UCC Article 9: What You Need to Know, Part 5

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Clint M. Hanni
April 2018

UCC Financing Statements

Once the loan documents have been signed, it is imperative from the lender’s point of view that a UCC financing statement be filed in the proper location to “perfect” its interest in the collateral. This is a routine task that is easy to overlook in the rush to close a loan. Multi-million dollar loans have been completely uncollectible because someone forgot to file the financing statement. The takeaway is simple: don’t forget to file!

Beyond simply filing the UCC financing statement, there are three fundamental issues that the lender must get right.

First, file in the right place. UCC Article 9 has a simple rule for finding the right place to file the UCC financing statement—file in the state where the debtor is located. For debtors that are business entities, such as corporations or limited liability companies, regardless of where they may have their corporate headquarters, they are deemed located in the state where they filed their organizing documents, such as articles of incorporation or certificate of organization.

Second, get the name of the debtor right. The general rule is that a UCC financing statement is effective only if a searcher could find it by searching the state’s database with the debtor’s correct name. What this means in practice is that you must list the exact legal name of the debtor on the UCC financing statement. This includes commas, periods, spaces, hyphens and all other incidental characters. For corporate entities, the best way to get the name right is to request that the debtor provide you with a good standing certificate from its state of organization, which will list the debtor’s exact legal name. DBA’s are not good enough. There are endless horror stories of misspelled debtor names that spelled disaster for lenders.

Third, get the collateral description right. All UCC financing statements must include an indication of the collateral. If the collateral is all the debtor’s assets, then you can simply list “all assets” in the collateral box (but remember that this approach does not work in the security agreement itself). If the collateral is a subset of the debtor’s assets, consult the signed security agreement and use its collateral description for the financing statement.

When it comes to UCC Article 9, small errors can be catastrophic. It will be well worth your time and money to consult an attorney with UCC expertise.

Clint M. Hanni is Of Counsel to Richards Brandt Miller Nelson. He is a member of the Business Transactions & Corporate Governance, Banking and Finance Law, Business Bankruptcy and Creditor Rights, and Real Estate Transactions & Litigation practice groups.

UCC Article 9: What You Need to Know, Part 4

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Clint M. Hanni
April 2018

Security Agreements – For Debtors

Let’s say that you have approached a bank about getting a loan for working capital purposes. You have inventory and accounts receivable to offer as collateral to secure the loan. After agreeing to basic terms, the bank sends you a loan agreement, a promissory note and a security agreement. The bank has assured you that these are all “standard documents” and encourages you to quickly sign and return them so the loan can be funded and you can get your money. Before you sign the security agreement, however, it’s important to understand that there’s really no such thing as a “standard document” when it comes to security agreements. There are only short-form minimalist documents that cover the basic elements necessary for the creation and attachment of a security interest and long-form documents that describe the lender’s remedies in exhausting detail.

The debtor should take care to review the obligations that are secured by the collateral. Generally, the obligations to be secured should be limited to obligations arising under the loan agreement itself. Lenders often will extend the obligations to include any and all obligations owing from the debtor to the lender at any time in the past or future. As a debtor, make sure you are comfortable with this approach or push back to place limits on the secured obligations.

Every security agreement will have a collateral description, and the debtor should review it carefully to confirm the collateral is as agreed. This is less important where the debtor has agreed that all its assets will constitute collateral. It is more important where the debtor has multiple lenders each with different collateral. Lenders often include over-inclusive collateral descriptions and depend on the debtor to trim them back. It is worth being careful on this point. An over-inclusive collateral description can throw the debtor into default under prior loan agreements and result in the waste of time and money to fix.

A security agreement gives the lender the right to seize the debtor’s collateral upon the occurrence of certain listed “events of default.” A debtor should review these events of default carefully to confirm they will not be triggered unexpectedly. For example, it is customary for the debtor’s failure to make a payment to the lender to be deemed an event of default, but only after all cure periods have been exhausted.

A smart debtor will insist that any loan documents it receives be reviewed quickly and efficiently by experienced counsel, even if the lender claims they are “standard documents.”

Clint M. Hanni is Of Counsel to Richards Brandt Miller Nelson. He is a member of the Business Transactions & Corporate Governance, Banking and Finance Law, Business Bankruptcy and Creditor Rights, and Real Estate Transactions & Litigation practice groups.

UCC Article 9: What You Need to Know, Part 3

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Clint M. Hanni
March 2018

Security Agreements – For Lenders

Security agreements lie at the heart of loan transactions. If you are a lender, the security agreement is the document that insures you will be repaid. Security agreements are most often stand-alone documents, but they don’t have to be. Language creating a security interest can be embedded in any other agreement, such as a loan agreement, a purchase order, a promissory note or a deed of trust. The key to creating a security interest is including language whereby the debtor “grants a security interest” to the lender in named collateral. Beyond that, there are two elements of utmost importance in a security agreement that, surprisingly, are often overlooked.

First, the security agreement must indicate what the collateral is. There doesn’t have to be an exhaustive description of each separate item of personal property of the debtor that constitutes collateral. It is enough to identify the category or type of collateral, such as equipment, inventory, accounts receivable, deposit accounts and the like. UCC Article 9 identifies the generally recognized types of personal property collateral in which a security interest can be taken. You should always consult a qualified lawyer to review any collateral description in a security agreement to confirm it is adequate (for the lender) and not overreaching (for the debtor).

A common pitfall is to identify the collateral by simply referencing “all assets” of the debtor or “all personal property” of the debtor. Many lenders have tried this, thinking that it will get them the most collateral, only to find out that UCC Article 9 specifically disqualifies this approach. Such lenders end up with no security interest, no collateral and a difficult path to repayment if the debtor becomes insolvent. To create an effective security interest, the collateral must be identified by specific type or category.

The second element of utmost importance is that the security agreement must be signed by the debtor. This is a simple matter, but often overlooked. An unsigned purchase order with embedded language about the creation of a security interest is not sufficient. The mere filing of a UCC financing statement (which, as a rule, is not a signed document) is not sufficient. Without the debtor’s signature on a written (or electronic) security agreement, no security interest will be created.

As you can see, the requirements of a security agreement are complicated. Before providing a security agreement to a debtor, it’s wise to have it reviewed by a competent attorney with UCC expertise.

Clint M. Hanni is Of Counsel to Richards Brandt Miller Nelson. He is a member of the Business Transactions & Corporate Governance, Banking and Finance Law, Business Bankruptcy and Creditor Rights, and Real Estate Transactions & Litigation practice groups.

 

UCC Article 9: What You Need to Know, Part 2

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March 2018

What is a security interest?
At the heart of UCC Article 9 is the concept of a “security interest.” The UCC itself defines a security interest as “an interest in personal property or fixtures which secures payment or performance of an obligation.” The definition goes on for another eight lines, but the gist of it is that a lender receives security for its loan by getting an interest in the debtor’s collateral. In other words, a security interest is a type of lien that allows a lender to take collateral from a debtor that defaults on an obligation. Under UCC Article 9, a security interest only attaches to personal property collateral. Personal property essentially includes everything but land and buildings (the latter are called real property).

When it comes to security interests, two important concepts come into play. First, in order to be of any effect, a security interest must be created and attach to personal property. Second, in order to be enforceable against a debtor, a security interest must be properly perfected.

In order for a security interest to be created and attach to collateral, there are three basic requirements. The debtor (the one owing the obligation) must sign a security agreement, which will be discussed in more detail in future blog segments. The secured party (the one receiving the obligation) must give value to the debtor, for example, in the form of a loan. Lastly, the debtor must have rights in the collateral, which generally means that the debtor owns or is leasing the collateral.

Even though a security interest has attached to collateral, it is of little value until it has been perfected, or in other words, can be legally enforced, a matter of great importance for lenders. The way to perfect a security interest depends on the type of collateral. For most types of collateral, perfection of a security interest is generally done by filing a UCC financing statement with the central filing authority in the state, which is often the secretary of state. In Utah, the place to file is the Division of Corporations and Commercial Code. For certain types of collateral, the only way to perfect a security interest is for the lender to take control or take possession. In other cases, the lender can perfect its security interest in any one of several ways, but with possibly differing priorities. It is possible, for example, for two lenders to perfect a security interest in the same collateral, but with different resulting priorities. If you are a lender wanting to perfect a first priority security interest in collateral, it is essential to consult a lawyer with expertise in UCC Article 9 so that you perfect the security interest in the proper manner and comply with other legal requirements for a legally enforceable interest.

Clint M. Hanni is Of Counsel to Richards Brandt Miller Nelson. He is a member of the Business Transactions & Corporate Governance, Banking and Finance Law, Business Bankruptcy and Creditor Rights, and Real Estate Transactions & Litigation practice groups.

UCC Article 9: What You Need to Know, Part 1

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Clint M. Hanni
March 2018

Introduction

If you’re a business owner, you’ve been using the Uniform Commercial Code (UCC) even if you’ve never heard of it. The UCC is a model body of law adopted by all 50 states and US territories in a generally uniform manner that governs commercial business transactions, although there are slight differences between the states. The UCC is divided up into eleven separate sections or “Articles” that each govern a different set of transactions.

What kind of transactions are governed by the UCC? Here’s a short list: selling goods, leasing equipment, issuing promissory notes, sending purchase orders, writing checks, opening bank accounts, shipping goods, and finance transactions where a loan is secured by collateral. This blog series will deal with finance transactions, which are covered by UCC Article 9.

As a business owner, why should you care about UCC Article 9? The answer is simple: whenever you enter into a financing arrangement, equipment lease or any transaction where an obligation is secured by collateral, UCC Article 9 is there in the background to protect you as long as the documents and agreements comply with its provisions. If you are entering into a transaction where you will provide financing, you’ll need to have a basic understanding of how UCC Article 9 helps protect your interest in the collateral. As you might expect, UCC Article 9 is a complicated statute, and you’ll need the help of a professional to navigate it. If you’re a lender, you’ll want to make sure the documents you are using have been vetted by an attorney so they comply with the UCC in your state. If you’re a borrower, you’ll want to hire a lawyer to confirm the documents aren’t overreaching and include the protections offered by the UCC.

Because UCC Article 9 touches so many different kinds of transactions, a general understanding of how it works and what to look for will benefit you regardless of whether you’re a lender, borrower, buyer or seller.

Clint M. Hanni is Of Counsel to Richards Brandt Miller Nelson. He is a member of the Business Transactions & Corporate Governance, Banking and Finance Law, Business Bankruptcy and Creditor Rights, and Real Estate Transactions & Litigation practice groups.

 

 

Tips for Borrowers Negotiating a Loan: Part 6 After the Closing

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Clint M. Hanni

April 2017

It’s a great relief for the borrower when the documents are signed and the money is wired. What happens after the loan has closed is critical to a successful loan.

  1. 1. Post-closing matters. The lender may have a laundry list of items for the borrower to provide after the closing. It almost goes without saying, but it’s in the borrower’s interest to complete all post-closing matters as promptly as possible. The borrower will usually be paying for the attorney’s fees of the lenders. The longer post-closing items drag on, the higher the attorney’s fees will be. Getting the post-closing items done quickly will save the borrower money and get the borrower-lender relationship off to a good start.

2. Prompt financial reporting. Many loan documents require ongoing reporting of financials, usually on a quarterly and annual basis. Borrowers that miss financial reporting deadlines (usually 45 days after each quarter and 60 days after the end of the year) put themselves at risk of getting a default notice from the bank. If the borrower won’t be able to get financials to the lender on time, they should give the lender notice before the due date.

3. Keep the lender in the loop. There will be times when a borrower fails to reach a financial covenant set by the bank in the loan documents. Sales may be down, and unforeseen expenses may lower net earnings. In times of financial distress, it’s in the borrower’s interest to contact the bank early and give them notice. Most borrowers tend to wait until the last minute to report bad news to their lender, but this will only erode trust between them. The borrower should strive to be as open and transparent with the lender as possible. By doing so, the lender will be more flexible and accommodating if the borrower misses a financial covenant or a payment. Lenders will often go the extra mile to assist cooperative borrowers. Without such trust, the Lender may quickly seek to enforce its rights against the borrower when the borrower can least afford it.

4. Keep your lawyer engaged. After the loan is closed, borrowers tend to drop their lawyer off the radar screen until an angry letter arrives from the lender. The better approach is to call your lawyer at the first indication of trouble. A good finance lawyer will be able to help a borrower frame a solution and formulate a proactive plan for dealing with its lender when difficulties arise. Visit https://www.richardsbrandt.com/practice-areas/utah/bank-finance-attorney

 

 

 

Tips for Borrowers Negotiating a Loan: Part 5 Closing Documents

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Clint M. Hanni
April 2017

Loan transactions are document intensive. When the agreements have all been drafted and agreed, it’s time for the lender and borrower to sign the documents and fund the loan. Closings can be easy or hard. Here are some tips to make them as smooth as possible.

1. Authorizing resolutions. After the main transaction documents are complete, there may remain other documents to be drafted, agreed and signed. For example, the lender wants assurance that the borrower’s board of directors has authorized the loan. To that end, the lender may provide its own form of board resolution for the borrower. It can take time to organize a meeting or pass around resolutions for signatures. Borrowers should plan to remain involved and put in extra time even after the documents are finalized.

2. Closing certificates. Most loans in excess of a few million dollars will require officers of the borrower to certify that all representations and warranties are true and that all conditions to the loan have been met. Other certificates may be required with respect to resolutions, articles of incorporation and bylaws of the borrower. In addition, the lender may ask for a solvency certificate to confirm the borrower is solvent. Insurance certificates may be required. Here’s the point—a fair amount of work remains to be done after the main loan documents are complete. Finance counsel can walk you through it all.

3. Third party documents. Closings are often delayed because the lender requires third parties, such as landlords, to sign documents (e.g., consents to collateral assignments of agreements or landlord estoppels). An experienced lawyer will help the borrower identify these documents in advance so that they can be distributed to third parties well before the closing. Lenders may be willing to accept such documents on a post-closing basis.

4. Closing mechanics. In the old days, all parties used to gather in a conference room to sign and release deal documents. That rarely happens nowadays. Most closings are done via email with little face-to-face interaction. But loan closings are still complicated. Final versions of the documents need to be gathered and distributed to each side for signatures. Some documents, such as stock certificates to be taken by the lender as collateral, must be delivered to the lender’s attorney. The lender may require the borrower’s attorney to render a closing opinion that the loan documents are enforceable. Any escrow procedures must be complied with. Often, last minute issues rise up and threaten to derail the deal. It’s important that you have counsel that is experienced in running a closing to work around these issues. Visit https://www.richardsbrandt.com/practice-areas/banking-and-finance-law/

Read Tips for Borrowers Negotiating a Loan: Part 6 After the Closing

 

Tips for Borrowers Negotiating a Loan: Part 4 Existing Lenders

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Clint M. Hanni
April 2017

New loans are more complicated when a borrower already has an existing loan with another lender. It’s all about collateral. Here are some tips to keep in mind:

1. Keep the old lender in the loop. If the old loan will remain in place, new lenders may only be willing to extend a loan if there is unencumbered collateral available to secure a new loan. For this reason, it’s wise for a borrower to: (i) know exactly what collateral has already been pledged to other lenders; and (ii) keep as many of its assets unencumbered as possible to use as collateral on additional loans. Existing lenders may be willing to release some of their collateral to secure a new loan, especially when the borrower will benefit from additional credit that the existing lender is unwilling to extend. As always, be careful to keep the old lender in the loop when looking for new or additional lenders.

2. Intercreditor Agreement. It’s common for two or more lenders to make loans secured by a single borrower’s collateral. To do this, they will enter into an intercreditor agreement that specifies the priority of each lender’s collateral. There are two possible scenarios: (i) the lenders can split the collateral between them, each maintaining a first priority position (e.g., one lender will take inventory as collateral, and the other lender will take equipment), and (ii) each lender can take the same assets of the borrower as collateral, with one lender being in a first priority position and the other being in second position. Intercreditor agreements can involve contentious negotiations between competing lenders, and it’s important for the borrower to have competent counsel to act play the role of a mediator. Many loan deals have failed to close because the lenders could not reach agreement on the intercreditor document.

3. Payoff Letter. When a new loan will be paying off an old loan, the old lender will be asked to provide a letter that details exactly how much principal, interest and fees are outstanding. The payoff letter should also state that, upon payment in full of all amounts owing, the old lender releases its lien on the borrower’s assets. Some lenders forget their obligation to release liens, and it can cause future problems for the borrower. Experienced finance counsel will help the borrower remember this important step and save money in the long run. Visit https://www.richardsbrandt.com/practice-areas/utah/bank-finance-attorney

Read Tips for Borrowers Negotiating a Loan: Part 5 Closing Documents

Tips for Borrowers Negotiating a Loan: Part 3 Ancillary Documents

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Clint M. Hanni
April 2017

The loan agreement isn’t the only document in a loan transaction. Other documents (sometimes dozens of them) can come into play. Here are a few to consider:

  1. 1. Security Agreement. If the loan will be secured by personal property, such as accounts, inventory, equipment or IP (patents, trademarks, copyrights), there will be a security agreement. Many borrowers make the mistake of assuming security documents are simply standard agreements off the shelf and nothing to worry about. The truth is different: security agreements can be used by lenders to add additional terms into the deal. The most important consideration in a security agreement is to make sure it correctly describes the collateral. If the loan is to be secured by all the assets of the borrower, the collateral description is less of an issue, but if the loan is to be secured only by a certain type of collateral (e.g., inventory), an overly broad collateral description can get the borrower in trouble, especially if the borrower wants to reserve some of its assets to use as collateral on another loan. To avoid costly mistakes, have this document reviewed by an experienced finance lawyer.

2. Pledge Agreement. Loans are often secured by stock or limited liability company membership units. A Lender may require a borrower to pledge the stock of its subsidiaries. A parent company or other affiliate may be required to pledge its stock as collateral. For all the stock pledges, the lender will insist on taking possession of the original stock certificates (if they exist) until the loan is paid back. In addition, the bank will ask for stock powers, a document that gives the bank the power to transfer the stock into its own name if an event of default occurs. During the loan period, the borrower will not be allowed to sell the pledged stock.

3. Guaranty. The lender may require that a third party closely related to the borrower (such as a parent company, a subsidiary or a major stockholder) agree to provide a guaranty of the loan, which is essentially a promise to pay off the loan if the borrower fails to do so. Not all guaranties are the same. Some are limited in amount and revocable; others are unlimited and irrevocable. As with all the loan documents, you need a good finance lawyer to make sure you are getting the deal you agreed to.

4. Promissory Note. A promissory note is a short document that represents the borrower’s obligation to pay back the loan and details the payments of principal and interest to be made. This document should be carefully reviewed by a professional to confirm that it correctly states the terms found in the term sheet and doesn’t introduce additional terms the borrower has not agreed to. Visit https://www.richardsbrandt.com/practice-areas/utah/bank-finance-attorney

Read Tips for Borrowers Negotiating a Loan: Part 4 Existing Lenders

 

 

Tips for Borrowers Negotiating a Loan: Part 2 The Loan Agreement

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Clint M. Hanni
April 2017

Once you have agreed on a term sheet for your loan, it’s time to turn to the “definitive loan documents.” The first document to get drafted is the loan agreement.

  1. 1. Get it reviewed by an attorney. The loan agreement contains the basic terms of the deal and describes what the bank will require the borrower to do beyond staying current on payments. All loan agreements are not the same. The bank may tell you it’s a “standard document” drafted by internal staff, but you can’t afford not to have it reviewed by a competent finance lawyer, potentially saving you thousands of dollars. If you decide to request a change in the document later, the bank will charge a modification fee. It’s best to get it right the first time.

2. Representations and warranties; schedules. Representations and warranties are statements of fact made by the borrower in the loan agreement, and any untrue statement could be grounds for the bank to call the loan. The representations and warranties may refer to schedules where the borrower discloses exceptions. The number one rule for preparing schedules can be distilled down to three words: tell the truth! Disclose any and all exceptions. If you are making a representation that your assets don’t have any liens other than as disclosed on a schedule, be careful to disclose all the liens on the schedule. As a borrower, it’s in your best interest to be thorough and inclusive.

3. Covenants. There are two kinds of covenants: thou shalt, and thou shalt not. Borrowers should pay special attention to covenants that restrict it from corporate actions, such as making distributions to its shareholders or members, selling its assets, merging with another entity or undergoing a change in control. Make sure you understand the limits imposed by the bank and can live with them.

4. Focus on costs and fees. Banks don’t just make money from interest. Every loan agreement will include other costs and fees to be paid by the borrower. For example, the lender may require the borrower to pay for an annual appraisal of its assets. Make sure you have already agreed to the costs in the term sheet. If not, don’t be afraid to push back. The bank may agree to cover the costs itself.

5. Events of Default. The events of default section is a list of events that allows the bank to require immediate repayment of all amounts outstanding. Generally, any violation of a representation and warranty or a covenant will be deemed an event of default after the passage of some period during which you can cure the problem. Don’t assume that the bank will only call the loan if you fail to make a payment. There are a multitude of other grounds for putting a loan in default. As with the rest of the loan agreement, it is important that you have this section reviewed by a seasoned credit finance lawyer. Visit https://www.richardsbrandt.com/practice-areas/utah/bank-finance-attorney

Read Tips for Borrowers Negotiating a Loan: Part 3 Ancillary Documents

 

 

 

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