2002 final exam (Commercial
Top student answers
Note: These were among the best answers received under examination conditions. They are not model answers, in that they all contain extraneous material as well as omitting useful information. Some even reach incorrect conclusions. However, they all provide intelligent, organized, approaches to the questions.
Question 1: Answer #1
This is a situation that is governed by
EFTA. It is therefore impossible to
determine the actual outcome of this situation. However, the Comment to
allows the application of appropriate principles by analogy. This is a
that meets the obligations of §4A-202(a). This was an authorized
payment by the
company (under an agency principle); it was just for $600 more than
§4A-202(e) states that this applies to amendments as well. Since
there is no
definition of amendment, I would assume that Factor's action is an
Therefore, this would be a proper electronic transfer of funds to Zoe.
also look at this as a negotiable instrument situation.
Zoe may have breached her warrantees
under 3-416 & 3-417 because the
check was altered, but this is unlikely. 3-407 says that alteration is
"unauthorized change". This seems to be a change after the instrument
has been drafted so this doesn't seem to fit under the definition.
was the only warranty that Zoe could possibly have violated. She
transferred the check.
It seems that FFB has no remedy against
Zoe under the UCC. However, 1-103
allows for causes of action outside the code. FFB could sue for unjust
enrichment. Zoe would argue detrimental reliance. However, from the
knew she had $600 more than she should and knew where it came from so
FFB v. Lam Rotcaf
This is a fictitious payee situation.
These checks are payable under
3-404(a). FFB is going to take the loss. The indorsements meet the
of 3-404(c)(i) and therefore, Bank Two became a holder when Factor
the checks and did not breach their presentment warranties under 3-4 17
FFB may make the argument under 3-404(d) that Bank Two's contributory
contributed to FFB's loss. Bank Two must use ordinary care in accepting
(3-103). It seems that Bank Two has exercised ordinary care, but it
debatable. What is the policy for the acceptance to negotiated checks?
most likely a losing argument for FFB.
This is the same situation as above, the
analysis hinges on whether the
signature meets the requirements of 3-404(c)(i) (3-404(c)(ii) does not
because this check was negotiated before deposit). The argument could
that "Mal Factor" and "Lam Rotcaf are substantially similar, but
this doesn't seem to be the case. Therefore, this is not a valid
Mal Factor breached his transfer warrantee (3-41 6(a)(2)) when he
Sharkey. Sharkey is therefore, not a holder under 3-417(a)(1) and
entitled to enforce the instrument. His bank is therefore, not entitled
present the check to FFB. FFB can therefore, bounce the check back to
who can bounce it back to Sharkey who would have to take the loss.
FFB v. Kevin
FFB had until midnight on Thursday to
return the check to Bank Three to avoid
being liable for the check
(4-302(a)). FFB did not notify Bank Three until Friday that it was
the check because it was a counterfeit. However, by statutory
have honored the check and are liable for payment to Bank Three. Under
however, FFB may have a defense.
It does not seem that there was any
breach of the presentment warranties.
This was a forged instrument, which is valid as to holders. Kevin was
and therefore a valid holder and his endorsement is therefore
Three did not violate its presentment warranty (4-208). Bank Three also
present the item "for the purpose of defrauding" FFB. It was the
purpose of Kevin to defraud FFB, not the intention of Bank Three, as it
know that the item was forged. Therefore, FFB is liable on the check.
FFB. Lucky &
§4A-202 requires a bank to have a
commercially reasonable security
procedure. The modification of their procedure by their employee most
makes their security procedures no longer commercially reasonable. In
the bank is going to have to bear the losses related to the wire
may be able to recover some sums. The $750,000 stolen by Factor is a
bank cannot recover unless FFB can find Factor.
FFB is entitled to recover via 4A-303(c)
the amount of the wire transfer from
Lucky. However, the full
amount received by Lucky is no longer available because FFB paid checks
Lucky's behalf with these funds. Can FFB get this money back? Yes, but
it '. seems that there only
remedy is against
FFB has a right to restitution under
3-418(b) and can pursue those who were paid
these sums. However, Comment 2
states that FFB has not right to restitution if the holder paid value
faith and had no reason to know of the mistake. This seems to be the
Under 4-401 though, FFB has the right to charge these sums against
account and can attempt to get these sums from Lucky.
Donald should have an action for wrongful
dishonor of the checks he wrote
after the transfer. Under 4-402(b), bank should be liable for actual
possibly consequential damages proximately caused by this wrongful
There is a question as to whether damages should come under 4A (Comment
we didn't deal with these kinds of damages, so I don't know what the
would be in this situation.
Question 1: Answer #2
Article 4A does not apply to funds transfers that are governed
Electronic Fund Transfer Act (EFTA). UCC §
4A-108. EFTA governs direct deposits of paychecks. 15 U.S.C. § 1693a(6), so Article 4A does not
govern. As to whether a direct deposit is a negotiable instrument, § 3-104 defines a negotiable instrument
as a "promise or order," defined in § 3-103 as a
undertaking" and "written instruction" respectively; a direct
deposit fits neither of these. Moreover, to the extent the EFTA does
liability in this area it would preempt the UCC as federal
FFB's only recourse other
EFTA would be common law remedies of unjust enrichment or restitution.
bank presumably would not even have constructive notice since
have indicated Zoe merely got a raise, so only Zoe would be liable.
With regard to the first two checks, under
UCC § 3-304(b)(2), if the payee as
written is a fictitious person as here, then "[a]ny indorsement. . . in
name of the payee stated in the instrument is effective as the
the payee in favor of a person who, in good faith, pays the instrument
it for value or collection." Id. This applies because Mal
the first two checks using "Lam Rotcaf." As to whether Bank Two took
the check for collection in good faith, we have no indication to that
Therefore, the checks were negotiated and Bank Two was a holder
enforce according to § 3-301.
Presumably, Bank Two presented the checks to FFB and is thus subject to
presentment warranties of § 3-4 17.
Of these, only the third is implicated, that the bank has no knowledge
draft is unauthorized, which would be hard to win for FFB. Bank Two may
subject to liability for comparative negligence under §
3-404(d), which would require showing that it failed to exercise
"ordinary care that contributed to the loss." Id. FFB would
have to show that prevailing commercial standards were that banks
customers to show identification when depositing indorsed checks, which
unlikely since an indorsed check is payable to bearer.
As to the third
check, § 3-404(b) does not apply since it was
not indorsed in the name of Rotcaf. Under § 1-201(20),
Mal is not a holder, since the check was payable to
Rotcaf and he is not Rotcaf. The key question is whether Sharkey became
entitled to enforce the instrument. The check was transferred to
according to §3-203(a) since it was
delivered for the purpose of giving Sharkey the right to enforce, and
right to enforce was vested in Sharkey, § 3-203(b),
but this right depended on Mal's becoming a holder by
signing in the name of Lam Rotcaf, which he did not. Therefore, Sharkey
never entitled to enforce. By the same token, Bank Three is also not
enforce. Thus Bank Three has breached the first presentment warranty, §3-417(a)(l). Sharkey is liable for
breach of transfer warranties under § 3-416,
specifically, that he is entitled to enforce the instrument and that
signatures are authentic and authorized, and his liability extends to
transferees including FFB.
Bank Two, Bank
Sharkey might try to argue a defense
of contributory negligence under § 3-406,
but this is limited to negligence that caused the forgery (depending on
dubious assumption that the signature of a fictitious person can be
negligence causing the issuing of the bogus checks.
(3) Presumably, FFB
accepted and paid
the counterfeit check. Under § 3-418(b), FFB may
revoke acceptance or seek restitution from Bank
Three as a person who benefited from the payment ("person" includes an
organization, § 1-201(30)). However,
Bank Three escapes this liability if it shows that it took the check in
faith and either gave value or changed position in reliance. § 3-418(c). Since Bank Three did allow
Kevin to withdraw the funds, it did give value; it could also be argued
Bank Three changed position in reliance on FFB's paying the check. Bank
still subject to the presentment warranties of § 3-417;
the question is whether Bank Three was entitled to enforce
the check. This is probably satisfied under § 3-301:
the check was presumably
indorsed by Kevin (the record does not say) and so payable to bearer,
Three was a holder, § 1-201(20).
With regard to FFB's
recovery, FFB is
subject to the duties indicated in §§ 4-301,
302 to meet its midnight deadline for dishonoring, which
it failed. FFB might be excused under
§ 4-109, under the provision
"circumstances beyond the control of the bank," and FFB must also show
that it exercised due diligence. The case law suggests that courts
this strictly, and Bank Three would argue that FFB was in control of
employees and failed its duty by not regularly checking for computer
(4) With regard to
Lucky: Under § 4A-202, if the bank
and customer have agreed to a procedure that is "a commercially
method of providing security against unauthorized payment orders," and
bank proves good-faith compliance, then the payment order is effective.
FFB is a
receiving bank under the definition of§ 4A-103(4) because
was sent to FFB. As such, FFB can recover from Lucky as beneficiary the
of the erroneous payment order if it was transmitted pursuant to a
procedure for the detection of error." 4A-205(a)(2). This probably
to the security procedure covering the transmission from Omicron to
§4A-205 provides that the law of mistake and restitution applies,
Lucky might raise a defense of estoppel, but this would require showing
knowledge on the part of FFB. In sum, Lucky is likely to be liable to
the entire $750,000.
There does not appear to be any basis for liability of Donald to FFB.
Question 2: Answer #1
demands are inflexible, VM's goals with regard to NMS are to pay the
arrears, to come up with the money to meet the 50% cash
demand, and to eliminate bankruptcy vulnerability in the
event of a BR petition.
Step I: Arrange cash financing with Merchants to take care of
payments and the 50% cash demand. See below for why Merchants will be
make the money available. NMS will likely not accept an arrangement
making it a secured, rather than an unsecured, creditor because: (a)
combination of Merchant's blanket SI and the operation of §9-317
means that NMS
will be subordinated under the first-to-file rule, and (b) whatever SI
granted would be avoidable as a
preference in bankruptcy.
Step 2: Any payments made to NMS could potentially be avoided
as preferences. To protect against §547 avoidance, any payments
made to NMS
must be made to fit within §547(c). These
payments should be structured so that it is easy for NMS to prove that
applies since §547(g) gives NMS and VM the burden of proof.
o Protecting the payments of the amounts in arrears: Section 547(c)(4)'s further extension of credit exemption will apply because without this payment NMS was going to refuse further sales on 50% unsecured credit. Thus, payment is a precondition to the extension of further credit by NMS.
o Protecting the 50% cash payments: These payments will be protected from §547(c)(l)'s exemption for contemporaneous exchanges for new value. The payments should be structured to make clear the parties' intent that the payment is a contemporaneous exchange for new value and the exchange should in fact be contemporaneous.
o Protecting the 50% unsecured credit payments: These payments will be protected by §547(c)(2)'s exemption for ordinary course payments. The debt will be incurred in the ordinary course, the payments will be made in the ordinary course and the payment will be made according to ordinary business terms so long as this kind of arrangement is not way outside industry practice. See Matter of Tolona Pizza.
here is to slash prices on Channing merchandise but avoid default and
acceleration under the reasonable insecurity clause.
Step 1: Ascertain the amount owed Channing and secured by her
inventory and receivables.
Step 2: Cut prices on Channing merchandise so that the aggregate
the Channing inventory and receivables is equal to the amount owed
secured by her PMSI.
Step 3: When Channing declares VM in default under her
insecurity" clause litigate the issue arguing—
o She has reasonable security because the value of the outstanding debt is completely secured by the value of the inventory and receivables.
o Calling the loan for discounting the merchandise is a violation of the duty of good faith implied in every default and acceleration at will clause by § 1-208. Cite K.M.C. for the proposition that there must be some objective basis upon which reasonable loan officer in the exercise of his discretion would have acted as Channing did.
Although this approach will alienate Channing, they are a
that VM can afford to abandon. Additionally, I'm sure that the FTC or
Antitrust Division would just love to hear about a supplier using its
to force retailers to maintain prices; Channing's threat is illegal.
this approach has the advantage of forcing them to sue VM if they want
to convince Merchants to provide further financing by giving it a SI
priority, a way to cash in on VM's going concern value, and protection
o Merchants already has a priority monopoly over future advances because of §9-322(a)'s first to file rule applied through §9-317(a); remind them of this.
o Use the debtor's §9-2 10 rights to show Merchants that there are no SI's with priority over its SI.
o Convert inventory covered by PMSI's into accounts by cutting prices to boost sales. This gives Merchants better priority because §9-324(b) leaves accounts out of the PMSI priority scheme.
o Deposit all VM's cash into its account at Merchants so that §9-327(4) applies to give Merchants depositary bank priority over conflicting SI's.
Cashing in on Going Concern Value: VM could issue stock options
Merchants that will allow it to cash in on going concern value. VM can
remind Merchants that will be on the hook for 40% of Channing's
contract if VM
goes under. This carrot and stick approach should induce Merchants to
further credit; especially credit to pay NMS since the business's
depends on advertising.
o §362. the automatic stay: the nature of the blanket SI and the extent of VM's debt means that there will be a lack of adequate protection so that the automatic stay can be avoided.
o §544(a), the hypothetical lien creditor: per §9-31 7(a)(2)(A), Merchants will have priority over the bankruptcy trustee because its SI has already been perfected under §9-308 and a petition has yet to be filed.
o §544(b), actual unsecured creditors: to use §554(b) the BR trustee will have to find an unsecured creditor who can beat Merchants outside BR—this would have to be the victim of a fraudulent conveyance and such parties are unlikely to be found.
o § 547, preferences: Section 547(b) does not present a problem. The loan payments will be in the ordinary course (§547(c)(2)) and there is no new SI so that there is no other transfer.
o §548, fraudulent conveyances: even if the BR trustee could prove an actual intent to hinder, delay, or defraud creditors, §548(c)'s for value and in good faith rule would apply to protect Merchants.
Question 2: Answer #2
value concern (protecting its asset value, including its trademark) and
value concern (possible economy up-turn and renewed profitability)
staying in business and avoiding bankruptcy. Avoiding insolvency is in
creditors best interests (either through a sale or re-gaining
prevent bankruptcy trustee from controlling distribution of the
Resolving ValuMart's financial predicament through mutual cooperation
renegotiation is best.
all creditors concerns, could find a buyer, possibly a competitor like
Mart, to purchase ValuMart, paying off all existing debts. Short of a
sale, the following courses of action might
creditors, keeping ValuMart out of bankruptcy:
an unsecured creditor, is least likely to receive payment in bankruptcy
the strongest incentive to negotiate protection.
Could cut NMS out completely by buying advertising directly from
outlets. This would save ValuMart some money and would ease concerns
will suspend service for non-payment. This is unattractive however,
ValuMart seems particularly dependent on NMS' services and might
reputation damage for failing to timely pay outstanding bills.
Advise NMS that discontinuation of advertising services would
result in bankruptcy NMS would receive nothing. All assets would go to
secured debt. NMS should be patient and allow ValuMart to turn itself
This is an unattractive option because NMS doesn't want to get further
hole than they already are.
Could bring NMS current (with cash on hand, by discounting
inventor~ or by borrowing from Merchants or another bank — See Sections
for discussion) and continue timely future payments to NMS. This is
subject to §547 preference avoidance in
bankruptcy if occurring within 90 days
of the filing. NMS can argue however, that these were Ordinary Course
excepted under §547(c). If this option is pursued, NMS should
payments up front each month. This avoids default and antecedent debt
Provide NMS with individual/personal guarantees, Merchant bank's
guarantee or Letter of Credit (bank did this for Channing and may have
incentive to guarantee NMS — see Section 3). A guarantee won't change
bankruptcy priority status, but would allow recovery from third party
Give NMS a Security Interest in existing assets. Because both
and Merchants already have superior security interests in ValuMart' s
without a subordination agreement, NMS would remain so under-secured
bankruptcy, it wouldn't recover anything anyway. Additionally, could
victim to § 547 preference claims for SI in the antecedent debt
its interest for new value services).
Give NMS super-priority by giving it possession of ValuMart's
paper. Although Channing and Merchants have security interests in the
paper, possession trumps the perfected security interest of Channing
ValuMart under 9-330(b). Again this would be subject to the trustee's
and fraudulent conveyance challenges.
· Since Channing is itself financially troubled, it may accept a "discounted" buy-out of the existing liability. If ValuMart pays off Channing (financed either by Merchants or a third party bank), it would be free to discount the inventory, getting a much-needed cash infusion (could use this infusion to pay NMS). This would also eliminate Channing's secured priority, allowing greater strength in Merchant's priority and NMS' (if also given a security interest). Convince Channing that because it's under-secured, in bankruptcy wouldn't get 4 million and a discounted buy-out would help them both.
Channing might not be interested in this because it has 40%
from Merchants and a PMSI in the inventory and any cash proceeds (its
has a SI
subordinate to Merchants in non-cash/credit receivables (9-317)).
argue that PMSI is unperfected (no notice as required by 9-342(c))
super-priority (not clear in fact pattern if actual notice was given
since Merchant's participated in negotiations, maybe notice is
Merchants: Merchants has the most invested in ValuMart
therefore the most to lose and gain depending on the outcome It has a
security interest in all assets (fact pattern doesn't indicate whether
financing statement was filed however, given the sophistication of this
it is likely that it perfected its security interest and has priority
other creditors (except Channing' s possible PMSI)) as the first to
Its long-standing relationship with ValuMart puts Merchants in
position to evaluate the viability of ValuMart's survival. If survival
turn-around is likely, it should loan additional funds, covered by
financing statement, conditioned on a Channing buy-out. This allows
discount the Channing inventory, eliminates all Channing's security
and gives ValuMart funds to pay off and continue business with NMS.
Merchants might hesitate to do this due to its
and insolvency/bankruptcy concerns. However, granting the loan itself
Merchants in control. Can add loan term that prevents ValuMart from
from anyone else, thus insuring Merchants secured priority status.
As further protection, Merchants can require all ValuMart funds
deposited with it, providing additional security via control over the
depositor's accounts (9-327). It can also take possession of all
as it becomes available. Possession will provide further
Finally, if Merchants doesn't want to extend additional credit
ValuMart, VM can shop for a third party loan. This will be difficult
because loan would be subordinate to Channing & Merchants unless
gets subordination agreements (this is unlikely given Merchant's huge
Loan could however be a re-consolidation requiring pay-off of Channing
The best options are re-consolidation of all debt through a third party lender OR more likely, borrowing more from Merchants to pay off Channing and come current with NMS. If none of this works, a final option is to file Chapter 11, get automatic stay protection and try to re-organize.
Question 3: Answer #1
Practical Problem: Tension exists between (a) provision of
fair, equitable and organized distribution of assets to all creditors
maximizing the bankruptcy estate' value and (b) unjustly enriching the
the expense of secured creditors. The trustee can (per §361/362),
collateral in the estate if necessary for an effective reorganization
value of the collateral is adequately protected.
trustee to keep a secured party's collateral in the estate without
interest results in an "interest free" loan to the bankruptcy estate
by the secured creditor.
Otherwise, the creditor would have access to and use of the
proceeds. The likely result is secured creditors' requiring
when they extend loans OR secured creditors repossessing/foreclosing
on collateral at the first late
payment or any other signs of default/insolvency problems.
plain language interpretation of "Adequate Protection" includes
keeping secured creditors in the same position as if the debtor hadn't
bankruptcy. If the creditor bargained for repossession/foreclosure
default, adequate protection should include the resulting ability to
the collateral, access the proceeds and compensate for the loss of use
the collateral to confer a benefit on the estate, the estate should not
unjustly enriched. Payment of interest is equitable and comports with
requirements of the UCC and common law.
diminishes the value of getting a security interest and encourages
"over-secure." This hinders economic and business market growth,
making it hard for businesses to get loans if they don't have
collateral. It will ultimately chill business development and the
Secured creditors are only protected up to the bargained for value of
security. If creditors extend under-secured loans, they accept the risk
limited recovery. Creditors should only get interest if they have
themselves against default/bankruptcy by over-securing. Lending is
secured creditors shouldn't get additional benefits at unsecured
expense. As long as the collateral is "adequately protected" and they
receive compensation for depreciation of the asset while it remains in
bankruptcy estate, they are getting what they bargained for and are not
bankruptcy, the secured creditor would either get repayment of the loan
debtor or repossession of the collateral, not interest. Unjust
precludes recovery of interest.
Conclusion: Both positions have merit. We don't want to
dis-incentivize lenders from extending secured loans. Similarly, we
want to further handicap disadvantaged unsecured creditors, who will
receiving a pro-rata share of the estate.
compromise would allow the under-secured creditor to receive interest
collateral kept in the bankruptcy estate however, the interest would be
as unsecured debt. The creditor would get a pro-rata share of the
like all other unsecured creditors. This recognizes the bargained for
advantage/interest of the secured creditor while simultaneously
inequitable treatment of unsecured creditors.
Problem: Leases are
advantageous to creditors because the default risks are lower (no
costs) and the administrative requirements for execution of a lease are
demanding than for secured transactions. Leases have lower monthly
are generally easier to qualify for than a secured purchase. Thus
access to goods they would not necessarily have been able to afford
However, lessors, to insure themselves against the costs of
maximize their return, construct leases that sometimes closely resemble
sales. The problem with this is twofold: it allows lessors to receive
bankruptcy benefits of lease priority (reclamation upon lessee's
default is also
easier); additionally allowing lessors to receive the benefits of
(risk allocation on the lessee for care of the goods).
leased goods from secured collateral is difficult and can lead to the
conclusion by potential creditors that leased property is actually
the estate and therefore subject to security. Debtors can give a false
their assets/net worth by failing to disclose whether goods are leased
This creates problems for subsequent lenders in calculating risk and
inhibits equitable distribution of assets in the event of bankruptcy.
FOR: Requiring lessor filing won't
eliminate the advantages of the leaseholder (if in fact it is a true
bankruptcy proceedings. Currently, optional filing provisions for
(9-505) protect the leaseholder from prejudice in the determination of
nature of the transaction (lease or sale).
requirement would alert potential lenders about property that is not a
assets, thereby providing important risk assessing information for the
requirement would also help ferret out disguised sales. This provides
protection for the debtor/lessee, potential lenders and the economy in
don't generally check the filing of financial statements so requiring
file won't make a difference anyway. The filing requirement will
higher costs for lessors that will be passed on to lessees. This will
minimize the economic incentive to grant leases rather than secured
filing requirement won't necessarily uncover disguised sales or
leases. If it's a lease of household goods, these probably don't add
value to the consumer's estate and are likely not of concern to the
risk/security purposes. If the leased goods are more significant (car,
etc.), the potential creditor can easily require the consumer to
to demonstrate proof of ownership.
requirement for leases of big-ticket personal property items, valued at
or more makes sense. This won't diminish the lessor's priority in
will give notice (assuming a potential creditor chooses to check) as to
debtor's assets and property status. Requiring filing on smaller ticket
would clog the system, be over-burdensome on lessors and would
the extension of leases on household goods. This would unnecessarily
already disadvantaged consumer population.
Question 3: Answer #2
typically textualist opinion in Timbers of
Inwood Forest focused on statutory commands rather than on the
underlying the weighty question he was resolving. The lack of a
policy argument belies a volatile debate, and the statutory focus
serves as a
clear reminder that Congress may overturn the decision b3 statutory
In question was whether an undersecured creditor, who was stayed under
Bankruptcy Code § 362 from enforcing its security interest during
bankruptcy and consequently incurred lost opportunity costs, was
postfiling interest as compensation. Predictably, creditors argued yes;
no. The Court sided with the latter.
creditor arguments stem from the notion of "enforcing their bargain"
and run to the very basis of secured credit itself. The secured
creditor gave a
presumably lower interest rate in exchange for the right to enforce a
interest in specified collateral; he contemplated taking the collateral
loan was not repaid. For now, at least, he is left with neither.
reason for taking secured credit was his ability to monitor the
guard against the debtor's potential moral hazard. This ability, too,
lost. Another reason for taking secured credit was the preference he
given in bankruptcy; that preference is largely mitigated by a
lengthy uncompensated delay. Finally, creditors argue that giving
debtors an interest-free loan is simply not their duty -- and that by
they are encouraging debtors to delay the process even further.
conversely, are based less on efficiency and more on distribution.
estates are by definition cash-starved, and adding a requirement to pay
substantial interest would be a "crushing burden." This burden would
adversely affect all other (primarily unsecured) creditors, potentially
including employees, tort claimants, or bondholders. Most importantly,
affect the debtor itself. As Justice Scalia noted, to maintain the stay
362(d)(2), the debtor must have "an effective reorganization. . .in
prospect." Where every dollar is precious, the possibility of a
reorganization's success is vastly diminished when substantial interest
paid. It is inefficient well as distributionally unfair to favor giving
to a secured creditor, already favored in the bankruptcy process, over
anything to unsecured creditors and over improving the debtor's chance
debtors' distributional and efficiency arguments more persuasive, I
advise Congress to pass legislation that would reverse this decision.
Despite the revisions to
1-201(37), characterizing deals as leases or secured transactions
one issue which induces the most litigation under Article 9. This is
unsurprising; commentators have long noted that the law attempts a
that might be ephemeral, and the line still remains devilishly fine and
determination inescapably fact-driven. Further, parties have strong
to skirt this line. For tax, accounting, financing, and bankruptcy
benefit from categorizing their deals as leases; thus clever attorneys
fact intend to create security interests will intentionally blur the
they can later argue, if necessary, tin they were creating leases.
To avoid the mess of
have proposed amending Articles 9 and 2A to require lessors to file
financing statements in order to maintain priority over competing
They argue that this will allow later comers the opportunity to avoid
claims for the same items; for instance, if creditors learn that a car
leased, they will avoid securing loans with that car as collateral. If
not given because no filing has been made, the blame lies with the
the loss of priority does as well. Similarly, bankruptcy trustees could
priority over lessors who fail to file.
Opponents argue that this
legal requirement is excessively burdensome. In most lease cases a
unnecessary, because there never would have been any litigation anyway
because the transaction was very clearly a lease, or because there
competing creditors, or because later creditors were fully aware of the
transaction. In these cases, public filing would be entirely redundant
impose a burden both on lessors and on the already burdened public
offices. Further, opponents argue, such a requirement could simply
costs and uncertainty elsewhere. For instance, if Lexis must file a
statement on all cars that it lease to business executives, must Alamo
all cars rented to tourists? Presumably so. If Alamo chose to file,
result in much higher costs, which would be passed on to consumers. If
not to -- suspecting that the Mendenhall situation
was rare enough -- it would still worry about every traveler avoiding
during her trip, and this would create much uncertainty.
Presumably, proponents of
filing rely in part on the large improvements to the filing system in
years. Filing is moving rapidly from local to centralized and from
electronic, the requirements have been mainstreamed (particularly under
and the backlog has been minimized. But that is not enough, I believe,
justify such a tremendous expansion of filing. Property and related
important source of leases, are exempted from centralized filing. The
of new filings could return the backlog to its former levels. And the
repeated lessors, such as landlords afraid of tenants' bankruptcies,
consequently to consumers, is unjustified. Further, lessors who
to avoid litigation can already file without prejudice under §