Class 16 Secured Transactions, Fall, 2018 Choice of Law

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 Process by which a creditor protects (strengthens) security interest from other claimants to the same collateral.  Perfection is not relevant between.
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Presentation transcript:

Class 16 Secured Transactions, Fall, 2018 Choice of Law 11/7/2018 Class 16 Secured Transactions, Fall, 2018 Choice of Law Randal C. Picker James Parker Hall Distinguished Service Professor of Law The Law School The University of Chicago Copyright © 2001-18 Randal C. Picker. All Rights Reserved.

Choice of Law by the Parties 11/7/2018 Choice of Law by the Parties Generally Respected See UCC 1-301 and 1-302 Called Off for Perfection in Article 9 See UCC 1-301(c)[7 or 8] November 7, 2018

Why Do We Care about Choice of Law? 11/7/2018 Why Do We Care about Choice of Law? Two Critical Issues for Article 9 Where to file financing statements Non-uniformities One result in one state, a second result in another state November 7, 2018

11/7/2018 9-301 Except as otherwise provided in Sections 9‑303 through 9‑306, the following rules determine the law governing perfection, the effect of perfection or nonperfection, and the priority of a security interest in collateral: November 7, 2018

Specific Collateral Types, Specific Rules 9-303: Goods covered by Certificate of Title 9-304: Deposit Accounts 9-305: Investment Property 9-306: Letter-of-Credit Rights November 7, 2018

9-301(4): As-Extracted Collateral 11/7/2018 9-301(4): As-Extracted Collateral (4) The local law of the jurisdiction in which the wellhead or minehead is located governs perfection, the effect of perfection or nonperfection, and the priority of a security interest in as-extracted collateral. November 7, 2018

9-301(2): Possessory Security Interest 11/7/2018 9-301(2): Possessory Security Interest (2) While collateral is located in a jurisdiction, the local law of that jurisdiction governs perfection, the effect of perfection or nonperfection, and the priority of a possessory security interest in that collateral. November 7, 2018

9-301(3)(A), (B): Fixture Filings, Timber to Be Cut 11/7/2018 9-301(3)(A), (B): Fixture Filings, Timber to Be Cut (3) Except as otherwise provided in paragraph (4), while negotiable documents, goods, instruments, money, or tangible chattel paper is located in a jurisdiction, the local law of that jurisdiction governs: (A) perfection of a security interest in the goods by filing a fixture filing; (B) perfection of a security interest in timber to be cut; and November 7, 2018

11/7/2018 9-301 Except as otherwise provided in Sections 9‑303 through 9‑306, the following rules determine the law governing perfection, the effect of perfection or nonperfection, and the priority of a security interest in collateral: November 7, 2018

11/7/2018 9-301(1): Baseline Rule (1) Except as otherwise provided in this section, while a debtor is located in a jurisdiction, the local law of that jurisdiction governs perfection, the effect of perfection or nonperfection, and the priority of a security interest in collateral. November 7, 2018

11/7/2018 9-301(3) (3) Except as otherwise provided in paragraph (4), while negotiable documents, goods, instruments, money, or tangible chattel paper is located in a jurisdiction, the local law of that jurisdiction governs: (C) the effect of perfection or nonperfection and the priority of a nonpossessory security interest in the collateral. November 7, 2018

Three Questions Magenta Issues Questions Are you “a debtor located in a jurisdiction”? Are these “goods … located in a jurisdiction”? Determined under choice of law rules of forum jurisdiction November 7, 2018

Three Questions Are You Perfected? Green: “Governs perfection” 11/7/2018 Three Questions Are You Perfected? Green: “Governs perfection” The local law of the location of the debtor determines this under 9-301(1) This matters for figuring out where to file a financing statement November 7, 2018

Three Questions If You Are Perfected, With What Consequences? 11/7/2018 Three Questions If You Are Perfected, With What Consequences? Purple: “Governs the effect of perfection or nonperfection, and the priority of a security interest in collateral” Call this EPNP&P November 7, 2018

11/7/2018 Three Questions Which local law governs EPNP&P this depends on the type of collateral in issue For nonpossessory SIs, the local law of the location of the collateral governs EPNP&P for goods and the other collateral types in 9-301(3) For the rest—think SIs in accounts and general intangibles—the local law of the location of the debtor governs EPNP&P November 7, 2018

11/7/2018 9-501 (a) [Filing offices.] Except as otherwise provided in subsection (b), if the local law of this State governs perfection of a security interest or agricultural lien, the office in which to file a financing statement to perfect the security interest or agricultural lien is: November 7, 2018

11/7/2018 9-501 (2) the office of [ ] [or any office duly authorized by [ ]], in all other cases, including a case in which the collateral is goods that are or are to become fixtures and the financing statement is not filed as a fixture filing. November 7, 2018

9-307: Location of Debtor (a) [“Place of business.”] 11/7/2018 9-307: Location of Debtor (a) [“Place of business.”] In this section, “place of business” means a place where a debtor conducts its affairs. (b) [Debtor’s location: general rules.] Except as otherwise provided in this section, the following rules determine a debtor’s location: November 7, 2018

11/7/2018 9-307: Location of Debtor (1) An debtor who is an individual is located at the individual’s principal residence. (2) A debtor that is an organization and has only one place of business is located at its place of business. (3) A debtor that is an organization and has more than one place of business is located at its chief executive office. November 7, 2018

11/7/2018 9-307: Location of Debtor (e) [Location of registered organization organized under State law.] A registered organization that is organized under the law of a State is located in that State. November 7, 2018

Which Location and When? 11/7/2018 Which Location and When? Location of the Debtor Always matters for questions of perfection Matters for EPNP&P for collateral that doesn’t have a natural location (AR and GI) Location of the Collateral Matters for EPNP&P certain types of collateral (including goods) November 7, 2018

Oil, Gas and Minerals as Collateral Two Key Situations Owner of OGM borrows money Wants to use the OGM as collateral Owner of OGM lends money in a sale of OGM Wants to sell OGM, finance the sale and take interest in it as collateral (PMSI) (SemCrude) November 7, 2018

Two Key Situations in Mind Owner Borrows Money Wants to grant an SI in oil and gas Enters into that transaction before oil and gas are extracted Article 9 as-extracted collateral rules (see 9-102(a)(6)) might apply to this situation November 7, 2018

Two Key Situations in Mind Owner Lends Money in Sale of OGM Owner is financing purchase of oil and gas by buyer and wants to take an SI in oil and gas as collateral for sales price This is, simplified, the situation in SemCrude As-extracted collateral rules should not apply to this situation November 7, 2018

OGM as Collateral for Owner Lending As-Extracted Collateral Generally Inapplicable Debtor is going to be the purchaser of the OGM with sale financed by Owner As-extracted collateral regime applies to situations where owner is debtor, not where owner is secured creditor Ordinary Article 9 rules apply where owner is lender November 7, 2018

Sale of OGM Sem1 OKLP Sem2 DELP Sem3 OKLP KS Producers Bank 11/7/2018 Sale of OGM Sem1 OKLP Sem2 DELP Sem3 OKLP KS Producers Sell O&G No FS SA: All Assets FS: OK/DE Bank Who has priority? November 7, 2018

Creating an Ordinary PMSI Usual Process Execute SA File FS (in which state?) Give appropriate notices required under 9-324(b) November 7, 2018

Where to File FS? Assuming uniform version of 9-301 9-301(4) covers as-extracted collateral, but that isn’t SemCrude 9-301(1) says governs perfection question governed by local law of the debtor’s location November 7, 2018

Where to File FS? Assuming uniform version of 9-307(e) A registered organization that is organized under the law of a State is located in that State. November 7, 2018

Where to File FS? 9-102(a)(71) “Registered organization” means an organization formed or organized solely under the law of a single State or the United States by the filing of a public organic record with, the issuance of a public organic record by, or the enactment of legislation by the State or the United States. November 7, 2018

Where to File FS? 9-102 Official Comment 11 “Not every organization that may provide information about itself in the public records is a ‘registered organization’. For example, a general partnership is not a "registered organization", even if it files a statement of partnership authority under section 303 of the Uniform Partnership Act (1994) or an assumed name (‘dba’) certificate.” November 7, 2018

Where to File FS? 9-102 Official Comment 11 “This is because such a partnership is not formed or organized by the filing of a record with, or the issuance of a record by, a state or the United States. In contrast, corporations, limited liability companies, and limited partnerships ordinarily are ‘registered organizations’.” November 7, 2018

Meaning Here For Ordinary PMSI File in location of debtor Under 9-307(e), file where debtor is registered, meaning Oklahoma and Delaware Under 9-301(1), location of debtor will govern perfection Under 9-301(3), for goods, location of collateral will govern EPNP&P

Kansas 9-339a Non-Uniform SI in Favor of Certain Oil and Gas Producers Purchase agreement itself operates as security agreement (9-339a(a)) SI perfected on recording of affidavit of production (9-339a(b)) November 7, 2018

Kansas 9-339a Given PMSI status without having to give standard notices (9-339a(f)) SI covers oil and gas itself and certain proceeds (9-339a(c)) November 7, 2018

Sale of OGM Sem1 OKLP Sem2 DELP Sem3 OKLP KS Producers Bank 11/7/2018 Sale of OGM Sem1 OKLP Sem2 DELP Sem3 OKLP KS Producers Sell O&G No FS SA: All Assets FS: OK/DE Do the KS Producers have a SI? Who has priority in a bankruptcy case filed in DE? Bank November 7, 2018

Choosing Applicable Law Outside of 9-301 to 9-307 Debtor and SP Can Choose Some Law (But Not all Law) 1-301(c)[7 or 8] bars choice of law only as to issues covered by 9-301 to 9-307 Debtor and SP should be able to choose Kansas law for, for example, attachment of the security interest November 7, 2018

Meaning Here? Do through Sale Contract Kansas producers should provide in sales contract that they get the benefits of Kansas 9-339a That would give them a security interest without doing a security agreement November 7, 2018

Perfection: Applying All of this Here Uniform 9-301’s (and KS is uniform too) Bankruptcy filed in DE Federal court under Klaxon applies state choice of law regime Applies DE 9-301 November 7, 2018

Applying All of this Here Under DE 9-301 Debtor’s location controls governs perfection question under 9-301(1) Under 9-307(e), that is where LP is registered, here OK and DE For goods, EPNP&P question governed by KS law November 7, 2018

Applying All of this Here Meaning? As to O&G, KS producers needed to file FSs in OK/DE to perfect Didn’t do so, so unperfected (with SI created by sale contract and allowed choice of Kansas law) Under KS version of 9-201 and 9-317, unperfected creditor loses to perfected secured creditors November 7, 2018

Is this Surprising? Designing Non-Uniform Statutes What did Kansas hope to accomplish with KS 9-339a? Did it work? How should it re-design the statute to accomplish its desired end? November 7, 2018

Does the Purchaser take free and clear of KS Producer SI? 11/7/2018 Second Sale of OGM Sem1 OKLP Sem2 DELP Sem3 OKLP KS Producers Sell O&G No FS SA: All Assets FS: OK/DE Does the Purchaser take free and clear of KS Producer SI? Bank Sell O&G Purchaser November 7, 2018

Two Relevant Sections 9-317(b): Buyer for Value 9-320: Buyer in the Ordinary Course of Business November 7, 2018

9-317(b): Buyer For Value (b) Except as otherwise provided in subsection (e), a buyer, other than a secured party, of tangible chattel paper, tangible documents, goods, instruments, or a certificated security takes free of a security interest or agricultural lien if the buyer gives value and receives delivery of the collateral without knowledge of the security interest or agricultural lien and before it is perfected. November 7, 2018

Two Key Issues Value Bought oil on credit but 8th Circuit says promise to pay suffices for value Other related transactions didn’t change that November 7, 2018

Two Key Issues Knowledge: 1-202 (a) Subject to subsection (f), a person has “notice” of a fact if the person: (1) has actual knowledge of it; (2) has received a notice or notification of it; or November 7, 2018

Two Key Issues Knowledge: 1-202 (3) from all the facts and circumstances known to the person at the time in question, has reason to know that it exists. (b) “Knowledge” means actual knowledge. “Knows” has a corresponding meaning. November 7, 2018