Blanket Liens HELPING DEALERS WITH BEST PRACTICES TO ENSURE YOUR EQUIPMENT IS PROTECTED.

Transcription

1 Blanket Liens HELPING DEALERS WITH BEST PRACTICES TO ENSURE YOUR EQUIPMENT IS PROTECTED.

2 1. Welcome/Overview 2. Blanket Liens: How Lenders use them 3. Changing Credit Markets o Economic Forecast o Succession issues AGENDA 4. Blanket Liens o Attachment o Release o How to Find them 5. Best Practices o Trade In / Sales Documents o UCC Search o Waivers 6. Questions

3 Historical Treatment of Blanket Liens Blanket Liens: o Generally used by primary credit provider of farmer/rancher o Bank takes a security interest in all assets, all accounts, all tangibles/intangibles, and all equipment of farmer o Bank files a UCC 1 Financing Statement with the Secretary of State in state the farmer operates Lien Priority: o UCC 1 filing date gives Bank priority over any other lender or credit provider o Lien attaches to equipment trades unless Dealer gets lien waiver from Bank

4 Historical Treatment of Blanket Liens (cont.) Common practices in strong economic cycles: o Longtime customers trade in good used equipment; o Dealer takes in equipment he knows he can sell quickly o Never runs UCC search o Sells used equipment with UCC lien on it to new buyer Fixes and Patches: o In strong economic cycles Banks willing to release liens; o Asset base high; or o Replacement Equipment covered

5 Credit Markets Prior Blanket Lien Practice has troubled outlook: Credit Markets Market forecasts indicate continued depressed commodity prices Falling Farm Income forecasted Farmer/Rancher balance sheets expected to be stressed relative to the last decade

6 Customer Business Succession Ag Business Succession Lots of new blood in family farming and ag business Unfamiliar with: Prior business practices Existing credit obligations Perfect storm for lien dispute litigation

7 Example o Customer A trades in tractor for $40,000 and buys new tractor for $100,000 o Community Bank has blanket lien on all of Customer A s assets including equipment o Customer A finances with OEM credit arm to purchase new tractor $100,000 o New tractor is not replacement equipment for Community Bank as OEM has Purchase Money Security Interest (PMSI) due to new sale o Dealer sells used tractor to Customer B for $55,000 o Dealer never runs UCC search and does not know that Community Bank has blanket lien o Customer A defaults on loan to Community Bank and Bank starts collection lawsuit and seeks to repossess the used tractor o Lawsuit names Customer A, Customer B (current owner) and Dealer in order to regain Tractor or receive damages for sold collateral o Dealer now has multiple problems: o Legal Costs for lawsuit o Relationship repair with Customer A and Customer B

8 Break for Questions COMMITTED TO BUILDING THE BEST BUSINESS ENVIRONMENT FOR EQUIPMENT DEALERS.

9 How Blanket Liens Survive Pay Downs ocommon problem as Farmer (borrower) believes significant pay downs equate to release of liens oasset Base of Farmer supports it oprior practice likely accommodated such a release ocommonly, in good economic times, Banks will be amenable to releasing liens on a specific piece of equipment

10 Community Bank Regulations onew lending regulations oclassified Loan versus unclassified o Increased scrutiny on loans secured by commodities: ograin ocattle o Custom Farming Receivables onew blood at Banks as well

11 Blanket Lien Attachment Blanket Liens always attach unless a lien waiver is obtained o Assurance of your customer is not sufficient o Verbal assurance of lender, loan officer is not sufficient o Banks often have a credit officer or credit committee that have final say on releasing collateral o Assumption of loan or work out with new buyer (Customer B) is not sufficient o Problems often come from Bank personnel that doesn t have the relationship with Farmer/Borrower

12 Owner of Asset UCC Search: oneed to know the Name(s) of your seller o Always signed John Smith omay have formed LLC omay have started doing business as Smith & Sons oeven without forming LLC just acknowledging next generation

13 Owner of Asset: Common Issues oestate Planning omany Farmers start Estate Planning before Succession Planning o Assets in name of Trust o Family Limited Partnerships o Other Estate Planning Vehicles osuccession planning oform LLC or Corporation for next generation o Instructive to form checklist to ask if they are doing business in either names or if they transferred ownership

14 Break for Questions COMMITTED TO BUILDING THE BEST BUSINESS ENVIRONMENT FOR EQUIPMENT DEALERS.

15 Ounce Of Prevention Sale and Trade Documents should include statement from Customer that equipment is not subject to lien Sale and Trade Documents should include authorization line from Customer allowing UCC Search Note: Customer authorization is not needed, but this is a red flag to any Customer who makes an intentional omission versus an innocent one

16 UCC Search How to Start a Lien Search: The vast majority of States have UCC Database housed through Secretary of State Some may have Search Fee associated with it UCC Search, if solely online, should only take minutes and can be down at time of Trade Pull name from Trade In Documents Search all variables of Name:

17 UCC Search (cont.) Example: Customer is John Smith, but his checks say Smith Farms, and his prior trades were to Smith Enterprises Search: John Smith Smith Farms Smith Farms, LLC Smith Enterprises Registered Agent: John Smith Registered Agent searches are a subset of UCC Would tell you any entities your customer is the contact person for Helpful if Secretary of State provides Registered Agent in same database

18 Break for Questions COMMITTED TO BUILDING THE BEST BUSINESS ENVIRONMENT FOR EQUIPMENT DEALERS.

19 UCC Search: What You Are Looking For UCC Search is designed to pull all lien hits on Customer Likely you will pull hits on excluded collateral: Example: Monsanto entity will have lien on accounts receivable as collateral for financing seed purchase. This would not extend to Tractor in our example. Dealer is looking for UCC Financing Statement that states: Lender.has lien on all assets, equipment, accounts, tangible or intangible property Any version of this language that says Assets or Equipment will be a blanket lien on that equipment Does not have to list specific equipment

20 What To Do: Blanket Equipment Hit If your UCC Search reveals a hit for a Blanket Lien: o Thankfully the resolution is very simple: o Dealer simply needs to obtain a one page lien waiver from Bank o Most Banks prefer to use their own form for this, but if not, many states have model forms for use o Bank simply needs to sign form o Form is part of Sale/Trade In Document package, all parties keep a copy o Does not need to be recorded with UCC

21 What to do: Specific Equipment Hit oif UCC Search reveals a hit for a Specific Equipment Lien onormal lien clearing procedures must be used oucc 1 Termination Statement must be filed by Lender or UCC 1 Amendment osimply no way around this lien

22 What to do: Bank won t release In tightening credit markets Bank s will use a Customer request for a lien release as leverage Customer could have covenant default or non payment default Best Practice: The Dealer cannot be swayed by a Customer who claims he ll work it out with Bank Red Flag that Bank won t release one piece of equipment when assuming Customer has other assets to secure Bank s loan If Dealer moves ahead, it s doing so with knowledge of existing lien on equipment and both Bank and new buyer of Equipment have claim against Dealer in litigation

23 Best Practices: Affirmative line in Trade In documents for Customer to state no lien Affirmative line in Trade In documents for Customer Name/affiliate names Affirmative consent in Trade in documents for UCC Lien Search of Customer Train sales reps to quickly and efficiently search UCC Ensure multiple names searched

24 Questions? COMMITTED TO BUILDING THE BEST BUSINESS ENVIRONMENT FOR EQUIPMENT DEALERS.