ASSET BASED LENDING IN CANADA CANADIAN PRIMER ON ASSET BASED FINANCING based on ASSET BASED FINANCING: A TRANSACTIONAL GUIDE Alison M anzer Howard Ruda LexisNexis*
TABLE OF CONTENTS Preface About thè Authors v ix Chapter 1 Introduction 1 Defìning Asset Based Financing 1 Consensual Agreement 3 Types of Asset Based Transactions 4 Unsecured Credit 6 Potential for Security 6 Negative Pledge 7 Single Purpose Corporation 8 Suretyship 10 Debt Subordination 10 Loan Characterization 11 Loan v. Investment 11 Security as a "Creature of Law" 12 Priority 13 Relation of Security to Debtor Insolvency 14 Relation of Security to Bankruptcy 15 Regulatory Law 17 Law Pertaining to Collateral 18 Types of Collateral 19 Proceeds 22 Real Property 23 Economie Basis 24 Need for Security 24 Debtor"s Present Financial Condition 25 Debtor's Future Financial Condition 25 Costs of Liquidation 25 Accounting Considerations 28
xii TABLE OF CONTENTS Chapter 2 Grant of Credit 33 Loan Approvai 33 Loan Documentation 33 Nature ofthird Party Problems 35 The Commitment or Intent Letter 37 TheBorrower 37 The Lender 38 What Should thè Commitment or Intent Letter Include? 38 Breachof thè Obligation to Lend 41 Breach of Obligation to Borrow 43 Chapter 3 Personal Property Security 45 In General 47 Excluded Transactions 49 Landlords' Liens and Interests in Real Estate 51 Mechanic's and Construction Liens 53 Interests in Insurance Policies and Deposit Accounts 53 Other Exclusions 54 Relevance of Types of Collateral 54 Accounts 55 Chattel Paper 55 Document 55 Instrument 56 Intangibles 56 Goods 57 Inventory 57 Equipment 58 Consumer Goods 58 Investment Property 58 General Validity of Security Agreement 61 Value Must Be Given 62 Borrower's Rights in Collateral 62 Security Interest in Proceeds 63 After-Acquired Property 63 Methods of Perfection 65 Possession 66
TABLE OF CONTENTS xiii Filing 66 Priorities 67 The General Rule: First in Time, First in Right 67 Purchase Money Security Interests 68 Purchase Money Security Interests in Inventory 70 Purchase Money Security Interests in Non-inventory 70 Buyers of Goods in Ordinary Course 71 Repairman's Liens, Statutory andcommon Law 72 Fixtures 73 Proceeds 74 Priority of Accessions 75 Priority When Goods are Commingled 75 Subordination 76 Transfers of Collateral 76 Filing andsearches 77 Location of Debtor 78 Description of Collateral 79 Consequences of Mistakes in Filing 80 Name 80 Discharge Statements 81 Rights of Secured Party Upon Default 82 Self-Help 82 Assembly and Delivery by Borrower 83 Lender's Right to Render Collateral Unusable 83 Voluntary Surrender and Statement 83 Disposition by Lender 84 Notice 84 AH Aspects Must Be Commercially Reasonable 85 Public or Private Disposition 85 Purchase by Secured Party 86 Surplus or Deficiency 86 Redemption by Debtor 87 Acceptance of Collateral inlieu of Disposition 87 Chapter 4 Personal Property Searches and Filing 89 Perfection 89
xiv TABLE OF CONTENTS Attachment 90 Methods of Perfection 91 WhentoFile 97 Filing Under Revised Artide 9 98 The Name of thè Debtor and Secured Party 98 Indication of thè Collateral Covered 100 Errors in thè Registration 101 TheBorrower 102 Prior Names 104 Where to Search 104 Secured Party 105 Agreements to Subordinate 105 Proceeds, 106 Contrai 106 Possession 106 Time Delays by Filing Office 107 Time Delays Permitted by Statute 107 Change of Name by Debtor 108 Conclusion 109 Checklist for Pre-Search Determinations 109 Personal Property Security Act Concordance 112 Chapter 5 Security Involving Real Estate Interests 121 Conflicting Real Estate Interests 121 Fixtures Defined 122 Perfection of Security Interests in Fixtures 123 Relative Priorities Under Personal Property Security Act Rules 124 Enforcement of Security Interests 125 Mechanic's Liens 127 Problems With Non-Fixture Real Property Collateral 128 Impact of Locai Law 129 Judicial v. Nonjudicial Foreclosure; Redemption 129 Leasehold Interests 132 Borroweras Lessee 133 Borrower as Lessor; Assignment of Rents 136
TABLE OF CONTENTS xv Landlord's Liens 137 Landlord's Waivers 138 Mortgagee's Waivers 140 Chapter 6 Real Estate Aspects of Asset-Based Financing 141 Forms of Instruments 141 Borrower's Interest 142 Mortgage 143 Priority of Mortgage 144 Wrap-Around Mortgages 146 Marshalling of Assets 147 Leasehold Mortgages 148 Title Insurance 148 Matters Covered 150 Matters Excluded 151 Environmental Studies 152 Formalities of Perfecting Mortgages and Deeds of Trust 152 Mechanics' Liens 154 Conflict of Laws as Affected by Real Property Security 157 Due-On-Sale Clauses 157 Sale Under Power 158 Statutory Right to Redeem 160 Mortgagee in Possession 162 Leasehold Mortgages 163 Chapter 7 Claims By and Against thè Federai Government 165 Government Contracts 165 Introduction 165 Structure of Transaction 165 Documentation 166 Security Agreement 166 Assignment 166 Notice of Assignment 167 Perfection of thè Security Interest 168
xvi TABLE OF CONTENTS Chapter 8 Intellectual Property Financing and Issues 173 Introduction 173 Intellectual Property as Collateral 173 What Are Patents, Trade Secrets, Trade-marks, Copyrights, Industriai Design & Integrated Circuit Topography? 174 Patents 174 Trade-marks 176 Copyrights 185 Industriai Design 186 Integrated Circuit Topography 187 Differences Among Types of Intellectual Property 187 Issues Common To AH Intellectual Property 189 Licence Agreements 190 Foreign Rights 193 Personal Property Security and Its Relation to Intellectual Property 193 Filings 194 Security Interests in Software 195 Patent Considerations in Connection with Financings 196 Computer Programs and Databases 198 DomainNames 198 WebSites 199 Licence Agreements 199 Intellectual Property Licences Under thè Bankruptcy Act 200 Financing Intellectual Property Licences 201 Chapter 9 Guarantees 203 Introduction 203 Joint and Several Loans 204 Indemnìty Bond 205 "Puf Agreement 206 Subordination 207 Keep Well Agreement 208 Comfort Letters 208 Take-or-Pay Agreements 209 Junior Participation 210 Warranty 210
TABLE OF CONTENTS xvii Purpose of Guarantee 211 Surety and Guarantee 212 Types of Guarantee 213 Formation and Interpretation of thè Contract of Guarantee 215 Consideration and Economie Benefit 216 Revocation 217 Assignment 218 Jurisdiction 219 Approvai and Enforceability 220 Resolution of thè Board of Directors 220 Release or Discharge of Guarantor 221 By Release of Security 223 By Release of Co-Guarantor 224 Death of Guarantor 225 Lack of Commerciai Reasonableness 225 Marshalling 226 Statute of Limitations 226 Measure of Damages 227 Contribution 228 Subrogation 229 Reimbursement 229 Chapter 10 Letters of Credit 231 Introduction 231 Basic Principles 235 Governing Law and Codified Custom 240 Relation to Asset-Based Finance 240 Classification As Commerciai, Standby, Payment and Clean Letters of Credit 243 Distinctions Between Commerciai and Standby Letters of Credit 245 Revocable and Irrevocable Letters of Credit 248 The Parties to thè LC Arrangement 248 Consideration 250 Electronic LCs 251 Negotiability 252 Interpretation 252
xviii TABLE OF CONTENTS Time for Payment 252 Wrongful Dishonour 253 Conformity of Documents to Letter of Credit 254 Issuer's Right to Reimbursement 257 Transfer or Assignment 259 Chapter 11 Joint Loans & Participations 261 What Are Multiple Lender Arrangements? 261 Reasons for Multiple Lender Arrangements 262 Perfecting Interests in Collateral 262 Doing Business Considerations 263 Participations 264 Types of Participation 271 Disclosure of Information About Borrower 274 Joint Loans 276 Character of Legai Relationships 277 Certain Special Provisions 278 Comparison of Participations and Joint Loans 279 Chapter 12 Intercreditor Agreements 283 Introduction 283 Consensual Agreement 287 Purpose 287 Statutory Alterations of Priority 288 Subordination of Debt Distinguished 289 The Personal Property Security Act 290 Bankruptcy 290 Written Agreements 291 Necessity 292 Benefits 294 Release and Subordination 294 Third Party Beneficiaries 295 Order of Perfection and Significance of Non-Perfection 296 Postponement of Subordinated Lender's Enforcement Rights 297 Cure Period 298 Notices 299
TABLE OF CONTENTS xix Right to Terminate 299 Consent of Borrower 300 Chapter 13 Debt Subordination 301 Introduction 301 Debt Subordinations in General 301 Commerciai Finance 307 Complete Subordination 307 Partial Subordination 308 Springing Subordination 309 Structural Subordination 309 Contract Theory 310 Defining "Senior Debt" 311 Permitted Payments 313 Negative Covenants 314 Transfer of Junior Debt 315 Voting Junior Debt 315 Alteration of Senior Debt 318 Cross-Default 319 Subrogation 320 Waiver of Marshalling 321 Assignment of Junior Debt 321 Chapter 14 Bankruptcy 323 Proposals and Plans 323 Need for an Action Pian 326 The Secured Lender's Goals Prior to and at Bankruptcy 328 A Checklist for thè Secured Lender 332 Status of Loan Documentation 333 Collateral Issues 333 Financial Analyses and Projections 334 Working with Other Major Creditors 335 Employees 335 Set-offs 336 Supply a Debtor Post-Petition 338 TheExecutory Contract 338 Contractual Attempts to Prevent Filings 340
Precedent 12: Form of Payout Letter and Securing Release 553 xx TABLE OF CONTENTS Bankruptcy Remote Entities & Securitization 342 Effect of Filing of a Petition, Voluntary or Involuntary 342 Litigation 344 Insurance 344 Enforcement of Liens Against thè Estate and thè Debtor 345 Preferences 346 Priority Claims 347 Purchase Money Security Interest 347 Secured Claims 348 Effect of Failure to File Proof of Claim for Secured Claims 349 Substantive Consolidation 350 Classification of Claims 351 Debtor-In-Possession Financing 352 Precedent Materials Precedent 1: Closing Memorandum 355 Precedent 2: Closing Checklist 363 Precedent 3: Perfection Certificate (Due Diligence Form) 373 Precedent 4: Loan Agreement 385 Precedent 5: Security Agreement 457 Precedent 6: Guarantee 469 Precedent 7: Subordination and Standstill Agreement 479 Precedent 8: Hypothec (Quebec Form) 495 Pledge of Debenture 527 Precedent 9: Blocked Account Agreement 535 Precedent 10: Landlord Waiver 547 Precedent 11 : Secured Creditor Acknowledgement 551
TABLE OF CONTENTS xxi Precedent 13: Compliance Certificate 557 Precedent 14: Availability Computation Form 561 Index 565