Securities Accounts and Other Investment Property Establishing Control Under the UCC to Perfect Security Interests in Special Collateral Types

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 WEDNESDAY, OCTOBER 26, pm Eastern 12pm Central 11am Mountain 10am Pacific Td Today s faculty features: Lynn A. Soukup, Partner, Pillsbury Winthrop Shaw Pittman, Washington, D.C. 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 t in Deposit Accounts, Securities Accounts and Other Investment Property: Establishing Control Under the UCC to Perfect Security Interests in Special Collateral Types Lynn A. Soukup Steven O. Weise October 26, 2011

6 Topics UCC Framework Collateral as to which security interest May be perfected by control Must be perfected by control Is excluded from Article 9 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 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 Collateral Types for which Control is a Perfection Method Deposit accounts Investment property Securities (certificated and uncertificated) Securities accounts and security entitlements Commodity accounts and commodity contracts Letter-of-credit rights Electronic chattel paper Electronic documents of title 8

9 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 9

10 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) 10

11 Securities Account / Security Entitlements Custodial arrangement for holding customer assets Security entitlement asset that a securities intermediary has agreed to hold for its customer and 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 11

12 Certificated and Uncertificated Securities (8-103 Rules) Security = share or similar equity interest issued by: Corporation / business trust t / statutory t t trust t Similar entity Not a security: Partnership interest LLC interest Exceptions to exclusion of LLC and partnership interests: Override exclusion by opting in 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 OC 13 to

13 Exclusion from Article (d)(13) ) excludes from Article 9 a security interest in a deposit account in a consumer transaction 9-102(a)(26) consumer transaction (determined by (i) individual as pledgor and (ii) purpose of the borrowing size of transaction not relevant) Non-UCC law applies to choice of law, creation, perfect and priority of collateral assignment (common law dominion and control and exclusion of debtor) 13

14 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 Bank s jurisdiction is determined as provided in 9-304(b) Can establish by control agreement If not in a control agreement, 9-304(b) provides rules 14

15 Choice of Law Certificated and Uncertificated Securities Certificated Security 9-305(a)(1) local law of the jurisdiction where certificated security is located governs perfection, the effect of perfection or nonperfection, and priority Uncertificated Security 9-305(a)(2) local law of the issuer s jurisdiction (as specified in 8-110(d)) governs perfection, the effect of perfection or nonperfection, and priority Perfection by filing = debtor location (9-305(c)(1)) 15

16 Choice of Law Securities Account / Security Entitlement 9-305(a)(3) local law of securities intermediary s jurisdiction governs perfection, the effect of perfection or nonperfection, and priority Securities intermediary s jurisdiction is determined d as provided in 8-110(e) Can establish by control agreement If not in a control agreement, 8-110(e) provides rules Perfection by filing = debtor location (9-305(c)(1)) 16

17 Perfection Choice of Law Investment Property Perfection Choice of Law 9-301, 9-305, 9-307, Possession / Control of Control of Filing: Control of Certificated Security: Uncertificated Security: Issuer s Securities Account / Entitlements: Securities Location of the Debtor 9-301, Location of Certificate 9-305(a)(1) Jurisdiction 9-305(a)(2), 8-110(d) Intermediary s 9-305(c)(1), ), Jurisdiction (a)(3), 8-110(e) Note: See re automatic and temporary perfection choice of law. 17

18 Priority Choice of Law Investment Property Priority Choice of Law Certificated Security: Location of Certificate 9-305(a)(1) Uncertificated Security: Issuer s Jurisdiction 9-305(a)(2), 8-110(d) Securities Account: Securities Intermediary s Jurisdiction 9-305(a)(3), 8-110(e) Note: Perfection method not relevant to priority it choice of law. 18

19 Creation of Security Interest 9-203(b) requirements: Debtor has rights in the collateral Value (1-204 (Former 1-201(44))) Security agreement evidenced d by an authenticated ti t record Legally sufficient description of collateral 9-203(b)(3)(C) (D) exceptions to requirement for authenticated record for: Control Possession of certificated security 19

20 Description of Collateral description is sufficient, whether or not it is specific, if it reasonably identifies what is described 9-108(b) examples of reasonable description (including by UCC type) 9-108(d) description of a security entitlement, securities account or commodity account is sufficient if it describes: (i) by those terms or as investment property, or (ii) the underlying financial asset or commodity contract 9-108(e) consumer transaction rule Monticello Banking Co. v. Flener (W.D. Ky. 2010) (currently on appeal to 6th Cir.) 20

21 Perfection Is Control Required? Investment property, p electronic chattel paper p and electronic documents of title filing effective Certificated security delivery (i.e. possession) is also effective Deposit account filing not effective Proceeds rules apply Letter-of-credit rights filing not effective Proceeds rules apply Automatic perfection for supporting obligations applies 21

22 Why You Want Control May be only means to perfect (deposit account and letter-of-credit rights) Control provides priority over perfection by filing, delivery (i.e. possession), proceeds or supporting obligation Requirement for protected purchaser status Control allows secured party to exercise remedies without court involvement 22

23 Control With respect to deposit account, securities (certificated and uncertificated) and securities account/security entitlements control = ability of secured party to direct transfer or disposition without further consent or action of the debtor 9-104(b), 8-106(f) control exists even if debtor retains right to make substitutions, to originate instructions ti or otherwise deal with the collateral l 23

24 Control Deposit Account 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 ti originated i 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 24

25 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) 25

26 Control Certificated Security 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 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 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 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 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 Priority General Rules Perfection by control has priority over perfection by other means First to obtain control has priority Depositary bank or securities intermediary will have priority even if it obtains control later in time Letter-of-credit rights priority subject to assignee beneficiary s rights and other parties rights 29

30 Bank / Intermediary's Rights depositary bank rights: Right of set off Right of recoupment bank not required to: Enter into control agreement Confirm existence of control agreement 8-106(g) securities es intermediary ed not required ed to: Enter into control agreement Confirm existence of control agreement 30

31 Protected Purchaser and Takes Free Applies to secured parties Purchaser / purchase (1-201(b)(29), (30)) 8-303(a) protected purchaser Gives value (1-204 (Former 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 8-502, 8-503,

32 Secured Party Obligations 9-207(c)(2) ) secured party that has possession or control of collateral shall either: Apply money or funds received from the collateral to reduce the secured obligation or Remit such money or funds to the debtor (Former 1-201(3)-(4)) (4)) provides that requirements of 9-207(c)(2) may be varied by agreement Practice pointer: Check security agreement provisions 32

33 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 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 l (OCs 6 and 7 to

34 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) 34

35 Why Use a Control Agreement? Other methods of control are available Secured party is the account customer Account at the secured party Might not use these methods if: Debtor retains rights to manage the account Secured party not the type of institution tion where account can be maintained Multiple secured parties Consider whether control agreement is best control method 35

36 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 36

37 UCC Related Terms of Control Agreement Choice of law (perfection / priority) Control (aka perfection) Bank / securities intermediary Account / crediting of assets Set off / recoupment rights of bank Security interest / priority of: Bank / securities intermediary Third parties 37

38 Perfection / Priority 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 account at that bank Bank s jurisdiction is determined as provided in 9-304(b) Can establish by control agreement If not in a control agreement, 9-304(b) provides rules No reasonable relationship requirement 38

39 Control Agreement Provision The bank s jurisdiction for purposes p 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? 39

40 Perfection/Priority Choice of Law Securities Account / Security Entitlements 9-305(a)(3) ) local law of securities intermediary's jurisdiction governs perfection, the effect of perfection or nonperfection, and priority in a security entitlement or securities account maintained at that intermediary Securities intermediary s jurisdiction is determined as provided in 8-110(e) Can establish by control agreement If not in a control agreement, 8-110(e) provides rules No reasonable relationship requirement 40

41 Control Agreement Provision The intermediary s jurisdiction for purposes of Part 3 of Article 9 of the UCC is [specify]. If this provision is not included then 8-110(e) will determine the applicable law Review for purposes of (i) selecting US jurisdiction and (ii) law covered in perfection by control and control priority opinions Also amend choice of law provisions of the account agreement and other agreements between intermediary and customer governing or relating to the account? 41

42 Control Control = ability of secured party to direct transfer or disposition of funds / assets without further consent or action of debtor 9-104(b), 8-106(f) -control exists even if debtor retains right to make substitutions, originate instructions or otherwise deal with collateral Remember: Deposit account as collateral in consumer transaction is outside scope of Article 9 Common law dominion and control test (more restrictive than Article 9 control standard) 42

43 Control Agreement Provision The bank will comply pywith instructions originated by the secured party without the debtor s further consent. Beware of: Debtor s right to terminate the agreement before bank is required to act on secured party s instructions Conditions that amount to a debtor consent right (e.g. confirmation from debtor as to occurrence of a default or as to amount that can be withdrawn) Contractual interpleader rights? Delays before bank required to act? 43

44 Control Agreement Provision The debtor is the bank s customer with respect to deposit account [identify]. Control agreement = Debtor, secured party and bank have agreed (FTC v. Transcontinental Warranty, Inc.) Account is with that bank Debtor is the bank s customer with respect to the account What if there is more than one customer? 44

45 Control Securities Account / Security Entitlements Control agreement = Securities intermediary has agreed (usually in a 3 party agreement, since consent of its customer is required) Account is with that intermediary Debtor is the intermediary s customer with respect to the account What if there is more than one customer? Are all assets shown on an account statement held in the account? 45

46 Control Agreement Provision Intermediary will comply py with all notifications it receives directing it to transfer or redeem any financial assets in the account (i.e. entitlement orders) originated by secured party, without debtor s further consent. Beware of: Debtor s right to terminate the control agreement before intermediary is required to act on secured party s instructions Conditions that amount to debtor consent right Contractual interpleader rights? Delay before intermediary required to act? 46

47 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 47

48 Control Agreement Provisions Intermediary maintains securities account [identify] for debtor. All property p credited to the account and all other right 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. Intermediary does not know of any claim to or interest in the account, except for claims and interests of [parties to the control agreement]. 48

49 Control Agreement Provisions 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. Bank 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. No third party has control (or priority) it or will obtain control Bank subordinates its priority (or waives its security interest and other rights) May be subject to negotiated exceptions 49

50 Control Agreement Provisions Intermediary represents and warrants that no third party has a right to give an entitlement order regarding the account or financial i assets in the account. Intermediary will not agree with any third party that intermediary will comply py with entitlement orders originated by the third party. Intermediary [subordinates] in favor of secured party any security interest, lien or right of setoff or recoupment intermediary may now or in future have against the account or financial assets in the account. No third party has control (or priority) or will obtain control Intermediary subordinates its priority (or waives its security interest and other rights) May be subject to negotiated exceptions 50

51 Other Control Agreement Provisions 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 Not required to exclude the debtor or prevent funds / assets from leaving the account for secured party to have control Has credit implications if agreed to 51

52 Negotiated Provisions in Control Agreements Indemnification and expense reimbursement of bank / securities intermediary Waiver vs. subordination of bank / securities intermediary rights to account Amounts bank / securities intermediary can charge to the account (margin, payments for securities, returned items, fees, indemnities) i i Secured party access to statements, on-line info Monitoring i of debtor activity it re account Notice of claims made by third parties to account 52

53 Issues for Trustee or Collateral Agent Limit obligations (e.g. expense reimbursement, fees, repayment of returned items, indemnity) to the funds / assets in the account Rights of the bank / intermediary to the account Coordination with terms of indenture, loan documents 53

54 Issues for Bank or Securities Intermediary Indemnification and reimbursement Exculpation, standards d of care Security interest in the account Time in which bank / intermediary is required to act on SP instructions ( outside time ) Confirming what is in the account (Fifth Third Bank v. Lincoln Financial Securities Corp. (WD Ky 2009)) Monitoring account and transactions Agreed upon forms of notices Contractual interpleader rights Termination of control agreement 54

55 Resources Model Deposit Accounts Control Agreement, Inserts and Reports om=cl Securities Account Control Agreement Annotated agreement (included with course materials) Legal Opinion Resource Center 55

56 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 Lynn A. Soukup Steven O. Weise Copyright 2011 Lynn A. Soukup All rights reserved /17/