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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
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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: [email protected]
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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