Avoiding the $1.5 Billion Mistake: Article 9 Lessons in the GM Bankruptcy Don Petersen, Esq. Bennett, Weston, LaJone & Turner, P.C August 14, 2016 Esquire CLE

Background Information Donald Petersen Harvard Law School Has taught secured transactions at law school for the past 12 years.

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.

Other Areas They Arise Any time you want to increase the probability of being repaid. Legal bills

Why is it so confusing? It’s governed by a confusing code. That gives words confusing definitions. That addresses issues that “never” arise.

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.

The Code’s Goals UCC – promotes commercial transactions Article 9 – protect potential lenders

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

9 Steps to Success: Petersen’s Wonder-Formula: Part 1 1. 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?

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?

Step 1 The Roster: ID and categorize. debtor obligor secondary obligor creditor etc.

Step 2 Classify each creditor’s collateral. Goods are classified based on how the debtor uses them -- when the SI attaches.

Step 3 Did each creditor attach a SI to its collateral? VRA

V-R-A Value Creditor supplies value to the obligor E.g., loan or commitment to loan §9-203(b)(1).

V-R-A Rights Debtor has rights in the collateral. §9-203(b)(2).

V-R-A Agreement Debtor signs an agreement that properly describes the collateral. The description must be more specific than for the FS. §9-203(b)(3)(A).

Malpractice Excuses Implied AAP provisions (Filtercorp) Composite Document Rule (PER)

Step 4 Did each creditor perfect its attached SI?

Perfection The goal of Article 9 Perfecting a SI puts the world on notice that a SI exists in the collateral!

Perfecting a SI FS – the most common and the default method. Automatic – when the SI attaches. Possession/Control

FS Requirements Debtor’s name “Indicate” the collateral. Can be super-generic. Other stuff – Just fill out the form!

Filing the FS The state where the debtor is located.

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.

Step 6 Did a creditor obtain a SI in proceeds? If so, go back to Step 2.

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?

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

Step 7 The Line-Up: ID the creditors fighting over each piece of collateral: JLC/Bankruptcy Trustee PSP USP Unsecured/general creditor SLC

Step 8 Find and apply the correct priority rules to each battle. Consider PMSI status, etc.

PMSI you borrow money to buy a good, and A PMSI arises if: you borrow money to buy a good, and you use that good as collateral for the loan.

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

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

Enforcement Against a Good Re-posses -- take possession of the good. Non-Article 9.

What do you do with the Good? Sell It – commercial reasonableness. Strict Foreclosure -- keep the good and apply it against the debt.

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

Contact Me Office: (214) 373-2550 Cell: (616) 389-4960 Email: dpetersen@bennettweston.com Don Petersen Bennett Weston LaJone & Turner, P.C. 1603 LBJ Freeeway, Suite 280 Dallas, TX 75234

Any Questions? Thank you!