2021-2022 Commercial Law Developments

• Publication year: 2023
• Author: Written by Steven O. Weise, Teresa Wilton Harmon, John F. Hilson, Stephen L. Sepinuck, Edwin E. Smith, and Lynn A. Soukup

2021-2022 COMMERCIAL LAW DEVELOPMENTS01

Written by Steven O. Weise, Teresa Wilton Harmon, John F. Hilson, Stephen L. Sepinuck, Edwin E. Smith, and Lynn A. Soukup

The following is a portion of the comprehensive summary of the 2021-2022 developments in commercial law assembled by the Commercial Transactions Committee. For those interested in the entire summary, please contact Walter Oetzell at wkoetzell@oetzelllaw.com.

I. PERSONAL PROPERTY SECURED TRANSACTIONS

A. SCOPE OF ARTICLE 9 AND EXISTENCE OF A SECURED TRANSACTION

1. GENERAL

A.Y. McDonald Industries, Inc. v. McDonald, No. 21-1365, 2021 WL 3076322 (Iowa Ct. App. 2021)—An agreement by which a judgment creditor agreed to cease collection activities in return for the judgment debtor's irrevocable appointment of an attorney-in-fact to forward payments due to the debtor from two spendthrift trusts did not function as a security agreement because the debtor had no power under the spendthrift trusts to collateralize his interests in them. Moreover, the appointment was revocable because otherwise the spendthrift nature of the trusts would be undermined.

In re Canuso, No. 18-23619-ABA Adv. No. 20-1043-ABA, 2021 WL 2144197 (Bankr. D.N.J. 2021)—An assignment agreement by which the debtor granted a designated agent a power of attorney to transfer the debtor's shares in a closely held corporation, and which expressly stated that the power was "coupled with an interest, [and] is irrevocable," did not create a security interest because the agent in fact had no interest. The agent could only transfer the shares among owners, it had no right to sell the shares and, because the agent was not a "qualified investor," could not become an owner pursuant to the shareholders' agreement. Moreover, if anyone extended credit to the debtor, it was the agent's 50% owner, not the agent itself.

2. INSURANCE

In re Barbato, No. 2-21-20087-PRW, 2021 WL 5173354 (Bankr. W.D.N.Y. 2021)—A bank's security interest in two annuity contracts—structured as a conditional assignment—was perfected under New York common law when the issuer of each annuity received and acknowledged notification of the bank's interest. The bank's security interest in one of the annuities was also perfected by possession of the annuity contract.

In re Linder Oil Co., No. 17-51323, 2021 WL 1244536 (Bankr. W.D. La. 2021)—An insurance premium financier received a security interest in the debtor's unearned insurance premiums, not an outright assignment of them, because the financier's right to cancel the policies and receive the unearned premiums was triggered upon default. The security interest was perfected under the common law because the insurer had knowledge of the financier's interest. The debtor's prepetition payments to the financier were not avoidable preferences if, as is likely, the financier was fully secured at the time of each payment, not at the time the petition was filed.

3. REAL PROPERTY

In re MTE Holdings LLC, 631 B.R. 690 (Bankr. D. Del. 2021)—The claims of real property owners for royalties arising from the debtor's extraction of oil and gas from the owners' real property in Texas were not secured pursuant to a non-uniform provision in

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the Texas Commercial Code. That provision provides for an automatically perfected PMSI to secure an obligation to pay the purchase price of only "produced" oil and gas, as opposed to raw hydrocarbons—and the real property owners never owned any produced oil or gas. The Texas law does provide a security interest for owners who are to be paid in kind but none of the owners in this case were entitled to payment in kind.

In re Sanchez Energy Corp., No. 19-34510, 2021 WL 3630000 (S.D. Tex. 2021)—A lessor's security interest in oil and gas extracted from the real property was not perfected by a recorded memorandum of lease because the security interest attached only upon attachment, when the oil and gas were personal property, and recording a memorandum of lease perfects a consensual lien on real property.

In re Dabbs, 625 B.R. 15 (Bankr. D.S.C. 2021)—A credit card issuer's PMSI in house siding that the debtor purchased was an automatically perfected PMSI in consumer goods, and the security interest remained perfected even though the siding became a fixture when it was installed on the debtor's residence.

ABB, Inc. v. Integrated Recycling Group of SC, LLC, 854 S.E.2d 171 (S.C. Ct. App. 2021)—The trial court did not err in ruling on summary judgment that a pelletizer was not a fixture, and therefore that a secured party with a perfected security interest in the pelletizer had priority over a mortgagee with a mortgage on the real property where the pelletizer was located. Although there was evidence that the pelletizer was heavy and was bolted to the floor, no evidence was offered about the debtor's intent to make the pelletizer a fixture or about the pelletizer's relationship to the use of the real property, and there was no dispute that the pelletizer could be removed without damaging the real property.

Vedrode v. Abdole, No. 353542, 2021 WL 3117523 (Mich. Ct. App. 2021)—The buyer of real property at a tax sale acquired the taxpayer's mobile home, which had become a fixture to the real property. Although the taxpayer had not filed an affidavit of affixture, doing so is not the only way in which a mobile can become a fixture. The taxpayer owned both the mobile home and the real property at the time that she had the mobile home moved to the property, all the items that made the home "mobile"—as wheels, towing hitches, and running gear—were removed, and the mobile home was attached to a basement foundation.

4. PERSONAL PROPERTY LEASING

Prospect ECHN, Inc. v. Winthrop Res. Corp., 569 F. Supp. 3d 935 (D. Minn. 2021)— Equipment leases that provided for automatic annual renewal after expiration of the initial terms of four to five years, unless terminated, were true leases. Although the leases were not terminable during the initial terms, they were terminable during the renewal periods, and therefore the bright-line test of section 1-203(b) was not satisfied. Even if the leases were not terminable, the lessee did not prove that either the initial terms or the renewed terms exceeded the useful life of the equipment.

5. SALES

Xynergy Healthcare Capital IILLC v. Municipality of San Juan, 516 F. Supp. 3d 137 (D.P.R. 2021)—A sale of accounts by a company that provided health-care billing services was not for the purposes of collection only because the buyer did pay for the accounts—80% of the face amount—and because the sales agreement stated that title vested in the buyer, authorized the filing of a financing statement, and required the seller to protect the buyer's title to the accounts.

In re Sandia Tobacco Manufacturers, Inc., No. 16-12335-j11, 2021 WL 3040937 (Bankr. D.N.M. 2021)—A customer's agreement with a cigarette manufacturer which "allocated" to the customer the manufacturer's residual interest in escrow sub-accounts that state law required the manufacturer to create, but which had been funded by the customer, was not a sale of accounts governed by Article 9. The purpose of a security interest is to secure payment or performance of an obligation, but the manufacturer had no payment obligation to the customer with respect to the sub-accounts.

NextEngine Inc. v, NextEngine, Inc., No. 2:19-cv-00249, 2021 WL 4026759 (C.D. Cal. 2021)—The restructuring of a financing transaction through which the debtor "assigned" patents and trademarks to a holding company, which then gave an exclusive license back to the debtor, was not a true assignment, but another security interest. The agreements referred to the intellectual property as "collateral," prohibited the holding company from transferring the IP prior to default, required the lender to notify the debtor before any sale of the IP and give the debtor reasonable opportunity to purchase the IP at a higher bid, required that any proceeds of the sale be applied toward satisfaction of the debt, and provided that the holding company's rights to the IP terminated upon full payment of the debt. Therefore, the holding company's assignee did not have standing to bring an infringement claim against the debtor.

In re Shoot the Moon, LLC, 635 B.R. 797 (Bankr. D. Mont. 2021)—Eighteen transactions by which a financier, in return

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for immediate cash, purportedly purchased the debtors' future receivables until the financier received a specified amount, were really secured loans. The documents granted the financier a perfected security interest in virtually all the debtors' assets, not merely the receivables purchased, which is not typical of a sale of receivables. The filed financing statements identified each debtor as a "debtor," rather than as a "seller." The financier obtained a personal guaranty of the debtors' payment and performance obligations and the guaranty contained a waiver of any requirement that the financier proceed against the "collateral" before demanding payment from the guarantor. The financier obtained an affidavit of confession of judgment "for a debt due." The parties discussed the transactions as "loans" with "terms" and "balances," and rolled funds from one transaction to the next. Finally, the financier retained a right of recourse against the debtors and the debtors commingled funds from the receivables allegedly sold with other funds.

As loans, the transactions were usurious under Montana law. Although the transaction documents include a New York choice-of-law clause and the financier was located in New York, Montana law applied because applying New York law would violate a fundamental policy of Montana and Montana has a materially greater interest in determining the issue due to the fact that the debtors were Montana entities owned and operated by Montana citizens working out of a Montana office and the extremely high cost of the loans contributed to the debtors' financial demise, which resulted in financial losses for numerous Montana...