2018 Choice of Law Randal C Picker James Parker Hall Distinguished Service Professor of Law The Law School The University of Chicago Copyright 200118 Randal C Picker All Rights Reserved ID: 711236
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Class 16Secured Transactions, Fall, 2018Choice of Law
Randal C. Picker
James Parker Hall Distinguished Service Professor of Law
The Law School
The University of Chicago
Copyright
©
2001-18
Randal C. Picker. All Rights Reserved.Slide2
November 1, 2018
2
Choice of Law by the Parties
Generally Respected
See UCC 1-301 and 1-302
Called Off for Perfection in Article 9
See UCC 1-301(c)[7 or 8]Slide3
Why Do We Care about Choice of Law?Two Critical Issues for Article 9Where to file financing statementsNon-uniformitiesOne result in one state, a second result in another state
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3Slide4
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4
9-301
Except as otherwise provided in Sections 9‑303 through 9‑306, the following rules determine the law
governing
perfection
,
the effect of perfection or
nonperfection
, and the priority
of a security interest in collateral
:Slide5
Specific Collateral Types, Specific Rules9-303: Goods covered by Certificate of Title9-304: Deposit Accounts9-305: Investment Property9-306: Letter-of-Credit Rights
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5Slide6
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6
9-301(4): As-Extracted Collateral
(4)
The local law
of the jurisdiction in which the
wellhead or
minehead
is located governs
perfection
,
the effect of perfection or
nonperfection
, and the priority
of a security interest in
as-extracted collateral
.Slide7
November 1, 2018
7
9-301(2): Possessory Security Interest
(2) While
collateral is located in a jurisdiction
,
the local law
of that jurisdiction
governs
perfection
,
the effect of perfection or
nonperfection
, and the priority
of a
possessory security interest
in that collateral.Slide8
November 1, 2018
8
9-301(3)(A), (B): Fixture Filings, Timber to Be Cut
(3) Except as otherwise provided in paragraph (4), while negotiable documents,
goods
, instruments, money, or tangible chattel paper is
located in a jurisdiction
,
the local law
of that jurisdiction
governs
:
(A)
perfection
of a security interest in the goods by filing a
fixture filing
;
(B)
perfection
of a security interest in
timber to be cut
; andSlide9
November 1, 2018
9
9-301
Except as otherwise provided in Sections 9‑303 through 9‑306, the following rules determine the law
governing
perfection
,
the effect of perfection or
nonperfection
, and the priority
of a security interest in collateral
:Slide10
November 1, 2018
10
9-301(1): Baseline Rule
(
1) Except as otherwise provided in this section, while a
debtor is located in a jurisdiction
,
the local law
of that jurisdiction
governs
perfection
,
the effect of perfection or
nonperfection
, and the priority of a security interest in collateral
.Slide11
November 1, 2018
11
9-301(3)
(3) Except as otherwise provided in paragraph (4), while negotiable documents,
goods
, instruments, money, or tangible chattel paper is
located in a jurisdiction
,
the local law
of that jurisdiction
governs
:
(
C)
the effect of perfection or
nonperfection
and the priority of a
nonpossessory security interest in the collateral
.Slide12
Three QuestionsMagenta IssuesQuestionsAre you “a debtor located in a jurisdiction”?Are these “goods … located in a jurisdiction”?
Determined under choice of law rules of forum jurisdiction
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13
Three Questions
Are You
Perfected
?
Green
: “Governs perfection”
The local law of the
location of the debtor
determines this under 9-301(1)
This matters for figuring out where to file a financing statement Slide14
November 1, 2018
14
Three Questions
If You Are Perfected,
With What Consequences
?
Purple
: “
Governs
the effect of perfection or
nonperfection
, and the priority of a security interest in collateral”
Call this EPNP&PSlide15
November 1, 2018
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Three Questions
Which local law governs EPNP&P this depends on the type of collateral in issue
For nonpossessory SIs, the local law of the location of the collateral governs
EPNP&P
for goods and the other collateral types in 9-301(3)
For the rest—think SIs in accounts and general intangibles—the local law of the location of the debtor governs EPNP&PSlide16
November 1, 2018
16
9-501
(a)
[Filing offices.]
Except as otherwise provided in subsection (b), if the
local law of this State governs perfection
of a security interest or agricultural lien, the office in which to file a financing statement to perfect the security interest or agricultural lien is:Slide17
November 1, 2018
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9-501
(2) the office of [ ] [or any office duly authorized by [ ]], in all other cases, including a case in which the collateral is goods that are or are to become fixtures and the financing statement is not filed as a fixture filing.
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November 1, 2018
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9-307: Location of Debtor
(a)
[“Place of business.”]
In this section, “place of business” means a place where a debtor conducts its affairs.
(b)
[Debtor’s location: general rules.]
Except as otherwise provided in this section, the following rules determine a debtor’s location:Slide19
November 1, 2018
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9-307: Location of Debtor
(1) An debtor who is an
individual
is located at the individual’s principal residence.
(2) A debtor that is an
organization and has only one place of business
is located at its place of business.
(3) A debtor that is an
organization and has more than one place of business
is located at its chief executive office.Slide20
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9-307: Location of Debtor
(e)
[Location of registered organization organized under State law.]
A
registered organization
that is organized under the law of a State is located in that State.
Slide21
Which Location and When?Location of the DebtorAlways matters for questions of perfectionMatters for EPNP&P for collateral that doesn’t have a natural location (AR and GI)Location of the CollateralMatters for EPNP&P certain types of collateral (including goods)
November 1, 2018
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Oil, Gas and Minerals as CollateralTwo Key SituationsOwner of OGM borrows moneyWants to use the OGM as collateralOwner of OGM lends money in a sale of OGMWants to
sell OGM, finance the sale and take interest in it as collateral (PMSI
) (
SemCrude)November 1, 201822Slide23
Two Key Situations in MindOwner Borrows MoneyWants to grant an SI in oil and gasEnters into that transaction before oil and gas are extractedArticle 9 as-extracted collateral
rules (see 9-102(a)(6))
might apply to this situation
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Two Key Situations in MindOwner Lends Money in Sale of OGMOwner is financing purchase of oil and gas by buyer and wants to take an SI in oil and gas as collateral for sales priceThis is, simplified, the situation in SemCrude
As-extracted
c
ollateral rules should not apply to this situationNovember 1, 201824Slide25
OGM as Collateral for Owner LendingAs-Extracted Collateral Generally InapplicableDebtor is going to be the purchaser of the OGM with sale financed by OwnerAs-extracted collateral regime applies to situations where owner is debtor, not where owner is secured creditorOrdinary Article 9 rules apply where owner is lender
November 1, 2018
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26
Sale of OGM
Bank
Sem2 DELP
KS Producers
Sell O&G
No FS
Who
has priority
?
Sem1 OKLP
Sem3 OKLP
SA: All Assets
FS:
OK/DESlide27
Creating an Ordinary PMSIUsual ProcessExecute SAFile FS (in which state?)Give appropriate notices required under 9-324(b)
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Where to File FS?Assuming uniform version of 9-3019-301(4) covers as-extracted collateral, but that isn’t SemCrude9-301(1) says governs perfection question governed by local law of the debtor’s location
November 1, 2018
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Where to File FS?Assuming uniform version of 9-307(e)A registered organization that is organized under the law of a State is located in that State.
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Where to File FS?9-102(a)(71) “Registered organization”means an organization formed or organized solely under the law of a single State or the United States by the filing of a public organic record with, the issuance of a public organic record by, or the enactment of legislation by the State or the United States.
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Where to File FS?9-102 Official Comment 11“Not every organization that may provide information about itself in the public records is a ‘registered organization’. For example, a general partnership is not a "registered organization", even if it files a statement of partnership authority under section 303 of the Uniform Partnership Act (1994) or an assumed name
(‘dba’)
certificate
.”November 1, 201831Slide32
Where to File FS?9-102 Official Comment 11“This is because such a partnership is not formed or organized by the filing of a record with, or the issuance of a record by, a state or the United States. In contrast, corporations, limited liability companies, and limited partnerships ordinarily are
‘registered organizations’.”
November 1, 2018
32Slide33
Meaning HereFor Ordinary PMSIFile in location of debtorUnder 9-307(e), file where debtor is registered, meaning Oklahoma and DelawareUnder 9-301(1), location of debtor will govern perfectionUnder 9-301(3), for goods, location of collateral will govern EPNP&P
33Slide34
Kansas 9-339aNon-Uniform SI in Favor of Certain Oil and Gas ProducersPurchase agreement itself operates as security agreement (9-339a(a))SI perfected on recording of affidavit of production (9-339a(b
))
November 1, 2018
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Kansas 9-339aGiven PMSI status without having to give standard notices (9-339a(f))SI covers oil and gas itself and certain proceeds (9-339a(c))
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Sale of OGM
Bank
Sem2 DELP
KS Producers
Sell O&G
No FS
Do the KS Producers have a SI? Who
has
priority in a bankruptcy case filed in DE?
Sem1 OKLP
Sem3 OKLP
SA: All Assets
FS:
OK/DESlide37
Choosing Applicable Law Outside of 9-301 to 9-307Debtor and SP Can Choose Some Law (But Not all Law)1-301(c)[7 or 8] bars choice of law only as to issues covered by 9-301 to 9-307Debtor and SP should be able to choose Kansas law for, for example, attachment of the security interest
November 1, 2018
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Meaning Here?Do through Sale ContractKansas producers should provide in sales contract that they get the benefits of Kansas 9-339aThat would give them a security interest without doing a security agreement
November 1, 2018
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Perfection: Applying All of this HereUniform 9-301’s (and KS is uniform too)Bankruptcy filed in DEFederal court under Klaxon applies state choice of law regimeApplies DE 9-301
November 1, 2018
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Applying All of this HereUnder DE 9-301Debtor’s location controls governs perfection question under 9-301(1)Under 9-307(e), that is where LP is registered, here OK and DEFor goods, EPNP&P question governed by KS law
November 1, 2018
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Applying All of this HereMeaning?As to O&G, KS producers needed to file FSs in OK/DE to perfectDidn’t do so, so unperfected (with SI created by sale contract and allowed choice of Kansas law)Under KS version of 9-201 and 9-317, unperfected creditor loses to perfected secured creditors
November 1, 2018
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Is this Surprising?Designing Non-Uniform StatutesWhat did Kansas hope to accomplish with KS 9-339a?Did it work?How should it re-design the statute to accomplish its desired end?
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43
Second Sale of OGM
Bank
Sem2 DELP
KS Producers
Sell O&G
No FS
Does the Purchaser take free and clear of KS Producer SI?
Sem1 OKLP
Sem3 OKLP
SA: All Assets
FS:
OK/DE
Purchaser
Sell O&GSlide44
Two Relevant Sections9-317(b): Buyer for Value9-320: Buyer in the Ordinary Course of BusinessNovember 1, 2018
44Slide45
9-317(b): Buyer For Value(b)Except as otherwise provided in subsection (e), a buyer, other than a secured party, of tangible chattel paper, tangible documents,
goods
, instruments, or a certificated security
takes free of a security interest or agricultural lien if the buyer gives value and receives delivery of the collateral without knowledge of the security interest or agricultural lien and before it is perfected.November 1, 201845Slide46
Two Key IssuesValueBought oil on credit but 8th Circuit says promise to pay suffices for valueOther related transactions didn’t change that
November 1, 2018
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Two Key IssuesKnowledge: 1-202(a) Subject to subsection (f), a person has “notice” of a fact if the person:(1) has actual knowledge of it;
(
2) has received a notice or notification of it;
orNovember 1, 201847Slide48
Two Key IssuesKnowledge: 1-202(3) from all the facts and circumstances known to the person at the time in question, has reason to know that it exists.(b) “Knowledge” means actual knowledge. “Knows” has a corresponding meaning.
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