August 31, 2012

Our Mini-Theme: Secured Transactions

Many lawyers work extensively in the secured transactions area. Far more are obliged to delve on a less frequent, or less in-depth, basis. For all of them, our mini-theme is intended to dispel five misconceptions: (1) more collateral is always better; (2) if you can't get the intended collateral, get the "proceeds" from it; (3) without remedies specified in your security agreement, you're out of luck; (4) you can always dispose of collateral "as is"; and (5) Canada has Article 9, too. If these sentences seem too simplistic, or even wrong, you're on to something. Our featured authors will take you pretty deeply into five topics, each in only a few accessible pages. Here's a brief summary.

Many secured financings involve so-called "blanket liens." Nonetheless, certain property should be excluded from the collateral package. Paul D. Brusiloff, Adrienne D. Baker, and Roshelle A. Nagar consider common exclusions and the reasons for them, such as de minimis value (in light of cost), tax considerations (e.g., where a non-U.S. subsidiary provides credit support for a parent U.S. borrower), stamp or recordation taxes and the like, logistical burdens (e.g., vehicle registrations), compliance with other law and obligations (e.g., corporate benefit tests, existing contracts), and operational flexibility.

Where there are impediments to the transfer of the intended collateral itself, some instead focus on the proceeds of such collateral. FCC licenses are a case in point. Cindy J. Chernuchin explains the limits of this "proceeds" approach, considering Article 9's anti-assignment override provisions and the Bankruptcy Code, in the context of analyzing whether proceeds from a post-petition sale of an FCC license are, or aren't, proceeds to which a secured party is entitled. After discussing the uncertainty resulting from recent and contemporaneous cases in Colorado (In re Tracy Broadcasting Corp.) and in the Southern District of New York (In re TerreStar Networks, Inc.), Ms. Chernuchin concludes with both collateral and structural recommendations.

Many security agreements specify the remedies available post-default. What if no such remedies are specified? Kathy Cabral and Teresa Wilton Harmon provide a roadmap of the statutory rights and remedies available under Article 9, Part 6, regardless of their inclusion in or omission from security agreements. These include the right to collect on collateral, to repossess collateral, to sell or dispose of collateral, and to retain the collateral in full or partial satisfaction of debt. Their article also summarizes the obligations and standards of care to which secured parties must adhere and the effects of secured party noncompliance with such standards.

Considering disposition of collateral in greater depth, Anthony R. Callobre and Harold J. Lee consider the seeming simplicity of the relevant UCC text provisions, but note that both commentary and case law require a more nuanced approach. They discuss the more holistic application of the commercial reasonableness standard, appropriate cost-benefit analysis, consideration of applicable industry custom, and the challenge of finding the balance between doing too little and doing too much--either could fail the "commercially reasonable" test.

Crossing the border? Kiriakoula Hatzikiriakos provides a primer on the creation and perfection of security interests under Canadian law. Beginning with a brief history of the Canadian secured transactions regime, and highlighting differences between the Personal Property Security Act (in the common law provinces) and the Civil Code (in Quebec), this article explains similarities and distinctions between U.S. security interests and their Canadian analogs, examining creation, perfection, conflict of laws, and other issues.

We hope you enjoy these articles as much as we did--whether covering new ground for you, or corroborating understandings you already have.