Your State Association Presents
Lenders LearnTM
The Top 10 Loan Documentation
MistakesProgram Materials
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September 7, 2016 Presenter: Robin Russell
Technical Support (for faster service please submit inquiries via email or online): (Registration & Tech Support): Email- [email protected], Phone- (877)988-7526 FOR ADDITIONAL ASSISTANCE PLEASE REFER TO OUR FAQs
About Lenders LearnTM
Lenders LearnTM provides lenders and compliance officers with a deep understanding of secured lending. For each of the 15 core courses (30 hours total), attendees receive a copy of the slides and at least one chapter from Robin’s new 2016 Multistate Secured Lending Guide.
Once you have completed the core curriculum, you will have a 17 chapter reference. Whether your bank registers for one or all 15 webinars, you will find the information practical and valuable. See below for 2016 broadcast dates.
1: Basic Business Entities (1/21)2: The UCC for Lenders (2/3)3: Loan Doc 101: The Basics (2/10)4: Loan Doc 101: Business Collateral (2/23)5 & 6: Loan Doc 101: Perfection by Possession & Control (2/18) 7 & 8: Basic RE Loan Documentation (3/2 & 3/3)9: Oil & Gas Lending (4/6) 10: Agricultural Lending (4/18)11: Commercial Loan Documentation (5/3 & 5/4)12: Letters of Credit (5/17)13: Lending to Municipalities (8/24)14, 15, 16: Basic Bankruptcy for Bankers (11/2)17: Loan Participations (11/15)
Also Recommended: • Advanced Commercial Loan Documentation (6/1)• Top Loan Documentation Mistakes (9/7)• Understanding Commercial Loan Documents (9/20)• Understanding Real Estate Loan Documents (9/22)• Commercial Real Estate Loan Documentation (12/7)
All programs will be recorded and available for viewing after the broadcast date. If you would like to complete the Lenders LearnTM curriculum and missed the webinar, please visit the on-demand catalog to register.
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The Top 10 Loan
Documentation Mistakes
Robin Russell
Andrews Kurth LLP
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Robin Russell
ROBIN RUSSELL Robin is a fellow in the American College of Bankruptcy. She combines a depth of experience in
bankruptcy restructuring and litigation with financial transactions. She has represented corporate debtors, liquidating
trustees, bondholders, unsecured creditors' committees, bank groups, private equity funds, landlords, trade creditors and
bidders for estate assets in Chapter 11 and Chapter 7 bankruptcy proceedings and has litigated fraudulent conveyance
and preference claims in bankruptcy and district court. She has also represented banks, institutional lenders and
corporate borrowers in commercial loan transactions and debt restructurings. Robin is the principal author of Thomson
Reuters’ Texas Practice Guides for both Creditors’ Rights and Financial Transactions and the Texas Bankers
Association’s Texas Secured Lending Guide, Texas Real Estate Lending Guide, Texas Problem Loan Guide and Texas
Account Documentation Guide. She is a frequent speaker on banking, bankruptcy and financial restructuring related
topics, an elected member of the American Law Institute and has served as a Chapter 7 Trustee. Robin received her
LL.M. in Banking Law from Boston University and her J.D. from Baylor University where she was Editor in Chief of the
Baylor Law Review and the highest ranking graduate in her class. Prior to joining the firm she clerked for the Texas
Supreme Court.
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Notice
This presentation is designed to provide accurate and
authoritative information in regard to the subject matter
covered. It is provided with the understanding that
neither the presenter nor your State Bankers
Association is engaged in rendering legal, accounting
or other professional advice or service. If legal advice
or other expert assistance is required, the services of a
competent professional person should be sought —
from a Declaration of Principles Adopted by the
American Bar Association and a committee of
Publishers and Associations.
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How Do I Become A Secured Creditor?
Lien a/k/a Attachment + Perfection = Secured Status
Security Agreement + UCC-1
Deed of Trust + Recording in County
Ship Mortgage + Coast Guard Filing
Aircraft Security Agreement + FAA Filing
Investment Property + Account Control AgreementSecurity Agreement
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Attachment
• Bank gives value
• Debtor has rights in collateral
• Debtor has signed written agreement granting lien
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So Why Do I Want To Be A Secured Creditor?
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The “Covered Dish Supper”Rules of Priority
EquityUnsecuredSecuredPMSI
Possessory Lienholder
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Bankruptcy 101
Assets fmv 500,000
Liabilities 2,000,000
Bank Debt 500,000
Trade Debt 750,000
Judgment 750,000
________________________________________
If Bank is secured and perfected - 100% recovery
If Bank unsecured or unperfected - 25% recovery
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Top 10 Mistakes
1. Misclassification of collateral
2. Filing the perfection document in the wrong location
3. Using the wrong borrower/debtor name
4. Not obtaining the proper authorization documentation
5. Having a bad collateral description
6. Improper assessment of lien position
7. Failing to amend your UCC-1
8. Failing to continue or terminate your UCC-1
9. Leaving items to post closing or making exceptions
10. Inadvertently waiving rights
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Avoiding Mistake #1:
Proper Classification of Collateral
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Business Collateral
Letter of
Credit Rights
Inventory
Warehouse Receipts
and Bills of Lading
Farm Products
Investment
PropertyCash
Chattel
Paper
Deposit
AccountsInstrumentsAccounts
Government
Contracts
Warehouse Receipts
and Bills of Lading
General Intangibles Tort Claims
Fixtures
Motor Vehicles Boats Vessels Aircraft
Equipment
Rolling Stock
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Types of CollateralInventoryAccountsU.S. Government ContractsChattel PaperEquipmentFixturesLeasehold ImprovementsGeneral IntangiblesInstrumentsDeposit AccountsInvestment PropertyDocuments: Warehouse Receipts and Bills of LadingAgricultural Collateral/Farm ProductsConsumer GoodsLife InsuranceMotor VehiclesManufactured HomesBoats and VesselsAircraftRolling StockOil and GasTort ClaimsLetter of Credit RightsGuaranties and Third Party Pledges of Collateral
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What Types of Collateral Are
Covered by the UCC-1?The UCC covers five types of tangible personal property:
• Inventory• Equipment• Fixtures• Farm Products• Consumer Goods
Intangible personal property is divided into the following classifications under the UCC:
• Accounts – (If accounts represent amounts due from the U.S. government, theymay be subject to special rules for Government Contracts)
• Chattel Paper• General Intangibles• Instruments• Investment Property• Deposit Accounts (Commercial)• Letter of Credit Rights• Commercial Tort Claims
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What Types of Collateral are
Not Covered by the UCC-1?
Tangible personal property includes the following types of collateral not exclusively covered by the UCC:• Motor Vehicles
• Manufactured Homes
• Boats and Vessels
• Aircraft
• Rolling Stock (i.e., railroad cars)
Intangible personal property also includes the following types of collateral not subject to the UCC:• Life Insurance
• Deposit Accounts (Consumer)
• Non Commercial Tort Claims
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Avoiding Mistake #2:Filing in the Right Location
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Methods Of Perfection
• File UCC-1
• Possession
• Control
• Notation on Title
• Non-UCC Filings
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Basic UCC-1 Filing Location Rules
• A debtor who is an individual is located in the state of the individual’s principal residence.
• A registered organization that is organized under the law of a state is located in that state.
• A debtor that is a nonregistered organization (i.e., a general partnership) and has only one place of business is located in the state of its place of business.
• A debtor that is a nonregistered organization and has more than one place of business is located in the state of its chief executive office.
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Additional UCC-1 Filing Locations
• A registered organization that is organized under the law of the United States and a branch or agency of a bank that is not organized under the law of the United States or a state are located:
– in the state that the law of the United States designates, if the law designates a state of location;
– in the state that the registered organization, branch, or agency designates, if the law of the United States authorizes the registered organization, branch, or agency to designate its state of location; or
– in the District of Columbia, if neither of the above applies (ex. Citizen of foreign country).
• A branch or agency of a bank that is not organized under the law of the United States or a state is located in the state in which the branch or agency is licensed, if all branches and agencies of the bank are licensed in only one state.
• The United States is located in the District of Columbia.
• A foreign air carrier is located at the designated office of the agent upon which service of process may be made on behalf of the carrier.
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Special UCC-1 Filing Location Issues
• A registered organization continues to be located in the
jurisdiction notwithstanding:
– the suspension, revocation, forfeiture, or lapse of the
registered organization’s status as such in its jurisdiction of organization; or
– the dissolution, winding up, or cancellation of the existence of the registered organization.
• A debtor who ceases to exist, have a residence or have a
place of business continues to be located in the jurisdiction where it last existed, resided or did business.
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At What Point in Time Do I File a
UCC-1?
• May file before security agreement signed
• Should file before funds advanced
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Avoiding Mistakes #3 and #4:Using the Debtor’s Name Right and
Obtaining Proper Authorization Documentation
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Who is your Debtor?
• The person who owns the property being
pledged to you.
• This is not always the borrower.
• It may be a guarantor or a third party only
pledging collateral.
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Debtor Name
• The most important element when preparing a
UCC-1 financing statement is the debtor name.
• The debtor name should be nothing more and
nothing less than the legal name of the debtor.
• Do not abbreviate words in the debtor name unless the legal debtor name contains
abbreviations.
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Individual
= John Lee Doe
= J.L. Doe
= Bubba Doe
Exact full legal name
Goes By
Nickname
Debtor for UCC-1 = John Lee Doe
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Sole Proprietorshipd/b/a
• An individual doing business under an assumed
name
John Lee Doe
d/b/aJohn’s Auto
d/b/aAutoworld
d/b/aJohn’s Flowers
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Authorization Documents Required
for Sole Proprietorship
• Assumed Name Certificate
• Sole Proprietorship Resolution of Authority
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What if my loan officer wants to put
the d/b/a in the loan documents?
Correct > John Lee Doe*
* individually and doing business under any assumed name including, without limitation, John’s Auto
Wrong > John Lee Doe d/b/a John’s Auto
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• If all partner’s surnames are not in partnership name (i.e., Doe & Brown Auto) then in most states the partnership name (i.e., John’s Auto) is considered an assumed name.
personally liable for partnership
debts
John’s Auto
John Doe Robert Brown
General partner general partner
UCC-1
UCC-1 ?UCC-1 ?
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Authorization Documents Required for General Partnership/Joint Venture
• Partnership Agreement
• Partnership Resolution of Authority
• Assumed Name Certificate
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John’s Corporate Shell, Inc.
General Partner
John’s Auto, LP
John
DoeJane
Doe
Bob
Smith
Limited Partners
Liable for debts of limited partnership
Not liable for debts of limited partnership
John’s Auto, L.P. by its
general partner
John’s Corporate Shell, Inc.
Signature By: ___________________________
Title: John Doe, President___________
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Authorization Documents Required
for Limited Partnership
• Limited Partnership Agreement
• Certificate of Limited Partnership or Certificate
of Formation
• Certificate of Fact: Status
• Partnership Resolution of Authority
• Certificate of Authority to Transact Business in all states in which entity does business
• Certificate of Fact: Assumed Name
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ShareholderShareholderShareholder
John’s Auto, Inc.
John’s Auto, Inc.
Signature By: _________________________
Title: _________________________
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Authorization Documents Required
for Corporation
• Certificate of Formation or Articles or Certificate
of Incorporation
• Bylaws
• Certificate of Fact: Status
• Certificate of Franchise Tax Account Status
• Resolutions of the Board of Directors
• Certificate of Authority to Transaction Business
• Certificate of Fact: Assumed Name
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Corporate Resolutions
• A meeting was held on a certain date
• The corporation made a decision to request a loan from the lender
• The loan will benefit the corporation
• Certain officers designated by name and title are authorized to execute loan documents on behalf of the corporation
• Pledging of corporate assets as collateral is authorized
*Funding of any loan should not occur prior to receipt of a properly executed corporate borrowing resolution. Otherwise, the borrowing could be challenged as unauthorized.
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Best Practices Checklist
Has the Bank satisfied itself prior to funding that:
� The borrowing under consideration is permitted
� Officers who are signing have been properly authorized
� Corporation does not have a maximum indebtedness clause which will be violated (from another credit arrangement or board action)
� All conditions precedent to borrowing have been met
� Exact corporate name on loan documents matches with
documents on file related to the corporation,
� Liens and security interests in collateral are proper and within the powers of the corporation as granted by its Board.
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John’s Auto, L.L.C.
John’s Auto, L.L.C.
Signature By: _________________________
Title: Manager__________________
Member Member Member
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Authorization Documents Required forLimited Liability Company
• Articles of Organization or Certificate of Formation
• Regulations or Company Agreement
• Certificate of Fact: Status
• Certificate of Franchise Tax Account Status
• Resolutions of the Members
• Certificate of Authority to Transact Business in all states in which entity does business
• Certificate of Fact: Assumed Name
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• durable v. nondurable powers of attorney
• broad powers v. limited powers
• effective now v. effective later
• a P of A cannot survive the death of the principal
and later even if the principal
becomes incompetent or
incapacitated
when the principal becomes
incompetent or incapacitated
Agent Acting under Power of Attorney
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Trust/Custodial RelationshipsTrustee Custodian
Trust Property UTMA Property
Beneficiary Minor
income stream
(general intangible)
John Doe, TrusteeThe Doe Family TrustName
Diana Doe as Custodian under UTMA for Sterling Doe
legal
title
beneficial
owner
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Authorization Documents Required
for Trust
• Trust Agreement
• Confirmation that loan proceeds are for benefit of beneficiary
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Beneficiary of a Trust
• A trust interest is a general intangible
• A “spendthrift” trust prohibits the beneficiary from
pledging the trust interest as collateral for a loan
• The Bank may take a lien on the property purchased with loan proceeds as collateral but not the trust interest
• The Bank may consider the trust distributions in determining creditworthiness
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Avoiding Mistake #5:Correct Collateral Description
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Requirements Of A Lien Document
Mandatory
• Identify parties
• Identify what obligation is being secured
• Identify collateral
• Contain “words of grant” granting lien on collateral
• In writing
• Signed by owner of collateral
Optional
• Representations/Warranties
• Covenants
• Events of Default
• Remedies
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COVENANTS
Duties Toward Property• possession• good repair• payment of taxes• access to inspect collateral• notification of loss• access to books and records• nondisposition (unless ordinary course)• recordation of security interest on chattel paper• proper collection and settlement of accounts• no commingling of proceeds• direct payment of accounts receivable• list of buyers for Farm Security Act notices• insurance
Other Duties• authorization of secured party to file financing statement• authorization of secured party to protect collateral
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Representations and Warranties
• valid existence as entity
• authorization to execute and perform
• past, present and future name
• ownership of collateral
• use of property (personal, business,
agricultural)
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UCC-1 Financing Statement Requirements
To be effective, a Financing Statement must:
• give the name of the debtor(s),
• give the name of the secured party,
• give a description of the collateral,
• provide a mailing address for the debtor and the Secured Party of record,
• indicate whether the debtor is an individual or an
organization, or,
• if the debtor is an organization, provide the type of organization and the jurisdiction of organization of the debtor,
• signature of debtor not required.
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Collateral Description
• A collateral description in the UCC-1 (but not the security agreement) on commercial collateral may simply state “all assets” or “all property”.
• A UCC-1 on consumer goods requires a description of
the specific consumer good.
• A security interest in a consumer’s investment property requires specific identification of the account.
• A commercial tort claim must be specifically described.
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Name of Record Owner
• If the name of the record owner is required in the UCC-1, it should be obtained through an abstract or title company or from a recent real estate tax bill or some similar document.
• A mailing or street address is not sufficient as a description.
• The following is an example of a legal description of real property:
Lot Fifty-Six (56), in Block Five (5), Plat of Bayou Woods, Section (8), in Harris County, Texas, according to the map thereof recorded in Volume 224, Page 15, of the Map Records of Harris County, Texas.
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Avoiding Mistake #6:
Proper Assessment of Lien Position
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Types of Lien Searches
• UCC – Secretary of State or other Central Filing Office
• County Real Estate Records
• Review of Certificate of Title
• Special Filing Office
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Where Do I Conduct a Lien Search?
• Lien searches are done in the locations for UCC-1 Financing Statements in the state where the debtor is located.
• A lien search is done on the legal name of the Debtor.
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What Names Do I Search?
An incomplete debtor name may result in a failure to disclose all the desired information.
Example #1: Real Name: Autoworld, Inc. Name Searched: Autoworld, Corp Result: Filings against AutoworldInc. will be shown because Inc. and Corp. are currently considered ancillary information by the Texas Secretary of State.
Example #2: Real Name: Autoworld of Texas, Inc. Name Searched: Autoworld of California; Result: Filings against Autoworld of Texas not shown.
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Liens Not Disclosed By UCC Lien Search
• Liens filed at the county level such as state tax liens and liens on fixtures.
• Liens perfected by possession, such as liens on chattel paper and certificated securities.
• Liens on special classes of collateral such as ships, aircraft, rolling stock, motor vehicles and manufactured homes.
• UCC-1 filings on the debtor in states not searched.
• Nonownership of the collateral by the debtor.
• A lien against the prior owner of the collateral.
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General Rules of Priority
• secured v. unsecured > secured wins
• perfected v. unperfected > perfected wins
• possession v. filing > possession wins
• first to file > wins
• pre-existing security interest > wins
• purchase money security > wins as to interest (PMSI) specific collateral
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First-to-File(Subordination)
John’s Auto, Inc.← 9/8/03 UCC-1 filed by John Doe, Sr.
John’s Auto, Inc.← 8/10/07 UCC-1 filed by Bank #1
Subordination
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Purchase Money Security Interest
Equipment and Fixtures• file UCC-1 within 20 days of possession
Inventory• file UCC-1 before debtor takes possession (i.e.,
pre-filing)• notification to other lien holders within last five years
Farm Products• pre-filing• notification to other lien holders within last six months
Consumer Goods
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Purchase Money Security Interest
John’s Auto, Inc. ← 9/8/03 UCC-1 John Doe, Sr.
John’s Auto, Inc. ← 8/10/07 UCC-1 filed by Bank #1
on all assets
John’s Auto, Inc. ← 12/8/09 UCC-1 filed by Bank #2PMSI on specific office equipment
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Possessory Liens
John’s Auto, Inc. ← 9/8/03 UCC-1 John Doe, Sr.
John’s Auto, Inc. ← 8/10/07 UCC-1 filed by Bank #1
on all assets
John’s Auto, Inc. ← 12/8/09 UCC-1 filed by Bank #2PMSI on specific office equipment
John’s Auto, Inc. ← 4/15/12 Equipment taken to repair shop
John’s Auto, Inc. ← 1/10/14 Rent is unpaid
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What are Proceeds?
• “Proceeds” include whatever is received upon the sale, exchange, collection or other disposition of collateral or proceeds of collateral.
• Insurance payable due to loss or damage to collateral is proceeds if the debtor is the beneficiary.
• Money, checks, deposit accounts and the like are “cash proceeds.”
• All other proceeds of collateral are “noncash proceeds.”
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Requirements for Continued Perfection of a Security Interest in Proceeds
• The Bank’s security interest continues in collateral, notwithstanding the
sale, exchange or other disposition thereof by the borrower unless the
disposition was authorized by the Bank in the security agreement or
otherwise.
• Bank’s security interest continues described below, in any identifiableproceeds of the collateral, including collections received by the borrower.
• The Bank’s security interest in proceeds becomes unperfected on the 21st
day after the borrower receives the proceeds unless:
– A UCC-1 covers the original collateral and the proceeds are collateral in which a
security interest may be perfected by filing a UCC-1 in the same office in which the original UCC-1 was filed.
– The proceeds are identifiable cash proceeds; or
– A security interest in the proceeds is perfected before the expiration of the 20-day period.
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Illustration of Perfection
Requirements For Proceeds
• If the Bank has a security interest in medical equipment which it has
perfected by the filing of a financing statement describing medical
equipment and the borrower exchanges some of the medical equipment for
office equipment, the Bank will have a continuously perfected security
interest in the office equipment.
• On the other hand, if the borrower sells the medical equipment and uses the
cash to buy a car, the Bank’s perfected security interest in the car will lapse
at the end of the 20 days, because there will be no notation on the
certificate of title to indicate that the Bank has a security interest in the office
equipment.
• If the borrower sells an x-ray machine for cash and then uses the cash to
buy the vaccine, the Bank will have a continuously perfected security
interest in the vaccine because it is inventory as described in the financing
statement.
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Personal Property Lien
Subordination
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Examples of Title Verification
Documentation
• Bill of Sale
• Invoice
• Title
• Deed of Trust
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Avoiding Mistake #7:
Knowing When to Amend Your UCC-1
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UCC-3
• Form UCC-3 is used to make changes in the original UCC-1 Financing Statement.
• A UCC-3 is a multipurpose form used to renew, transfer, amend or terminate a UCC-1.
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When Do I Need to Amend a UCC-1?
• Add collateral
• Delete collateral (i.e., a partial release)
• Reflect an address change
• Anytime the UCC-1 becomes “seriously
misleading”
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Addition of Collateral
• An “Amendment” filed on Form UCC-3 may be
used to add other collateral.
• A clear description of any collateral to be added must be included.
• An Amendment adding collateral is effective as to the added collateral only from the date of filing the Amendment.
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What is Seriously Misleading?
John’s Auto Inc. UCC-1
5/8/08
Jane Anne Doe
Autoworld, Inc. 1/1/104 months
5/1/10
Jane Anne Smith
no longer perfectedon after acquired8/21/10 Bank #2files UCC-1 on
Autoworld, Inc.
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Change Corporate Structure of Debtor
• If the debtor changes its location to another jurisdiction the Bank must
refile in the new location within four months.
� EXAMPLE: Debtor is a general partnership
whose chief executive office is in Texas. Bank perfects a
security interest by filing in Texas. Debtor moves its chief
executive office to New Mexico. Bank has four months to refile
in New Mexico.
• If the original debtor merges with another entity resulting in a “new
debtor” located in a different state (example, Delaware corporation
merges into Texas corporation), the following rules will apply: The
Secured Party has one year to file a UCC-1 in the new state (in the
above example, Texas) unless the name of the new debtor is seriously misleading when compared to the name of the original debtor. In this
event the Secured Party has only four months to file in the new state to
file or risk the loss of a perfection with respect to after-acquired
property.
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Refiling of Expired Financing Statements
• A new Financing Statement may be filed where the original filing has lapsed.
• Priority established with the original filing would not be maintained as the new filing would not relate back to the
file date of the original filing.
• An intervening lien would take priority over the lapsed financing statement
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Transfer of Collateral by Borrower
• The UCC does not require a refiling in the name of a transferee in the case of a transfer of the collateral by the borrower to a transferee located in the same state as the borrower.
• It is advisable for the Bank to file Form UCC-3 when the transfer is made subject to the Bank’s security interest or to file Form UCC-1 when a transfer is made by the borrower to a transferee who executes an assumption agreement.
• If the original debtor transfers the collateral to a transferee located in a different state, the Secured Party has one year to file in the new state to maintain perfection and priority.
Example: Delaware corporation transfers to California limited partnership – Bank has one year to refile in California.
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Avoiding Mistake #8:Knowing When to Continue or
Terminate Your UCC-1
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How Long Does My UCC-1 Last?
• A Form UCC-1 Financing Statement is effective for five (5) years and may be extended for additional five year periods during the six-month “window” prior to expiration of the previous five-year period.
• A UCC-1 filed in connection with a public-finance transaction is effective for 30 years.
• A UCC-1 on fixtures filed in the County Real Property Records is effective for five years.
• A fixture financing statement contained within a mortgage or deed of trust it is effective for the term of the mortgage or deed of trust.
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Termination/Total Release
• A “Termination Statement” may be filed
– where all secured parties wish to terminate a financing statement, or
– where one or more, but not all, secured parties wish to totally release their lien against the debtor.
• The termination is only effective as to the secured parties who are named in item 9 of form UCC-3.
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Termination
• Consumer – Bank (i.e., secured party) must file termination
– within 20 days after “authenticated” demand but
– no later than one month after
• no outstanding obligation and
• no commitment to advance
• Business – Bank must send debtor termination statements or file them within 20 days after
“authenticated” demand if
– no commitment to advance
– no outstanding obligation
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Continuation
• Central Filing: UCC-1 good for five (5) years
• County Real Estate Records (on fixtures) in most states good for longer of UCC-1 or
length of deed of trust
• Bankruptcy filing continuation does not violate automatic stay
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Total or Partial Assignment
An assignment may be made by • One or more secured parties
• A secured party may assign all (Total Assignment) or part (Partial Assignment) of their interest under a Financing Statement.
• The Form UCC-3 must set forth the name and address of the assignee and identify the secured party making the assignment (Item 9).
• For a Partial Assignment, a description of the specific collateral assigned must be included.
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Avoiding Mistake #9:
Don’t Make Exceptions or Leave Items Until Post Closing
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Guarantees
• Must be in writing
• Must be supported by consideration
• Guarantees signed after funding are not supported by consideration
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Review Checklists
� Make certain promissory note, lien document and
guaranty contain no errors, all blanks have been
filled in, all blocks checked and all signatures
obtained and witnessed or notarized, if required.
� Loan officers or their counsel must review the lien
searches so the bank will be in first lien position.
� Check collateral specific documents required.
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Review Checklists (continued)
� Obtain Borrower’s affidavit regarding no bankruptcies, judgments or other legal actions pending.
� Existing insurance policies should be reviewed for adequacy of coverage. Bank to be named as mortgagee and loss payee on casualty policy.
� Prepare regulatory disclosures and notices (if consumer).
� Determine valuation of collateral is acceptable to bank prior to closing.
� Take assignment of any building leases.
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Review Checklists (continued)
� Get up-to-date financial statements from all makers,
co-makers and guarantors.
� Obtain authorizing documents for non-natural
person borrowers (corporation, partnership, LLC)
� Confirm UCC-1s and/or mortgage/deed of trust are
properly filed.
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Avoiding Mistake #10:Documenting Default Waivers
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Documenting Default Waivers
• Defaults
− monetary = payments
− nonmonetary = covenants, representations, etc.
• Cure Periods
− None (principal payment, voluntary bankruptcy)
− 3 to 90 days for others
• Under some agreements “Default” becomes “Event of Default” after expiration of cure period
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The Alternatives
• Bank waives default for specified period to allow
borrower to come back into compliance
• Bank begins to negotiate workout, renewal, extension, etc.
• Bank begins collection process (i.e., sue,
foreclose, etc.)
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Legal Action upon Default
• Notice of Default
• Demand for Payment
• Notice of Intent to Accelerate
• Notice of Acceleration
• Abandonment of Acceleration
• Reinstatement
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Elements of Waiver
• A right of the bank (i.e., to call default and accelerate)
• Knowledge of its existence
- Right set forth in loan document
- Bank aware of breach
• Bank engages in conduct inconsistent with claiming the
right
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Course of Dealing
• Effect of Failure to Take Action could constitute
a waiver
• Waivers should be limited and documented
• Effect of Acceptance of Post-Default Payments
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