Security over Collateral. USA PENNSYLVANIA Eckert Seamans Cherin & Mellott, LLC

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1 Security over Collateral USA PENNSYLVANIA Eckert Seamans Cherin & Mellott, LLC CONTACT INFORMATION Jay T. Blount Louis J. Moraytis Eckert Seamans Cherin & Mellott, LLC U.S. Steel Tower 600 Grant Street, 44th Floor Pittsburgh, PA / 1. Can assets be charged, liened and/or encumbered in your jurisdiction? Please insert any exemptions, if any. Generally, one may grant a lien or security interest in some or all of one s assets to secure obligations owed to another. There are no exceptions or exemptions to the types of property upon which an owner thereof may grant a lien. 2. In your jurisdiction, under what circumstances may security arrangements be subjected to choice of law and/or choice of forum clauses (does it matter, whether the security itself is located abroad and/or governed by foreign law [e.g. a pledged claim])? What is the market practice in your jurisdiction? Is there a treaty on this in your jurisdiction, whether bilateral or multi-lateral? Are there any requirements for enforcement in your jurisdiction? When parties to a secured transaction select the law to govern their transaction and/or the forum for dispute resolution, Pennsylvania courts generally will enforce those choices if the governing-law-state selected has some rational interest or connection to the transaction and/or one of the parties and the forum selected has some rational basis for its selection. The choice of law and forum selection of the parties are the parties contractual choices. Please note, however, despite the parties choices, the laws which governs priority and perfection will depend upon the type of collateral. (See Question 4 below).

2 3. In your jurisdiction, are floating charges or security over the overall assets of an entity accepted, and if so in what terms? The grant of a lien on existing property and after-acquired property is enforceable if the property type is adequately and correctly described in the agreement setting forth the grant of the lien. Furthermore, grants of liens on all of the assets of an entity may be made by use of the proper instruments (i.e., for real estate, a mortgage; for personal property governed by the Uniform Commercial Code, a security agreement; for shares of stock, a stock pledge agreement). 4. In relation to the following types of assets, please explain in your jurisdiction the types of security that can be created or granted, if the security requires any type of registration or perfection requirements, an estimate of cost (including applicable taxes and any other duties/ costs) and timing for granting such security, and any special considerations regarding the asset type: For most types of personal property collateral, a security interest can be perfected by filing a financing statement under Article 9 with the Secretary of State in the jurisdiction where the debtor is located, which for most business entities is the jurisdiction of organization. For example, if the debtor is a corporation organized in Pennsylvania, then security interests in most types of its personal property are perfected by filing a financing statement with the Pennsylvania Department of State. The current cost of filing a financing statement with the Pennsylvania Department of State is $84. For ease of reference, these filings are referred to as Article 9 filings or financing statements. (a) Aircraft; (b) Bank Accounts; A security interest in aircraft is perfected by filing with the Aircraft Registration Branch of the Federal Aviation Administration (49 U.S.C ). The recording fee is $5.00. Bank accounts often are referred to as deposit accounts. A security interest in a deposit account can be perfected only by control. There are three ways to obtain control over a deposit account: (1) if the secured party is the bank where the deposit account is maintained; (2) if the deposit account is maintained in the name of the secured party on behalf of the debtor, or (3) if the secured party, debtor and bank enter into a three-party agreement (called a control agreement) pursuant to which the bank agrees to comply with the secured party s instructions with respect to the account without further consent from the debtor. Under a typical deposit account control agreement, the debtor retains its access to the funds in the account prior to a default and the bank s receipt of an instruction from the secured party to cut off the debtor s access. Giving the debtor access to the account prior to default does not preclude control.

3 (c) Animals, Crops (in ground and severed) and Timber; (d) Equipment; A security interest in crops and livestock generally is perfected by filing an Article 9 financing statement. Growing crops, even though they are connected to the real estate, are considered goods subject to Article 9. Similarly, timber to be cut, even though still connected to the real estate, is considered goods governed by Article 9. Article 9 provides, however, that a security interest in timber to be cut can be perfected only by a local fixture filing made with the Office of the Recorder of Deeds of the county where the related real estate is located. Once the timber is cut, it usually becomes inventory for which an Article 9 financing statement is used for perfection. A security interest in equipment is perfected by filing an Article 9 financing statement. (e) Intellectual Property; (f) Inventory; (g) Leases; It is not clear that perfecting a security interest in intellectual property is governed by Article 9 or certain federal laws applicable to intellectual property. Accordingly, it is common practice to perfect a security interest in intellectual property by filing an Article 9 financing statement and a notice with the applicable federal agency. Generally, the rules are: (1) for patents, file an Article 9 financing statement and a precautionary notice with the United States Patent and Trademark Office ( USPTO ); (2) for trademarks, same as patents file an Article 9 financing statement and a precautionary notice with the USPTO; (3) for registered copyrights, file a notice with the United States Copyright Office and a precautionary Article 9 financing statement; and (4) for unregistered intellectual property (which is treated as a general intangible), file an Article 9 financing statement. The current cost of filing a notice with the USPTO is $40 per patent covered by the filing and $40 for the first trademark and $25 for each additional trademark covered by the filing. The current cost of filing a notice with the United States Copyright Office is $95 per copyright title. A security interest in inventory is perfected by filing an Article 9 financing statement. As noted above, the grant of a security interest in inventory, which is constantly turning over (or least the debtor hopes so), should include an after-acquired property clause so that it is clear the security interest extends to replacement inventory.

4 A lien on a party s right to occupy leased real estate (a leasehold interest) is perfected by the recording of a leasehold mortgage with the Office of the Recorder of Deeds of the county in which the leased property is located. A party s right to receive rents under a lease of real estate is expressly excluded from Article 9. A lien on such a right is perfected by the recording of an assignment of leases and rents (which may be contained in a mortgage) with the Office of the Recorder of Deeds of the county in which the real estate producing the rents is located. (h) Mineral Interests, including Hydrocarbons; Oil, gas and other minerals that have not been extracted from the ground are (unlike crops and timber to be cut) treated as real estate to which Article 9 does not apply. Upon extraction, oil, gas and minerals become personal property subject to Article 9. To perfect a security interest in anticipation of this collateral becoming extracted, a local fixture filing is made with the Office of the Recorder of Deeds of the county where the related real estate is located. (i) Promissory Notes and Chattel Paper; (j) Real Estate; A promissory note is an instrument evidencing a promise to pay (as opposed to an order to pay, such as a check). A security interest in an instrument can be perfected by filing an Article 9 financing statement or by taking possession, with possession being the better method of perfection. A security interest in chattel paper may be perfected by filing an Article 9 financing statement, taking possession of the chattel paper (or tangible chattel paper) or taking control over the chattel paper (for electronic chattel paper), with possession and control (when applicable) being a better method of perfection than filing. A lien on real estate is perfected by recording a mortgage with the Office of the Recorder of Deeds of the county where the real estate is located. The cost of recording a mortgage varies from county to county. Generally, there is an initial recording fee (typically around $50) with additional fees for more names and pages. A security interest in fixtures, which are goods so related to real estate that they are treated as real estate, also can be perfected by making a local fixture filing with the Office of the Recorder of Deeds of the county where the related real estate is located. (k) Receivables (credit rights under contracts or invoices);

5 Receivables are part of a larger collateral category called accounts. A security interest in accounts is perfected by filing an Article 9 financing statement. (l) Rights under Contracts (excluding Receivables); Generally, a security interest in contract rights is perfected by filing an Article 9 financing statement. However, the method of perfection can depend on the subject matter of the contract. For example, the proceeds of insurance polices (except for healthcare receivables) are excluded from Article 9. And, as noted above, if the contract right is the right to occupy real estate under a lease, it is excluded from Article 9. (m)shares (in book-entry and certificate form and other securities); (n) Vessels; (o) Vehicles; A lien on shares of a corporation can be perfected by filing an Article 9 financing statement, taking delivery of the shares (if certificated) or taking control over the shares, with control being the best method of perfection. Interests in partnerships and limited liability companies are treated as general intangibles and a lien on such interests can be perfected only by filing an Article 9 financing statement. However, if the partnership or limited liability company has agreed to be subject to Article 8 of the Uniform Commercial Code, a lien on such interests is perfected in the same way as a lien on shares of a corporation, which is (as noted above) by filing, taking delivery (if certificated) or taking control, with control being the best method of perfection. Perfecting security interests in vessels, railroad cars, locomotives, rolling stock and accessories requires compliance with the filing system established with the Surface Transportation Board (49 U.S.C ), which is a United States economic regulatory agency. Ship mortgages on documented vessels have to be filed with the United States Secretary of Transportation (46 U.S.C ). A security interest in a car is perfected by having the lien noted on the certificate of title, which is done by application with the Pennsylvania Department of Motor Vehicles. If the debtor is in the business of selling cars, a security interest in the debtor s inventory of cars is perfected by filing an Article 9 financing statement. (p) Business as an ongoing concern. A party can grant a security interest in all of its assets. Even when that is the intent, however, the secured party must be careful to adequately

6 describe the collateral in the agreement containing the security interest grant. Super-generic descriptions, such all assets are not sufficient to create a security interest in all of a debtor s assets. Such a description may, however, be used for the collateral description in the Article 9 financing statement used to perfect such an interest. Keep in mind that the financing statement used to perfect the all assets lien will perfect the secured party s interest only in the collateral with respect to which a lien can be perfected by filing. For example, if all of the assets include a deposit account, the security interest in that deposit account still can be perfected only by control. 5. Please explain briefly for each type of assets the procedure for enforcement (judicial and extra-judicial). Is it possible to enforce security governed by another jurisdiction? If yes, what is the procedure? No matter which type of asset is being addressed, the parties to the agreement which sets forth the grant of the lien also may set forth the secured party s rights and remedies with respect to the collateral upon the occurrence of a default. Furthermore, in the absence of express contractual provisions, Pennsylvania statutes set forth the procedures and notice requirements which a secured party should follow to foreclose and realize upon its collateral without resort to the courts. Judicial enforcement requires that the secured party initiate a civil action in a local trial court to enforce its rights. In the case of real estate, the action would be a Complaint in Civil Action/Foreclosure. In the case of personal property, the action would be a Complaint in Civil Action/Breach of Contract. Pennsylvania courts also will enforce liens which are created by an agreement which is governed by the laws of a jurisdiction other than Pennsylvania. The procedure to enforce such a lien will depend upon the requirements of the state whose laws govern the agreement. In addition, a secured party who has obtained a judgment against the grantor of a lien in a jurisdiction other than Pennsylvania may transfer that judgment to Pennsylvania so as to be able to enforce that judgment in Pennsylvania. 6. Can a trustee or security agent be used in your jurisdiction, or must security be granted in favour of all lenders? The lenders in a secured loan transaction can designate a representative or a third party to act as collateral agent for them. The appointment of the collateral agent would be set forth in the loan documentation and the Article 9 financing statement would identify the agent as such. 7. In bankruptcy or insolvency scenarios, what are the suspect periods, is clawback possible, and what other types of rights (tax debts, employees, etc.) have preference over security granted? The claw-back period which is referred to in the United States as the preference period generally is within 90 days of the bankruptcy filing. The period is extended to one year for transfers to insiders, such as officers and directors of a corporation.

7 As a general rule, the claim of a secured party with a properly perfected lien will be paid from the proceeds of the collateral (the property subject to the lien). If the collateral is insufficient to pay the claim in full, the balance is treated as an unsecured claim. For unsecured claims, the United States Bankruptcy Code gives priority to certain types, such as: (1) claims for debts to spouse or children for court-ordered support; (2) claims for the expense of administering the bankruptcy case; (3) certain employee claims for wages and contributions to a benefit plan, each up to $10,000 per employee; and (4) claims for recent income, sales, employment or gross receipts taxes. The list of unsecured claim priorities is set forth in Section 507 of the United States Bankruptcy Code (11 U.S.C. 507). 8. In your jurisdiction, can borrowers or guarantors subordinate their claims and if so in what terms? Yes, in Pennsylvania one holding a claim against a debtor can subordinate his claim pursuant to terms and conditions which the subordinating creditor and the other creditor(s) agree. 9. What are the consequences of a transfer, assignment or novation of an underlying credit in your jurisdiction (is new security necessary, is the security automatically transferred, etc.) The transfer, assignment or novation of an underlying credit impacts that credit only. A corresponding assignment of the security is necessary for the new holder of the debt or obligation to have the benefit of the original collateral. Furthermore, care should be exercised in the case of a novation not to extinguish the old debt because by doing so one may lose the priority of the original lien. 10. Can you have on top of a security in your jurisdiction, another layer consisting of an assignment of the collateral concerned conditional upon default by the debtor? Generally speaking, no. Purported outright assignments generally are treated only as assignments for security. For example, assignments of leases and rents often are written as absolute assignments. However, when it comes to enforcing such assignments, courts typically treat them only as assignments for security (at least until there has been a default and the secured party has notified the tenants to make rent payments directly to it rather than the debtor). 11. Are step-in rights lawful in your jurisdiction or does any action to take control require the creditors to go through a court process? Step-in or self-help rights are lawful in Pennsylvania so long as the exercise of those rights can be accomplished without a disturbance of the peace.