WHEN, WHERE, AND WHY: APPLICATION OF NON-UCC RULES AND LAW

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1 WHEN, WHERE, AND WHY: APPLICATION OF NON-UCC RULES AND LAW Presented by the American Bar Association Solo, Small Firm and General Practice Division, Section of Administrative Law and Regulatory Practice, Business Law Section and Center for Professional Development

2 American Bar Association Center for Professional Development 321 North Clark Street, Suite 1900 Chicago, IL Submit a Question Visit to submit a question on the content of this course to program faculty. We ll route your question to a faculty member or qualified commentator in 2 business days. The materials contained herein represent the opinions of the authors and editors and should not be construed to be the action of the American Bar Association Solo, Small Firm and General Practice Division, Section of Administrative Law and Regulatory Practice, Business Law Section or Center for Professional Development unless adopted pursuant to the bylaws of the Association. Nothing contained in this book is to be considered as the rendering of legal advice for specific cases, and readers are responsible for obtaining such advice from their own legal counsel. This book and any forms and agreements herein are intended for educational and informational purposes only American Bar Association. All rights reserved. This publication accompanies the audio program entitled When, Where, and Why: Application of non- UCC Rules and Law broadcast on July 26, 2016 (event code: CE1607UCC).

3 Non-UCC Rules in UCC Cases Steve Weise Proskauer Rose LLP 1 Outline General relevance of non-ucc law Agency Choice of law Contract interpretation Contract amendment Contract novation Mistake and reformation Void contracts and standing Indemnity Good faith Subrogation Tracing Trust law Fiduciary duties Fraudulent transfers Property Trust law Remedies Liquidated damages Guaranties Forbearance agreements Arbitration Successor liability 2

4 UCC reference to other law UCC 1-103: (b) Unless displaced by the particular provisions of the Uniform Commercial Code, the principles of law and equity, including the law merchant and the law relative to capacity to contract, principal and agent, estoppel, fraud, misrepresentation, duress, coercion, mistake, bankruptcy, and other validating or invalidating cause supplement its provisions. 3 Federal common law There is no Federal common law: o [Klaxon]. Except when there is: o [CASA DEL CAFFE VERGNANO S.P.A. no arbitration agreement for FAA]. 4

5 Common law agency UCC 9-509: filing is effective if authorized Comment 3: generally look to other law to determine if authorization exists 5 Common law agency Official Committee of Unsecured Creditors of Motors Liquidation Company v. JPMorgan Chase Bank, N.A., 103 A.3d 1010 (Del.Sup. Ct. 2014) (... the Second Circuit has asked us to assume that the secured party itself JPMorgan review[ed] and knowingly approved for filing a UCC 3 purporting to extinguish the perfected security interest.... for a termination statement to become effective under and thus to have the effect specified in of the Delaware UCC, it is enough that the secured party authorizes the filing to be made... ) (emphasis in original) Official Committee of Unsecured Creditors of Motors Liquidation Company v. JPMorgan Chase Bank, N.A., 777 F.3d 100 (2 nd Cir. 2015) ( From these facts it is clear that although JPMorgan never intended to terminate the Main Term Loan UCC-1, it authorized the filing of a UCC ] 3 termination statement that had that effect. Actual authority... is created by a principal s manifestation to an agent that, as reasonably understood by the agent, expresses the principal s assent that the agent take action on the principal s behalf. ) 6

6 Common law agency In re The Adoni Group, Inc., 2015 WL (Bankr. S.D.N.Y. 2015) (Debtor can ratify earlier, unauthorized filing of a financing statement) 7 Common law agency Cantor v. FDIC (In re Downey Financial Corporation), 593 F.App x. 123 (3d Cir. 2015) (Tax sharing agreement did not create agency relationship because alleged principal did not control alleged agent; thus property in possession of agent was agent s property) 8

7 Choice of law UCC In re Nelson, 521 B.R. 733 (Bankr.D.S.C. 2014) (Enforces choice of law clause, which gives secured party greater rights) Trustco Bank v. Mathews, 2015 WL (Del. Ch. 2015) (Court determines that place of harm determines law applicable to a fraudulent transfer) 9 Common law contract interpretation U.S. Bank N.A. v. Yashouafar, 232 Cal.App.4 th 639 (Cal.App. 2014) (No prepayment fee due until defendants actually prepaid the note s indebtedness) In re Energy Futures Holding Co, 539 B.R. 723 (Bankr. D. Del. October 29, 2015) (Makewhole premium provision interpreted not to apply as a matter of contract law as a result of filing of bankruptcy) 10

8 Common law contract amendment In re Residential Capital, LLC, 2015 WL (Bankr. SDNY 2015) (Depositary bank may use change of terms provision to make depositor into guarantor of debts of affiliates if depositor owed to bank) 11 Contract novation Restatement (Second) of Contracts 280: A novation is a substituted contract that includes as a party one who was neither the obligor nor the obligee of the original duty. Inwood Nat'l Bank v. Wells Fargo (Tex App 2015) (renewal of note is not a novation and therefore not a future advance for purposes of UCC Standard Bank v Hughes (Ill.App 2015) (new note that was in exact amount of sum of two earlier notes was novation for purposes of determining application of guaranty) 12

9 How to count Legras v Aetna Life Insurance Company, 786 F.3d 1233 (9 th Cir. 2015) (As a matter of Federal common law, when counting days within which an act must occur, if the last day falls on a weekend) 13 Mistake and reformation Charles R. Tips Family Trust v. PB Commercial LLC, 2014 WL (Ct App Texas 2014) (Note that misstated in words the amount loaned could not be reformed because of pleading error) In re Duckworth, 776 F.3d 453 (7 th Cir 2014) (Security agreement that misstated date of secured note by two days could not be reformed to refer to correct note) 14

10 Set off Santander Bank, N.A. v. Durham Commercial Capital Corp., _ F.Supp.3d _, 2016 WL (D.Mass. 2016) (Breach of confidentiality provision and recoupment rights) 15 Notes and mortgages Aurora Loan Services, LLC v. Taylor, 2015 WL (NY June 11, 2015) (As a matter of common law (not UCC Articles 3 and 9) the person in possession of a note has the right to enforce it and the related mortgage follows the note) 16

11 Void contracts and standing Yvanova v. New Century Mortgage, 62 Cal. 4 th 919 (February 18, 2016) (Maker of note has standing to assert that transfer by payee was void) 17 Indemnity Le Metier Beauty Investment Partners LLC v. Metier Tribeca, LLC, NYLJ (Sup.Ct. App/ Div. 2015) (Enforceability of defective non-reliance clause evaluated as a general disclaimer ) 18

12 Subrogation Pearlman v. Reliance Insurance Company, 83 S.Ct. 232 (1962) (Subrogation rights of surety) Canter v. Schlager, 358 Mass. 789 (1971) (Subrogation rights of surety) 19 Subrogation Avondale Gateway Center Entitlement, LLC v National Bank of Arizona, 2011 WL (D.Ariz. 2011) (Contractual subrogation can operate more broadly than equitable subrogation) 20

13 Tracing Universal CIT Credit Corp. v. Farmers Bank of Portageville, 358 F.Supp. 317 (E.D.Mo. 1973) (Rules of constructive trust law used to try to trace proceeds) 21 Tracing In Re: Tusa-Expo Holdings, Incorporated, 811 F.3d 786 (5th Cir. 2016) - Bankruptcy trustee has the burden of tracing on preference claim even though the comments to UCC suggest that the burden is on the secured party. 22

14 Fiduciary duties Feresi v. The Livery, LLC, 232 Cal.App.4 th 419 (2014) (Perfected secured party did not have priority over unperfected secured party because perfected secured party owed a fiduciary duty to unperfected secured party and acted unfairly; fiduciary duty arose outside of the Article 9 relationship) Iqbal v. Zafar, 2013 US Dist LEXIS (N.D. Ill. 2013) (Lender does not owe fiduciary duty to borrower in workout) Jolley v. Chase Home Finance, 213 Cal.App.4 th 872 (2013) (Lender may have fiduciary duty to borrower) 23 Fraudulent transfers + equitable subordination Sentinel Management Group, Inc., 2016 WL (7Th Cir. January 8, 2016) - In defense of "actual intent" fraudulent transfer action, transferee may assert "good faith" defense under Bankruptcy Code section 548(c). To use that defense transferee must make diligent investigation when it becomes aware of suspicious facts relating to the legitimacy of a loan transaction. The transferee must be on "inquiry notice", which required it to investigate the collateral the borrower was using to secure the loan where the transferee had "awareness of suspicious facts that would have led a reasonable firm, acting diligently, to investigate further and by doing so discover wrongdoing.. and an investigation would have revealed that the bank could not in good faith accept assets of [transferor's] customers as security for the bank's loans to Sentinel. These facts did not also justify equitable subordination, unless they amounted to "fraud. That standard would require that the bank believed there was a high probability of fraud and acted deliberately to avoid confirming its suspicion. The secured party's suspicion of potential wrongdoing without any follow up might be negligent, but that is not an adequate basis for imposing equitable subordination. 24

15 What is property? In re Circle 10 Restaurant, LLC, 519 B.R. 95 (Bankr. D.NJ 2014) (Liquor license and its proceeds are not property for purposes of Article 9) 25 Trust law who has the interest in the property? UCC 9-301: (1) Except as otherwise provided in this section, while a debtor is located in a jurisdiction, the local law of that jurisdiction governs perfection, the effect of perfection or nonperfection, and the priority of a security interest in collateral. UCC 9-102(a)(28): Debtor means: (A) a person having an interest, other than a security interest or other lien, in the collateral, whether or not the person is an obligor; Restatement (Third) of Trusts: 3: (3) The person who holds property in trust is the trustee. 42: the trustee takes a nonbeneficial interest of unlimited duration in the trust property... 26

16 Escrows who has the interest in the property? Wakefield Kennedy, LLC v. Baldwin, 2014 WL (D. Utah 2014), affirmed 2015 US App. LEXIS 9739 (10th Cir. 2015) (Debtor no longer had rights in the note placed into escrow) 27 Liquidated damages Mahlum v. Adobe Systems Incorporated, 2015 WL (N.D. Calif. 2015) (Early termination fee is not liquidated damages and thus not analyzed to determine if it s a penalty ) 28

17 Remedies Harris v. TD Ameritrade, Inc., 805 F.3d 664 (6 th Cir. 2015) (Entitlement holder does not have private remedy for securities intermediary s breach of obligations under UCC 8-504, 8-506, 8-507(a), and 8-508) o Decision does not refer to UCC 1-305(b) ( Any right or obligation declared by [the UCC] is enforceable by action unless the provision declaring it specifies a different and limited effect. ) 29 Guaranties California Bank & Trust v DelPonti, 232 Cal.App.4th 162 (2014) (Guarantor waivers must be specific) Cooperative Centrale Raiffeisen Boerenleenbank, B.A. v. Navarro, 978 NYS2d 186 (NY. Sup. Ct. App. Div. 2014) (Guarantor waivers may be broadly stated) 30

18 Unconscionability Grand Prospect Partners, L.P. v. Ross Dress For Less, Inc., 232 Cal.App.4th 1332 (2015) (No procedural unconscionability where party refuses to negotiate with respect to a particular term) 31 Forbearance agreements Arias v. Elite Mortgage Group, 108 A.3d 21 (NJ Sup.Ct.App. Div. 2015) (Lender does not breach duty of good faith when terminating loan forbearance agreement when borrower defaults) In re TPOP, LLC, _ B.R. _ (Bankr. D. Del. 2015) (Creditor does not have to forgive debt when debtor breaches forgiveness agreement) 32

19 Arbitration Lexel Imaging Systems, Inc. v. Video Display Corp, 2015 WL (E.D.Ky. 2015) (Scope of arbitration clause does not require arbitration to determine if default exists before secured party exercises self help) 33 Successor liability Automotive Innovations v. J.P. Morgan Chase Bank, 2014 WL (N.J. Super.App. Div. 2014) (Article 9 foreclosure sale does not insulate buyer from successor liability claim) Tap Holdings, LLC v. Orix Finance Corp., 970 N.Y.S.2d 178 (NY Sup. Ct. 2015) (Buyer from foreclosure sale buyer has successor liability where essentially the same entity) 34