May 14, 2020

Secured Lenders

Secured Lenders

Leveraged Aircraft Leases: The Lender's Perspective
      Stephen R. Kruft, 44(3): 737–69 (May 1989)
Institutional investors frequently finance leveraged leases of large aircraft and may be disadvantaged if they are unfamiliar with the unique issues and concerns relating to this highly mobile and valuable equipment. This Article discusses these concerns and suggests methods of protecting the lender's interests by properly allocating the many risks encountered in aircraft lease transactions.

Look Before You Lend: A Lender's Guide to Financing Government Contracts Pursuant to the Assignment of Claims Act
      Heidi M. Schooner and Steven L. Schooner, 48(2): 535–65 (Feb. 1993)
Government receivables offer an enticing source of collateral in the financing of government contracts. Lending against government receivables, however, has its own inherent risks. This Article analyzes the Assignment of Claims Act, the federal statute allowing for the assignment of receivables from the government. It further explores situations in which the government may not be required to pay the assignee, despite a valid assignment. The Article also describes the procedure for asserting a claim against the government for payment of an assigned receivable.

Prepetition Waivers of the Automatic Stay: A Secured Lender's Guide
      Michael St. Patrick Baxter, 52(2): 577–604 (Feb. 1997)
Secured lenders are turning increasingly to prepetition waivers of the automatic stay as a way to deal with the subsequent bankruptcy of a borrower. This Article discusses the factors that appear to be influential in the enforcement of prepetition stay waivers. The author contends that the single most important factor in the enforcement of a stay waiver is the debtor's prospect of reorganization. The author concludes that stay waivers are useful devices for secured lenders, but counsels against their indiscriminate use.

Initial Report of the Joint Task Force on Deposit Accounts Control Agreements
      Joint Task Force on Deposit Account Control Agreements, ABA Section of Business Law, 61(2):745—796 (February 2006)

At the Crossroads: The Intersection of Federal Securities Laws and the Bankruptcy Code
      Wendy Walker, Mike Wiles, Alan Maza, and David Eskew, 63(1): 125–146 (November 2007)
This Article examines the ways in which the federal securities laws and the U.S. Bankruptcy Code do—and, at times, do not—work together, with an emphasis on the potential conflict between the Fair Funds Provision of the Sarbanes–Oxley Act of 2002, which permits the U.S. Securities and Exchange Commission to distribute penalties and disgorged funds collected from debtor–corporations to shareholders, and the "absolute priority rule," which prevents distributions to equity holders in Chapter 11 reorganization cases absent payment in full of creditors. Although touched upon in some of the largest bankruptcy cases in recent years, including Enron, WorldCom, and Adelphia, this potential conflict has not been squarely addressed by the courts and presents issues which should be examined by Congress.

Report of the Model First Lien/Second Lien Intercreditor Agreement Task Force
      committee on Commercial Finance, ABA Section of Business Law, 65(3): 809–884 (May 2010)

Article 9 of the UCC: Reconciling Fundamental Property Principles and Plain Language
     Thomas E. Plank; 68(2): 439-506 (February 2013) 
Article 9 of the Uniform Commercial Code, which governs (i) the grant of a security interest in personal property to secure payment or performance of an obligation—a “true security interest”—and (ii) the sale of receivables, incorporates the primary property law principle of nemo dat quod non habet—one cannot transfer an interest in property that one does not have—and its corollary —a transferee can receive what the transferor has and no more. For good policy reasons, however, Article 9 also enacts the innovative exception to nemo dat, the Filing Priority Principle codified in the “first-to-file-or-perfect rule,” that permits a secured party who first files a financing statement to obtain a superior security interest over a secured party who first obtains a security interest and would otherwise prevail under nemo dat. For true security interests, the plain language of Article 9 effectuates the policies of nemo dat and the Filing Priority Principle.

U.C.C. Article 9, Filing-Based Priority, and Fundamental Property Principles: A Reply to Professor Plank
     Steven L. Harris and Charles W. Mooney, Jr., 69(1): 79-92 (November 2013)
Uniform Commercial Code Article 9 generally follows the common law principle that one cannot give rights in property that one does not have (nemo dat quod non habet). In many circumstances, however, the priority rules under Article 9, including its rule awarding priority to the first security interest that is perfected or as to which a financing statement has been filed, trump nemo dat and enable a debtor to grant a senior security interest in property that the debtor previously had encumbered. In this article, Professors Steven Harris and Charles Mooney argue that, properly understood, the first-to-file-or-perfect rule confers upon a debtor the power to create a security interest in accounts and other rights to payment that the debtor has already sold and in which it retains no interest. In doing so, the authors take issue with Professor Thomas Plank, whose argument to the contrary appeared in the February 2013 issue of The Business Lawyer.

Rolling Back the Repo Safe Harbors
      Edward R. Morrison, Mark J. Roe, and Christopher S. Sontchi, 69(4): 1015-1048 (August 2014)
Recent decades have seen substantial expansion in exemptions from the Bankruptcy Code’s normal operation for repurchase agreements. These repos, which are equivalent to very short-term (often one-day) secured loans, are exempt from core bankruptcy rules such as the automatic stay that enjoins debt collection, rules against prebankruptcy fraudulent transfers, and rules against eve-of-bankruptcy preferential payment to favored creditors over other creditors. While these exemptions can be justified for United States Treasury securities and similarly liquid obligations backed by the full faith and credit of the United States government, they are not justified for mortgage-backed securities and other securities that could prove illiquid or unable to fetch their expected long-run value in a panic. The exemptions from baseline bankruptcy rules facilitate this kind of panic selling and, according to many expert observers, characterized and exacerbated the financial crisis of 2007–2009. The exemptions from normal bankruptcy rules should be limited to United States Treasury and similar liquid securities, as they once were. The more recent expansion of these exemptions to mortgage-backed securities should be reversed.

Massey Prize for Research in Law, Innovation, and Capital Markets Symposium—Foreword
     70(2): 319-320 (Spring 2015)

Financial Innovation and Governance Mechanisms: The Evolution of Decoupling and Transparency
     Henry T. C. Hu; 70(2): 347-406 (Spring 2015)
Financial innovation has fundamental implications for the key substantive and information-based mechanisms of corporate governance. “Decoupling” undermines classic understandings of the allocation of voting rights among shareholders (via, e.g., “empty voting”), the control rights of debtholders (via, e.g., “empty crediting” and “hidden interests”/ “hidden non-interests”), and of takeover practices (via, e.g., “morphable ownership” to avoid section 13(d) disclosure and to avoid triggering certain poison pills). Stock-based compensation, the monitoring of managerial performance, the market for corporate control, and other governance mechanisms dependent on a robust informational predicate and market efficiency are undermined by the transparency challenges posed by financial innovation. The basic approach to information that the SEC has always used—the “descriptive mode,” which relies on “intermediary depictions” of objective reality—is manifestly insufficient to capture highly complex objective realities, such as the realities of major banks heavily involved with derivatives. Ironically, the primary governmental response to such transparency challenges—a new system for public disclosure that became effective in 2013, the first since the establishment of the SEC—also creates difficulties. This new parallel public disclosure system, developed by bank regulators and applicable to major financial institutions, is not directed primarily at the familiar transparency ends of investor protection and market efficiency.

As starting points, this Article offers brief overviews of: (1) the analytical framework developed in 2006−2008 for “decoupling” and its calls for reform; and (2) the analytical framework developed in 2012−2014 reconceptualizing “information” in terms of three “modes” and addressing the two parallel disclosure universes.

As to decoupling, the Article proceeds to analyze some key post- 2008 developments (including the status of efforts at reform) and the road ahead. A detailed analysis is offered as to the landmark December 2012 TELUS opinion in the Supreme Court of British Columbia, involving perhaps the most complicated public example of decoupling to date. The Article discusses recent actions on the part of the Delaware judiciary and legislature, the European Union, and bankruptcy courts—and the pressing need for more action by the SEC. At the time the debt decoupling research was introduced, available evidence as to the phenomenon’s significance was limited. This Article helps address that gap.

As to information, the Article begins by outlining the calls for reform associated with the 2012−2014 analytical framework. With revolutionary advances in computer- and web-related technologies, regulators need no longer rely almost exclusively on the descriptive mode rooted in intermediary depictions. Regulators must also begin to systematically deploy the “transfer mode” rooted in “pure information” and the “hybrid mode” rooted in “moderately pure information.” The Article then shows some of the key ways that the new analytical framework can contribute to the SEC’s comprehensive and long-needed new initiative to address “disclosure effectiveness,” including in “depiction-difficult” contexts completely unrelated to financial innovation (e.g., pension disclosures and high technology companies). The Article concludes with a concise version of the analytical framework’s thesis that the new morphology of public information—consisting of two parallel regulatory universes with divergent ends and means—is unsustainable in the long run and involve certain matters that need statutory resolution. However, certain steps involving coordination among the SEC, the Federal Reserve, and others can be taken in the interim.

Task Force Introductory Report and Background Considerations Model Intellectual Property Security Agreement
     Model Intellectual Property Security Agreement Task Force, Commercial Finance committee and Uniform Commercial Code committee, ABA Business Law Section, 771(3): 849-932 (Summer 2016)

The Past and Future of Debt Recharacterization
     James M. Wilton and William A. McGee, 74(1) 91-126 (Winter 2018/2019)
The bankruptcy doctrine of debt recharacterization, as developed in four federal circuits, uses multi-factor tests derived from tax cases involving solvent companies. Aspects of these tests make no sense when applied to debt of insolvent companies and the U.S. Treasury has determined that, even for the purpose originally intended, the tests produce “inconsistent and unpredictable results.” The Ninth Circuit has now joined the Fifth Circuit in looking to state law as the basis for determining whether debt claims should be recharacterized as equity and disallowed in bankruptcy cases. This Article examines these two approaches, analyzing arguments for and against application of a federal or a state law rule of decision for debt recharacterization. Drawing on U.S. Supreme Court precedent, statutory analysis, and policy, the Article shows that, under long-standing legal principles, state law provides the proper framework for determining whether debt should be recharacterized as equity in bankruptcy and offers both consistency between state and federal courts and a higher degree of predictability concerning the enforcement of insider debt. The article predicts that the U.S. Supreme Court will ultimately resolve the circuit split in favor of a state law rule of decision. In anticipation of such a ruling, the article concludes by providing an overview of choice of law issues and state law approaches to debt recharacterization.

Oil and Gas Rights in Bankruptcy: Beware the Many Pitfalls for Interest Holders and Creditors
     Richard L. Epling, 74(1) 127-150 (Winter 2018/2019)
Lenders, vendors, pipelines, storage facilities and other businesses that lend money to or do business with the working interest owner/lessors of oil and gas properties often assume that their contractual bargains will prevail over the rights and claims of other participants in the hydrocarbon production process. Such persons often fail to take into account the varied local and state laws affecting the definitions of what is real and personal property, the requirements for perfection and certain overriding priorities granted to field operators, suppliers and vendors in certain cases. Bankruptcy is the crucible for testing these conflicting rights and claims, and there have been some instructive recent developments in several key court decisions.