A Modified Approach to Article 9 Deficiencies in Missouri

Unlike real property foreclosures, which are the subject of detailed statutory regulation, Part 5 of Article 9 establishes a free-wheeling system for personal property foreclosures which gives significant latitude to secured creditors. The secured party can sell, lease or otherwise dispose of any or all of the collateral so long as proper notice is given and every aspect of the disposition including the method, manner, time, place and terms. . . [is] . . . commercially reasonable. If the disposition creates a surplus, it must be turned over to the debtor; if part of the debt remains unpaid, the secured party can pursue a deficiency judgment. In theory, this system should benefit both parties by enhancing the amounts realized through foreclosure. In practice, it often leads to erratic results. On occasion, debtors have been denied an effective remedy notwithstanding significant procedural irregularities. More often, the courts have imposed harsh penalties on secured parties who failed to comply fully with the rules. There is some evidence that such overzealous protection of debtors is creating a backlash, causing some creditors to adopt default strategies that insulate them from attack but that also tend to reduce the collateral\u27s disposition value. It would be unfortunate if such strategies became commonplace. The purpose of this article is to examine critically the penalties for creditor misbehavior in Missouri. It will then propose a judicial approach to the problem which is somewhat different from those currently being used. It is hoped that adoption of this approach will help restore balance to the system and inure to the benefit of secured parties and debtors alike

An Analysis of Durrett and Its Impact on Real and Personal Property Foreclosures: Some Proposed Modifications

Section 548(a)(2) of the Bankruptcy Code empowers a bankruptcy trustee to avoid fraudulent transfers of the debtor\u27s assets if the debtor was insolvent at the time of the transfer. Since 1980, a number of federal courts have allowed trustees in bankruptcy to avoid properly conducted foreclosure sales of a debtor\u27s pledged collateral when the collateral was sold for less than seventy percent of its fair market value. These courts have based their decisions on the theory that the transfers involved in these sales are fraudulent conveyances. This theory has been the subject of vigorous opposition from mortgage holders and other secured lenders. Professor Henning argues that the theory is a proper and useful tool for trustees because it permits the trustee to recapture equity in the collateral that otherwise would be lost from the debtor\u27s estate. He concludes, however, that certain modifications should be made to the theory to prevent inequities to the secured lender, the debtor, and any third-party purchasers of the collateral

Achieving Law Reform Sometimes Requires a Strong Defense

In 2019, a joint drafting committee authorized by the Uniform Law Commission and the American Law Institute began work on a sweeping set of amendments to the official text of the Uniform Commercial Code (UCC) that address issues arising from emerging technologies. The amendments were approved by the sponsoring organizations at their 2022 annual meetings, and efforts are already underway to gain uniform nationwide enactment by state legislatures. The most significant changes to the UCC consist of a new Article 12 dealing with digital assets and amendments to Article 9 that facilitate the leveraging of these assets. Also in 2019, Wyoming adopted legislation to accomplish much the same thing. Although well-intended, the manner in which the legislation was drafted created serious problems for the functioning of that state’s version of Article 9 and for lawyers planning financing transactions involving digital assets. Between 2019 and 2022, bills based on the Wyoming model were introduced in over 20 states. In response, the Uniform Law Commission launched an intense effort by a small team of its members to explain to these states the problems with the legislation and to encourage them to wait for the official amendments to be finalized. I was a member of the joint drafting committee and of the team that opposed Wyoming-like legislation. The Article is based on my first-hand observations and on documents maintained in my files

Amended Article 2: What Went Wrong

This symposium issue explores two related questions: 1) Is the current version of Article 2 of the Uniform Commercial Code (U.C.C., or Code) satisfactory for dealing with modem sales-law issues; and 2) What problems are likely to arise as a result of amended Article 2\u27s failure in the legislatures? My answer to the first question is probably not, but it will have to do. The original article was drafted when manufacturers\u27 warranties were rare and electronic contracting and products that combine goods and software were unknown. Although brilliant in conception, the drafting is often confusing and even sloppy. Judging from the massive volume of litigation that continues to this day, at least one of the article\u27s key innovations--the so-called battle-of-the-forms provision--must be rated a failure. Despite these flaws, the courts have managed to deal with the issues and are capable of continuing to do so, albeit at great cost both to litigants and to those planning transactions. As to the second question, the failure of the amendments may go beyond merely missing an opportunity to improve the law. The inability of stakeholders to reach consensus on key issues and the willingness of some to commit resources to fight the amendments in the legislatures suggest a weakening of the consensus that in the past has supported uniformity at the state level in the field of commercial law. The failure of the amendments, coupled with other events described below, provides an occasion to think seriously about the need to keep the Code current and the problems that will arise if we are unable to do so

Article Nine\u27s Treatment of Commingled Cash Proceeds in Non-Insolvency Cases

One of the most difficult questions arising under Article 9 of the Uniform Commercial Code is the extent to which a secured party\u27s interest in collateral continues to be enforceable against the proceeds generated upon disposition of that collateral. Much of the difficulty surrounding this issue springs from the fact that proceeds occupy a position at the nexus of two competing Code policies. On the one hand, Article 9 validates the floating lien and minimizes the extent to which a secured party must continue to police a transaction once his interest has been perfected. On the other hand, it is important for third parties to be able to ascertain the extent to which property in a debtor\u27s possession is subject to encumbrances. The problem becomes especially severe when the proceeds are cash proceeds that have become commingled with funds from other sources in the debtor\u27s general banking account. The Code addresses some of the problems associated with proceeds through a network of complex provisions, but many of the most important issues cannot be resolved by direct reference to statutory language. From these rules, it seems clear that the security interest does not continue in proceeds unless those proceeds remain identifiable, but nowhere does the Code define what is meant by the term identifiable. When cash proceeds become commingled with funds from other sources, an issue arises as to whether the commingling destroys identifiability. If it does, the security interest is no longer enforceable against the proceeds. Even without commingling, an argument can be made that depositing cash proceeds in a bank account prevents them from being recovered in specie, thereby rendering them unidentifiable. The question whether commingled cash proceeds remain identifiable may arise in a variety of contexts. In recent years, a series of cases has held that cash proceeds remain identifiable notwithstanding commingling in the debtor\u27s bank account. The courts in many of these cases have analogized the facts before them to situations in which constructive trusts have been imposed and have determined that the debtors should be regarded as trustees of funds which belong, in equity, to the secured parties. Once this basic analogy between security arrangements and constructive trusts has been established, the secured party is armed with tracing principles that allow him to determine, artificially, that portion of the deposit account that is allocable to proceeds. Under this approach, identifiable is construed as the equivalent of traceable. Ultimately, this article takes the position that the use of artificial tracing rules is not prohibited by the Code and that the recent cases reach a proper result notwithstanding the weaknesses of the constructive trust analogy. Since the UCC encourages secured parties to permit debtors to retain proceeds and use them in conducting their businesses pending default, it makes sense to give secured parties who make use of these liberal provisions some protection. Given the nature of the potential priority conflicts and the fact that third parties will rarely have relied on the funds in the account in making extensions of credit, the courts are justified in developing remedies to assist secured parties, although it should be recognized that the constructive trust is being employed as a fiction to permit use of these remedies. On the other hand, it can be argued that while the Code validates the floating lien it makes good sense to build in incentives for the secured party to engage in a modicum of policing. This article will suggest an approach to conflicts involving rights of set-off that will penalize the secured party for permitting commingling in situations where banks actually rely on funds in the account in deciding to extend credit without completely stripping him of his security interest in the proceeds. This article will approach the issues by examining the situations in which commingling is likely to occur, reviewing the right to trace proceeds under some of the pre-Code financing devices, and analyzing the use of the term identifiable in the context of Article 9. It will then examine the modem line of cases involving secured parties\u27 claims to commingled cash proceeds and will conclude by suggesting how some of the potential conflicts can be resolved in a manner that protects the interests of secured parties while remaining sufficiently flexible to grant priority to third parties in the relatively rare situations where the equities warrant such a result

A Unified Rationale for Section 2-607(3)(a) Notification

An aggrieved buyer that fails to give its seller timely notification of breach, or that gives a timely but insufficient notification, suffers serious and sometimes catastrophic consequences under Article 2 of the Uniform Commercial Code (UCC or Code). On the serious end, a buyer entitled to reject must provide its seller with a timely notification that makes it clear that the goods again belong to the seller, with failure as to either timeliness or sufficiency resulting in acceptance rather than rejection. Obvious policy rationales support both requirements. The timeliness requirement creates an incentive for a buyer to exercise its inspection rights quickly. Prompt detection and reporting of a nonconformity is desirable because a cure can be effectuated more quickly, thereby mitigating the harm to both parties. If there is no cure, the seller can maximize the goods\u27 resale value by recovering them quickly and, as nearly as practicable, in the same condition as when they were tendered. Regarding sufficiency, if a notification merely states that there is a problem, the seller could legitimately assume that the buyer intends to accept the goods and that the purpose of the notification is to preserve its right to recover monetary damages. This level of information will not suffice for a rejection: The seller must be made aware that the buyer does not intend to keep the goods so that it can exercise its cure rights or recover the goods. A revocation of acceptance also requires a timely notification that advises the seller that the seller owns the goods, and the underlying policies are the same as in cases of rejection. Section 2-607(3)(a) provides that the buyer must within a reasonable time after he discovers or should have discovered any breach notify the seller of breach or be barred from any remedy. This rule is a nuclear bomb that, if triggered, eradicates all remedies. One would anticipate that such a catastrophic result must be grounded in appropriate policies but, as we shall see, many of the rationales that have been advanced to support it are thoroughly unconvincing. Note at the outset that the policies underlying the notification requirements in cases of rejection and revocation of acceptance do not apply in this context because the buyer rather than the seller owns the goods and the seller does not have statutory cure rights. Professor Richard Speidel, to whose memory this tribute issue is dedicated, sought through the Article 2 revision process to ameliorate the harsh effects of section 2-607(3)(a). After he resigned as Reporter in 1999 and the scope of the project was scaled back, the solution he drafted retained the support of the reconstituted drafting committee and was included among the amendments promulgated by the Code\u27s sponsors in 2003. His solution captures the essence of the need for postacceptance notification and articulates a viable standard to satisfy that need

A Unified Rationale for Section 2-607(3)(A) Notification

The premise of this Article is that the approach drafted by Professor Speidel is far superior to the original approach. The denial of any remedy to an aggrieved party because it stumbles with respect to some aspect of a notification is draconian, and section 2-607(3)(a) should not be retained in its present form. The original provision\u27s requirement that notification be given within a reasonable time and its silence as to the required contents give the courts a great deal of discretion, and they can do much to ameliorate its harsh effects by using only the prejudicial effect of a delay or lack of sufficiency as the basis for determining whether proper notification has been given. Under our suggested approach, a buyer would lose all remedial rights only if its notification failure significantly prejudiced an interest of the seller

The Uniform Law Commission and Cooperative Federalism: Implementing Private International Law Conventions through Uniform State Laws

The Uniform Law Commission (ULC) is a non-partisan, nonprofit, unincorporated association comprised of commissions formed in each state of the United States and also the District of Columbia, Puerto Rico, and the U.S. Virgin Islands. Its mission is to promote uniformity in the law among the several States on subjects as to which uniformity is desirable and practicable. In the 117 years of its existence, the ULC has produced hundreds of uniform laws and forwarded them to the legislatures of its member jurisdictions for enactment, often with striking and sometimes with universal success. Its premier product, produced in partnership with the American Law Institute (ALI), is the Uniform Commercial Code (UCC), but the laws it promulgates extend far beyond the area of commercial law. Among the many other areas in which the ULC is active, and of particular importance to the subject of this article, is family law. The ULC chooses its projects carefully, emphasizing acts that facilitate the interstate flow of commerce, acts that avoid conflicts when the laws of more than one state might apply to a particular situation, and acts that fill emergent needs, modernize antiquated concepts, or codify the common law

Elimination of Automatic Judgment Liens in Missouri

The traditional automatic judgment lien on real property following rendition of a money judgment has been statutorily eliminated. Judgment liens are now dependent upon the filing of an abstract of the judgment by the court clerk, but the implementing legislation contains ambiguities that raise issues regarding the scope of such liens

Impact of Revised Article 9 on Missouri\u27s Fixture Financing Scheme, The

In 1963, Missouri adopted the Uniform Commercial Code, including Article 9, which integrated the existing state laws governing the use of personal property as security. Since that time, significant revisions of Article 9 have been approved by the Code\u27s national sponsors, representing substantial changes in the law of secured transactions. These revisions have been introduced in the Missouri legislature but have not yet been enacted. It seems reasonably certain that they will be enacted in the near future. The area that has been more extensively revised than any other is Article 9\u27s treatment of security interests in fixtures. These revisions stem from widespread dissatisfaction with the original version\u27s fixture provisions. Fixtures is a hybrid classification, encompassing chattels that have been connected with realty in such a manner that, while not losing their separate identity, they would be considered a part of the realty by a disinterested observer. Thus, fixtures have characteristics of both realty and personalty, and while they may be subject to Article 9 security interests, they may also be subject to the interests of a variety of other parties with rights in the real estate to which they are affixed. The Article 9 secured party may be competing for priority rights with prior or subsequent owners, mortgagees, or lien creditors, including a trustee in bankruptcy. Both versions of Article 9 set out a complex series of rules designed to resolve these potential conflicts, but there are major differences between the current and the revised Code. This Article examines the fixture provisions of both versions of the Code and comments on the changes made by the revisions. In the process, the Article examines Missouri\u27s rather sketchy non-Code law of fixtures and discusses how this law interacts with both versions of the Code. In addition, the Article deals briefly with the interrelationship between the fixture provisions of Article 9 and relevant provisions of bankruptcy law. The Article was written at this time because of the adverse reaction generated in other states by the Code\u27s original provisions. Fixtures fall at the nexus between real and personal property security systems, and had the Code\u27s original rules been fully analyzed in terms of their impact on state real property regimes, much of the criticism could have been avoided. Before a new set of rules is enacted, it may be beneficial to examine Missouri\u27s fixture scheme to determine whether the revisions are, in fact, advisable