Basics of UCC Article 9 -- Your Guide to Security Interests June 28, 2018 Panelists: James C. Schulwolf (moderator), Shipman & Goodwin LLP, Hartford, CT R. Marshall Grodner, McGlinchey Stafford, Baton Rouge, LA Stephanie Stephens, Lane Powell, Seattle, WA
TERMINOLOGY Parties Debtor/Borrower/Obligor Secondary Obligor (guarantor/surety) Agent/Lender/Secured Party Depository Institution vs. Secured Party Third parties (warehouse, landlord, bailee, processor, mortgagee, consignee, other debtholders [consider if insiders], government debtors, parties to a parent entity agreement [for example, other members to an LLC agreement when one member is pledging its interest])
COLLATERAL CATEGORIES Tangible Goods Consumer Goods Inventory Farm Products Equipment
COLLATERAL CATEGORIES Semi-Intangible Investment Property Securities Certificated Uncertificated Securities Accounts Security Entitlements Instrument Promissory Note
COLLATERAL CATEGORIES Semi-Intangibles (cont.) Chattel Paper Tangible Electronic Documents Bills of Lading Warehouse Receipts Letter of Credit Right
COLLATERAL CATEGORIES Intangibles Accounts Healthcare Insurance Receivable Deposit Accounts Commercial Tort Claim General Intangible Payment Intangible Software
COLLATERAL CATEGORIES Other Fixtures Timber to be Cut As-extracted Collateral
SCOPE OF ARTICLE 9 Any transaction that creates a security interest in personal property Applies to certain sales Accounts Chattel Paper Payment Intangibles Promissory Notes
SCOPE OF ARTICLE 9 Exclusions Interests in Real Property Except as accessories Claim under policy of insurance Except for health insurance receivables and as proceeds Rights in Judgments Non-commercial tort claims Non-commercial deposit accounts
Requirements Value be given ATTACHMENT Rights in the collateral Either Authenticated security agreement Possession of tangible collateral pursuant to agreement Control of deposit account or investment property pursuant to a security agreement
PERFECTION Most collateral can be perfected by filing a financing statement in the central office Important Exceptions When filing isn t the method Copyrights Control of certain collateral Letter of Credit rights Security interests in some categories of collateral can be perfected more than one way (priority issues) Investment Property File early and file often Why does your lawyer want to file before the deal is even closed? Where to file (if you have fixtures consider filing both fixture filings and a central filing)
FINANCING STATEMENT Contents Name of debtor Name of secured party or representative Indication of collateral Fixture Filings Description of real property If debtor has no record interest, the name of the record owner
NAME OF THE DEBTOR Registered Organization An entity that requires filing of a public organic record with a state Includes Corporations LLCs Many statutory trusts
NAME OF THE DEBTOR Registered Organization Name on the most recent public organic record No tradenames Safe Harbor If it shows up on a certified search using the correct name Practice tip: Do a post-closing certified UCC search
WHERE TO FILE Registered Organizations The state of formation Non-registered organizations PPB, or CEO if more than one PPB Individuals Principal residence Exception: Fixtures Real property records of the local jurisdiction
CONTROL PERFECTION Deposit accounts can only be perfected by control Funds held by a depository bank Generally includes: Operating accounts Accounts with proceeds of leases and rents Reserve accounts
DEPOSIT ACCOUNTS Methods of obtaining control The secured party is the depository institution Practice Tip: Agented deals Secured party becomes bank s customer Control Agreements (DACA)
INVESTMENT PROPERTY What is investment property? Securities Securities Account Securities Entitlement Investment property does not include an interest in an LLC ordinarily LLC can opt-in to article 8 and make the membership interest a security (and thus may be certificated)
CONTROL Can perfect by filing, but perfection by control takes priority over filing. Certificated securities Bearer form delivery Registered Form Delivery with any necessary endorsement SP becomes registered owner Uncertificated securities SP becomes registered owner on the books of the issuer Issuer agrees it will comply with directions of SP with further consent of the debtor/owner
INSTRUMENTS Perfection in Instruments Filing Upon attachment for sale of promissory notes Possession Likely need possession of promissory notes for foreclosure
LLC INTERESTS SP can perfect by filing as a general intangible Practical tip: To ensure priority Opt-in to article 8 In the articles and operating agreement make the membership interest a security under article 8 Then also make it a certificated security Last, take possession of the certificated security Possession (even without necessary endorsement) insures priority over other non-control perfection methods
SAMPLE LOAN DOCUMENTS Loan Agreement vs. Credit Agreement Security Agreement Pledge Agreement Control Agreement Collateral Assignment Third Party Agreements Collateral Assignment Warehouseman Agreement Landlord Waiver Subordination Agreement Intercreditor Agreement Miscellaneous Consent
Priority Priority Determining who wins if there are competing security interests Basic Rules First to file or perfect wins Perfected security interest has priority over unperfected security interest Control or possession has priority over filing
Priority (Cont.) Purchase Money Security Interests ( PMSI ) PMSI in goods has priority over a conflicting security interest in goods if PMSI is perfected when debtor received possession of collateral or within 20 days thereafter PMSI in inventory has priority over competing security in inventory (as well as in proceeds of inventory, proceeds of chattel paper, and identifiable cash proceeds of inventory) if:
Priority PMSI perfected when debtor receives possession of inventory PMSI secured party sends authenticated notification to holder of conflicting security interest Holder of conflicting security interest receives notification within 5 years before debtor gets possession of inventory; and Notification states that sender has or expects to acquire a PMSI and describes the inventory
Priority Priority (Cont.) Notification only required if conflicting security interest holder filed a financing statement Before the date of the PMSI filing or If the PMSI filing was temporarily perfected without filing, before the beginning of the 20 th day period PMSI rules also apply to software (i.e. PMSI in software has priority over conflicting security interest in software)
Priority Priority (Cont.) Deposit Accounts Secured party with control has priority over conflicting security interest without control First to obtain control wins Security interest held by the depository bank wins over conflicting security interests, but if the secured party becomes the depository bank s customer with respect to the deposit account, the secured party wins over the depository bank
Priority Priority (Cont.) Investment Property Secured party with control has priority over conflicting security interest without control First to obtain control wins If the investment property is a security entitlement, must look to Article 8 to determine when control was obtained Security interest held by securities intermediary in a security entitlement or securities account maintained with the securities intermediary wins over a conflicting security interest held by another party.
Filing and Searches
Filing Where to file Filing and Searches Real estate recording office for fixture filing Otherwise Secretary of State s office Sufficiency of Financing Statement Name of debtor Name of secured party or its representative
Filing and Searches Sufficiency of Financing Statement (Cont.) Collateral covered by financing statement No signature required Name of Debtor (9-503) If debtor is a registered organization, the name in the public organic record in its jurisdiction of organization
Filing and Searches Name of Debtor (9-503) (Cont.) If collateral is administered by the personal representative of a decedent, the name of the decedent (along with separate indication that collateral is being administered by a personal representative) If the debtor is a trust The name of the trust if the organic record specifies a name and otherwise the name of the settlor or testator
Filing and Searches Name of Debtor (9-503) (Cont.) If the debtor is an individual If your state adopted Alternative A, the individual s name on his/her current driver s license (or, if debtor doesn t have one, his/her first and last name) If your state adopted Alternative B, then any of debtor s individual name, debtor s first and last names, or debtor s name on his/her current driver s license
Filing and Searches Collateral Description - (9-504) Can be all assets This is OK in a financing statement but not in a security agreement Financing statement cannot be seriously misleading Incorrect debtor name is seriously misleading unless search using filing office s standard search logic would have disclosed the statement If debtor s name changes, amendment must be filed within 4 months of the name change
Filing and Searches Who can file? A person authorized by the debtor in an authenticated record Amendments must be authorized by the secured party Amendments Add or delete collateral Continue the financing statement Terminate the financing statement Amend other information
Filing and Searches Financing statements effective for 5 years from date of filing Lapses at end of 5-year period except if continued Continuations are filed within 6 months before the expiration of the 5-year period Subsequent continuations are filed within 6 months of expiration of the initial financing statement
Filing and Searches Filing consists of communication of the record to the filing office and paying the required fee Filing office can reject the record under for a variety of reasons, including not providing debtors name 9-521 provides standard form of UCC-1 and amendment/continuation
Filing and Searches Searches Where to search Debtor s jurisdiction or organization or state of residence (if an individual) Each state filing office has its own search logic Be sure to have the debtor s exact name otherwise search may go awry
POST-CLOSING CHANGES Four Month Grace Periods Change of Debtor s Name Change of Debtor s Location Re-domestication Change of Location of Collateral
POST-CLOSING CHANGES Double Debtor Issues Transfer of Collateral to Debtor located in a new jurisdiction One Year SP of Transferor v. SP of Transferree SP of Transferor prevails.
POST-CLOSING CHANGES New Debtor Merger Transferee becomes bound by law or contract to the security agreement of old debtor Security Interest Attached
Perfection POST-CLOSING CHANGES New Debtor Name is seriously misleading 4 month rule New Debtor location change must file to get New Debtor after-acquired property Priority Transferred Collateral SP of Transferor wins. After-acquired property of New Debtor SP of Transferor is junior to SP of Transferee New Debtor in different location 1 year to file in new location (mainly for after acquired property).
Default and Enforcement Part 6 of Article 9
Generally Covers Default and Enforcement Part 6 of Article 9 Rights after Default Collections and Enforcement Surplus and Deficiency Secured Party Taking Possession Disposition of Collateral Required Notification Form of Notification
Default and Enforcement Part 6 of Article 9 Generally Covers (Cont.) Rights of Transferees Strict Foreclosure Acceptance of Collateral in Full or Partial Satisfaction Effects of Noncompliance Commercial Reasonableness
Default and Enforcement Part 6 of Article 9 Rights after Default Secured Party Rights Foreclosure Obtain Judgment Receive Proceeds if in possession or control of collateral Debtor has certain rights sprinkled throughout Article 9 Many cannot be waived by debtor (even if secured party asks or demands)
Default and Enforcement Part 6 of Article 9 Collection and Enforcement If agreed, and in any event after default, secured party may Notify account debtor to pay secured party directly Take proceeds Enforce debtor s rights with respect to an account debtor Apply balance in a deposit account of secured party to the obligations or, if the deposit account is with another bank, instruct that bank to pay the balance in the deposit account to secured party
Default and Enforcement Part 6 of Article 9 Collection and Enforcement (Cont.) Secured party may deduct its expenses (including attorney s fees) from the proceeds of collection Collection and enforcement actions must be done in a commercially reasonable manner
Default and Enforcement Part 6 of Article 9 Application of Payments Costs and expenses of collection (including attorney s fees) Satisfaction of obligations (principal, interest, fees, etc.) secured by the security interest Junior secured obligations Junior lienholder may be required to furnish proof of its lien Any surplus goes to the debtor, but debtor is liable for any deficiency
Default and Enforcement Part 6 of Article 9 Possession and Disposition (9-609) (9-610) Possession Secured party can take possession after default Use judicial process or nonjudicial (so long as it does not breach the peace) Can require debtor to assemble collateral at a reasonably convenient location Disposition Secured party may sell, lease, license or otherwise dispose of collateral
Default and Enforcement Part 6 of Article 9 Disposition (Cont.) Every aspect of disposition must be commercially reasonable Method, manner, time, place, and other terms If commercially reasonable, can be by public or private proceedings Secured Party can purchase collateral At public disposition At private disposition only if collateral is customarily sold on a recognized market or is the subject of widely distributed standard price quotations
Default and Enforcement Part 6 of Article 9 Disposition (Cont.) Sale carries standard warranties, which can be disclaimed by the secured party No set rules as to time, manner, etc. Intent is to encourage private distribution through regular commercial channels Public Disposition Disposition at which price is determined after the public has had a meaningful opportunity for competitive bidding
Default and Enforcement Part 6 of Article 9 Public Disposition (Cont.) Meaningful opportunity implies that some form of advertisement of public notice precedes the disposition and the public must have access to the disposition Distinctions between public and private dispositions Secured party can buy at a public disposition but typically not at a private disposition
Default and Enforcement Part 6 of Article 9 Distinctions between public and private dispositions (Cont.) Debtor is entitled to notice of the time and place of a public disposition but only entitled to notice of the time after which a private disposition will take place Low price does not mean that a disposition was not commercially reasonable (but it suggests that a court should carefully scrutinize the disposition).
Default and Enforcement Part 6 of Article 9 Notification If secured party disposes of collateral under 9-610 it must notify The debtor Any secondary obligor Any person from whom secured party received authenticated notification of a claim in the collateral Any other secured party that held a perfected security interest in the collateral 10 days before the notification date
Default and Enforcement Part 6 of Article 9 Notification (Cont.) 9-613 establishes form of notification and required contents for sufficiency Description of debtor, secured party, and collateral Method of disposition Debtor entitled to an accounting and charge, if any, for accounting time and place of public disposition or time after which private disposition will occur
Default and Enforcement Part 6 of Article 9 Strict Foreclosure (9-620) Secured party may accept collateral in full or partial satisfaction of debt only if Debtor consents Secured party doesn t receive objection within 20 days from Person to whom notice was required to be sent A junior secured creditor
Default and Enforcement Part 6 of Article 9 Strict Foreclosure (Cont.) Debtor must consent to partial satisfaction in writing In the case of a full satisfaction, debtor either consents in writing or doesn t object to an unconditional proposal by secured party within 20 days after proposal is sent
Default and Enforcement Part 6 of Article 9 Notice of strict foreclosure must be sent to Any person who notified the secured party of an interest in the collateral before the debtor s acceptance Any person that had a perfected security interest in the collateral 10 days before debtor accepted
Default and Enforcement Part 6 of Article 9 Acceptance of collateral by secured party in strict foreclosure Discharges the secured debt Transfers all of debtor s rights in collateral to secured party Discharges security interest of secured party and all subordinate liens Terminates any other subordinate interest
Default and Enforcement Part 6 of Article 9 Commercial Reasonableness (9-627) The fact that a higher price could have been obtained at a different time or by a different collection method is not of itself sufficient to preclude the secured party from establishing that collection, enforcement, disposition, or acceptance was made in a commercially reasonable manner
Default and Enforcement Part 6 of Article 9 Commercial Reasonableness (Cont.) Disposition is made in a commercially reasonable manner if it is made In the usual manner on any recognized market At the current price on a recognized market at the time of disposition In conformity with reasonable commercial practices among dealers in the type of property that was the subject of the disposition Or if it is approved by Court, creditors committee, representative of creditors, or assignee for benefit of creditors