UNIFORM COMMERCIAL

CODE FOR DIRT

LAWYERS

REAL ESTATE FINANCING 2017

TERMINOLOGY

• Parties

– Debtor

– Obligor

– Secured Party

– Secondary Obligor

TERMINOLOGY

• Collateral

– Accounts

– Deposit Accounts

– Investment Property

– Goods

• Equipment

• Inventory

• Farm Products

• Consumer Goods

Terminology

• General Intangibles

– Payment Intangibles

• Fixtures

SCOPE OF ARTICLE 9

• Any transaction that creates a security

interest in personal property

• Applies to certain sales

– Accounts

– Chattel Paper

– Payment Intangibles

– Promissory Notes

• Excludes interests in real property

ATTACHMENT

• Requirements

– Value be given

– Rights in the collateral

– Either

• Authenticated security agreement

• Possession of tangible collateral pursuant to

agreement

• Control of deposit account or investment

property pursuant to a security agreement

PERFECTION

• Most collateral can be perfected by filing

a financing statement

• Important Exceptions

– Getting Priority

• To be discussed later

– Deposit Accounts

– Letter of Credit Rights

FINANCING STATEMENT

• Contents

– Name of debtor

– Name of secured party or representative

– Indication of collateral

– Fixture Filings

• Description of real property

• If debtor has no record interest, the

name of the record owner

NAME OF THE DEBTOR

• Registered Organization

– An entity that requires filing of a “public

organic record” with a state

– Includes

• Corporations

• LLCs

• Many statutory trusts

NAME OF THE DEBTOR

• Registered Organization

– Name on the most recent public organic

record

– No tradenames

– Safe Harbor

• If it shows up on a certified search using

the correct name

• Practice tip: Do a post-closing certified

UCC search

WHERE TO FILE

• Registered Organizations

– The state of formation

• Non-registered organizations

– PPB, or CEO if more than one PPB

• Individuals

– Principal residence

• Exception: Fixtures

– Real property records of the local

jurisdiction

CONTROL PERFECTION

• Deposit accounts can only be perfected

by control

– Funds held by a depository bank

– Generally includes:

• Operating accounts

• Accounts with proceeds of leases and

rents

• Reserve accounts

DEPOSIT ACCOUNTS

• Methods of obtaining control

– The secured party is the depository

institution

• Practice Tip: Agented deals

– Secured party becomes bank’s

customer

– Control Agreements (DACA)

DACA

• Requirements

– Agreement between debtor, secured

party and depository bank that provides

that the depository bank will follow the

instructions of the secured party without

further consent of the debtor

INVESTMENT PROPERTY

• What is investment property?

– Securities

• Divisible into classes or series

• Type traded on exchanges

• Either

– Certificated – security certificate

– Uncertificated – book entry

– Securities Account

– Securities Entitlement

INVESTMENT PROPERTY

• Investment property does not include an

interest in an LLC ordinarily

– LLC can opt-in to article 8 and make the

membership interest a security

• It also can be “certificated”

• Mezzanine Financing

CONTROL

• Can perfect by filing, but perfection by

control takes priority over filing.

• Certificated securities

– Bearer form – delivery

– Registered Form

• Delivery with any necessary

endorsement

• SP becomes registered owner

CONTROL

• Uncertificated securities

– SP becomes registered owner on the

books of the issuer

– Issuer agrees it will comply with

directions of SP with further consent of

the debtor/owner

CONTROL

• Brokerage Accounts

– SP becomes the registered owner

– Securities intermediary agrees to

comply with orders originated by SP

with out further consent of debtor

• Like a DACA

PERFECTION BY

POSSESSION • Instruments

– Written promise to pay not including

security agreement or a lease

• Promissory notes

– Instrument that is not a check, draft or

CD

– Sales of promissory notes included in

Article 9, including:

• Promissory note secured by mortgage

INSTRUMENTS

• Perfection in Instruments

– Filing

– Upon attachment for sale of promissory

notes

– Possession

• May need possession of promissory

notes for foreclosure

AUTOMATIC PERFECTION

• Payment Intangibles

– A general intangible in which the primary

obligation is a payment of money

• Sales of payment intangibles are covered by

Article 9

• Perfection

– Filing

– Sales are perfected upon attachment

AUTOMATIC PERFECTION

• Payment intangibles and real estate

financing

– A sale of a participation interest is a sale

of a payment intangible under Article 9

– Automatic perfection

– Recharacterization issues

• Should always file as well

PRIORITY

• Fixture priority

– Generally interest in real estate takes

priority over a fixture filing

– Important exception – PMSI

• A PMSI takes priority if the security

interest is perfected before the goods

become fixtures

PRIORITY

• First to file or perfect rule

– Need a UCC search

• Non-temporal exceptions

– Purchaser of instrument (including a

promissory note) who has possession

takes priority over prior filer

– Control/possession of investment

property takes priority over prior filer

INSTRUMENTS

• Promissory notes secured by

mortgages

– Take possession for priority purposes

• Automatic perfection does not help

– Bailee can take possession on behalf of

a secured party, but Bailee must

acknowledge that it is possessing on

behalf of secured party

INVESTMENT PROPERTY

• General Rule

– Control takes priority over prior filer

• Certificated securities

– Need possession to take priority over

prior filer

• Even if there is no necessary

endorsement

CERTIFICATED SECURITIES

• Mezzanine lending

– Many times the mezzanine lender does

not get an interest in the real estate, but

gets a “pledge” of the sponsor’s interest

in the SPE real estate owner

– Most SPEs are LLCs now.

• An LLC membership interest is a

general intangible not a security.

LLC INTERESTS

• SP can perfect by filing as a general

intangible

• Practical tip: To ensure priority

– Opt-in to article 8 • In the articles and operating agreement make the

membership interest a security under article 8

• Then also make it a “certificated security”

• Last, take possession of the certificated security

• Possession (even without necessary endorsement)

insures priority over other non-control perfection methods

LLC INTERESTS

• Opt-in language: All issued Units of the Company shall be represented by

certificates. All Units of the Company shall be a

security governed by the Uniform Commercial Code –

Investment Securities (La. R.S. §§ 10:8-101 et seq.).

Each issued Unit is a “certificated security” as defined in

La. R.S. § 10:8-102(a)(4) and the certificate

representing any Unit or Units is a “security certificate”

as defined in La. R.S. § 10:8-102(a)(16)

MISCELLANEOUS

• Multi-lender transactions

– Examples

• Lender 1 - term loan on fixed assets;

Lender 2 – revolver on accounts and

inventory

• First lien/second lien

– Need to establish relative priorities

• Intercreditor agreements

MISCELLANEOUS

• Proceeds

– Security interest in collateral continues in

proceeds

– Proceeds are

• Whatever is obtained on disposition

• Rights arising out of the collateral

• insurance proceeds

– Priority in original collateral is priority in

“cash” proceeds

MISCELLANEOUS

• Security interest in contracts (like construction

contracts, etc.) and licenses/permits (liquor,

etc.) are often required

• Most contracts and license agreements

contain restrictions on assignment

• There are also legal restrictions on

assignment for governmental licenses and

permits

RESTRICTIONS ON

ASSIGNMENT • Generally rights under a contract, such

as a construction contract or franchise

agreement, or licenses or permits are

general intangibles

– Any restriction on assignment (or

creation of default) are ineffective.

– But the secured party cannot enforce

such rights against the obligor.

RESTRICTIONS ON

ASSIGNMENT • Practical Results of Article 9

– The SP can create and perfect a

security interest

– The SP cannot enforce the security

interest against the obligor

– The SP has a security interest in the

proceeds of the general intangible

• So has priority on the proceeds of the

sale, in bankruptcy or otherwise

LETTER OF CREDIT RIGHTS

• Many lessors accept LCs as a security

deposit

• A secured party can get a security

interest in the payment rights under an

LC by control if:

– The issuer consents to the assignment

of proceeds

CONCLUSION

Questions?