avoiding the $1.5 billion mistake: article 9 lessons in the ......article 9 lessons in the gm...

Avoiding the $1.5 Billion Mistake: Article 9 Lessons in the GM Bankruptcy

Don Petersen, Esq. Bennett, Weston, LaJone & Turner, P.C

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Background Information

▶ Donald Petersen

▶ Harvard Law School

▶ Has taught secured transactions at law school for the past 12 years.

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What is “Secured Transactions”?▶ “Traditional: A borrower wants a

loan.

▶ A lender wants to “make sure” the borrower repays the loan.

▶ So the lender asks for collateral in case the borrower doesn’t repay it.

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Other Areas They Arise

▶ Any time you want to increase the probability of being repaid.

▶ Legal bills

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Why is it so confusing?

▶ It’s governed by a confusing code.

▶ That gives words confusing definitions.

▶ That addresses issues that “never” arise.

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It’s really not that confusing!▶ Most transactions are treated the

same.

▶ Get your head out of the code – think about it logically!

▶ Think about what the code is trying to do.

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The Code’s Goals

▶ UCC – promotes commercial transactions

▶ Article 9 – protect potential lenders

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Article 9

▶ Part 1 – gen. provisions, defs.

▶ Part 2 – SA/SI

▶ Part 3 – Perfection and Priority

▶ Part 4 – 3rd Parties’ rights

▶ Part 5 – Filing/detail stuff

▶ Part 6 – Default/Remedies

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9 Steps to Success: Petersen’s Wonder-Formula: Part 11. The Roster: Who are they?

2. Classify each creditor’s collateral.

3. Did SI attach to collateral?

4. Did each creditor perfect its SI?

5. Did a later event impact a PSI?

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9 Steps to Success: Petersen’s Wonder-Formula: Part 2

6. If proceeds – go to Step 2.

7. By claimant, list (i) collateral it’s fighting for, and (ii) its status.

8. Resolve all priority battles.

9. What are creditor’s remedies?

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Step 1

▶ The Roster: ID and categorize.

▶ debtor

▶ obligor

▶ secondary obligor

▶ creditor

▶ etc.11

Step 2

Classify each creditor’s collateral.

▶ Goods are classified based on how the debtor uses them -- when the SI attaches.

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Step 3

▶ Did each creditor attach a SI to its collateral?

➢ VRA

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V-R-AValue

▶Creditor supplies value to the obligor

▶E.g., loan or commitment to loan

▶§9-203(b)(1).

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V-R-ARights

▶Debtor has rights in the collateral.

▶§9-203(b)(2).

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V-R-AAgreement

▶ Debtor signs an agreement that properly describes the collateral.

▶ The description must be more specific than for the FS.

▶ §9-203(b)(3)(A).

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Malpractice Excuses

▶ Implied AAP provisions (Filtercorp)

▶ Composite Document Rule (PER)

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Step 4

▶ Did each creditor perfect its attached SI?

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Perfection

▶ The goal of Article 9

➢ Perfecting a SI puts the world on notice that a SI exists in the collateral!

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Perfecting a SI

▶ FS – the most common and the default method.

▶ Automatic – when the SI attaches.

▶ Possession/Control

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FS Requirements

▶ Debtor’s name

▶ “Indicate” the collateral. Can be super-generic.

▶ Other stuff – Just fill out the form!

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Filing the FS

▶ The state where the debtor is located.

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Step 5

▶ Did anything impact a creditor’s PSI?

▶ Did the debtor move to a new state?

▶ Did the debtor change its name?

▶ Did the debtor sell the collateral?

▶ Has five years elapsed?

▶ Etc.

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Step 6

▶ Did a creditor obtain a SI in proceeds?

➢ If so, go back to Step 2.

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SI and Proceeds

▶ The SI attaches automatically to proceeds.

▶ The Si is perfected for at least 20 days.

▶ Will it last longer than 20 days?

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Summary – Proceeds Analysis

▶ 9-315(d)(1) Applies if the debtor “trades” the collateral

▶ Collateral → Non-Cash Item

▶ 9-315(d)(2) Applies if the debtor gets cash proceeds

▶ Collateral → Cash Proceed

▶ 9-315(d)(3) Applies if the debtor uses cash proceeds to buy a non-cash item

▶ Collateral → Cash Proceed → Non-Cash Item

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Step 7

▶ The Line-Up: ID the creditors fighting over each piece of collateral:

▶ JLC/Bankruptcy Trustee▶ PSP▶ USP▶ Unsecured/general creditor▶ SLC

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Step 8

▶ Find and apply the correct priority rules to each battle.

▶ Consider PMSI status, etc.

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PMSI

▶ A PMSI arises if:

▶ you borrow money to buy a good, and

▶ you use that good as collateral for the loan.

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Depends on the Claimants

▶ The rule that you apply depends on who is fighting for the collateral.

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Step 9

▶ See if the default/remedy provision of Part 6 of Article 9 are applicable.

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Enforcement Against a Good

▶ Re-posses -- take possession of the good.

▶ Non-Article 9.

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What do you do with the Good?

▶ Sell It – commercial reasonableness.

▶ Strict Foreclosure -- keep the good and apply it against the debt.

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Disbursing Cash Proceeds

▶ First – the SP’s costs.

▶ Second -- pay off any obligation owed to the foreclosing SP.

▶ The balance – if any, is given to junior lienors who demand a share.

▶ Surplus – to the debtor

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Contact Me

Office: (214) 373-2550Cell: (616) 389-4960Email: dpetersen@bennettweston.com

Don PetersenBennett Weston LaJone & Turner, P.C.1603 LBJ Freeeway, Suite 280Dallas, TX 75234

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Any Questions? Thank you!

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