Presenting a live 90-minute webinar with interactive Q&A UCC Security Interests in Proceeds of Collateral Navigating Attachment, Perfection and Priority and the Impact of a Debtor's Bankruptcy TUES DAY, OCTOBER 1, 2013 1pm East ern | 12pm Cent ral | 11am Mount ain | 10am Pacific Today’s faculty features: John Lawlor, Partner, Mayer Brown , Chicago Jim Pfau, Partner, Faegre Baker Daniels , Minneapolis The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions emailed to registrants for additional information. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 10 .
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The Outer Limits of Proceeds October 2013 John F. Lawlor Partner 312-701-7220 jlawlor@mayerbrown.com Mayer Brown is a global legal services provider comprising legal practices that are separate entities (the "Mayer Brown Practices"). The Mayer Brown Practices are: Mayer Brown LLP and Mayer Brown Europe-Brussels LLP both limited liability partnerships established in Illinois USA; Mayer Brown International LLP, a limited liability partnership incorporated in England and Wales (authorized and regulated by the Solicitors Regulation Authority and registered in England and Wales number OC 303359); Mayer Brown, a SELAS established in France; Mayer Brown JSM, a Hong Kong partnership and its associated entities in Asia; and Tauil & ChequerAdvogados, a Brazilian law partnership with which Mayer Brown is associated. "Mayer Brown" and the Mayer Brown logo are the trademarks of the Mayer Brown Practices in their respective jurisdictions.
Introduction • Commercial Tort Claims • Insurance Proceeds • FCC Licenses • Bankruptcy Considerations • Some Other Cases 6
Commercial Tort Claims • UCC §9-102(a)(13): “Commercial tort claim” means a claim arising in tort with respect to which: (A) the claimant is an organization; or (B) the claimant is an individual and the claim: (i) arose in the course of the claimant’s business or profession; and (ii) does not include damages arising out of personal injury to or the death of an individual. A commercial tort claim is not a general intangible 7
• Official Comment 5.g to UCC §9-102: “A security interest in a tort claim may exist if the claim is proceeds of other collateral.” • Proceeds definition includes “ . . . claims arising out of the loss, nonconformity, or interference with the use of, defects or infringement of rights in, or damage to, the collateral.” UCC §9-102(a)(64). 8
• Two ways that Article 9 treats commercial tort claims differently than other intangible collateral – Under UCC §9-204(b)(2), an after-acquired property clause in a security agreement will not include commercial tort claims that are not in existence when the security agreement is authenticated. – Under UCC §9-108(e), the description of a commercial tort claim in the granting clause cannot be by “type” (which would otherwise be a permissible way of describing the collateral). The description must be by another means specified in UCC §9-108(b) (specific listing, category, etc.) 9
• American Cartage case, 656 F. 3 rd 82 (1 st Cir., 2011) – Complicated facts involved suit by purchaser of all bankrupt debtor’s assets against advisor and manager of the debtor while in bankruptcy. Claims alleged conversion, breach of fiduciary duty, interference with contractual relationships and conspiracy. – Purchaser argued that claims were proceeds of collateral. – Court held that proceeds of collateral can only include the right to payment from resolution of a commercial tort claim, and not the claim itself. – Court cited language in Official Comment 15 to UCC §9-109 to support this analysis. 10
• Comment 15 relates to 9-109(d)(12), which excludes assignments of claims “arising in tort” from Article 9, but specifically states that commercial tort claims are not so excluded. • Comment 15 provides as follows: “This Article now applies to assignments of ‘commercial tort claims’ (defined in Section 9-102) as well as to security interests in tort claims that constitute proceeds of other collateral (e.g., a right to payment for negligent destruction of the debtor’s inventory).” • Court found that “ . . . treating commercial tort claims themselves as proceeds would blur any meaningful distinction between the two categories.” • Comment 15 does not say that only a right to payment from a tort claim can constitute proceeds; the court’s argument is contrary to Official Comment 5.g to UCC §9-102, which says that a “tort claim” may be proceeds, not simply the right to receive payment upon resolution of a tort claim. 11
• In American Cartage the successor in interest was seeking to prosecute the tort claims against the alleged tortfeasors, which may have caused the court to conclude as it did, that only the right to payment of a resolved tort claim can be proceeds collateral, not the claim itself. 12
Tort Claims and Insurance Proceeds • Several cases have held that tort claims seeking to recover general business losses, rather than losses attributable to a diminution in value of specific collateral, do not constitute “proceeds” of such original collateral. – Helms v. Certified Packaging Corp. , 551 F.3 rd 675 (7 th Cir., 2008) – In re Ferry Road Properties, LLC , 78 U.C.C. Rep. Serv. 2d 580 (Bankr. E.D. Tenn. 2012) • Cf. lead in language to clauses (D) and (E) of the definition of “proceeds” (referring to tort and insurance claims) “to the extent of the value of collateral . . . .” 13
• In Helms , lender’s original collateral was equipment • Helms : – “The usual proceeds of collateral are the money obtained from selling it. By a modest extension . . . they are money obtained in compensation for a diminution in the value of the collateral. But replacing a business loss is not restoring the value of damaged collateral. There is no necessary relation between the value of collateral and a business loss that results from its being destroyed or damaged—as this case illustrates: the business losses exceeded the impairment of the value of the collateral ninefold. The claim of a secured creditor to the proceeds of collateral cannot exceed the value of the collateral.” 14
• Would the lender in Helms have prevailed on its proceeds argument if the original collateral been all assets or had included all accounts and general intangibles? • See MNC Commercial Corp. v. Rouse, 1992 U.S. Dist. LEXIS 22166 (W.D. Mo. 1992) • MNC Commercial held that payments of a business interruption insurance policy were proceeds of debtor’s accounts and general intangibles. 15
FCC Licenses • As a matter of federal law, FCC licenses are not assignable, and this includes a prohibition on the grant of a security interest in an FCC license. • Beginning in 1994, the FCC has taken the position that a lender may take a security interest in the proceeds of an FCC license. 16
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