Perfecting Security Interests in Deposit Accounts, Securities Accounts and Other Investment Property

Transcription

1 Presenting a live 90-minute webinar with interactive Q&A Perfecting Security Interests in Deposit Accounts, Securities Accounts and Other Investment Property Establishing Control Under the UCC to Perfect Security Interests in Special Collateral Types THURSDAY, JULY 23, pm Eastern 12pm Central 11am Mountain 10am Pacific Today s faculty features: Sandra M. Rocks, Counsel, Cleary Gottlieb Steen & Hamilton, New York Edwin E. Smith, Partner, Morgan Lewis & Bockius LLP, New York Steven O. Weise, Partner, Proskauer Rose, Los Angeles The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions ed to registrants for additional information. If you have any questions, please contact Customer Service at ext. 10.

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5 Perfecting Security Interests in Deposit Accounts, Securities Accounts, and Other Investment Property July 2015 Sandra Rocks Cleary Gottlieb Steen & Hamilton LLP Edwin E. Smith Morgan, Lewis & Bockius LLP Steven O. Weise Proskauer Rose LLP

6 Topics UCC framework Choice of law Creation of security interest Perfection, effect of perfection or nonperfection, and priority of security interest Secured party duties and exercise of remedies Comparison of security interests in deposit accounts and security interests in securities accounts Legal opinions 6

7 Topics control agreements Drafting and negotiating control agreements Deposit accounts Securities accounts / security entitlements Control agreement provisions Related to UCC provisions / requirements Commonly negotiated business terms Considerations in representing indenture trustees and collateral agents Considerations in representing banks and securities intermediaries 7

8 Exclusion from Article 9 UCC 9-109(d)(13) excludes from Article 9 a security interest in a deposit account in a consumer transaction UCC 9-102(a)(26) consumer transaction: individual as pledgor purpose of the borrowing size of transaction not relevant In excluded transactions, non-ucc law applies to choice of law, creation, perfection, and priority of collateral assignment (common law dominion and control and exclusion of debtor) 8

9 What is a security shares? Security : share or similar equity interest issued by: Corporation/business trust/ statutory trust Similar entity 9

10 What is a security other interests? Not a security : Partnership interest LLC interest Series LLC interest? Exceptions to exclusion of LLC and partnership interests: Override exclusion by opting in (UCC 8-103) Held as a security entitlement Registered investment company / publicly traded Debt (if a security ) Highland Capital Management LP v. Schneider (N.Y. 2007) 2010 Revisions UCC 8-102, Comment 13 PEB Commentary 10

11 Deposit account v. securities account does it matter? Requirements for control agreement Description of the account Choice of law Available perfection methods Protected purchaser / takes free rules Transaction excluded from Article 9 Credit risk In re Gem Refrigerator Co., 512 B.R. 194 (Bankr. E.D. Pa. 2014) 11

12 What is an account? No definition in the UCC for the account element of a securities account or deposit account Reliance on the books and records of the securities intermediary or bank, whether or not designated by it as an account Except, in the case of a deposit account, a certificate of deposit that qualifies as an instrument. See UCC 9-102(a)(29) 12

13 What is a deposit account? Debt of a bank to its customer Includes certificates of deposit (CDs) that are not represented by an instrument Can include some certificated CDs (In re Perez (Bankr. D. N.J. 2010)) CDARS program CDs held in a securities account Not a deposit account Monticello Banking Co. v. Flener (W.D. Ky. 2011) (CDARS program creates security entitlements) [part of decision on collateral description issues discussed below] 13

14 What is a securities account /security entitlement? Custodial arrangement for holding customer assets Security entitlement bundle of rights wit respect to asset that a securities intermediary has agreed to hold for its customer and is a financial assets or securities intermediary has agreed to treat as a financial asset Credited or accepted for credit to the customer's securities account Intermediary obligated to credit to the account Securities account a collection of security entitlements May also include other rights of the customer against the intermediary 14

15 In what capacity is the bank or securities intermediary acting? Example: Bank is the depositary bank for Customer. Bank is also the agent on a syndicated loan facility to Customer. Under a security agreement authenticated by Customer, Customer has granted to Bank, as agent for the benefit of the syndicate lenders, a security interest in all of Customer s customers deposit accounts maintained at Bank. Is a control agreement required for the Bank, as agent for the benefit of the syndicate lenders, to have a security interest in the deposit accounts perfected by control? See Comment 1 to UCC (2010) 15

16 Treatment of financial assets Securities account Financial assets other than securities. See UCC 8-102(a)(9)(iii); Article 8, Prefatory Note, III.C.1. Cash Duty to maintain under UCC Question about cash balance credited to a securities account if no election to treat cash as a financial asset. Investment in U.S. treasuries or money market shares Use of deposit account 16

17 Choice of law deposit account Local law of the bank s jurisdiction governs perfection, the effect of perfection or nonperfection, and priority of a security interest in a deposit account at that bank (UCC 9-304) Bank s jurisdiction is determined as provided in UCC 9-304(b) Can select bank s jurisdiction in the control agreement If not in a control agreement, UCC 9-304(b) provides rules No reasonable relationship requirement ((see UCC (former UCC 1-103) 17

18 Choice of law securities Certificated security Local law of the jurisdiction where certificated security is located governs perfection, the effect of perfection or nonperfection, + priority (UCC 9-305(a)(1)) Uncertificated Security Local law of the issuer s jurisdiction (as specified in UCC 8-110(d)) governs perfection, the effect of perfection or nonperfection, + priority (UCC 9-305(a)(2)) Perfection by filing Location of debtor (UCC 9-305(c)(1)) 18

19 Choice of law securities account /security entitlement Local law of securities intermediary s jurisdiction governs perfection, the effect of perfection or nonperfection, and priority (UCC 9-305(a)(3)) Securities intermediary s jurisdiction is determined as provided in UCC 8-110(e) Can establish by control agreement If not in a control agreement, UCC 8-110(e) provides rules Perfection by filing location of debtor (UCC 9-305(c)(1)) Hague Securities Convention 19

20 Creation of security interest Usual requirements (UCC 9-203): Debtor has rights in the collateral Value (UCC (Former UCC 1-201(44))) Security agreement evidenced by an authenticated record Legally sufficient description of collateral Exceptions to requirement for authenticated record (UCC 9-203(b)(3)(C) - (D)) Control Possession of certificated security 20

21 Description or indication of investment property as collateral UCC description is sufficient, whether or not it is specific, if it reasonably identifies what is described UCC 9-108(b) examples of reasonable description (including by UCC type) UCC 9-108(d) description of a security entitlement, securities account, or commodity account is sufficient if it describes: by those terms or as investment property, or the underlying financial asset or commodity contract UCC 9-108(e) consumer transaction rule Monticello Banking Co. v. Flener (W.D. Ky. 2010) (affirmed in unpublished opinion by 6th Circuit) Must use UCC 9-108(d) language Decision widely criticized 21

22 Perfection and priority by control Control as a method of perfection Alternative to filing for securities, security entitlement, and securities account as original collateral Only method of perfection for a deposit account as original collateral Control as establishing non-temporal priority over a security interest not perfected by control 22

23 Other benefits of control Requirement for protected purchaser status Control allows secured party to exercise remedies without court involvement 23

24 Security agreement v. control agreement Security agreement Between debtor and secured party Grants security interest and describes the collateral and secured obligations Specifies defaults and remedies (with loan agreement) Choice of law for creation of security interest Control agreement Among debtor, secured party and depositary bank / securities intermediary where account is maintained Gives secured party right to direct the bank / securities intermediary as to the account Deals with priority as between secured party and bank / intermediary Choice of law for perfection/priority/effect of perfection or nonperfection of security interest Practice pointer: keep them separate 24

25 Meaning of control general Control means the ability of secured party to direct transfer or disposition of funds / assets without further consent or action of debtor Control exists even if debtor retains right to make substitutions, originate instructions or otherwise deal with collateral (UCC 9-104(b), 8-106(f)) Traditional blocked account agreement may not suffice 25

26 Control certificated security UCC 8-106(b) purchaser (including a secured party) has control of a certificated security in registered form if: Certificated security is delivered to the purchaser (possession) and Certificate is either: Indorsed to the purchaser or in blank by an effective indorsement or Registered in the name of the purchaser (upon original issue or registration of transfer by the issuer) 26

27 Control uncertificated security UCC 8-106(c) purchaser (including a secured party) has control of an uncertificated security if: Uncertificated security is delivered to the purchaser (registered in purchaser s name) or Issuer has agreed that it will comply with instructions originated by the purchaser without further consent by the registered owner 27

28 Control securities account/ security entitlement UCC 8-106(d) purchaser (including a secured party) has control of security entitlement if: Purchaser becomes the entitlement holder Securities intermediary has agreed that it will comply with entitlement orders originated by purchaser without further consent by entitlement holder or Another person has control of the security entitlement on behalf of purchaser or, having previously acquired control of the security entitlement, acknowledges that it has control on behalf of purchaser UCC 8-106(e) if security interest in a security entitlement is granted by entitlement holder to entitlement holder s own securities intermediary, securities intermediary has control 28

29 Control deposit account UCC 9-104(a) secured party has control of deposit account if: Secured party is the bank with which the deposit account is maintained Debtor, secured party and bank have agreed in an authenticated record that bank will comply with instructions originated by secured party directing disposition of the funds in the deposit account without further consent by debtor or Secured party becomes the bank s customer with respect to the deposit account 29

30 Type of agreement Securities account Oral agreement? (see UCC 8-113) Deposit account Authenticated record 30

31 Bank/intermediary s rights Bank not required to: Enter into control agreement Confirm existence of control agreement (UCC 9-342) Securities intermediary not required to: Enter into control agreement Confirm existence of control agreement (UCC 8-106(g)) Securities intermediary may not enter into control agreement without consent of entitlement holder (UCC 8-106(g)) 31

32 Who are the parties? Securities account/security entitlement Agreement of only the securities intermediary? Deposit account Three-party agreement in a single agreement? 32

33 Control securities account / security entitlement Who is the securities intermediary? Referring and clearing brokers National Consumer Cooperative Bank v. Morgan Stanley & Co. (M.D. Pa. 2010) Fifth Third Bank v. Lincoln Financial Securities Corp. (WD Ky 2009) Practice pointer: If can t determine who is the intermediary, have all sign the control agreement 33

34 Key control agreement provision deposit accounts The bank agrees to comply with instructions originated by the secured party, without the debtor s further consent. 34

35 Key control agreement provision security entitlement/account Intermediary agrees to comply with all entitlement orders originated by secured party, without debtor s further consent. 35

36 Effect of other provisions on present control general Watch for provisions that amount to a debtor consent right 36

37 Effect of other provisions on present control conditions Example: The control agreement states that the secured party may not give an entitlement order or instruction to the securities intermediary or bank unless the secured party certifies to the securities intermediary or bank that the debtor is in default. See Comment 7 to UCC and Comment 3 to UCC

38 Effect of other provisions on present control conditions Example: The control agreement states that the junior secured party may not give an entitlement order or instruction to the securities intermediary or bank unless the senior secured party consents. See Comment 7 to UCC

39 Effect of other provisions on present control debtor default Confirmation from debtor as to: Occurrence of a default Amount that can be withdrawn 39

40 Effect of other provisions on present control interpleader Contractual interpleader rights? Compare to statutory interpleader rights 40

41 Effect of other provisions on present control termination Debtor s right to terminate the agreement before bank is required to act on secured party s instructions Provide that upon termination by debtor funds or financial assets transferred to secured party 41

42 Effect of other provisions on present control delays Delays before bank required to act? 42

43 Priority general rules Perfection by control has priority over perfection by other means First to obtain control has priority Depositary bank or securities intermediary as secured party will have priority even if it obtains control later in time (See UCC 9-327(3) and 9-328(3)) 43

44 Other bank rights UCC depositary bank rights: Right of set off Right of recoupment 44

45 Subordination issues Fees and expenses of the securities intermediary or bank Reversals of provisional credits/returned items New advances by the securities intermediary or bank Margin Indemnities from account holder 45

46 Control agreement: subordination Bank/intermediary subordinates in favor of secured party any security interest, lien or right of setoff or recoupment bank may now or in future have against the account. Absent agreement to the contrary, the bank or intermediary can exercise its subordinated remedies 46

47 Investment property: protected purchaser and takes free Applies to secured parties Purchaser / purchase (UCC 1-201(b)(29), (30)) UCC 8-303(a) protected purchaser Gives value (UCC (Former UCC 1-201(44))) Does not have notice of any adverse claim to the security (certificated or uncertificated) Obtains control of the security Analogous protection for securities accounts / security entitlements UCC 8-502, 8-503,

48 Deposit accounts: transferee of funds Transferee takes free of security interest in deposit account, unless transferee acts in collusion with debtor to violate rights of secured party UCC 9-332(b) 48

49 Deposit account control agreement: choice of law The bank s jurisdiction for purposes of Part 3 of Article 9 of the UCC is [specify]. If this provision is not included, 9-304(b) determines applicable law Review for purposes of (i) selecting US jurisdiction and (ii) law covered in perfection by control and control priority opinion Also amend choice of law provisions of the account agreement and other agreements between bank and customer governing or relating to the account? 49

50 Securities account control agreement: choice of law The intermediary s jurisdiction for purposes of Part 3 of Article 9 of the UCC is [specify]. If this provision is not included determines applicable law Review for purposes of (i) selecting US jurisdiction and (ii) law covered in perfection by control and control priority opinion Also amend choice of law provisions of the account agreement and other agreements between intermediary and customer governing or relating to the account? 50

51 Control agreement: status of account Intermediary maintains securities account [identify] for debtor. All property credited to the account and all other rights of debtor against Intermediary arising out of the account, including any free credit balances, will be treated as financial assets under Article 8 of the [jurisdiction] UCC. Securities intermediaries that are banks often will not agree to treat cash as a financial asset, unless they are acting through their trust department Confirming what is in the account or value of the account (or not) (Fifth Third Bank v. Lincoln Financial Securities Corp. (WD Ky 2009)) Monitoring account and transactions 51

52 Control agreement: other control agreements Intermediary does not know of any adverse claim to the account, except for claims and interests of [parties to the control agreement]. Bank represents and warrants that no third party has a right to give instructions with respect to the account. Bank will not agree with any third party that bank will comply with instructions originated by the third party. No third party has control (or priority) or will obtain control 52

53 Control agreement: status and transfer issues Status of bank as a bank /securities intermediary as a securities intermediary for UCC purposes? Successor and renumbered accounts Assignee or successor to secured party 53

54 Control agreement: indemnity + duties Indemnification and expense reimbursement of bank/securities intermediary Exculpation, standards of care Time in which bank / intermediary is required to act on secured party instructions ( outside time ) 54

55 Control agreement: miscellaneous Secured party access to statements, on-line info Monitoring of debtor activity re account Notice of claims made by third parties to account 55

56 Sweep investments Example: Secured party has a control agreement with depositary bank and debtor over debtor s deposit account maintained with bank Funds in the deposit account are swept each evening into an investment vehicle maintained by bank and deposited to the deposit account the next morning with the overnight return. Does secured party have control over debtor s interest in the funds in the investment vehicle when the funds are in the investment vehicle rather than the deposit account? See ABA BLS Sweep Investment Form

57 Repledge Securities account Right of secured party to repledge. UCC UCC 207(c)(3); but see UCC 8-504(a) Control during the period of repledge. See UCC 9-314(c) Deposit account Debtor/creditor relationship 57

58 Insolvency of the secured party Pledgor access rights ISDA IA Seg. working group project Automatic stay v. safe harbors Secured party as broker-dealer being liquidated under SIPA Sec. Investor Prot. Corp. v. Lehman Bros. Inc., 433 B.R. 127 (Bankr. S.D.N.Y. 2010) 58

59 Insolvency of the securities intermediary or bank Broker dealer under SIPA Treatment of cash and securities Federally insured bank under FDIA Treatment of securities Treatment of cash Allocation of credit risk between the secured party and the debtor 59

60 Secured party remedies Without control of collateral secured party may have difficulty effecting a transfer or liquidation of collateral or exercising other remedies following default UCC determines the rights between secured party and debtor in the exercise of secured party remedies, but not the duties of an account debtor, bank or other person obligated on the collateral (Comments 6 and 7 to UCC 9-607) 60

61 Legal Opinions Creation Perfection By filing By possession By control Control priority Protected purchaser (certificated or uncertificated security) and takes free (security entitlement / securities account) TriBar report 61

62 Control Deposit Account In re Hawaiian Telecom Communications, Inc. (Bankr. D. Hawaii 2009) FTC v. Transcontinental Warranty, Inc. (N.D. Ill. 2009) Full Throttle Films, Inc. v. National Mobile Television, Inc. (Cal. App. 2010) In re Perez (Bankr. D. N.J. 2010) 62

63 Resources Model Deposit Accounts Control Agreement, Inserts and Reports e.cfm?com=cl Securities Account Control Agreement Annotated agreement (included with course materials) Legal Opinion Resource Center 63

64 Thank You Sandra Rocks Cleary Gottlieb Steen & Hamilton LLP Edwin E. Smith Morgan, Lewis & Bockius LLP Steven O. Weise Proskauer Rose LLP 64