July 12, 2018
I. WHAT ARTICLE 9 COVERS MAY SURPRISE YOU
As most lawyers know, Article 9 of the Uniform Commercial Code (“UCC”) covers secured transactions in personal property. Indeed, section 9-101, the very first section of Article 9, says simply, “This article may be cited as Uniform Commercial Code--Secured Transactions.” What could be simpler?
Yet, comment 4(a) to 9-101, adopted at the time of the amendments to Article 9 that became effective in 2001, lists nine separate ways in which the scope of Article 9 was expanded by those amendments, without changing the title. Some of those changes are not germane to this discussion; oil and gas tax credits are unrelated to health-care-insurance receivables, nonpossessory statutory agricultural liens, consignments or commercial tort claims. But some of the expanded coverage is central to our topic. Most germane to our discussion: sales of payment intangibles.
Let’s back up, however, literally, and look at the definition of “security interest” in Article 1, the general provisions of the UCC.
This is 9-201(a)(35)2 (inconveniently, AS 45.01.211(38)):
“security interest” means an interest in personal property or fixtures that secures payment or performance of an obligation; "security interest" includes an interest of a consignor and a buyer of accounts, chattel paper, a payment intangible, or a promissory note in a transaction that is subject to AS 45.29; "security interest" does not include the special property interest of a buyer of goods on identification of those goods to a contract for sale under AS 45.02.401, but a buyer may also acquire a security interest by complying with AS 45.29; except as otherwise provided in AS 45.02.505, the right of a seller or lessor of goods under AS 45.02 or AS 45.12 to retain or acquire possession of the goods is not a security interest, but a seller or lessor may also acquire a security interest by complying with AS 45.29; the retention or reservation of title by a seller of goods notwithstanding shipment or delivery to the buyer under AS 45.02.401 is limited in effect to a reservation
The first part of the definition is what you think of as a security interest: “an interest in personal property or fixtures that secures payment or performances of an obligation.” The rest of the definition is pretty murky to anyone but a UCC specialist. What can be done to make it understandable and clearer?
First, after the first sentence, ignore that the term is “security interest”. Think of it instead as an “Article 9 interest” or even a whimsical term like “Art9” or even “Artie”. Because while the reasons behind which interests are and are not covered are not impossible to understand, they are in many cases difficult to grasp and the reasons behind them are not particularly relevant to a practitioner. They are, to coin a phrase, what they are.
And what they are is somewhat circular and somewhat confusing. The part of the definition with which we will be most concerned is that a security interest “includes an interest of a . . . buyer of accounts, chattel paper, a payment intangible or promissory note in a transaction that is subject to AS 45.29 . . . .” But the scope section of Article 9, A.S. 45.29.109(a),(1) tells us in the first instance, that Article 9 covers “a transaction, regardless of its form, that creates a security interest in personal property or fixtures by contract.” Here, frankly, the statute means only “security interest” in the sense of the first sentence of 9-102(a)(35). Before we work through the rest of 9-109, remember those four critical words in the scope: “regardless of its form”. In terms of this topic, the scope of Article 9, there are no more important words, so let’s not forget them. Clause (3) of 9-109(a) contains the words that make the second sentence of 1-201(a)(35) work. Article 9 applies to “a sale of accounts, chattel paper, payment intangibles, or promissory notes.” So, to put it together in connection with what we are concerned with, a security interest under the UCC applies to the interest of a buyer of accounts or payment intangibles in connection with a sale of accounts or payment intangibles. The leading treatise on the UCC, White & Summers, justifies this by saying, “The ‘factoring’ or ‘sale” of rights to payment by the person entitled to those payments has long been regarded as a financing transaction.” 4 J.J. White & R.S. Summers, UNIFORM COMMERCIAL CODE 11 (6th ed. 2010). More to the point, by including these transactions in Article 9, particularly with, as we will see, the automatic perfection rules that accompany them, those who employ these transactions get all the advantages of Article 9 while experiencing few of its inconveniences.
The key here is the “regardless of its form” language quoted above. As White & Summers state, the essence of Article 9 “is that substance governs form.” Id. at 10. And this means that one can fall into the Article 9 regime without realizing it and can sometimes not escape it even if one wishes to.
Because it applies to any transaction that ‘regardless of its form’ creates a security interest, parties will find it difficult or impossible to make a transaction that has the economic characteristics of a security interest into something else simply by changing the terminology of the agreement without changing its substance. Id. at 11.
The archetype for this kind of disguised security interest is one where a sale occurs but the seller attempts to “retain title.” Such a transaction is a security interest under Article 9, and unless the seller either has retained possession of the goods sold, or filed a financing statement, the seller will be very unhappy if the buyer files for bankruptcy protection. All the words in the world will not convince a bankruptcy judge that this transaction is anything other than a secured financing, and without some means of perfection, the seller is just a secured, but unperfected, secured party. Bankruptcy courts eat such folks for lunch.
Another such typical transaction is one where a seller sells goods or something else, like promissory notes secured by mortgages, and then promises to repurchase the same items at a specified time for a specified price, one that looks an awful lot like the original purchase price plus a market rate of interest. As you have probably guessed, these get the same result. By including sales of promissory notes and payment intangibles in Article 9, parties who enter into such transactions do not need to worry whether their transaction “secures an obligation” or not; rather, they are within Article 9 either way. Complying with Article 9 is thus no longer just a safe harbor for certain transactions; it is critical. But it is also sufficient. Once they have complied with Article 9, there will ordinarily be no other legal regime with which they must comply in order to obtain the benefits of attachment and perfection.
Most practitioners are aware of the ordinary distinction between attachment and perfection under Article 9. Attachment, which takes place under the rules of 9-203, creates the circumstance under which a security interest is good as between the debtor and the secured party. Once security interest has attached, the secured party will have rights against the debtor and as against the collateral in the hands of the debtor.
But attachment, by itself, is not generally good against third parties, including a trustee in bankruptcy of the debtor. The key provision is 9-317, particularly clauses (b) and (d). These are good examples of clauses where the term “security interest” should be replaced by “Artie.” Look at clause (d):
A licensee of a general intangible, or a buyer, other than a secured party, of accounts, electronic chattel paper, or investment property other than a certificated security takes free of a security interest if the licensee or buyer gives value without knowledge of the security interest and before it is perfected. (emphasis supplied). The words “buyer, other than a secured party” when connected to an intangible item make no sense unless you understand that the term “secured party’ in the UCC is doing double-duty, relating both to the person who is a secured party in the classic sense and the buyer of items that are “security interests” only as a result of the counterintuitive provisions of 9-109(a)(3), what we are calling an “Artie”. Comment 6 to 9-317 makes the result of this explicit:
Unless 9-319 excludes the transaction from this Article, a buyer of accounts, chattel paper, payment intangibles or promissory notes is a “secured party” (defined in Section 9-102) and subsections (b) and (d) do not determine the priority of the security interest created by the sale. Rather, the priority rules generally applicable to competing security interests apply. See Section 9-322.
In other words, since a sale of certain items is, under the UCC, a grant of a security interest, the buyers of those items will, as compared to another secured party (including both a classic secured party and another holder of an “Artie”), have to look to the rules of competing security interests, not the rules about how an unperfected security interest compares to the rights of a buyer in the classic sense (i.e., one who does not hold an “Artie”). But the UCC giveth with the other hand from which it taketh. While the financial wizards wanted sales of payment intangibles and similar items to be included within the UCC so as to avoid the question of whether a transaction involving them was a sale or a grant of a security interest, they also wanted to avoid the hassle and expense of filing initial financing statements, filing continuation statements, searching, etc. So the rule on perfection for sales of payment intangibles and promissory notes is quite simple: they are perfected when they attach. 9-309(3) and (4). In other words, no filing is necessary.
When we get to 9-322, the priority rule, we learn that the priority is the simple “first to file or perfect” rule that applies throughout Article 9. 9-322(a)(1) provides:
Conflicting perfected security interests and agricultural liens rank according to priority in time of filing or perfection. Priority dates from the earlier of the time a filing covering the collateral is first made or the security interest or agricultural lien is first perfected, if there is no period thereafter when there is neither filing nor perfection.
But this doesn’t answer all the questions relating to priority as to a payment intangible. The
UCC does not have a direct answer to an important question: is a filing effective to give priority to a sale of a payment intangible under the first to file or perfect rule?
This is not merely a theoretical question. Consider two parties who are considering buying payment intangibles from someone. One of the parties sends the prospective buyer a letter, pursuant to 9-509(a)(1), authorizing it to file a financing statement listing “all payment intangibles debtor may sell to secured party from time to time”, and files such a financing statement against the debtor (i.e., the prospective seller) in the proper filing office on September 30. The other party does nothing with the filing office. It completes its transaction with the debtor, though, on October 1, which of course means that its rights in the payment intangible attach on October 1. They are also, by operation of 9-309(3), perfected on October 1. On October 2, the party who filed the financing statement enters into its transaction with the debtor. Only the debtor, by greed or negligence, has sold the same payment intangible to both parties. Who has priority?
This is a question that vexes UCC practitioners and to which Article 9 does not provide a clear
answer.3 Each party has a very good argument.4 The October 1 buyer will claim that it clearly had priority on October 1. The October 2 party’s security interest had not attached and therefore was not perfected under 9-309(3) until the October 2 transaction took place. This depends, of course, on whether the filing was “effective.” And this is where the confusion occurs.
Ordinarily, when we are asking whether a financing statement is effective, we are looking at the question of whether the financing statement was properly authorized (which in this case the financing statement certainly was) and properly filed. There is nothing in the UCC that defines effectiveness in a way that requires attachment of any collateral before a financing statement is deemed effective.
What there is, however, is 9-318(a):
A debtor that has sold an account, chattel paper, payment intangible, or promissory note does not retain a legal or equitable interest in the collateral sold.
So the October 1 buyer makes the not unreasonable argument that under 9-318(a), the debtor sold all the rights it had in the payment intangible on October 1, and therefore the debtor, when it made the October 2 sale, had no “rights in the collateral.”
Putting another twist on this transaction makes it even harder. We posited that the authorized and filed October 1 financing statement expressly mentioned the possibility of competing prospective sales of payment intangibles. Let’s take it one step further, and instead make the September 30 collateral description refer simply to “all general intangibles” or “all payment intangibles” with no mention that this is the particular form of “Artie” delineated specifically in the financing statement as we posited earlier. Now we as searchers of the UCC record don’t know, with respect to payment intangibles, if this is intended to be a grant of a security interest or a purchase. But of course the UCC doesn’t say one way or another.
This is also why the question of whether a financing statement that purports to perfect an interest in a transaction that is, by its terms, perfected without filing a financing statement, can be so vexing. The UCC doesn’t expressly mention any other means of perfection for a sale of a payment intangible other than automatic perfection upon attachment because it seemed so simple: if no other steps are necessary, then why even mention anything? But the first to file or perfect rule, literally applied, makes the question in some cases more than academic: is a filing for a transaction that doesn’t need a filing and is not enhanced in perfection by the filing other than as to priority, effective to give one priority? As noted, academics have spilled a lot of ink on this question, without solving it, and an attempt to clarify it in the amendments that went effective on July 1, 2013, did not get much traction and died in committee.5 This is a long way around making this critical point: you have to trust your seller or your grantor of a security interest (a real one, not an Artie) when the item being sold or pledged is an intangible. You can check the UCC records, but a sale of payment intangible needn’t be recorded. You can check the seller’s own records, but the seller can be a protégé of Bernard Madoff. There is no definitive way to learn a definitive answer.
II. TREATING TAX CREDITS UNDER ARTICLE 9
The prior discussion was general. It is time to get a little more specific: how does the UCC treat tax credits?’
There are, of course, different kinds of tax credits and different situations in which they are earned. There are federal credits and state credits. In some states, the state credits are dependent on corresponding tax items under federal law and in others they are independent. Some credits can be transferred by express provisions of law and some credits cannot be transferred at all. Some credits can be transferred by the creation of complex structures and others can be transferred by a simple bill of sale. Not surprisingly, there is no one rule on what a tax credit is, and therefore no one rule on how to treat tax credits under Article 9. A leading law review article on the topic does not have good news for a practitioner.6 Professor Odinet states:
The exotic and economically profitable nature of the tax credit as collateral is what makes it both attractive to investors but also uncertain to lawyers. Tax credits do not fit neatly into the traditional categories of collateral under Article 9 of the UCC. Although they may seem to fit into the UCC’s category of “general intangibles” because of their amorphous and unique qualities, courts have struggled with how to properly label and deal with these rights. For instance, general intangibles have been held to include copyrights, trademarks and intellectual property.
However, whether tax credits fall precisely into this category has yet to be determined. Some courts have avoided making an affirmative determination; others have engaged in confusing legal acrobatics to affirm them; and in some cases, courts have denied their use as collateral at all. 64 S.C. L.Rev. at 149-50 (footnotes omitted). Professor Odinet laments that “cases on the issue are incredibly sparse.” Id. at 150.
Professor Odinet is certainly right that the case law is thin on the ground. However, the choice of how to classify tax credits utilizes the same analysis that would be used for any other collateral under the UCC.
Under Article 9, what needs to be considered is whether tax credits constitute something that fits under one of the more specific headings, or are instead general intangibles, which is the default classification for collateral that is not goods. If they are general intangibles, they are likely payment intangibles. This is so because a payment intangible is defined in 9-102(a)(61) as “a general intangible under which the account debtor’s principal obligation is a monetary obligation.” If you consider the government to be the account debtor, and it is, since that is defined under 9-102(a)(3) as a “person obligated on an account, chattel paper or general intangible”, and “person” is defined way up in 1-201(b)(27) to include a “government”, then if a tax credit does not fit with any of the other classifications for intangibles under Article 9, it will be a payment intangible.
According to Professor Odinet, there have been no relevant cases since the adoption, generally on July 1, 2001, of the amendments to Article 9 that added the term “payment intangible” to the UCC. While this may mean simply that the issue has not arisen, it is also possible that the amendments essentially answered the question of how to classify such rights under the UCC. A key case he cites, In re Richardson, 216 B.R. 206 (Bankr. S.D. Ohio 1997), struggled with the question of how to classify earned income tax credits owed a debtor in a Chapter 13 bankruptcy proceeding. The court classified the right to receive the proceeds of the EITC as a “chose in action”, which is clearly a general intangible. See 9-102 Comment 5d (“‘General intangible’ is the residual category of personal property, including things in action, that is not included in the other defined types of collateral.”). What the amendments effective July 1, 2001, would have done is to not only make this clear, but to explicate more carefully some issues involving the relationship among general intangibles, accounts and payment intangibles.
First, every payment intangible is a general intangible; the one is a subset of the other. 9- 102(a)(42) and (61) and Comment 5d.
Second, the universe of payments under government programs is likely to be covered under three UCC classifications: account, payment intangible and general intangible other than a payment intangible. 9-102 Comment 5i, although the comment also recognizes that this is not an exclusive list.
Third, the bundle of rights under an assignment may consist of more than one classification under the UCC. “When all the promisee’s rights are assigned together, an account, a payment intangible, and a general intangible may all be involved, depending on the nature of the rights.” 9-102, Comment 5d.
Finally, Sections 9-406(d) and 9-408(a) make it clear that terms in a contract restricting the right of the debtor to assign rights in accounts, payment intangibles and general intangibles are generally unenforceable. That means that the security interest is effective and enforceable in the sense that no party other than the secured party will be able to recover their proceeds, if any, in bankruptcy. Such immobilization is critical to most financing transactions. It is here, however, that the proper classification may be critical: if the right is a payment intangible or an account, 9-408(f) applies and a restriction imposed by contract or law on assignment is generally ineffective. But if the right is instead a general intangible that is not a payment intangible, then 9-408(d), which would enforce those restrictions, will apply.
Immobilization is valuable, but if you don’t actually get to receive the right itself upon a default or in bankruptcy, you may not have as much as you thought you had bargained for. Applied to tax credits, these can be critical distinctions. Does the debtor/taxpayer have an immediate right to payment from the government? At some point, it probably does. But until that point, there are important issues that relate to the relation between the government and taxpayers that can interpose some serious restrictions on a secured party’s rights. One, of course, is simply whether there will be a monetized tax credit at all. If the debtor (and that includes a seller) of a right has a tax obligation, it may wish to, or under some tax schemes even be obligated to, offset the tax credit against the liability. In most circumstances, the government will not intervene in a taxpayer’s application of a tax credit against its tax liability; indeed governments generally prefer not to pay out cash to taxpayers, which is not their usual method of doing business. Another is the idea that the government generally will wish only to deal with one party, the taxpayer, in connection with any issues arising from that taxpayer’s tax obligations. In other word, the government, when it is engaged in its taxing capacity, will seek a definitive dialogue with the taxpayer, not subject to second-guessing by a third party.
What this means is that ordinarily with regard to even the most enforceable assignments of tax credits, only the taxpayer will be entitled actually to file the return in question. It may have been contractually obligated to do so and in an agreed way, but unless it actually does it, the government will act upon the facts presented to it by its taxpayer, up to and including letting a right to a refund go unredeemed, rather than taking orders from an assignee. This makes a good deal of sense, particularly from the government’s standpoint. Having to resolve conflicting instructions can be confusing and expensive and often, if a mistake is made, the government will lack a solvent party from whom to be made whole. Since the government sets the rules, it should be no surprise that it will make this turn out in its favor.
How can we know if a particular tax credit is a payment intangible, or more precisely, whether the right to payment under a tax credit is a payment intangible? This will depend, of course, on the nature of the particular credit. Nonetheless, the analysis will be the same in each instance:
we will need to exclude from their application each of the relevant other definitions. Some we can dispose of without much thought. A “health-care-insurance receivable” is, under 9-102(a)(46), a claim upon a policy of insurance. Our tax credits are not going to be claims under policies of insurance, so we can be certain that definition will not apply. They aren’t going to be “letter-of-credit rights” under 9-102(a)(51) either.
Similarly, we can exclude “chattel paper” and “instruments” under 9-102(a)(11) and (47). Our tax credit is not going to be evidenced by a negotiable instrument, at least before it is reduced to a check, and it does not relate to a security interest in specific goods. Neither will it fit under the definition of “investment property” in 9-102(a)(49) because it won’t fit under the definitions of “security”, “securities account”, “security entitlement” “commodity contract” or “commodity account.”
That leaves, as the comment suggests, accounts. This is the lengthy current UCC definition of “account” in 9-102(a)(2): (2) "Account", except as used in "account for", means a right to payment of a monetary obligation, whether or not earned by performance, (i) for property that has been or is to be sold, leased, licensed, assigned, or otherwise disposed of, (ii) for services rendered or to be rendered, (iii) for a policy of insurance issued or to be issued, (iv) for a secondary obligation incurred or to be incurred, (v) for energy provided or to be provided, (vi) for the use or hire of a vessel under a charter or other contract, (vii) arising out of the use of a credit or charge card or information contained on or for use with the card, or (viii) as winnings in a lottery or other game of chance operated or sponsored by a State, governmental unit of a State, or person licensed or authorized to operate the game by a State or governmental unit of a State. The term includes health-care-insurance receivables. The term does not include (i) rights to payment evidenced by chattel paper or an instrument, (ii) commercial tort claims, (iii) deposit accounts, (iv) investment property, (v) letter-of-credit rights or letters of credit, or (vi) rights to payment for money or funds advanced or sold, other than rights arising out of the use of a credit or charge card or information contained on or for use with the card.
You can tick through the romanette subclauses of this definition one by one and it will be quickly evident that, except perhaps in the most unusual of tax credit schemes, none of them apply. (iii) we have already disposed of. (v)-(viii) we can fairly readily ignore. The remaining three must be analyzed in connection with tax credits, and the results may differ depending on the nature of the particular credit, because courts are likely to confuse the obligation to do something and the earning of a tax credit upon having done the same thing. So, for instance, if a tax credit is earned by expenditures for particular goods or services, a court may parse the language of 9-102(a)(2)(i) finely and say, “this tax credit is a monetary obligation of the government for property that is sold, even though it is neither sold by or to the government, and therefore it is an account.” This ignores the last part of the definition, which expressly excludes from the definition of “account” “the rights to payment for money or funds advanced or sold”.
While Comment 5a to 9-102 indicates that the main goal of this exclusion was to exclude the duty to pay a bank loan from the definition of account, it fits the right to payment from the government under a tax credit scheme far better than shoe-horning it into clause (i) or (ii) (which applies to services the same way as (i) applies to goods).
That leaves (iii), “for a secondary obligation incurred or to be incurred”. While the UCC does not define “secondary obligation”, it does define “secondary obligor” in 9-102(a)(71) and “supporting obligation” in 9-102(a)(77). The latter is defined as including letter-of-credit rights and “secondary obligations.” Secondary obligors are those whose obligations are secondary and who have a right of recourse against a primary obligor. Guarantors and other sureties are classic secondary obligors. It is unlikely, in a tax credit scheme, that the government will have a right of recourse against anyone; the nature of tax credits is that the government is funding some preferred activity, not that it is standing in to pay when someone else does not and then will seek to collect against that person. Accordingly, it will be rare that a tax credit scheme will be other than general intangibles. As noted above, the monetary obligation portion of the tax credit scheme will likely be payment intangibles.
As we explored in part I, that means that the ownership of such collateral will, except in extraordinary circumstances, be bathed with a degree of uncertainty.
III. TREATING TAX CREDITS UNDER SB 83
When this paper refers to “SB83” it is referring to Section 4 of SB 83 as passed by the Legislature in 2013, which is now AS 43.55.029. While there is no useful legislative history of SB 83, it is easy to conclude that the purpose of the statute was to make oil and gas tax credit certificates marketable.
Before analyzing whether they are in fact made more marketable by the legislation, it is worthwhile going through what SB 83 provides. Present Assignment. The first and most notable feature is that SB 83 relates to a “present assignment” of tax credits. The term “assignment” has an unusual provenance in the UCC: it is undefined but there is a comment that talks about it, and the concomitant term “transfer”, at length. This is Comment 26 to 9-102, the definitional section of Article 9. It states, In numerous provisions, this Article refers to the “assignment” or the “transfer” of property interests. These terms and their derivatives are not defined. This Article generally follows common usage by using the terms “assignment” and “assign” to refer to transfers of rights to payment, claims, and liens and other security interests. It generally uses the term “transfer” to refer to other transfers of interests in property. . . . [N]o significance should be placed on the use of one term or the other. Depending on the context, each term may refer to the assignment or transfer of an outright ownership interest or to the assignment or transfer of a limited interest, such as a security interest.
So the term “present assignment” interpreted, as it should be under Alaska law,7 with reference to the UCC, essentially means a present transfer of a right to payment. But the last sentence of comment 26 comes in to explain that such a present transfer may be of “an outright ownership interest” or of “a limited interest, such as a security interest.” So it should be clear that one can grant either a security interest or the broader, Artie, kind of transfer, i.e., an outright sale, under SB 83.
Within 30 Days of Application. The second feature of SB 83 is the trickiest. The statute is quite clear that there are only two ways in which to obtain the protections of SB 83: an assignment that accompanies the application for a tax credit or an assignment that is received by the Department of Revenue within 30 days of the application. In determining how critical this statutory deadline is, the exact wording of the statute can be critical. Here, it states, “The assignment may be made either at the time the application is filed with the department or not later than 30 days after the date of filing with the department.” In Alaska, statutory deadlines are either “mandatory” or “directive”. “A party must strictly comply with a procedural statute only if its provisions are mandatory; if they are directory, then ‘substantial compliance is acceptable absent significant prejudice to the other party.’” Kim v. Alaska Seafoods, Inc., 197 P.3d 193, 196 (Alaska 2008).
A statute is considered directory if (1) its wording is affirmative rather than prohibitive; (2) the legislative intent was to create "guidelines for the orderly conduct of public business"; and (3) "serious, practical consequences" would result if it were considered mandatory.
South Anchorage Concerned Coalition, Inc. v. Municipality of Anchorage, 172 P.3d 768, 772 (Alaska 2007). Applying these standards to the language in SB 83 is difficult. As the court has
noted in a similar context involving taxes, “Any effort to apply the analysis outlined above to the statutory provisions in the present case, however, is somewhat problematic.” City of Yakutat v. Ryman, 654 P.2d 785, 790 (Alaska 1982). Most cases that find a requirement directory involve the State or one of its subdivisions not meeting a statutory deadline, which can have significant consequences for the often understaffed government. Here, the assignor controls when it will file its application for a tax credit and counting out thirty days from the date of application is no too hard. And, unlike cases where agencies are rendering decisions substantially, instead of exactly, within timelines, here there is really no way in which the department could know that something was substantially “within 30 days of the application.” 7 City of Kenai v. Friends of Recreation Ctr., 129 P.3d 452, 459 n.33 (Alaska 2006).
In calculating the 30 days, note should be taken of AS 01.10.080, “The time in which an act provided by law is required to be done is computed by excluding the first day and including the last, unless the last day is a holiday, and then it is also excluded.” It is probably best to consider that the statute is mandatory and file accordingly, using AS. 01.10.080 as a guide to how to calculate the 30 days. Any other approach will be subject to the department ignoring the assignment and to litigation with any competing creditors. Irrevocable. This one is relatively easy. This means essentially that the assignor cannot terminate the assignment without the consent of the secured party (although 9-513 (c)(1) requires termination of a financing statement when the debt is paid off and there is no future commitment to lend; this shouldn’t stop the security interest from being irrevocable within the meaning of the statute).
Shall Be Filed. This is one of the traps for the unwary. The statute says,
If a production tax credit certificate is issued to the explorer or producer, the notice of assignment remains effective and shall be filed with the department by the explorer or producer together with any application for the department to purchase the certificate under AS 43.55.028e).
Obviously, if this is complied with, there will be no problems. But what happens if the explorer or producer fails to file the notice of assignment with its application to purchase the certificate? The statute does not say. We may speculate on what might happen and try to reach a conclusion about what should happen.
To begin with, what should not happen is that if the explorer or producer (whose assignment, as noted, is irrevocable) fails for any reason to file the notice of assignment along with its application to purchase, the department is not authorized to ignore the assignment and pay the explorer or producer directly. This would negate everything else in the statute. What it could mean is that the department will not process the application if it is not accompanied by the assignment. This is a plausible reading of the statute, though it frankly raises the question as to why this requirement was included in the statute in the first place. If the department would hold up an application because it does not include the required assignment, this would mean that the department was aware of the assignment. If the department is aware of the assignment, then why does the assignment need to be filed with the application? In Writing and Signed. The question that must be answered here is whether this means “physical writing and wet signature” or whether an electronic document with an electronic signature is acceptable.
Under the Uniform Electronic Transactions Act (UETA), codified in Alaska at AS chapter 09.80, in general, “A record or signature may not be denied legal effect or enforceability solely because it is in electronic form.” AS 09.80.040(a). However, there is an exception for acceptance of records by government agencies. AS 09.80.150(a) provides, “each governmental agency of this state shall determine whether, and the extent to which, the governmental agency will send and accept electronic records and electronic signatures to and from other persons and otherwise create, generate, communicate, store, process, use, and rely upon electronic records and electronic signatures.” To date, the department of revenue has not authorized electronic records by regulation.
The second issue is that it is to be signed by both the assignor and assignee. This is unusual for secured transactions; security agreements are ordinarily only signed by the assignor, as are bills of sale in sales transactions. It is just one more item to watch in these transactions, however. Identify Assignor, Assignee and Tax Credit Application. The first and last of these shouldn’t be hard. The assignor is the producer or explorer, i.e., the taxpayer who would otherwise be entitled to the tax credit certificate.
Issues can arise with the assignee. In many sophisticated loan transactions, the identity of the actual lenders is not known at the time of funding. Rather, the lead lender is just a syndicator (sometimes intending to retain none of the loan) who will, after closing, place the loan with others.
There is also the question of agency. Often the nominal assignee is just a collateral agent, who again may or may not be a lender, whose job it is to distribute the proceeds among the parties entitled thereto (which may include the assignor).
There is nothing in SB 83 that speaks to how specific the naming of the assignee must be. It is fair to read the statute to ignore all these distinctions. The assignee is the party who will receive the funds on behalf of one or more lenders. It may be a lender, or it may not be, so long as it is authorized to receive and distribute those funds, and even if the actual parties with financial interests in the proceeds will change and may not even have been identified at the time of a filing.
There are two reasons to reach this conclusion. First, the department needs only one thing: to know who is supposed to get the money in a way that no one will be complaining afterward about who got the money. The department is not concerned with the niceties of a potentially complex syndication of a loan. It just wants to know who gets the electronic transfer. Second, given the short 30 day window for effecting an assignment, it is to be expected that the complete financing arrangements may be subject to “design and build” rather than fully in place by the time, under SB 83, the assignment is due. There is no indication the Legislature placed this requirement in the statute in order to limit the deals that could be done to those where the syndicate is known and in place within 30 days of an application being filed. Such a requirement would not only make no sense, it would be antithetical to the Legislature’s plain desire to increase the marketability of the tax credit certificates.
Define the Interest. Probably the most vexing interpretive problem in SB83 involves the next requirement: define the interest in the production tax credit being assigned, expressed as either an amount in dollars, which may not exceed 90 percent of the credit applied for, or a percentage of the credit to be issued by the department;
Why is this vexing? There are numerous reasons. First, there is the question of why the assignment in an amount in dollars cannot be for more than 90% of the credit applied for. If the amount the department eventually determines is due is less than 90%--and obviously no one knows this at the time of the application—the department will still just pay the amount owed, presumably all of it to the assignee. But if the amount determined is over 90%, the taxpayer will reap the windfall. But that will mean that parties financing these transactions who take a specific amount of the application instead of a percentage of the final adjustment will generally finance less to the explorer or producer. This seems antithetical to the purpose of the statute. On the other hand, if the amount is stated as a percentage of the final determination, that can be up to 100%.
Second, what happens if there are multiple assignments of the same application? Can those amounts exceed 90-% of the total applied for in the aggregate? The statute is unclear if, having assigned 50% of the amount applied for, one can then assign only 40% more, or 50% more, or even 90% more. A guy can hope, can’t he?
Third, can there be multiple but hybrid assignments? If the first assignment is based on a percentage of recovery, can the second be of a specific amount applied for, or vice versa? Fourth, how is priority determined? We’ll get to the priority rule in SB 83 in a bit, but for the moment let’s just try to determine what the rule should be without that priority rule. The ordinary priority rule under the UCC is first to file or perfect. Is the department going to look at the UCC filings, or, God forbid, make a determination of whether there was a true sale of a payment intangible? What if we got one of the inconclusive priority issues described in part I? One doesn’t consider the department to be steeped in arcane provisions of the UCC. So if there is a priority dispute, the department is likely to adopt one of three rules, whether formally or informally, to resolve it. The first, easiest rule, not expressly authorized by the statute and in some ways contrary to a plain interpretation of the language quoted above, would be to say that the department is going to accept only a single assignment for any application.
The argument would be administrative convenience; the department is not a paying agent assigning cash to numerous creditors of a taxpayer. If the taxpayer wants to make multiple assignments, it can do so consensually among creditors by paying someone to be a paying agent.
The department doesn’t do that. The second rule would be a simple first in time, first in right. The second assignee gets nothing until the first assignee is satisfied. This would appear to work well with the language on an assignment in dollars, but less well for a percentage of the amount determined. This is not as easy to calculate., An Account in Alaska. The Legislature was clearly looking out for the local banks in providing that the assignment can only be made to a bank located in Alaska. Given that the payments will all be made by electronic transfer, there is literally no difference in how the department would transmit these funds to a bank in Alaska or to anywhere in the lower 48. Fedwire is Fedwire.
Cite This Section, Etc. The provision that requires the citation of the statutory section and acknowledges that the assignment is irrevocable feels like busy work. Creating a Property Interest. The language about creating a property interest in the tax credit application and the resulting certificates and proceeds appears to be intended to track the UCC. Also Create a Security Interest. This is the most curious part of the statute. SB 83 could have easily simply created a separate regime for perfection of a security interest in applications, certificates and their proceeds that would displace the UCC. Instead, it has created a separate system but then declared that it lays only side by side with the UCC. What this means is unclear, and may need to be explicated in case law in the future.
Superpriority by Complying. Basically, the question is this: do you get the superpriority by “complying with this section” by filing an assignment complying with the specific terms of SB 83 or do you also have to comply with the attachment and perfection rules of the UCC? More specifically, while if you have a true sale you are clearly okay because you get automatic perfection, if you don’t have a true sale, either because you have expressly denominated your transaction as a grant of a security interest (not an Artie), do you get the superpriority if you don’t file a financing statement?
The answer appears to be, yes, you do need to file that financing statement unless you are clear you have an Artie and not a classic security interest. This is the classic trap for the unwary. Filing that assignment sure seems like it should be enough to immobilize the application, certificate and proceeds. But the statute says superpriority only arises, “if the assignee has taken the steps necessary under state and federal law to perfect a security interest in the assignment. There are no federal laws that really apply; bankruptcy courts will defer to state law and state law is the UCC.
This can lead to some absurd results, where someone with a financing statement filed against general intangibles of a taxpayer who is totally unaware of the application will prevail in a bankruptcy against someone who has gone through all the hoops at the department of revenue, but has not filed a financing statement, if they are later determined not to have an Artie. Scary. Can’t Sue the State. We’ll take the second from next part of the statute out of turn. Nobody can sue the state under this regime. This sort of fits in with the little trap that was laid by requiring UCC perfection. If the state complies with the rules, you can’t go back against them for having done so. If the state pays under these rules to the wrong person, go after that person (if you can). Doesn’t Affect the Terms of the Credits. This is fairly obvious; this regime has no effect on the application process itself. The Department Can Adopt Regulations. But don’t hold your breath. It’s a busy department. Unless they are confronted with the same issues over and over again, they are unlikely to take the time to develop regulations on this statute.
IV. WINNING NO MATTER WHAT HAPPENS
So what should you do? The title of this paper, “Belt, Suspenders and Tight Pants”, should give you a clue. What you’re going to do is everything you can.
There are three outlets for your concern. First, and foremost, is the relationship between lender and borrower. It should be based on trust, but remember that old Ronald Reagan truism: trust, but verify.
And here is when you run into a significant barrier: how do you verify? One huge difference between the UCC world and the SB 83 world is that there is no public registry of assignments under SB 83. In the UCC world, you can search financing statements to your heart’s content (though of course you’ll not see perfection of an Artie). In the SB 83 world, you can only see a taxpayer’s records with the taxpayer’s written consent. That will include any assignments under SB 83. So trust is still important; you’ll be a long way down the road in documenting a transaction involving tax credit certificates before you’ll have access to the department’s records.
The second place is the documentation between the lender or buyer and the borrower or seller. You will want covenants covering every step of the application process, to make sure you’re buying an application that is likely to stand up to audit. You’ll of course want to document each step in the assignment process.
Here’s a simple covenant you’ll want: the bank to which the assignment is made must at all times be a bank located in Alaska. Luckily, if a bank currently located in this state were to close its offices, that would make sufficient news in Alaska you’re likely to know about it. Third, you’ll want to cover both the assignment and the UCC. The only way to ensure that you’re protected under SB 83 is to file a financing statement even if you have an Artie. Without a financing statement, you have an argument; with a financing statement, you have perfection.
Not bad for twenty bucks. And here’s the real crux: you need to make sure that the debtor will not have tax obligations which will be offset against the credits. If it does, the department will not issue payment.
1 Partner, Stoel Rives LLP, Seattle, Washington. Member, Alaska and Washington State Bar Associations. Chair, Secured Transaction Subcommittee, Business Law Section, American Bar Association. Fellow, American College of Commercial Finance Lawyers.
2 Unless it is relevant, I will throughout this paper use the uniform numbering for the UCC. of a security interest; whether a transaction in the form of a lease creates a security interest is determined under AS 45.01.213;
3 See Kenneth C. Kettering, True Sale of Receivables: A Purposive Analysis, 16 ABI L. Rev. 511, 538 n. 112 (2008).
4 Compare Steven L. Harris & Charles W. Mooney, Jr., Using First Principles of UCC Article 9 to Solve Statutory Puzzles in Receivables Financing, 46 Gonz. L. Rev. 297 (2011) with Thomas E. Plank, Article 9 of the UCC: Reconciling Fundamental Property Principles and Plain Language, 68 Bus. Law. 439 (2013). Professors Harris and Mooney have answered Professor Plank in Steven L. Harris & Charles W. Mooney, Jr., U.C.C. Article 9, Filing-Based Authority, and Fundamental Property Principles: A Reply to Professor Plank, which will be published in a forthcoming issue of The Business Lawyer and of which Professor Harris kindly provided me a proof copy.
5 Stephen L. Sepinuck, Perfecting Article 9: A Partial Prescription for the Next Revision, 46 Gonz. L. Rev. 555, 559 (2011).
6 Christopher K. Odinet, Testing the Reach of Article 9: The Question of Tax Credit Collateral in Secured Transactions, 64 S.C. L.Rev. 143 (2012-13)..