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Avoiding the $1.5 Billion Mistake: Article 9 Lessons in the GM Bankruptcy

This article provides 9 lessons learned from the GM bankruptcy, helping readers understand secured transactions and avoid costly mistakes.

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Avoiding the $1.5 Billion Mistake: Article 9 Lessons in the GM Bankruptcy

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  1. Avoiding the $1.5 Billion Mistake: Article 9 Lessons in the GM Bankruptcy Don Petersen, Esq. Bennett, Weston, LaJone & Turner, P.C August 14, 2016 Esquire CLE

  2. Background Information • Donald Petersen • Harvard Law School • Has taught secured transactions at law school for the past 12 years.

  3. What is “Secured Transactions”? • “Traditional: A borrower wants a loan. • A lender wants to “make sure” the borrower repays the loan. • So the lender asks for collateral in case the borrower doesn’t repay it.

  4. Other Areas They Arise • Any time you want to increase the probability of being repaid. • Legal bills

  5. Why is it so confusing? • It’s governed by a confusing code. • That gives words confusing definitions. • That addresses issues that “never” arise.

  6. It’s really not that confusing! • Most transactions are treated the same. • Get your head out of the code – think about it logically! • Think about what the code is trying to do.

  7. The Code’s Goals • UCC – promotes commercial transactions • Article 9 – protect potential lenders

  8. Article 9 • Part 1 – gen. provisions, defs. • Part 2 – SA/SI • Part 3 – Perfection and Priority • Part 4 – 3rd Parties’ rights • Part 5 – Filing/detail stuff • Part 6 – Default/Remedies

  9. 9 Steps to Success: Petersen’s Wonder-Formula: Part 1 1. The Roster: Who are they? 2. Classify each creditor’s collateral. 3. Did SI attach to collateral? 4. Did each creditor perfect its SI? 5. Did a later event impact a PSI?

  10. 9 Steps to Success: Petersen’s Wonder-Formula: Part 2 6. If proceeds – go to Step 2. 7. By claimant, list (i) collateral it’s fighting for, and (ii) its status. 8. Resolve all priority battles. 9. What are creditor’s remedies?

  11. Step 1 • The Roster: ID and categorize. • debtor • obligor • secondary obligor • creditor • etc.

  12. Step 2 Classify each creditor’s collateral. • Goods are classified based on how the debtor uses them -- when the SI attaches.

  13. Step 3 • Did each creditor attach a SI to its collateral? • VRA

  14. V-R-AValue • Creditor supplies value to the obligor • E.g., loan or commitment to loan • §9-203(b)(1).

  15. V-R-ARights • Debtor has rights in the collateral. • §9-203(b)(2).

  16. V-R-AAgreement • Debtor signs an agreement that properly describes the collateral. • The description must be more specific than for the FS. • §9-203(b)(3)(A).

  17. Malpractice Excuses • Implied AAP provisions (Filtercorp) • Composite Document Rule (PER)

  18. Step 4 • Did each creditor perfect its attached SI?

  19. Perfection • The goal of Article 9 • Perfecting a SI puts the world on notice that a SI exists in the collateral!

  20. Perfecting a SI • FS – the most common and the default method. • Automatic – when the SI attaches. • Possession/Control

  21. FS Requirements • Debtor’s name • “Indicate” the collateral. Can be super-generic. • Other stuff – Just fill out the form!

  22. Filing the FS • The state where the debtor is located.

  23. Step 5 • Did anything impact a creditor’s PSI? • Did the debtor move to a new state? • Did the debtor change its name? • Did the debtor sell the collateral? • Has five years elapsed? • Etc.

  24. Step 6 • Did a creditor obtain a SI in proceeds? • If so, go back to Step 2.

  25. SI and Proceeds • The SI attaches automatically to proceeds. • The Si is perfected for at least 20 days. • Will it last longer than 20 days?

  26. Summary – Proceeds Analysis • 9-315(d)(1) Applies if the debtor “trades” the collateral • Collateral  Non-Cash Item • 9-315(d)(2) Applies if the debtor gets cash proceeds • Collateral Cash Proceed • 9-315(d)(3) Applies if the debtor uses cash proceeds to buy a non-cash item • Collateral  Cash Proceed  Non-Cash Item

  27. Step 7 • The Line-Up: ID the creditors fighting over each piece of collateral: • JLC/Bankruptcy Trustee • PSP • USP • Unsecured/general creditor • SLC

  28. Step 8 • Find and apply the correct priority rules to each battle. • Consider PMSI status, etc.

  29. PMSI • A PMSI arises if: • you borrow money to buy a good, and • you use that good as collateral for the loan.

  30. Depends on the Claimants • The rule that you apply depends on who is fighting for the collateral.

  31. Step 9 • See if the default/remedy provision of Part 6 of Article 9 are applicable.

  32. Enforcement Against a Good • Re-posses -- take possession of the good. • Non-Article 9.

  33. What do you do with the Good? • Sell It – commercial reasonableness. • Strict Foreclosure -- keep the good and apply it against the debt.

  34. Disbursing Cash Proceeds • First – the SP’s costs. • Second -- pay off any obligation owed to the foreclosing SP. • The balance – if any, is given to juniorlienors who demand a share. • Surplus – to the debtor

  35. Contact Me Office: (214) 373-2550 Cell: (616) 389-4960 Email: dpetersen@bennettweston.com Don Petersen Bennett Weston LaJone & Turner, P.C. 1603 LBJ Freeeway, Suite 280 Dallas, TX 75234

  36. Any Questions? Thank you!

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