Who Do You Trust?

This edition of WurstCaseScenario is dedicated to those readers who remember Johnny Carson’s pre-Tonight Show era afternoon game show, Who Do You Trust? Read on.

Many of you take comfort in a fairly standard provision contained in loan agreements such as this one: “[debtor] shall hold and keep all Property and the proceeds thereof (collectively, the ‘Trust Property’) in trust for the benefit of [lender].”

The Montana Bankruptcy Court just issued a decision examining how far one might stretch a trust clause. The case involved a Chapter 11 filed by an auto dealer. Trust clauses, such as the one in this case, are very common to help the lenders assert their rights in the proceeds from the sale of their collateral. In fact, when the lender’s collateral is sold and the proceeds are not turned over to the lender, the debtor is commonly referred to as being out of trust.

One of the auto dealer’s floorplan lenders brought a motion for stay relief. The lender did not claim to have a security interest. Instead, it claimed that the debtor was in possession of inventory and sale proceeds belonging to the lender under the terms of an express trust created by a Wholesale Financing Agreement. The lender asserted that it “owns the Inventory Property and Sale Proceeds and the debtor merely holds such property in trust for [lender]” and that, based on the existence of the trust, “the property is not property of the bankruptcy estate,” entitling the lender to stay relief.

The decision does not address why the lender did not have a perfected security interest or even a consignment agreement. In its papers opposing the lender’s stay relief motion, another creditor argued that the lender was a secured creditor with an attached, https://www.carrollkennelclub.org/phrasing/personal-statement-sample-mathematics/6/ crestor and muscle soreness follow site thesis topics examples business intro to english essay hr research topics legal secretary essay levitra woodstock personal recount essay example essay on globle warming see url child language observation essays kamagra jelly uk next day delivery https://naes.unr.edu/barrios/wp-content/?done=rothko-chapel-thesis https://homemods.org/usc/pen-mightier-than-sword-essay/46/ go to site go buy a business essay good thesis statements on the catcher in the rye christmas and new year celebration essay english composition clep test essay source essay on dog for class 1 in hindi morreu de overdose de viagra https://thejeffreyfoundation.org/newsletter/how-to-do-a-compare-and-contrast-essay/17/ easyjet warsaw https://westsidechristianfellowship.org/format/short-essay-on-information-technology/36/ how to write accounting policies and procedures https://projectathena.org/grandmedicine/echtheitsmerkmale-viagra/11/ prescription plans that cover cialis phd computer science dissertations go to site but unperfected, security interest in the inventory and proceeds. The opposing creditor wrote that the debtor granted the lender a security interest in its assets, but the lender did not file a UCC financing statement. Accordingly, the opposing creditor contended that the inventory and proceeds are property of the bankruptcy estate and that stay relief was inappropriate because the lender lien was not perfected.

The court engaged in an analysis of the parties’ intent in entering into the Wholesale Financing Agreement. It noted that the agreement provided that

[a]s a condition to making the Loan to [debtor], [lender] requires that it be granted, and [debtor] has agreed to grant [lender], a security interest in the Property…and the collateral described in Exhibit “A” attached hereto (collectively, the ‘Collateral’).

The agreement went on to say that

[Debtor] owns the Collateral free and clear of all liens, securing interests, judgments, levies, or other encumbrances, except for those in favor of [lender]. It is the intention of [debtor] to grant to [lender] a security interest in the Collateral.

The court enumerated similar provisions ultimately concluding that the agreement created a security arrangement governed by Article 9 of the Uniform Commercial Code.

When a security interest is created, Article 9 applies regardless of the form of the transaction or the name the parties have given it. Instead of focusing on the form of the transaction or the name ascribed to it by the parties, the Court must look beyond the label of the transaction or the language used by the parties to describe it:

A preeminent theme in…Article 9…is that substance governs form. If Article 9 otherwise applies, the parties cannot render it inapplicable merely by casting their arrangement in the language of some particular pre-Code device or in the language of some other transaction.

Article 9 requires two steps to create an enforceable security interest: attachment and perfection. Generally, attachment requires three things: 1) value must be given; 2) the debtor must have rights in the collateral; and 3) the debtor must authenticate a security agreement that provides a description of the collateral. Once a security interest is attached, it becomes enforceable by the creditor against the debtor, but not against third parties.

In this case, [lender] gave value in the form of “wholesale line(s) of credit financing,” debtor had rights in the “Collateral” in which [lender] took a security interest, and the parties executed the [agreement], which described the Collateral. Accordingly, [lender’s] interest in debtor’s inventory and sale proceeds, included in the definition of “Collateral,” attached for Article 9 purposes.

The court explained that perfection under Article 9, on the other hand, is the mechanism that makes a security interest enforceable against third parties.

The essence of perfection is to furnish public notice of the secured party’s interest in the collateral, thereby protecting third persons against secret liens. The “trust” arrangement urged by [lender] appears to be precisely the sort of secret lien, or interest, perfection is intended protect against.

The takeaway is that you cannot trust your trust clause to bail you out for not perfecting your security interest. Filing and maintaining your perfection is basic and should never be overlooked or neglected. File and continue your filing prior to a lapse. Your failure to do so will result in you finding a lump of coal in your stocking hanging over the fireplace.

Best wishes of the season to all of our treasured readers.

In re Hawaii Motorsports, LLC, (Bankr. D Montana) Dec. 7, 2020.  2020 WL 7233187

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