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‘ABC’s of Handling Repossessed Property
2010 Provides Unique Opportunity to Defer Tax on Roth IRA Conversions
Floor Plan Lending Presents Special Challenges (maybe from your regulator)
When a Horse Is “Equipment” – It could only be the UCC
Compliance Dates Roundup
‘ABC’s of Handling Repossessed Property
The bad news is you have a non-performing loan. The good news is you have lawfully repossessed or your borrower has surrendered possession of the collateral. Now what? As always, the starting point for determining the rights and obligations of the parties is the loan documents themselves. However, the contractual rights and obligations of the parties are supplemented, and in some cases superceded by statutory provisions.
Many of the rights and obligations of the lender and borrower relating to repossessed personal property are addressed in Article 9 of the Uniform Commercial Code (“UCC”), specifically 12A Okla. Stat. § 1-9-601, et seq. Section 1-9-609 provides a good starting point, generally affirming the lender’s right to repossess after default, stating:
(a) After default, a secured party:
(1) may take possession of the collateral; and
(2) without removal, may render equipment unusable and dispose of collateral on a debtor’s premises under Section 1-9-610 of this title.
(b) A secured party may proceed under subsection (a) of this section:
(1) pursuant to judicial process; or
(2) without judicial process, if it proceeds without breach of the peace.
(c) If so agreed, and in any event after default, a secured party may require the debtor to assemble the collateral and make it available to the secured party at a place to be designated by the secured party which is reasonably convenient to both parties.
The “Golden Rule” of Dealing with Repossessed Property
Once your bank has obtained possession of its collateral through repossession (or judicial process), there is one overriding rule that is succinctly stated at 12A Okla. Stat. § 1-9-610(b), which provides:
Every aspect of a disposition of collateral, including the method, manner, time, place, and other terms, must be commercially reasonable. If commercially reasonable, a secured party may dispose of collateral by public or private proceedings, by one or more contracts, as a unit or parcels, and at any time and place and on any terms.
What is “commercially reasonable” could be the subject of many pages of discussion. Specific statutory provisions regarding whether a disposition is commercially reasonable are contained at 12A Okla. Stat. § 1-9-627. However, in general, the lender should make reasonable attempts to maximize the results of disposing the collateral.
One basic choice that a lender faces is whether to sell property through a private sale or through a public auction. A private sale is what most people think of a typical purchase/sale transaction involving a purchaser and seller coming to an arms-length agreement for the sale of property. Generally, the alternative to a private sale is a public auction (a private auction is another, less frequently used alternative). Whether a private sale is commercially reasonable depends on the type of goods that are being sold and how they are usually handled. Often, a public auction that is appropriately advertised will be viewed as the most beneficial means of selling an item. However, where the costs of advertising, commissions and other costs are too expensive, a private sale may also be commercially reasonable.
Notice of Disposition of the Collateral (12A Okla. Stat. § 1-9-611)
For CONSUMER GOODS, prior to disposing of the collateral, a lender must send an “authenticated notice of disposition” to the debtor(s) and all secondary obligors. For goods other than consumer goods, in addition to the debtor and secondary obligors, the notice must also be sent to (i) any party that has sent the secured party a notification of a claim of an interest in the collateral; (ii) any other secured party that held a security interest in or other lien on the collateral and had filed a financing statement covering the collateral as of 10 days before sending the notice; and (iii) any other secured party who held a security interest where pursuant to federal law filing of a financing statement is not required to perfect a security interest (one example is security interests in civil aircraft).
Because commercial goods require that notice must be sent to other perfected secured creditors, it is necessary to perform a UCC search. The statute specifies that this requirement is satisfied so long as a search was performed in a commercially reasonable manner within the period between 20 and 30 days before the notification date.
Several important exceptions to the pre-notification requirement are contained at Section 1-9-611(d). No prenotification notice is required if (i) the collateral is perishable; (ii) the collateral may decline speedily in value; or (iii) the collateral is of a type customarily sold on a recognized market (for example, publicly traded stocks).
Contents of the Notice of Disposition of Collateral (12A Okla. Stat. §§ 1-9-613, 1-9-614)
For NON-CONSUMER GOODS, a notification of disposition must: (1) identify the debtor and the secured party (your bank); (2) describe the collateral that is the subject of the disposition; (3) state the method of intended disposition; (4) state that the debtor is entitled to an accounting of the unpaid indebtedness and state the charge, if any, for such an accounting (NOTE: I would not recommend charging for an accounting unless the charge is specified in the loan documents); and (5) state the time and place of a public disposition, or the time after which any other disposition is to be made. The statute contains a form of notification, that if used properly, will be considered sufficient, at 12A Okla. Stat. § 1-9-613(5).
For CONSUMER GOODS, the notification of disposition must contain the 5 items listed above for non-consumer goods. In addition, the notification should also include: (1) a description of any liability for a deficiency for which the person to whom the notice is sent may be liable; (2) a telephone number from which the amount that must be paid in order to redeem the collateral; and (3) a telephone number or mailing address from which additional information concerning the disposition and the obligation secured is available. Like the statute outlining the non-consumer goods notification, the statute contains a form of notification for consumer goods, that if used properly, is considered sufficient, at 12A Okla. Stat. § 1-9-614(3).
Timing of Sending Notice of Disposition of the Collateral (12A Okla. Stat. § 1-9-612)
The notice of disposition must be sent within a reasonable time. For CONSUMER GOODS, whether the timing of the sending of the notice is reasonable is always a question of fact. For non-consumer transactions, a notification of disposition must be sent (i) after default and (ii) at least 10 days before the disposition date set forth in the notification.
While there is no statutory safe harbor for consumer transactions, the general practice is that ten days is sufficient. See Oklahoma Comment to Section 1-9-612. Clearly, however, if circumstances require that collateral be sold more quickly in order to maximize the recovery, a quicker sale may be considered reasonable.
Right to Redeem Collateral (12A Okla. Stat. § 1-9-623)
A debtor, secondary obligor or any other secured party or lienholder has the right to redeem the collateral at any time prior to disposition. In order to redeem the collateral, the redeemer must fulfill all obligations secured by the collateral, including the lender’s reasonable expenses and attorney’s fees, to the extent these are provided for by the loan documents.
Application of the Proceeds of the Disposition (12A Okla. Stat. § 1-9-615)
It is possible that the disposition of collateral may result in more money than is owed to the lender. Further, in the instance where the proceeds are not sufficient to satisfy the obligation, application of the proceeds of the disposition will affect the amount of deficiency that may still be owed by the debtor.
The UCC’s statutory scheme specifies that cash proceeds will be applied in the following order: First, to the reasonable expenses of retaking, holding, preparing for disposition, processing, and disposing, and to lender’s reasonable attorney’s fees and legal expenses (to the extent provided for by the loan documents and not prohibited by law); Second, to the satisfaction of the obligations secured by the collateral; Third, to the satisfaction of other liens or security interests on the collateral (but only if the other secured party notified the lender of its interest); Fourth, any remaining proceeds should be delivered to a cosigner for the borrower’s obligation (but only if the cosignor gives the lender a written demand for the proceeds before distribution of the proceeds is complete); and Fifth, if there are remaining proceeds and no cosignor, to the debtor.
Right to a Deficiency
Generally, a lender is entitled to a deficiency when the proceeds of a collateral disposition are insufficient to satisfy the underlying debt. See 12A Okla. Stat. § 1-9-615(d)(2). However, there are several important exceptions to this rule. For example, pursuant to Section 1-9-615(e), if the collateral that is disposed of is (i) accounts, (ii) tangible chattel paper, (iii) payment intangibles, or (iv) or promissory notes, the obligor WILL NOT be liable for any deficiency.
In addition, a special rule applies if the transferee of the collateral is the lender, a person related to the secured party, or a secondary obligor. In this situation, the deficiency amount (or surplus) will be calculated based on the amount of proceeds that WOULD HAVE BEEN REALIZED in a disposition to an unrelated third party that was commercially reasonable. See 12A Okla. Stat. § 1-9-615(f). This provision can complicate an otherwise commercially reasonable disposition of collateral. The provision is meant to recognize that in a public auction situation, at times the only bidder may be the lender, or in some instances a cosignor. In this situation, the transferee may lack the incentive to maximize the proceeds of the disposition. This rule will recognize that a sale to a third party may have resulted in a higher sales price and will apply the higher sales price as proceeds of the disposition.
Application of the Uniform Consumer Credit Code – PLEASE NOTE: The discussion in this paragraph DOES NOT apply to pure loan transactions in the state of Oklahoma. However, if you are lending outside of Oklahoma, your ability to obtain a deficiency judgment may be further limited by the Uniform Consumer Credit Code (“UCCC”). Further, this discussion may apply to Oklahoma lenders when dealing with the disposition of owned property, e.g., loan transactions on repossessed automobiles. In certain instances, the UCCC restricts the ability to obtain a deficiency. 14A Okla. Stat. § 5-103(2) provides that:
If the seller repossesses or voluntarily accepts surrender of goods which were the subject of the sale and in which he has a security interest and the cash price of the goods repossessed or surrendered was [this amount is indexed to inflation – for 2010 the amount is $4,400] or less, the buyer is not personally liable to the seller for the unpaid balance of the debt arising from the sale of the goods …
Section 5-103 of the UCCC, as adopted in Oklahoma, differs from the standard provision of the UCCC, which would make this provision apply to both sellers AND lenders. Thus for loans outside of Oklahoma, it may not be possible for lenders to obtain deficiency judgments for smaller consumer loans. If your bank makes loans of this type outside of Oklahoma, you should consult with local counsel on this topic. In addition, as stated above, even in Oklahoma, for loans made on consumer sales of repossessed collateral of $4,400 or less (in 2010), a lender may not obtain a deficiency.
Explanation of Calculation of Surplus or Deficiency (12A Okla. Stat. § 1-9-616)
CONSUMER debtors (or co-obligors) are entitled to receive an explanation of the calculation of the surplus or deficiency (i) upon request (within 14 days of the request), or (ii) before or at the time the lender either accounts to the debtor and pays any surplus or first makes written demand for a deficiency. Thus, if there is no surplus and the lender does not want to pursue a deficiency and no request is made by the consumer, a lender does not have to provide this explanation.
If required, an explanation must contain the following information: (1) the amount of the surplus or deficiency; (2) an explanation of the calculation of the surplus/deficiency – this must include the following information in the following order: (i) the aggregate amount of obligations secured by the security interest in the collateral (if the amount reflects a rebate of unearned interest or credit service charge, this must be specified), (ii) the amount of proceeds of the disposition, (iii) the aggregate amount of the obligations after deducting the amount of proceeds; (iv) a description of the expenses and attorney’s fees which are known and have been charged by the lender that relate to the most current disposition of the collateral; (v) a description of credits and rebates or interest or credit service charges which the lender knows that the borrower is entitled; and (vi) the amount of the surplus or deficiency; (3) if applicable, the explanation must state the future debits, credits, charges or interest, rebates and expenses that may affect the amount of the surplus/deficiency; and (4) the telephone number or mailing address from which additional information concerning the transaction is available. Each debtor or consumer obligor is entitled to one such explanation without charge. If additional responses are requested, the lender may charge up to $25 for each additional response.
Penalties for non-compliance with Article 9 are covered in more detail below. However, it is worth mentioning here that failure to provide an explanation of calculation of surplus or deficiency will subject the lender to a $500 fine.
Short-Circuiting the Process: Accepting the Collateral in Satisfaction of the Obligation (12A Okla. Stat. §§ 1-9-620 – 1-9-622)
As can be seen by the length of this article and many caveats, disposing of collateral is not without its pitfalls and can lead to unwanted and unnecessary litigation. This is especially true when the prospect of further recovery from the debtor is small or non-existant. In many instances, a preferable alternative may be to reach an agreement with the borrower to accept the collateral in full or partial satisfaction of the obligation. This approach is specifically sanctioned at 12A Okla. Stat. § 1-9-620.
Acceptance of collateral is pretty straightforward when the only parties interested in the collateral are the borrower and the lender. However, where other parties, including co-obligors and other lien holders, are affected or have an interest in the collateral, a lender still must send notice to the other interested parties. This will often require that the lender perform a UCC search to confirm the identity of other secured parties. The notice requirements are spelled out at 12A Okla. Stat. § 1-9-621.
Importantly, a secured party’s acceptance of the collateral is only valid under Section 1-9-620 if: (i) the debtor consents in writing to the terms of the acceptance of the collateral; (ii) no other interested party has objected to the terms of the proposed acceptance; (iii) for CONSUMER GOODS, the debtor IS NOT in possession of the goods when he consents to the acceptance; and (iv) in certain instances, a lender must perform a commercially reasonable disposition of the collateral, as provided in Section 1-9-610, unless this requirement is WAIVED by the debtor (this requirement applies to CONSUMER GOODS when at least 60% of the cash price has been paid by the debtor for purchase-money security interests or at least 60% of the principal amount of the obligation has been paid in the case of non-purchase money security interests).
If collateral is accepted by the lender in full or partial satisfaction of the obligation, the debt is discharged to the extent agreed to by the parties, the lender obtains all the rights of the debtor in the collateral and all subordinate liens or security interests in the collateral are discharged.
Remedies for Failure to Comply with Provisions of UCC (12A Okla. Stat. § 1-9-625)
There can be serious consequences for a lender who fails to comply with the requirements of the UCC relating to disposition of collateral. First, if a lender is proceeding in a manner inconsistent with the statute, a court can stop them, even prior to a disposition. Second, any party (including the debtor, any co-obligor or other secured party) that is harmed as a result of a lenders’ actions that are not consistent with the statute will be entitled to recover damages in the amount of any loss caused by the lender’s failure to comply with the statutory requirements. Third, the statute provides for STATUTORY DAMAGES for certain violations of Article 9. A $500 fine is provided in several instances, including failure to provide an explanation of calculation of surplus or deficiency, failure to provide an accounting under Section 1-9-210, and failure to file a lien release.
2010 Provides Unique Opportunity to Defer Tax on Roth IRA Conversions
Most banks offer their customers the opportunity to open IRAs, including Roth IRAs. 2010 represents a unique opportunity for bank customers in two ways (i) in many instances 2010 is the first year a taxpayer will be eligible to convert a traditional IRA, or even a qualified plan (including 401k balances) to a Roth IRA; and (ii) conversions of traditional IRAs and qualified plan balances made during 2010 can be made on a tax deferred basis, delaying the tax effect to 2011 and 2012. Banks may wish to consider marketing efforts to assist their customers in taking advantage of this opportunity.
A Roth IRA differs from a traditional IRA in that contributions to a Roth IRA are ‘post tax,’ that is paid with a person’s after-tax income. This is in contrast to a traditional IRA, for which contributions are typically made with pre-tax dollars. (Note, however, that excess post-tax contributions could be made to traditional IRAs). The major benefit to a Roth IRA is that all growth in the IRA is tax-free. This is in contrast to the traditional IRA, which is fully taxable (both the original pre-tax contribution and the growth thereon) when funds are distributed from the IRA.
Since 2006, it has been possible to convert a traditional IRA to a Roth IRA. This could be beneficial for taxpayers who believe that the expected future growth within the IRA will be sufficient to offset the negative current tax costs of such a conversion. Because the conversion from the traditional IRA to a Roth IRA is a taxable event, the taxpayer will pay tax on the amount converted from a traditional IRA to a Roth IRA. The proportion of the conversion that will be taxable will depend on the proportion of contributions to the IRA that were made on a pre-tax basis.
However, prior to 2010 there have been income restrictions that have limited the ability of many taxpayers to perform a conversion. Taxpayers whose adjusted gross income exceeded $100,000 (whether single or married) were not eligible to convert a traditional IRA to a Roth IRA. In addition, single taxpayers who earned $110,000 or more ($160,000 for married couples filing jointly) were not eligible to contribute to a Roth IRA at all. 2010 represents the first year that everyone, regardless of taxable income, can (i) contribute to a Roth IRA, and (ii) convert their traditional IRA to a Roth IRA.
In addition, there is an important tax deferral provision for 2010 only – taxpayers who convert their traditional IRA to a Roth IRA during 2010, may elect to pay no taxes on the conversion in 2010, and instead recognize 50% of the income from the conversion in 2011 and 50% in 2012. It is important to note that this tax deferral opportunity applies only to conversions that occur in 2010. Taxpayers that convert in 2011 would owe the entire tax burden in 2011.
Until 2008, only traditional IRAs could receive rollovers from a qualified plan. Although it was possible in 2009 to rollover from a qualified plan directly into a Roth IRA, income restrictions discussed above still applied, so taxpayers with adjusted gross income in excess of $100,000 could not convert to a Roth IRA. 2010 represents the first year that qualified plans can be rolled over directly to a Roth IRA, regardless of income. (Note: Rollovers from a 401k are typically only allowed under the 401k plan once an employee has left. Thus the application of this will normally be limited to individuals with 401k accounts held at an ex-employer.)
Important Note: Banks should practice diligence in advising their customers to obtain their own legal and tax advice. How the changes outlined above will affect a particular customer cannot be determined by a bank (and you shouldn’t try). Especially when giving any information in writing, the bank should explicitly state that it is not giving tax or legal advice, and that their customers should consult with their attorney and/or accountant before deciding whether to open any IRA account with the bank. In this regard, let me provide my own disclaimer to the readers of this article:
IRS Circular 230 Disclosure: Pursuant to recently-enacted U.S. Treasury Department Regulations, we are now required to advise you that, unless otherwise expressly indicated, any federal tax advice contained in this communication, including attachments and enclosures, is not intended or written to be used, and may not be used, for the purpose of (1) avoiding tax-related penalties under the Internal Revenue Code or (2) promoting, marketing or recommending to another party any tax-related matters addressed herein.
Floor Plan Lending Presents Special Challenges (maybe from your regulator)
Floor plan lending is a form of retail goods inventory financing in which each loan advance is made against a specific piece of collateral. As each piece of collateral is sold by the dealer, the loan advance against the piece of collateral is repaid. Items that are subject to floor plan lending typically include automobiles, home appliances, boats and recreational vehicles.
One challenge inherent in floor plan lending is that for the typical buyer, the lender’s security interest in the collateral is cut off. Thus, the lender must be prepared to lose its original collateral and rely solely on following the proceeds to pay off the debt. This result is dictated by 12A Okla. Stat. § 1-9-320(a), which provides:
…[A] buyer in ordinary course of business, other than a person buying farm products from a person engaged in farming operations, takes free of a security interest created by the buyer’s seller, even if the security interest is perfected and the buyer knows of its existence.
If you think about it, this result is consistent with our everyday experience. If you walk into a car lot and plop down a cashier’s check for the full purchase price of a car, you do not expect for the bank that was lending funds on that car to come after you, even if it doesn’t get paid by the dealer.
Let’s walk through a few examples of the proceeds of an automobile sale and determine how a lender will maintain its priority in each: (i) financing provided by your bank; (ii) financing provided by a separate lender; (iii) automobile taken in trade; (iv) cash, check or cashier’s check.
The opportunity to finance purchases made at a dealership may be the major incentive to make a floor plan loan. For loans financed by the floor plan lender, the floor plan lender will credit the debtor’s credit limit related to the item financed.
In the case of a buyer who obtains financing from a separate lender, the new lender has a strong incentive to make sure that any existing security interest on the item financed is fully satisfied. This is because, unlike the purchaser of the car, the lender is not a buyer in the ordinary course of business, and is not afforded any protection by Section 1-9-320. The new lender’s major protection from default from the car buyer is the automobile itself. Thus, the new lender will likely make sure that the floor plan lender gets paid from the proceeds of the sale, either by making funds payable to both the dealership and the lender, or by arranging to wire payment directly to the lender.
In the case of an automobile taken in trade, the lender is also likely to maintain its priority. The trade-in is proceeds of the original collateral that the floor plan lender will maintain its priority to.
Of the four types of payments outlined above, the major risk to the lender is presented when the dealership is paid in cash, check or cashier’s check. Let’s look at why this is a problem. Presumedly, a floor plan lender will always maintain a deposit account for the debtor. This makes sense, as the lender will always automatically maintain priority in a deposit account held with the lender. See 12A Okla. Stat. § 1-9-104. However, what happens if the dealership fails to deposit cash or check proceeds into the account held with the lender? What is to stop the dealership from taking such deposits to the bank down the street (or in the case of cash, not depositing it at all)? In practice, there is no practical impediment to the dealership other than controls implemented by the lender to ensure that cash or check proceeds are used to reduce the debt owed to the lender.
How will your regulator treat floor plan loans?
Almost as important as the risk of nonpayment of floor plan loans is the manner that your regulator will treat a floor plan loan. You may have a fully performing loan with a long-term customer that you trust. However, if your regulator determines that controls in place are insufficient, you may have to treat the collectability of your loan as questionable. A good source of information regarding how regulators look at floor plan loans is provided by the OCC’s Comptroller’s Handbook, Section 210 (this publication can be found at http://www.occ.treas.gov/handbook/floorplan1.pdf). The remainder of this article will highlight some of the issues raised in the OCC’s publication.
Section 210 recognizes that “the inherent weakness in any floor plan loan is the banker’s inability to exercise full control over the collateral.” Section 210 lists several things that a lender should be doing in relation to a floor plan loan. These include:
1. Periodic review of the borrower’s deposit account. The deposit account is valuable for the lender for 2 reasons: (i) the balance in the account is available to the lender to offset the debt owed; and (ii) the lender can monitor the deposit account as a tool to ensure compliance with the loan terms. A review of the flow of funds into and out of the account may reveal that inventory has been sold without debt reduction, that the dealership is incurring abnormal expenses, or that unreported financial activity has occurred that may affect the viability of the credit arrangement.
2. The lender should have an established procedure for flooring verification. Physical periodic inspection of the collateral is essential. Inspections should be sufficiently frequent and broad to detect any irregular activity. Per Section 210, “Flooring check sheets should be on file in the bank, indicating that a bank representative has personally verified every article, by serial number and description, shown by bank records as unsold and in the dealer’s possession.” Further, missing items, including items that have reportedly been sold but for which payment is in process should be verified. Another important recommendation contained in Section 210 is that “Inspection duties should be rotated among the department’s staff…” This recommendation is important, as it recognizes the reality that even your own bank employees may be subject to compromise, and thus a system of multiple controls is always in order.
3. The lender should account for depreciation. Loan advances are frequently made based 100% on the value of the collateral. As the collateral begins to depreciate, a lender must take this into account by curtailing the credit available to the borrower. Frequent issues that may cause depreciation include when collateral is used as a demonstrator, when collateral is no longer a current model year, or when the collateral was used at the time of purchase.
4. Review of the borrower’s financial statements. A dealership’s principal asset is its inventory. Conversely, the dealership’s principal liability is the debt related to the inventory. Section 210 states that “A dealer’s financial statement must show an inventory figure at least equal to the related flooring liability as of the date of the financial statement. Unless the difference is represented by sales receivables … a flooring liability that is greater than the amount of inventory is an indication that the dealer has ‘sold out of trust.’”
5. Avoid multiple-lender arrangements. Section 210 recognizes that “Bankers are able to exercise only minimal control over financed inventory under the best of arrangements.” Having a dealer financed by multiple floor plan lenders creates a situation that is almost impossible to maintain any effective controls or to determine the relative rights of all the parties.
Conclusion
Banks that practice floor plan lending need to exercise extra diligence. Even with well-established customers, the risks associated with floor plan lending may cause a regulator to determine that the collectability of a particular loan is suspect. Banks should carefully consider and document the procedures that it will follow for its floor plan loans and should document that these procedures are carefully followed.
When a Horse Is “Equipment” – It could only be the UCC
Would you ever think of a horse as “equipment”? You might, if you are thinking of the proper way to classify collateral under the Uniform Commercial Code (“UCC”). For an instructive case on this point, let us look at a case out of Illinois, In re Bob Schwermer & Associates, Inc., 27 B.R. 304 (N.D. Ill. (Bank.) 1983). Schwermer was a bankruptcy case. The ultimate issue was whether a secured creditor filed its financing statement in the proper filing office. In deciding this issue, the Schwermer court had to decide whether the collateral, 6 race horses, should be classified under the UCC as “farm products”, or whether another classification was appropriate.
In Schwermer, the 6 race horses were owned by the debtor, exclusively for the purposes of racing. In considering the proper classification, the court reasoned:
Under … the UCC equipment is defined as goods which are ‘used or bought for use primarily in business (including farming or a profession).’ In the instant case … the horses were purchased for business purposes, as race horses. … In cases where live stock is owned by persons not engaged in farming the animals are not considered farm products. … On the basis of clear statutory language, case law and the facts of this case it must be concluded that the horses are equipment …
Id., at 308.
I believe that the Schwermer court reached the correct decision. Further, despite some minor variations to definitions of “equipment” and “farm products” under the UCC prior to the 2001 re-write of Article 9, I believe a court faced with the same circumstances would reach the same conclusion today.
Under the current version of the UCC, the general definition of “goods” is “all things that are movable when a security interest attaches.” See 12A Okla. Stat. § 1-9-102(a)(43). Certainly, horses would appear to qualify as “goods.” “Equipment” is defined as “goods other than inventory, farm products, or consumer goods.” See 12A Okla. Stat. § 1-9-102(a)(33). It seems likely that a horse would be classified as either equipment, farm products, or possibly consumer goods (how about someone who owns one horse for recreational purposes). “Farm products” are defined as “goods … with respect to which the debtor is engaged in a farming operation and which are: … livestock, born or unborn…” See 12A Okla. Stat. § 1-9-102(34). A horse is livestock, right? Yes it is. But, notice that even livestock do not constitute farm products unless the debtor is engaged in a farming operation with respect to the collateral. “Farming operation” is defined as “raising, cultivating, propagating, fattening, grazing or any other farming, livestock, or aquacultural operation.” Under the circumstances presented in Schwermer, a court would likely reach the same result under the current version of the UCC.
Why is it important?
In Schwermer, the proper classification of the collateral affected the proper place to file a financing statement in order to perfect a security interest. Under the previous version of the UCC, the proper place to file for equipment was the central filing office. The proper place to file for farm products was in the county where the collateral was located.
With the 2001 revisions to Article 9, central filing became the almost universal rule. Under 12A Okla. Stat. § 1-9-501, the only notable exceptions to filing in the central filing office of the county clerk of Oklahoma County are (i) as-extracted collateral (oil and gas), (ii) timber to be cut; and (iii) fixtures. Thus, whether a horse were considered equipment, farm collateral, or consumer goods, the proper place to file a financing statement today would be the central filing office. However, if the horse were considered a farm product, due to passage of the Federal Food Security Act, a lender may also desire to file an effective financing statement with Oklahoma’s farm products central registry (at the Oklahoma Secretary of State’s Office). NOTE: For a thorough discussion of issues related to maintaining priority in farm products, please go to the article written on this subject in the October 2009 Legal Update.
The important point of this exercise is that when determining the nature of and describing collateral, it is necessary to think of how the collateral is held FROM THE PROSPECTIVE OF THE DEBTOR. Depending on who the debtor is and how he is using the collateral, a horse could be equipment, consumer goods or farm products. Another easy to understand example is an automobile. An automobile could be considered equipment (in the hands of a limosine service), inventory (in the hands of a car dealership or consumer goods (in my hands, for example). Proper classification and description of the collateral will directly affect a secured party’s rights.
Compliance Dates Roundup
4/1/2010 – Escrow Required for HPML Applications Received after April 1 (except manufactured housing) (See September 2009 Legal Update)
6/1/2010 – Compliance Deadline for new Reg GG (Unlawful Internet Gambling Enforcement Act (“UIGEA”) mandatory (delayed from December 1, 2009) (See November 2009 and December 2009 Legal Updates)
7/1/2010 – Deadline to comply with new Reg E Opt-in Requirement for Overdraft Protection for ATM and One-Time Debit Card Transactions (See December 2009 Legal Update)
7/1/2010 – Deadline to comply with new Reg Z Changes to Open-End Credit (See March 2010 Legal Update)
7/1/2010 – Deadline to comply with new regulations under Fair and Accurate Credit Transactions Act (“FACT Act”) (See March 2010 Legal Update)
7/1/2010 – Deadline to Comply with Changes to Reg AA (under Unfair and Deceptive Acts or Practices (UDAP), dealing with marketing and account management of credit cards) Note: Previously published final rule amending Reg AA has been RESCINDED. These changes are now incorporated in the Changes to Reg Z relating to credit cards.