I teach Secured Transactions, I will be mindful of my approach on these issues to see if there are better ways to make this easier for the students. With this exception, though, I am confident that the students do understand the basics of Article 9.

Most of my students this year will be taking the bar examination in Pennsylvania where Article 9 is no longer on the bar exam. But as these issues come up routinely in practice, the examinations give me confidence that they will be able to solve these issues when they arise. I would use this format of examination again, though it was a close call to pair multiple-choice with a long format traditional essay. I hope that you all had a good semester and have your grading done (or at least almost).

Testing Secured Transactions

When I went to Vanderbilt law school some years ago, I had Professor Margaret Howard for Secured Transactions. Professor Howard gave us a multiple choice final examination that I recall had elements of short answer format as well. When I’ve taught Secured Transactions in the past, I’ve nearly always given the traditional long format essay exam. But, I’ve not taught Secured Transactions in a few years, so I am revisiting this as I am thinking about this Spring’s rapidly approaching exam. I am leaning toward using a short answer examination for Secured Transactions.

Of course, what do lawyers really need to know about U.C.C. Article 9? Not that they haven’t been taught a great deal in class, but testing forces professors and students alike to give thought to focusing on key issues. It would seem at the least that students must understand the basics of classifying collateral, creating a security interest, perfecting the security interest and sorting out priorities. But then, there are plenty of other good things to learn as well. Should students really know how the “rebuttable presumption” test works for non-complying sales? What should they know about the treatment of inventory that is leased to a lessee where the lessor’s lender has a security interest in the collateral?

Lynn Daggett’s recent article All of the Above: Computerized Exam Scoring of Mulitple Choice Items Helps To: (A) Show How Exam Items Worked Technically, (B) Maximize Exam Fairness, (C) Justly Assign Letter Grades, and (D) Provide Feedback on Student Learning in the recent volume of the Journal of Legal Education makes the pitch for multiple choice generally, but not in the context of commercial law. The most persuasive argument is the ability to have data showing areas where students either mastered the material (or didn’t). Kenney Hegland’s 2006 article On Essay Exams also in the Journal of Legal Education takes the opposite stance. Hegland makes a pretty good case that exams not only evaluate, but also teach. This, of course, is better done with essay format.

The merits of both Daggett’s and Hegland’s arguments are easy to see, but are there reasons to prefer one over the other for commercial law? With the breadth of code provisions, it is tempting to use multiple choice questions in commercial law. In fact, I have used a partial multiple choice format when teaching Sales. But even in this class, I share Hegland’s desire to teach and a general commitment to having students carefully work analysis. The breadth of issues with Secured Transactions would make it easy to weave a single long fact pattern of a transaction in its entirety from the creation of the security interest to default and repossession by a lender. There would certainly be plenty for all students to write about in such a case. But, I find myself drawn to a format that might use the same transaction in a format that breaks it down to shorter 20-30 minute segments. This approach, I believe, would require students that might otherwise skip over difficult code issues to have to take them up because they are set out as separate grading items. There is also a greater potential for using variations on the fact patterns with this format, which is especially helpful for drawing out code nuances. Like Daggett, I like knowing which areas of Article 9 the students had more difficulty with on the examination. But, I am not quite willing to commit to giving the students a pass on explaining their analysis.

For any of you also mulling this over, several other articles that you might want to look at (though not specifically about commercial law) are:

Steven Friedland, A Critical Inquiry into the Traditional Uses of Law School Evaluation, 23 Pace L. Rev. 147, 174-79 (2002);

Linda R. Crane, Grading Law School Examinations: Making a Case for Objective Exams to Cure What Ails “Objectified” Exams, 34 New. Eng. L. Rev. 785 (2000);

Marcella David, A Funny Thing Happened on the Way to the Multiple-Choice Exam: Or, The Schoolroom Lessons from Bush v. Gore, 51 J. Legal Educ. 1 (2001);

Steve Sheppard, An Informal History of How Law Schools Evaluate Students, With a Predictable Emphasis on Law School Final Exams, 65 UMKC L.Rev. 657, 665-88 (1997).

The Cost of Default: Bow Wow

Snoop Dog may have his namesake in favor of Snoop Lion, but Bow Wow offers Uniform Commercial Code entertainment for those with a canine preference.  Apparently, a lender had to repossess Bow Wow's Lamborghini.  The original loan was in the amount of $300,165, with about $157,571 owing on the loan at the time of repossession.  The bank managed to sell the car for $161,000, but had $25,000 in costs associated with the repossession and resale of the car.  The bank sued the rapper for a deficiency of $21,371. See, Bank to Bow Wow.

 

UCC Article 9 directs the secured party to apply the proceeds from a disposition of collateral to the expenses of retaking, holding and preparing the collateral for disposition and then toward the obligation secured by the loan.  9-615.  The debtor is liable for any deficiency after application of the proceeds.  So, Bow Wow does in fact appear to owe the Bank the additional chow.  One of my students found this case.  Apparently, like me, he enjoys a little bit of Article 9 in action.

 

- JSM

Mark Roark on Fixtures

Commercial Law's Mark Roark (LaVerne) has written Defining Fixtures in Law and Policy in the UCC, which will appear in the Cincinnati Law Review. It always warms my heart to see great law review placements on UCC papers! Here's the abstract:

This article offers both a concession and a critique. The article concedes that the law of fixtures under the Uniform Commercial Code is helplessly tied to the various state laws dictating real estate. The natural impact of explicitly tying a UCC doctrine to multiple state law variation is the automatic loss of uniformity. At the center of the fixtures discussion in the UCC is a definition that does not define, and more importantly, does not limit doctrinal extension. Because the UCC offers a non-defining definition, this article considers the function of the fixtures definition. Specifically, the article looks to the original drafters comments about what the purpose of the fixtures definition was intended to accomplish.

Conceding that the definition in the UCC does not define, the article then critiques the definition by asking what role the definition plays in the game of seeking uniformity. Specifically, the article argues that the fixtures definition in UCC Section 9-102(a)(41) performs a function just as important as defining - it narrates. The article argues that the drafters in deciding on a definition of fixtures isolated themes of commonality and described those themes in a concise, but useful description of the fixture. Those themes include the joining of goods to realty, the concept of relation, and the emphasis on interests as a governing factor in the fixtures analysis. The article argues that the narration accomplished by the UCC allows for uniformity, not by mandatory uniformity, but by synchronic dialogue - allowing the themes to create images and the images to compel instinctive beliefs. The article argues, however, that the description provided by the drafters should be reunited with the substantive provisions relating to fixtures since each are tied to the other’s understanding.

-JSM

The Roller Coaster Ride of Bankruptcy

When this news story popped into my feeder today, I knew Google understands me. Roller Coasters, Fixtures, Bankruptcy, Creditor priority challenges... Its all there.

Six Flags Inc., currently in chapter 11 Bankruptcy, has decided to close its Louisville Park -- Kentucky Kingdom. The dispute relates to the ownership of certain rides in the park. The creditors are Six Flags America and the State of Kentucky. The state of Kentucky (in what appears to be a futile argument) alleges that the rides are affixed to the realty and therefore belong to the state of Kentucky. (The park leased the real property from the State of Kentucky for a term of years). The state also argues that the lease provides that if Six Flags terminates the lease with the state, the landlord will accede to the ownership of the rides.

Taking these issues separately, its clear that the lease agreement between Six Flags and the State of Kentucky establishes certain privileges to personalty on behalf of Six Flags (the tenant). Under the common law trade fixtures doctrine, a tenant has the right to remove those things he attaches to the realty in furtherance of his trade. (I believe its pretty clear that amusement rides would be in furtherance of Six Flag's trade). The single caveat is if the fixtures cannot be removed without damage to the realty. Thus, the rides are not treated as realty, but rather as personalty.

Taking the state's argument that a provision in the lease grants it an interest in the rides if Six Flags terminates its contract with the state, there seems to me to be a question of what type of interest the state obtains. First, in theory the state could obtain such a right, at least in as much as lessees may grant an interest in its property to its lessor. The question is what kind of transaction does this grant create. It seems that when a creditor (in this case a landlord) reduces its claim to a debtor's (in this case a tenant's) property, that is a security interest, and therefore must comply with the provisions of Article 9 -- the problematic point being if there is another creditor in the picture. The state may very well have a security interest, but may lose out in the priority scheme if other creditors have a claim.

If the state's position is that it has a state possessory lien on the tenant's possessions for failure to pay rentals (which does not appear to be the state's theory), the case may be more clear cut -- particularly given the preference for liens under Article 9-333.

Whichever it is, we will keep an eye on this case to see what the bankruptcy court does with the various roller coasters. If the Court needs (after a safety evaluation) a thrill description of the roller coasters in Kentucky Kingdom park, I would be happy to offer my services; though I suspect I would need to include at least four other theme parks in my assessment in order for my report to be complete.

Image is of the Chang Roller Coaster, Courtesy of Coaster Gallery. Chang's statistics are:

Built: 1997

Composition: Steel

Height: 154 Feet

Drop: 144 Feet

Top Speed: 63 mph

Ride Time: 2 Minutes, 30 seconds

MLR (Marc )

Bitcoin and Other Cryptocurrencies: Regulatory and Commercial Law Concerns

Interest in cryptocurrencies is growing, even after Mt. Gox, formerly the largest international Bitcoin exchange, filed for bankruptcy in Japan following $473 million in losses  (See also, Almost Half a Billion Vanishes). Bitcoin’s resulting drop in value, from a $1,000 high to around $500, should be a reminder that cryptocurrencies are volatile payment systems under which the applicability of existing regulatory and commercial law is unclear. 

Bitcoin Regulation

Because Bitcoin is not backed by any government or central bank, banking and financial industry regulations may not apply to Bitcoin transactions. For this reason, Federal Reserve Chair Janet Yellen testified before Senate that the Federal Reserve lacks regulatory authority over Bitcoin. Similarly, the FDIC indicated in at least one context that a money transmitter like PayPal is not a bank for federal banking law purposes. Consequently, Bitcoin users cannot expect deposit or investment protection from the FDIC or customer protection from the SIPC.

Given this uncertainty, the Federal Trade Commission, Consumer Financial Protection Bureau, Securities and Exchange Commission, and Commodity Futures Trading Commission are studying the need for cryptocurrency regulation. Additionally, New York and California are racing to pass state regulations.

Notwithstanding, it appears Bitcoin exchanges may be subject to money-laundering rules under the Bank Secrecy Act. The U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN) previously stated that exchanges must register with FinCEN as money services businesses and report large or suspicious transactions. This is not surprising given the anonymous and irreversible nature of Bitcoin transactions, which make them susceptible to money laundering and other criminal activity. For these reasons, it is unclear how Bitcoin exchanges can fully comply with reporting requirements.

Bitcoin Under Existing Commercial Law

It is equally uncertain how Bitcoin transactions are treated under existing commercial laws not designed to address cryptocurrency concerns. Because Bitcoin is intangible, yet acts as a store of value and a financial medium for the exchange of goods and services, it is difficult to classify as a property type. Under non-bankruptcy law, bitcoins are likely a “general intangible” or “payment intangible” for purposes of Article 9 of the Uniform Commercial Code (UCC), as adopted in most jurisdictions. Consequently, a creditor taking bitcoin as collateral should obtain a security agreement from the debtor sufficiently identifying the collateral. Perfection of the security interest would require filing a UCC-1 financing statement in the state where the debtor is located. Failure to perfect may render the creditor’s security interest subject to avoidance by a subsequently appointed bankruptcy trustee. Interestingly, because secured lenders sometimes take blanket security interests in all of a debtor’s property, including general intangibles, many banks and financial institutions may already hold security interests in a debtor’s bitcoins without realizing it.   

At least one commentator has also indicated that, because Bitcoin exchanges may not constitute banks, bitcoin held by an exchange would not qualify as a “deposit account” under the UCC, but rather as a “payment intangible.” Thus, perfection in a debtor’s cryptocurrency held on an exchange cannot be accomplished by an account control agreement typically used to perfect against deposit accounts. As a result, when a debtor transacting  business through a Bitcoin exchange defaults, it may be harder for secured creditors to liquidate their collateral. 

Given Bitcoin’s inherent volatility, and the difficulty secured creditors may face collecting against it, Bitcoin’s use as collateral in conventional lending transactions remains highly suspect. For these reasons, cautious lenders should consider including representations and covenants in lending agreements to prohibit or limit a borrower’s use of Bitcoin.

In bankruptcy, a debtor’s bitcoin at filing would likely qualify as property of the estate since the debtor would have a legal or equitable interest therein. Accordingly, a bankruptcy trustee should be able to assert control over a debtor’s bitcoins (or their value) and liquidate them for the estate’s benefit. A debtor’s failure to schedule or adequately explain the absence of previously held bitcoins, or turn over existing bitcoins to the trustee, could provide grounds to object to the debtor’s discharge. A debtor’s pre-bankruptcy transfers of bitcoins may provide grounds for a trustee to pursue preference or fraudulent conveyance actions against bitcoin recipients. However, identifying the recipients may be complicated by Bitcoin’s anonymity. Regardless, prudent trustees should inquire about a debtor’s existing or past Bitcoin investments or transactions.  See, The Hazards of Lending to Bitcoin Users.

Increased awareness of Bitcoin’s potential security pitfalls highlights the uncertainties surrounding cryptocurrency’s future. Going forward, legislation and case law will likely provide more clarity on existing commercial law and regulatory concerns. Until then, parties transacting business with or investing in Bitcoin should exercise caution.  See, Is UCC Article 9 the Achilles Heel of Bitcoin?

By Robert N. Gilbert and Alexandra D. Blye , Carlton Fields, Jorden Burt, Miami, Florida

Links provided by JSM

Teaching Real Estate Wearing Commercial Law Glasses

When I was a new professor, eager to meet any and all institutional needs, I agreed to teach Real Estate Transactions, a common law class in a civil law state. It really is a property course properly within the property curriculum, but inadequate staffing there (apparently few property profs want to teach real property these days, the rage being IP) pushed it my direction as the junior person. And that is how I became a real estate teacher. I run hot and cold on the course, but teaching it this semester has been wildly fun with the economic/mortgage crisis. When I am left to the traditional commercial law curriculum, the time is rare when the subject for the day is all over the papers and television, nearly every day. Now I know how my Con Law colleagues feel, talking about this new development or that new case.

Interestingly, I have found that the class, and the task of mastering real estate law, have broadened significantly my perspective on general commercial law. First, you realize what a truly grand and amazing achievement the UCC in fact is. Property law is scattered all over the place--radical disuniformity at the common law, disparate state perspectives and approaches, periodic interventions of federalization, but there is nothing, no statutory supplement or code, that you can pick up and wave with any sort of authority and state "this is the law you must know." The students love this, as you might imagine. Nearly every NCCUSL foray into real property areas has crashed and burned, which makes me less uptight--and almost pragmatic--about the impending failure of the Revised Article 2 project. I have spent the last couple of weeks on state statutory redemption and anti-deficiency laws, and the chaos in that area of mortgage law elevates Grant Gilmore from "Great" to "Bodhisattva who walked among us once" in my pantheon of Commercial Law idols. Mucking through the mess that is real property secured transactions law, you can truly appreciate the amazing accomplishment that is Article 9.

Another interesting thing about a tour of duty in Real Estate is that you see how the doctrine of good faith purchase permeates all of commercial law. You see it with transfers of deeds, foreclosure sales, recording acts. No property casebook does this doctrine to my satisfaction, and I always end up rephrasing things to put them into my Article 3/4 framework. I now see holder in due course less as an Article 3 anachronism to be viewed in isolation, but rather as simply the UCC's play on a comprehensive commercial law doctrine that extends throughout all of transactional law.

In semesters such as these where I am doing a Code class and Real Estate the same day, there is an exciting juxtaposition. In the mornings there is the precision and clarity of the UCC for my Article 2 class, followed up by the chaos and indeterminacy of mortgage law. I would like to say that each legal approach makes me appreciate the other more, but I have to admit that each foray into the regulation of real estate makes me admire and understand the whole enterprise that is the UCC just a bit more.

Valuable Reading for Commercial Law

Now that most states have adopted the 2010 Amendments to Article 9, a new copy of the ABA's Portable UCC (5th edition) might be helpful, if you've not already seen it.  In other interesting new reads:

1. The CISG as Soft Law & Choice of Law: Gōjū Ryū? (Lisa Spagnolo).
2. UCC Suvey - Sales (Jennifer Martin).  Highlighting cases from 2013 decided under Article 2 of the Uniform Commercial Code. Particular Article 2 highlights include the mixed goods case of Whitecap Investment Corp. v. Putnam Lumber & Export Co., a case involving multiple transactions for treated lumber where the court found that application of the “predominant purpose” test to determine whether Article 2, or common law, applies to disputes is dependent upon whether the parties have an overriding agreement for the transactions or whether the court evaluates each individual transaction on its own. The Sales Survey also took up the merchants must read their mail case of Brooks Peanut Co., Inc. v. Great Southern Peanut, LLC., a case involving peanut brokers and communications among the parties and their brokers.
3. The Uniform Commercial Code Survey: Letters of Credit (James Barnes & James Byrne).  This survey concentrates on the most significant letter of credit ("LC") issues addressed in cases decided in the United States in the year 2012.
4. The Incoherent Role of Bargaining Power in Contract Law (Max Helveston & Michael Jacobs). 

This paper was presented at the KCON in February.

Here it the video for that session:

What About Revised Article 7?

To finishing following up on Robyn Meadows's earlier post, when Governor Edward Rendell signed Pennsylvania HB 1152 into law on April 16, Pennsylvania became the twenty-ninth state to enact Revised UCC Article 7 — joining Alabama, Arizona, Arkansas, California, Colorado, Connecticut, Delaware, Hawaii, Idaho, Indiana, Iowa, Kansas, Maryland, Minnesota, Mississippi, Montana, Nebraska, Nevada, New Hampshire, New Mexico, North Carolina, North Dakota, Oklahoma, Rhode Island, Texas, Utah, Virginia, and West Virginia. Nine days later, Governor Phil Bredesen added his signature to Tennessee HB 3950, bringing the number of enacting states to thirty.

Elsewhere, on April 9, the Illinois Senate unanimously passed SB 2080 — which, as has been true in a number of states (including Pennsylvania, but not Tennessee) proposes enacting both Revised Article 1 and Revised Article 7. The bill now awaits a first reading in the Illinois House, which stands in recess until April 29. Massachusetts HB 4302, likewise, combines Revised Articles 1 & 7. As detailed in my white paper on Revised Article 1, HB 4302 has a tortured history and appears to stand little chance of enactment any time soon.

All of the enacted versions of Revised Article 7 are in effect except for Pennsylvania's, which should take effect on or about June 15, and Kansas's and Tennessee's, which will take effect on July 1. If enacted, Illinois SB 2080 will take effect on or after June 1.

UCC Revised Article 1 Enactment Status

As of January 1, 2008, Revised UCC Article 1 was in effect in 28 states -- Alabama, Arizona, Arkansas, California, Colorado, Connecticut, Delaware, Florida, Hawaii, Idaho, Indiana, Iowa, Kentucky, Louisiana, Minnesota, Montana, Nebraska, Nevada, New Hampshire, New Mexico, North Carolina, North Dakota, Oklahoma, Rhode Island, Texas, Utah, Virginia, and West Virginia. Kansas's version of Revised Article 1, enacted last year, will take effect on July 1. Of the 29 state enactments to date, 0 of 29 include the uniform Revised 1-301 choice of law provision -- each of the 29 enacting state legislatures having opted instead for some variation of its state's pre-revised 1-105 -- and only 20 of 29 include the uniform 1-201(b)(20) definition of "good faith" -- 9 state legislatures opting to retain the pre-revised "honesty in fact" definition in Article 1 and reserve "the observance of reasonable commercial standards of fair dealing" requirement for parties and transactions subject to that standard under another Article.

As of February 28, 2008, bills proposing to enact Revised Article 1 were pending in five states: Massachusetts, Pennsylvania, South Dakota, Tennessee, and Vermont. Massachusetts HB 4302, which succeeds the previously unsuccessful HB 3731, is currently awaiting a third reading in the Massachusetts House. Pennsylvania HB 1152, which was tabled last fall after passing the Pennsylvania House, was removed from the table on February 12 and awaits a third reading in the Pennsylvania Senate. South Dakota SB 93 unanimously passed the South Dakota Senate on January 29, unanimously passed the South Dakota House yesterday, and now awaits Governor Mike Rounds's approval (or lack of disapproval, as the case may be). Tennessee HB 3949 and SB 3993 were both introduced on January 31 and are currently before their first committees in their respective introducing chambers. Vermont HB 563 passed the Vermont House on January 24 and is now before the Vermont Senate Economic Development, Housing & General Affairs Committee. All five currently-pending bills reject the uniform Revised 1-301 choice of law provision (opting instead for some variation of pre-revised 1-105) and embrace the unitary good faith standard of uniform Revised 1-201(b)(20).

Waiting for SB 2080

Both chambers of the Illinois legislature passed SB 2080 on May 31, 2008. Taking advantage of most of the 30 days the Illinois Constitution affords the legislature to present a passed bill to the governor, see Ill. Const. art. IV, § 9(a), SB 2080 was sent to Governor Rod Blagojevich on June 27, 2008. As of July 30, 2008, Governor Blagojevich has neither signed nor vetoed SB 2080. If this were legislation Congress forwarded to President Bush or that most state legislatures forwarded to their respective governors, SB 2080 would by now be deemed enacted by passage of time. However, the Illinois Constitution affords the governor 60 days to sign or veto a bill before it is deemed enacted without the governor's action. See Ill. Const. art. IV, § 9(b). So, while the bills enacting Revised Article 1 in Pennsylvania (also enacting Revised Article 7), South Dakota, Tennessee, and Vermont this year have all taken effect since the Illinois General Assembly passed SB 2080, Illinois's incipient enactment of Revised Articles 1 and 7 continues to idle. (Hopefully, unlike Godot, SB 2080 will eventually arrive.)

If enacted, SB 2080 will make Illinois the thirty-fourth state to have enacted Revised Article 1 and the thirty-first state to have enacted Revised Article 7.

What's In a Name?

On March 13, 2008, the Nebraska Legislature passed LB 851 and it is now awaiting the Governor’s signature. If signed, the new law will take effect three months after the legislature adjourns (the legislature is currently slated to adjourn on April 17, 2008) and will have a significant impact for those who conduct UCC searches on individual debtor names in the state.

The bill amends § 9-506(c) so that a financing statement is sufficient for an individual name if a search on just the correct last name of the individual would disclose the record. The effect of this legislation will be to make the first and middle names of individuals irrelevant to the efficacy of a financing statement. That in turn will increase the due diligence burden for searchers. In short, searchers will have to review every financing statement that provides the same last name as the individual name searched. This could be a large task.

For example, a UCC search of the individual last name “Johnson” on the Nebraska Secretary of State’s web site produces 2671 unique active records. For a searcher interested in the property of any one of them, each of those filings would have to be reviewed. This would seem to significantly add to the cost associated with using the filing system, something that would seem undesirable in this time of tight credit.

The problems associated with filing and searching against individual debtors has frequently been the subject of long trains of postings on the UCC listserv. Texas has already enacted a non-uniform rule to deal with the preceived problem and now Nebraska is poised to adopt a different approach. The ALI and NCCUSL are in the process of establishing an Article 9 Review Committee to discuss issues that have arisen and formulate proposals (but not to do actual drafting). I hope the remaining 48 states refrain from adopting any more non-uniform approaches -- especially not Nebraska's approach -- to this issue until that Committee has the opportunity to address the matter.

Update on Dragnet Clauses

Courts are continuing to split on the efficacy of dragnet clauses in consumer transactions. Some courts give effect to such clauses, see In re Shemwell, 378 B.R. 166 (Bankr. W.D. Ky. 2007) (dragnet clause in open-ended line of credit granted to consumer is enforceable, and thus collateral secures all obligations of the consumer to the creditor); In re Nagata, 2006 WL 2131318 (Bankr. D. Haw. 2006) (credit card agreement, which provided for debt to be secured by all collateral provided for other loans made to the debtors, was secured by cars which debtor later refinanced, even though debtors had paid off the car loans); In re Franklin, 343 B.R. 815 (Bankr. N.D.W. Va. 2006) (enforcing a future advances clause in a consumer loan transaction without discussing the purpose of the future advance or how related it may be to the original loans). However, about an equal number do not. See Wooding v. Cinfed Employees Credit Union, 872 N.E.2d 959 (Ohio Ct. App. 2007) (although auto loan agreement provided that car would secure all obligations the borrower owed to the lender, nothing specifically indicated that the car would secure the borrower’s credit card account obligations and thus there was "no meeting of the minds with respect to the cross-collateralization of the automobile"); In re Yelverton, 2007 WL 841393 (Bankr. M.D. Ala. 2007) (neither first loan agreement, which included a clause indicating that collateral securing other loans also secures this one, nor second loan agreement, which included a clause purporting to make the collateral secure all other debts of the borrowers, was adequate to make the collateral granted in the second agreement secure the debt created in the first).

The most recent decision on this point is In re Keeton, 2008 WL 686938 (Bankr. M.D. Ala. 2008) (dragnet clause in security agreement with joint debtors did not clearly encompass obligations later incurred by only one of them, and thus the collateral did not secure those individual obligations). Decisions such as this are lamentable. They are a judicial invention that implicitly treats secured transactions as if they were governed by the common law, rather than a fairly detailed legislative code. Beyond that, they are expressly rejected in the comment to revised Article 9. See 9-204 comment 5 . More important, the requirement that the advances be of a similar kind is inconsistent with its own underlying rationale. In an effort to ensure that the debtor has truly consented to secured treatment of the future advance, courts refuse to enforce the parties’ agreement as written – which is the best evidence of their intent. Moreover, in the process, they relegate the unquestioned intent of the secured party to an irrelevancy. Most significantly, there is really no way to draft around the rule to ensure that all future advances will be covered, even if that is the true intent of both parties and even though the rule is ostensibly designed to give effect to their (or at least the debtor’s) intent.

The Death of [the] Contracts [Course]... Maybe that's a good thing

The AALS Contracts list-serve two months ago carried a stream of interesting comments around the question whether contracts should be taught in four or six hour blocks of time. These discussions have been brought by the need to inject other things into the first year curriculum, such as skills courses, constitutional law, etc... (which I am all for). However, I want to offer a different proposal than a mere reduction of hours -- maybe we shouldn't teach contracts to first year students at all. Instead perhaps we should teach students in the first semester Article 2 of sales. Here are my reasons, in no particular order of significance. By the way, you can disparage me in person if you are going to the Contracts Panel at SEALS this summer, as this will be the basics of my presentation...

1. Its a Legislative World and I'm a Legislative.... The same argument I consistently hear justifying common law contracts as a First Year Course is that it teaches students how to read cases. First, doesn't Torts, Property, Criminal Law, and Civil Procedure do equally fine jobs of teaching students how to read cases? Second, and more importantly, where in the first year curriculum are we teaching students how to read statutes and Codes. We are not, and as a result, when students come to take a code based course, they repeat their first year growing pains again by by having to learn how to read and analyze statutes. Sales provides a great opportunity to fill the legislative gap and still .....

2. Introduce Students to the basic principles of contracting. Offer, assent, parole evidence, statute of frauds, battle of the forms (of course) impossibility, remedies... Its all there. The difference is two fold: one, the material is in a more concrete format in the form of a code; and two, the material becomes more understandable because students have a familiar and definite context for understanding specific rules like parole evidence, statute of frauds exceptions and the battle of the forms. As I tell my UCC students, we have all bought candy bars by the time we get to law school and we know the essence of the process --I give you money and you give me a Snickers. We now are putting definite terms to that process.

3. Is Common Law Contracts that relevant anymore? Sure the basic principles of offer, acceptance, etc.... in some form stretch the gambit of contracting. But our legal system has created so many different types of contracts that each vary in nuanced ways from each other. Employment contracts are different from sales contracts which are different than construction contracts, which are different from licenses and so on and so on. The idea that we are teaching general principles that stretch through the curriculum falls apart when students learn that each of these different contracts have their own unique language and terminology that renders the common law of contracts at best a quaint introduction to the sport of creating obligations. Add to that fact that much of contracting gets reduced to form-negotiations and contracting as an art becomes mostly irrelevant. If contracting were taught as an exercise in transacting, I believe it would be far more effective. One of the comments from the contracts list-serve discussion that I really appreciated came from Peter Linzer, in which he said:

At a less abstract, but much more practical level, I have for a long time been advocating a shift from Contracts as a course in busted deals to a course in what real contracts lawyers do, advising clients, helping them to plan, and getting the plan on paper through good drafting. I’m still trying to slip a bit of that into my four-credit course, but I can’t really change much. Some parts of Contracts must be taught from the cases (interpretation, the parol evidence rule, remedies, the click-wrap issues (which, of course, are also part of the transactional part of the process)). But the real task of preparing students to be transactional lawyers needs to be taught differently, and can’t be covered well in a four credit course. I can teach a class of 100 how to draft, but I can’t review their work to raise them beyond the very basics. That has to be covered in a more advanced course. But if we can sensitize students to what contract lawyers really do, and the important role of drafting and planning, we can greatly improve the abysmally low level of quality among most business lawyers, especially those dealing with small businesses. That, however, needs much more time than is available in a four hour course.

I concur.

4. Teaching common law contracts does not necessarily prepare students for the bar exam. First of all, students rarely retain what the parole evidence rule is versus the statute of frauds between the end of their contracts course and the beginning of their second year (or they may just deny any knowledge of those things in class). Moreover, we have pretty well ceded bar preparation to Bar-Bri, Mishmash, or what ever other cram course students are willing to fork out $2500 to cram long-forgotten doctrines in their minds. Have we all of a sudden become less confident in bar-review's capacity to teach contract doctrine as well? It seems to me that most professors I talk to vehemently deny that they are teaching for the bar (which I do as well). So why would we teach a course on that basis.

5. For that matter, Sales does not prepare students for the bar exam either, but there is a trickle down effect. In the same way that contracts does not necessarily create a long-term knowledge of contracts doctrines, neither will Sales. Though, at least by teaching sales early, we open the door for other UCC courses to be more accessible to students. Students that take Article 9 or Article 3-4, are more likely to be prepared for courses like bankruptcy, debtor and creditor rights, taxation, and corporations. Getting students in the sales curriculum earlier rather than later aids that process.

6. Wouldn't we all be happier teaching a perspectives-esque upper level course on the theory of contracts. Really isn't that what we all really want to teach anyway. This to me is the best use of the contracts course and one that often gets pushed aside for lack of hours or because students are not quite ready to understand these nuances. This is the art of preparing lawyers: equipping them with the intellectual tools to make rational decisions regarding how contracting should be undertaken. Forcing students to struggle through Law and Economics views of contracting, moral theory of contracting, etc... before they truly understand the contracting process seems to me to be reversed. Students will learn more and professors will be happier with the result.

The only upside to the contracts course is it might make the classic movie, The Paper Chase irrelevant, though I think I can live with that -- I think.

Marc (MLR)

The One Thing Markets Hate Worse Than Losses?

The last two days offer a vivid illustration of the raison d'être of the UCC (and commercial law generally). The one thing that markets hate worse than losses is . . . uncertainty.

The Dow has risen 779 points--over 7%--over the past two days (really, the past day-and-a-half), with financial stocks enjoying impressive gains (from the CNN story: "Merrill rose 28%, Bank of America gained 17%, AIG rose 51%, Morgan rose 25%, Goldman rose 20% and WaMu rose 28%."). All this on news that these very financial companies are going to be allowed to sell their worst assets to a newly created federal entity at a huge loss. Wait, can that be right? Hooray for losses???

The CNN story quotes one financial expert as saying that "the fundmentals have changed and that's going to support markets going forward." What fundamentals could this odd loss-accelerating proposal implicate?

Well, the most important fundamental, apparently: certainty, or at least the lack of obvious uncertainty. On Wednesday, the bailout of AIG created not certainty that the end of this crisis was nigh, but fears about which financial giant would be next on the Fed's discount shopping spree through Wall Street. No one knew who would be the next victim of uncertainty with respect to the value of the mortgages and mortage-backed securities at the heart of this problem. Beginning with rumors yesterday and confirmed today, the market finally started to glimpse the light at the end of the tunnel. If we have to run over hot coals barefooted to get to that light, so be it, but just tell us when we've hit rock bottom! Though the details remain shrouded in secrecy, the thrust of the plan is to drill down to bedrock by goosing some sort of market mechanism that will force banks and investors to admit once and for all how depressed the value of their mortgage-related assets really is (i.e., auctions to see who can offer these toxic assets to the Feds for the lowest price--I'll sell for 50% face value; no I'll sell for 40% . . . what a spectacle that will be!). Once the culprits of the housing crisis are forced to eat crow and turn over these assets, one hopes the feds will follow the FDIC-IndyMac example and start responsibly writing down the principle on overvalued mortgages, keeping people in their homes, and stopping the downward spiral in home prices. The end is near . . . . ?

O.K., O.K., another fundamental is involved here, too, I guess: liquidity. A Fed purchase of these uncertain payment streams will result in a huge infusion of liquidity into the market, having the double benefit of easing fears about the value of the assets and dousing loan markets with the cash that they have so desperately needed to get back to financing business and consumption on reasonable loan terms. That being said, my sense is that the infusion of certainty is much more central to this recovery (one hopes, long-term) than the expected infusion of liquidity.

It's hard for us to offer ready examples to students of why the certainty of HIDC status or Article 9 so facilitated the growth of commerce in the olden days, so let's point out the amazing effects of the promised exorcism of uncertainty this week.

Tennessee Enacts Revised UCC Article 1; Illinois SB 2080 Makes Further Progress

On May 15, Tennessee Governor Phil Bredensen signed SB 3993, subsequently designated Chapter 930, making Tennessee the thirty-third state to enact Revised UCC Article 1 since the ALI and NCCUSL promulgated it in 2001.

Prospects look reasonably favorable for Illinois to follow suit in the near future. The Illinois Senate unanimously passed SB 2080 on April 9. On May 20, the Illinois House Judiciary Committee recommended passage and the bill was placed on the House's "short debate" calendar. On May 23, the House extended the final action deadline until May 31.

Revised Article 1 is already in effect in twenty-eight states: Alabama, Arizona, Arkansas, California, Colorado, Connecticut, Delaware, Florida, Hawaii, Idaho, Indiana, Iowa, Kentucky, Louisiana, Minnesota, Montana, Nebraska, Nevada, New Hampshire, New Mexico, North Carolina, North Dakota, Oklahoma, Rhode Island, Texas, Utah, Virginia, and West Virginia. It will take effect in Pennsylvania on June 15 and in Kansas, South Dakota, Tennessee, and Vermont on July 1.

As I have discussed previously, the two primary bones of contention during the enactment process have been uniform R1-301's choice-of-law rules and uniform R1-201(b)(20)'s "good faith" definition. None of the thirty-three enacting states has adopted uniform R1-301; instead, all have chosen to either leave their pre-revised 1-105 in place or to enact a substitute 1-301 with language consistent with pre-revised 1-105. (Louisiana subsequently amended its substitute 1-301 to diminish the distinction between choice-of-law rules applicable to UCC and non-UCC transactions; but, a fuller exploration of that amendment is another topic for another day.) There had been less uniformity with regard to defining "good faith." Twenty-three states have enacted uniform R1-201(b)(20)'s "honesty in fact and the observance of reasonable commercial standards of fair dealing" definition; while ten states — including Tennessee — have retained pre-revised 1-201(19)'s "honesty in fact in the conduct or transaction concerned" definition, reserving the requirement of commercial reasonableness for merchants under 2-103(1)(b) & 2A-103(3). If enacted as it currently reads, Illinois SB 2080 would make uniform R1-301 0-for-34 and would make Illinois the eleventh enacting state to retain the bifurcated good-faith standard.

Commercial Law Podcasts Now Available Through CALI

Need to brush up on Secured Transactions and Payment Systems basics? Great news.  CALI (Computer Assisted Legal Instruction) is now offering podcasts on a variety of UCC topics.  The podcasts are available on the CALI website, through the Podcast app on most phones (using the Lawdibles channel) and even through Itunes (again Lawdibles). UCC topics include:

• Payment Systems Introduction Podcast
• Payment Systems: Being a Holder in Due Course: Personal Defenses Podcast
• Payment Systems: Being a Holder in Due Course: Real Defenses Podcast
• Payment Systems: Credit Cards Podcast
• Payment Systems: Debit Cards Podcast
• Payment Systems: Effect of the Instrument on the Underlying Obligation Podcast
• Payment Systems: Employer Responsibility Podcast
• Payment Systems: Fiduciary Duty and Liability of Representatives Podcast
• Payment Systems: Fraudulent Signatures, Alterations and Negligence Podcast
• Payment Systems: Holders Podcast
• Payment Systems: Imposters and Fictitious Payees Podcast
• Payment Systems: Indorsement Liability and Transfer and Presentment Warranties Podcast
• Payment Systems: Indorsements Podcast
• Payment Systems: Instruments Signed for Accommodation Podcast
• Payment Systems: Liability of the Parties on a Negotiable Instrument Podcast
• Payment Systems: Negotiable Instruments Vocabulary Podcast
• Payment Systems: Who Can Bring a Claim on a Negotiable Instrument Podcast
• Payment Systems: Who Can Enforce a Negotiable Instrument Podcast
• Payment Systems: Who is a Holder in Due Course Podcast
• Secured Transactions: Priority: Buyers v. Secured Parties Podcast
• Secured Transactions: After-Acquired Property and Future Advances Podcast
• Secured Transactions: Bankruptcy and the Automatic Stay Podcast
• Secured Transactions: Basics Podcast
• Secured Transactions: Debtors’ Names Podcast
• Secured Transactions: Fixtures Podcast
• Secured Transactions: Lapse, Continuation, and Termination of Security Interests Podcast
• Secured Transactions: Perfection of Security Interests Podcast
• Secured Transactions: Possession, Control, and Automatic Perfection Podcast
• Secured Transactions: Priority: Purchase Money Security Interests (PMSI) Podcast
• Secured Transactions: Priority: Sellers v. Secured Parties Podcast
• Secured Transactions: Proceeds and Related Concepts Podcast
• Secured Transactions: Repossession of Collateral Podcast
• Secured Transactions: Scope of Article 9 Podcast
• Secured Transactions: True and Disguised Leases Podcast

Enjoy!

JSM