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Article 9 and Bankruptcy Judges

posted by Melissa Jacoby

prior post addressed a proposed amendment to Article 9's official comments stating that the date of an Article 9 filing relates back to the initial filing date even if the debtor did NOT authorize the filing at that time. This post returns to that topic for two reasons. First, although it is risky to generalize, I sense that bankruptcy judges may still be unaware of this proposed amendment. This is relevant because bankruptcy judges often are on the "front lines" of Article 9 interpretation. Second, I have heard, indirectly, that at least some people want this amendment to lend approval to some lenders' current practice to routinely file without authorization during the loan application process. In other words, the loan is likely to be given within a few days, so no harm no foul. Maybe I misheard or misunderstood?  

Article 9 does contemplate and even endorses "pre-filing," (filing a financing statement before the loan is approved). Absent exceptions not relevant here, however, Article 9 expressly conditions a lender's authority to file a financing statement against a debtor on getting that debtor's authorization for the filing in an authenticated record - whether in an elaborate loan application or scrawled on a napkin. This may well be one of the clearest parts of Article 9. Whatever one's views of the merits, a comment cannot trump this statutory requirement that reserves to the debtor some control over the clouding of title to his/her/its property. 

As suggested by one of the commentators in response to my last post, eliminating debtor signatures from financing statements sure did open a can of worms. Moving to medium neutrality is one thing. Rendering debtor authorization optional is something different entirely.      


One question arises, where Revised UCC Article 9 may allow filing a security of record, how can it be lawfully filed under many of the states laws to be that of a lawful filing of a security interest that may or may not have a indebtedness to be secured too?

I wouldn't say that debtor authorization is optional. I'd rather say that UCC 9 works like the rest of the UCC (and indeed the common law.) It imposes liability for misconduct rather than imposing a duty of proper conduct. (There are exceptions: e.g., UCC 8-504.) "No harm, no foul" is implicit in this attitude.

The liability is there, if the harm is there. A person who file an unauthorized UCC financing statement is subject to full civil liability in tort for slander of title and often liability for fraud, which is sometimes criminal. And of course, an unauthorized filer does not obtain perfection through filing.

I'm not trying to defend this approach on its merits. The civilians do things differently, and not poorly either. But it is quite consistent with the rest of the UCC.

You would be surprised how rarely bankruptcy judges address Art. 9 issues. When I was appointed, I got myself a slew of Art. 9 books, figuring I'd need them. Ten years later I've opened them once.

James in Texas, I fear I am not understanding your question. As far as I know, no one is arguing that the filing of the financing statement itself creates or perfect a security interest that doesn't exist. They seem to be arguing, though, that practices that include the routine failure to get debtor authorization to file a financing statement are not violations of Article 9, and further, that later attachment of a security interest gets the benefit of the early date of the unauthorized filing. Ebenezer Scrooge, I agree with your conceptualization overall, but still find it problematic that an official comment not only would endorse a practice that entailed express violation of an existing Article 9 provision, 9-509, but encourage it by giving a later security interest the benefit of the early unauthorized date. Essentially, my initial modest wish was that the comment simply be omitted. To get the benefit of the early pre-filing date, all the lender has to do is get the debtor's authorization. If not authorized at the time, the lender should get priority from the date the financing statement is de facto authorized by the execution of a security agreement.

Bankruptcy Judge, I do appreciate your point that Article 9 issues may comprise a small percentage of any given judge's workload (I saw a fair amount during my bankruptcy court clerkship, mostly generated from a single case if I recall correctly, but it was a modest component of the overall work). Looking at the issue from the other direction, though, a large proportion of Article 9 case law is generated from bankruptcy courts. Bankruptcy court decisions (or appeals from such decisions) also heavily populate some Article 9 case books. So that was the vantage point from which I was starting.

I'd really like to know why it's so taboo to expect lenders to properly document their loans. Why can't they get the borrower to sign the note and security agreement before forking over the cash? If the borrower won't sign the paperwork, don't make the fleeming loan! And yes I know the UCC focuses on punishing wrongdoing instead of imposing rightdoing, but I'd really like to know why anyone considers it systemically more efficient to impose the burden of proper documentation on the borrower after the transaction rather than on the lender before. I suspect it's strictly a matter of who has the better lobby at the ULC.

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