Law Commons^™

A Sea Change In Creditor Priorities, Kristen Van De Biezenbos

University of Michigan Journal of Law Reform

This Article argues that the operation of maritime law undermines a primary justification for creditor priorities under U.S. law. Under current law, when a debtor becomes insolvent, its secured creditors will be paid the full amount of their debt to the extent of their security interest, even if that leaves nothing to pay unsecured creditors. This is controversial with respect to involuntary unsecured creditors, particularly those with tort claims against the debtor. Defenders of this scheme of priorities have argued that allowing greater priority to involuntary creditors would hinder the availability or increase the cost of credit. However, involuntary creditors …

Law-Enforcement Officers And Self-Help Repossession: A State-Action Approach, Aaron Loterstein

Michigan Law Review

Repossession of secured collateral is a fundamental component of the consumer credit industry. The Uniform Commercial Code authorizes a secured party to engage in self-help repossession of secured collateral under section 9-609, so long as the repossession takes place without "breach of the peace." While that term is undefined, several courts have adopted a counterintuitive rule, holding that a law-enforcement officer's presence during a self-help repossession - regardless of purpose or level of involvement - creates a breach of the peace. The Official Comments to the Code have seemingly endorsed this position as well. This Note rejects the primary justifications …

Venture Capital On The Downside: Preferred Stock And Corporate Control, William W. Bratton

Michigan Law Review

When stock indices drop precipitously, when the startup companies fizzle out, and when it stops raining money on places like Wall Street and Silicon Valley, attention turns to downside contracting. Law and business lawyers, sitting in the back seat as mere facilitators on the upside, move up to the front and sometimes even take the wheel. The job is the same on both the upside and downside: to maximize the value of going concern assets. But what comes easily on the upside can be dirty work on the down, where assets need to be separated from dysfunctional teams of business …

Reconciling The Old Theory And The New Evidence: Comments On Ronald Mann's 'The Role Of Letters Of Credit In Payment Transactions', Jacob I. Corré

Michigan Law Review

Ronald Mann's thorough research and rigorous analysis provide compelling evidence that the commercial letter of credit does not further the fundamental purpose traditionally associated with it. Equally persuasive are his hypotheses about the functions that letters of credit actually serve in the real world. The objective statistics are startling. An overwhelming majority of letter of credit seller-beneficiaries make at least initial presentations to issuing or correspondent banks that by the express terms of the letter of credit do not entitle the seller to payment. Without a waiver from its customer, the issuing bank is legally entitled to, and surely will …

Informality As A Bilateral Assurance Mechanism: Comments On Ronald Mann's 'The Role Of Letters Of Credit In Payment Transactions', Avery Wiener Katz

Michigan Law Review

Ronald Mann's study of documentary defects in the presentation of commercial letters of credit is a valuable contribution to the commercial law literature in at least three respects. First, it offers a detailed and thorough empirical survey of an important though specialized aspect of commercial practice. Mann collected and coded a data sample of 500 randomly selected letter-of-credit transactions, personally evaluating each transaction to determine whether the documentary presentation by the beneficiary of the letter of credit (i.e., the seller) complied with the letter's formal terms. Then, for each case in which he found one or more documentary defects, Mann …

Letters Of Credit As Signals: Comments On Ronald Mann's 'The Role Of Letters Of Credit In Payment Transactions', Clayton P. Gillette

Michigan Law Review

Why would buyers and sellers transact with each other through a third party that charges a significant fee for its services and that typically is authorized to make payment notwithstanding noncompliance with the very prerequisites that it has been engaged to monitor? This is the puzzle that Ronald Mann's provocative and nuanced article purports to explain. Under the traditional story about the esoteric world of letters of credit, these transactions allow distant buyers and sellers to circumvent obstacles that would otherwise frustrate long-distance transactions. The traditional story explains that these credits induce buyers to approve payment prior to receiving conforming …

The Role Of Letters Of Credit In Payment Transactions, Ronald J. Mann

Michigan Law Review

Common justifications for the use of the letter of credit fail to explain its widespread use. The classic explanation claims that the letter of credit provides an effective assurance of payment from a financially responsible third party. In that story, the seller - a Taiwanese clothing manufacturer, for example - fears that the overseas buyer - Wal-Mart - will refuse to pay once the goods have been shipped. Cross-border transactions magnify the concern, because the difficulties of litigating in a distant forum will hinder the manufacturer's efforts to force the distant buyer to pay. The manufacturer-seller solves that problem by …

Startegy And Force In The Liquidation Of Secured Debt, Ronald J. Mann

Michigan Law Review

The question of why parties use secured debt is one of the most fundamental questions in commercial finance. The commonplace answer focuses on force: A grant of collateral to a lender enhances the lender's ability to collect its debt by enhancing the lender's ability to take possession of the collateral by force and sell it to satisfy the debt. That perspective draws considerable support from the design of the major legal institutions that support secured debt: Article 9 of the Uniform Commercial Code and the less uniform state laws regarding real estate mortgages. Both of those institutions are designed solely …

The Immovable Object Versus The Irresistable Force: Rethinking The Relationship Between Secured Credit And Bankruptcy Policy, Lawrence Ponoroff, F. Stephen Knippenberg

Michigan Law Review

The last leaf in O. Henry's classic short story was hanging by a delicate thread, but it never fell. It never fell, of course, because it wasn't real; Old Behrman had painted it (and caught pneumonia for his trouble) in order to give Johnsy the will to live. The Supreme Court's decision in Dewsnup v. Timm is also hanging by a thread, following a barrage of scholarly criticism and more than four years of limiting case law and legislative incursions on the case's core conceptual rationale. But the holding in Dewsnup, unlike the last leaf, is very real. It has …

Securing Russia's Future: A Plea For Reform In Russian Secured Transactions Law, Jason J. Kilborn

Michigan Law Review

After many turbulent years of uneasy transition to a market economy, Russia is finally "open for business." Nonetheless, the transitional period remains far from over, and Russian enterprises are still starved for capital that they desperately need for retooling to convert from military to consumer production, for acquiring new equipment to replace old and worn machinery, and for undertaking new and lucrative projects. While Russian financial institutions may provide significant funding, their reserves are limited; they could not hope to finance independently the multitude of existing and potential enterprises within the expansive Russian territory. Therefore, much of the financing for …

Preserving Purchase Money Security Interests And Allocating Payments, Lynda Kay Chandler

University of Michigan Journal of Law Reform

This Note explores the rationale underlying the courts' conflicting decisions in light of the purposes of the UCC. It concludes that the language of the UCC and its goals of uniformity and simplification require that a PMSI should not be entirely destroyed because a creditor also has a security interest in items the debtor acquired after the purchase money transaction or because a creditor extends additional credit. The best solution is to permit the creditor to retain a PMSI, to the extent of the purchase money loan, in those goods that the creditor's loan helped to purchase.

Part I is …

The Transformation Rule Under Section 522 Of The Bankruptcy Code Of 1978, Raymond B. Check

Michigan Law Review

This Note rejects the statutory arguments that have been advanced in favor of the transformation rule, and argues that the rule is inconsistent with both the policies motivating section 522 of the Bankruptcy Code and the overall purposes of the U.C.C. priority system. Part I examines the treatment of purchase money security in the U.C.C. scheme. It also describes the exemption provisions of the 1978 Bankruptcy Code and the legislative concerns that shaped those provisions. Part II summarizes the judicial adoption of the transformation rule and the statutory basis relied upon by courts in applying it. Part III argues that …

Standards For Insecurity Acceleration Under Section 1-208 Of The Uniform Commercial Code: A Proposal For Reform, Darlene M. Nowak

University of Michigan Journal of Law Reform

This article examines in Part I how insecurity clauses function under the common law and the U.C.C .. Part II discusses the areas of controversy under section 1-208, the definition of good faith, the need for notice to the debtor, and the debtor's burden of proof. The article will evaluate the need for substantive reform in each area of controversy. A two-tier test of the creditor's insecurity is proposed wherein although the creditor has no responsibility to check the truth of his information, he may accelerate only if the information is true and is such as to make a reasonable …

The Federal Priority In Insolvency: Proposals For Reform, William T. Plumb Jr.

Michigan Law Review

In 1970, the ABA approved a revised version of its insolvency priority recommendation which is now before the Senate Judiciary Committee as S. 2197, having been introduced by Senator Quentin N. Burdick. "by request," for the purpose of inviting public comment. The suggestions and criticisms made in the following analysis of the proposal are meant to detract nothing from the great desirability of the reform, for which I have worked for many years, but are intended to facilitate the kind of accommodation to the legitimate interests of the Government that ultimately paved the way for the adoption of the Federal …

The Partially Secured Creditor Under Chapter Xiii Of The Bankruptcy Act, Wayne C. Dabb Jr.

University of Michigan Journal of Law Reform

Under current bankruptcy law, a partially secured creditor can force a struggling debtor into straight bankruptcy despite the debtor's voluntary attempt to rescue himself from insolvency under a Chapter XIII wage earner plan. Since the partially secured creditor has a security interest in the debtor's personal property, though it may be one of only negligible value, he is generally treated under Chapter XIII as a wholly secured creditor. If the partially secured creditor is affected by the wage earner plan, his assent to it is required before the court can confirm the plan. He may therefore, by his single dissent, …

Choice Of Law In Secured Personal Property Transactions: The Impact Of Article 9 Of The Uniform Commercial Code, Russell J. Weintraub

Michigan Law Review

It is likely that, in view of the adoption in forty-nine states of the Uniform Commercial Code (Code), particularly of article 9 dealing with secured transactions, the incidence of interstate conflict-of- laws problems concerning commercial transactions in personal property will be greatly reduced. The reason for this anticipated reduction is that the Code creates uniformity in the applicable law governing the rights and duties both between the secured creditor and the debtor and between the secured creditor and third parties who challenge the secured creditor's right to enjoy his security interest.

Ucc--Secured Transactions--Judicial Sales--Purchaser At Judicial Sale Takes Property Subject To Unperfected Security Interest Of Which He Has Knowledge, Michigan Law Review

Michigan Law Review

p>The first question for consideration is the applicability of the "shelter provision" of section 2-403(1) to these cases. This section may be relied upon by different parties depending upon the nature of the sale. When a bankruptcy sale is involved, the buyer may claim, as Armstrong did in Mitchell, that the section allows him to succeed to the trustee's priority over unperfected security interests. When an ordinary judicial sale is involved, however, there is no intermediate transferee with both title to the property and a clear claim to priority, and the secured party may rely on this section …

Preferential Transfers On The Eve Of The Bankruptcy Amendments, Richard M. Kohn

University of Michigan Journal of Law Reform

While secured lenders may have been content to ride the crest of judicial legislation, the only permanent solution to the problem lie in amending either the Bankruptcy Act, the Uniform Commercial Code, or both. This at least is the view taken by the National Bankruptcy Conference's Committee on Coordination of the Uniform Commercial Code and Bankruptcy Act. Since its first meeting in June 1966, the Committee has focused its attention primarily upon the validity, in bankruptcy proceedings, of Article 9 security interests in after-acquired property. In September 1967, the Committee submitted to the Bankruptcy Conference its first draft of a …

Conflicting Perfected Security Interests In Proceeds Under Article 9 Of The Uniform Commercial Code, Michigan Law Review

Michigan Law Review

Section 9-306 gives the inventory financer a "continuously perfected" security interest in the proceeds of the inventory if the security interest in the original collateral was perfected. "Proceeds" is defined as including "whatever is received when collateral or proceeds is sold, exchanged, collected or otherwise disposed of." Thus, the inventory financer may have a security interest in the proceeds of the original collateral or the proceeds of the proceeds. The security interest in the proceeds may be perfected in either of two ways: (1) under section 9-306(3)(a) the security interest is perfected by filing a financing statement that expressly covers …

Bankruptcy Preferences-Secured Transactions-Security Interest In After-Acquired Property Is Voidable Preference If Received Within Four Months Of Bankruptcy-In Re Portland Newspaper Publishing Co., Michigan Law Review

Michigan Law Review

In an effort to provide employment for several hundred workers who had lost their jobs in an unsuccessful strike against Portland's two largest newspapers, the local printers' unions and several civic leaders organized the Portland Reporter Publishing Co. (Reporter) to publish a rival newspaper. The unions also formed the Rose City Development Co. (Rose City), which leased facilities and equipment to Reporter and subsequently made several emergency operating loans to it. These loans were secured by an agreement designating as collateral all of Reporter's previously unsecured accounts receivable, both present and after-accruing. This type of agreement -securing after-acquired property of …

Bootstraps And Capital Gain--A Participant's View Of Commissioner V. Clay Brown, William H. Kinsey

Michigan Law Review

A closely held corporation may be sold in a variety of ways. At one end of the spectrum is an all-cash sale. In such a transaction, the seller receives the purchase price and has no further concern with the economic well-being of the business. The difficulty with this method, of course, is finding a purchaser with sufficient cash who is willing to pay a fair price.

At the other end of the spectrum is a full-fledged bootstrap sale, where there is no down payment other than from the underlying assets of the sold corporation, and the purchaser's obligation to pay …

Uniform Commercial Code Article 9 Filing Procedures For Railroad, Utility, And Other Corporate Debtors: Some Suggestions, Daniel R. Elliott Jr.

Michigan Law Review

After a brief discussion of the provisions of Article 9 peculiarly applicable to the long-term mortgage, a portion of this comment will review the relevant statutes and case authority in force prior to the effective date of the Code in various states and still applicable in others. More specifically, it will examine the special treatment accorded certain types of corporate indentures, particularly those securing the debt of railroads and other public utilities. Second, an attempt will be made to explain the probable solutions to the problems raised by the filing requirements of Article 9 as promulgated in each jurisdiction and …

Security-Chattel Mortgages-Mortgage Recorded Under Federal Aviation Act Of 1958s As Affected By State Laws, William C. Brashares

Michigan Law Review

Defendant, a Michigan corporation, ordered a new airplane from Air-O-Fleet, a retailer. Air-O-Fleet financed its purchase from the manufacturer through a loan from plaintiff, a Texas corporation, who took a chattel mortgage on the airplane. One day after Air-O-Fleet had made delivery to defendant and received full payment, plaintiff recorded the chattel mortgage with the Federal Aviation Authority in accordance with the Federal Aviation Act of 1958, section 1403, which provides that "no conveyance or instrument ... shall be valid ... against any person other than the person by whom the conveyance or other instrument is made or given, ... …

Mechanics' Liens-Improvements Outside Building--Lien Allowed For The Clearing Of Land Unconnected With The Construction Of A Building, Byron Bronston S.Ed

Michigan Law Review

Plaintiff filed a bill of complaint seeking to enforce a mechanic's lien for the clearing of eighty acres of land pursuant to an agreement with the owners. The bill alleged that plaintiff's lien was superior to a mortgage which, though prior in time of execution, had been recorded subsequent to the inception of the clearing contract. Defendant mortgagee demurred on the ground that land clearance did not qualify for a lien under the pertinent mechanic's lien statute which provided that "every ... person ... who shall do or perform any work or labor upon ... any building or improvement on …

The Lazy Lawyer's Guide To Secured Transactions Under The Code, Peter F. Coogan

Michigan Law Review

It is expected that few, if any, who can really qualify as "lazy lawyers" will read this paper. There is, however, an obvious need for a reasonably simple statement which a young Iawyer, for example, may find helpful in explaining article 9 of the Uniform Commercial Code to the partners in his firm, or a lender's lawyer may use in explaining the essentials of article 9 to a borrower's counsel who has only occasional contact with secured transactions-- or, in either case, vice versa.

If we could assume that our learner had absolutely no knowledge of article 9, we could …

Stockholder Votes Motivated By Adverse Interest: The Attack And The Defense, Earl Sneed

Michigan Law Review

It is the purpose of this article to study stockholder votes motivated by adverse interest from the standpoint of the attack and the defense. First, the remedies available to the complaining minority are examined. Then follows a study of the indicia of adverse interest in specific shareholder actions. Knowledge of the nature and import of these indicia should enable the careful lawyer to avoid or defeat the charge that unconscionable adverse interest vitiated the result of a stockholder vote.

Mortgages - Priorities -Mechanics' Lien Attaching To Optionee's Interest In Land Superior To Purchase Money Mortgage, Roger W. Kapp

Michigan Law Review

The holder of an option to purchase land ordered building materials from plaintiff. The materials were delivered the same day. The option was subsequently exercised by the vendee, and a warranty deed received from the vendor. At the same time a deed of trust was executed and delivered by the vendee to the defendant to secure a loan for the purchase money. The trust deed was properly recorded. Upon a failure of payment, plaintiff filed its mechanic's lien. Defendant subsequently foreclosed its trust deed. Plaintiff commenced this action to foreclose its lien. The trial court held the mechanic's lien superior …

Bankruptcy - Uniform Trust Receipts Act - Rights Of Entruster To A Lien Interest In The General Assets Of Bankrupt Trustee, Barry I. Fredericks

Michigan Law Review

Plaintiff, a credit corporation, used a trust receipt arrangement to finance a car dealer, who thereafter sold a number of the entrusted cars (out of trust sales) without remitting the proceeds to plaintiff. In order to restore some of these proceeds, which had been dissipated in the course of running his business, the car dealer gave plaintiff a trust receipt on ten unencumbered trucks in its possession, in release of part of plaintiff's security interest under the first trust receipts. Plaintiff later sold these ten trucks. Subsequently, in the course of bankruptcy proceedings filed against the car dealer, plaintiff sought …

Bills And Notes - Acceptance - Payment By Drawee Of Raised Check Precludes Recovery Under Section 62 Of The Uniform Negotiable Instruments Law, Louis A. Kwiker

Michigan Law Review

Defendant, collection bank and presenter, paid the face amount of a raised check, executed its unqualified indorsement thereon, transmitted the check through regular banking channels, and received payment from drawee bank. Upon discovery of the overpayment plaintiff, surety, reimbursed the drawee and sought recovery from the defendant. The trial court sustained defendant's demurrer. On appeal, held, affirmed. Under section 621 of the Uniform Negotiable Instruments Law, a drawee bank which pays a raised but otherwise genuine check to a non-negligent holder in due course cannot recover the amount by which the instrument was raised because payment constitutes an acceptance …

Bills And Notes - Indorsements - Effect Of Contemporaneous Agreement On The Indorsement Contract, W. Stanley Walch

Michigan Law Review

Plaintiff, payee of a promissory note, indorsed and negotiated the note to the defendant bank. Attached to the note was a separate agreement of assignment and warranty in which the plaintiff assigned the note and a conditional sales contract to defendant, and further agreed to repurchase the note if any of the warranties in the contemporaneous agreement were breached. The maker of the note defaulted and defendant, after due presentment and notice, debited plaintiff's account for the face amount of the note. Plaintiff brought suit to recover the money from defendant on the theory that the contemporaneous agreement had qualified …