ASSET-BASED FINANCE, PART 1 & PART 2 (60 minutes)Automatic perfection (§ 9-309) •Sales (§...
Transcript of ASSET-BASED FINANCE, PART 1 & PART 2 (60 minutes)Automatic perfection (§ 9-309) •Sales (§...
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ASSET-BASED FINANCE, PART 1 & PART 2
First Run Broadcast: August 22 & 23, 2017
1:00 p.m. E.T./12:00 p.m. C.T./11:00 a.m. M.T./10:00 a.m. P.T. (60 minutes)
Asset-based loans are the most common form of finance among closely held companies. Often
lenders are unwilling to loan on the basis of a company’s cash flow – or loan on terms the
company finds acceptable – leaving collateral based loans – secured by the company’s
equipment, inventory, receivables or other assets – as the only form of capital available to the
company. Each type of collateral loan has a different structure and its own nuances that may
help the company sustain operations and grow, or prove to be an operational hindrance. This
program will provide you with a practical guide to structuring, reviewing and drafting for asset-
based loans.
Day 1 – August 22, 2017:
• Asset based v. cash flow borrowing – how it impacts reps, warranties and covenants in
loan documents
• Overlay of UCC Article 9 law and practice on asset-based finance
• Types of loans – revolving loans based on inventory and receivables, terms loans based
on equipment, and chattel paper financing
• Structures – bilateral v. syndicated loans, letter of credit facilities, second liens, inter-
creditor agreements
• Lender fees and other compensation
Day 2 – August 23, 2017:
• Focus on specific types of loans and structuring and drafting nuances of each
• Equipment financing – attachment, perfection and priority issues
• Inventory financing – eligibility, lending formula, and attachment
• Receivables financing – identifiable cash proceeds, lockbox arrangements and control
agreements
• Anticipating enforcement – repossession, disposition, and retention
• Review bankruptcy issues
Speaker:
Steven O. Weise is a partner in the Los Angeles office Proskauer Rose, LLP, where his practice
encompasses all areas of commercial law. He has extensive experience in financings, particularly
those secured by personal property. He also handles matters involving real property anti-
deficiency laws, workouts, guarantees, sales of goods, letters of credit, commercial paper and
checks, and investment securities. Mr. Weise formerly served as chair of the ABA Business Law
Section. He has also served as a member of the Permanent Editorial Board of the UCC and as an
Advisor to the UCC Code Article 9 Drafting Committee. Mr. Weise received his B.A. from Yale
University and his J.D. from the University of California, Berkeley, Boalt Hall School of Law.
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VT Bar Association Continuing Legal Education Registration Form
Please complete all of the requested information, print this application, and fax with credit info or mail it with payment to: Vermont Bar Association, PO Box 100, Montpelier, VT 05601-0100. Fax: (802) 223-1573 PLEASE USE ONE REGISTRATION FORM PER PERSON. First Name ________________________ Middle Initial____ Last Name__________________________
Firm/Organization _____________________________________________________________________
Address ______________________________________________________________________________
City _________________________________ State ____________ ZIP Code ______________________
Phone # ____________________________Fax # ______________________
E-Mail Address ________________________________________________________________________
Structuring & Drafting for Asset-based Financing, Part 1 Teleseminar
August 22, 2017 1:00PM – 2:00PM
1.0 MCLE GENERAL CREDITS
PAYMENT METHOD:
Check enclosed (made payable to Vermont Bar Association) Amount: _________ Credit Card (American Express, Discover, Visa or Mastercard) Credit Card # _______________________________________ Exp. Date _______________ Cardholder: __________________________________________________________________
VBA Members $75 Non-VBA Members $115
NO REFUNDS AFTER August 15, 2017
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VT Bar Association Continuing Legal Education Registration Form
Please complete all of the requested information, print this application, and fax with credit info or mail it with payment to: Vermont Bar Association, PO Box 100, Montpelier, VT 05601-0100. Fax: (802) 223-1573 PLEASE USE ONE REGISTRATION FORM PER PERSON. First Name ________________________ Middle Initial____ Last Name__________________________
Firm/Organization _____________________________________________________________________
Address ______________________________________________________________________________
City _________________________________ State ____________ ZIP Code ______________________
Phone # ____________________________Fax # ______________________
E-Mail Address ________________________________________________________________________
Structuring & Drafting for Asset-based Financing, Part 2 Teleseminar
August 23, 2017 1:00PM – 2:00PM
1.0 MCLE GENERAL CREDITS
PAYMENT METHOD:
Check enclosed (made payable to Vermont Bar Association) Amount: _________ Credit Card (American Express, Discover, Visa or Mastercard) Credit Card # _______________________________________ Exp. Date _______________ Cardholder: __________________________________________________________________
VBA Members $75 Non-VBA Members $115
NO REFUNDS AFTER August 16, 2017
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Vermont Bar Association
CERTIFICATE OF ATTENDANCE
Please note: This form is for your records in the event you are audited Sponsor: Vermont Bar Association Date: August 22, 2017 Seminar Title: Structuring & Drafting for Asset-based Financing, Part 1 Location: Teleseminar - LIVE Credits: 1.0 MCLE General Credit Program Minutes: 60 General Luncheon addresses, business meetings, receptions are not to be included in the computation of credit. This form denotes full attendance. If you arrive late or leave prior to the program ending time, it is your responsibility to adjust CLE hours accordingly.
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Vermont Bar Association
CERTIFICATE OF ATTENDANCE
Please note: This form is for your records in the event you are audited Sponsor: Vermont Bar Association Date: August 23, 2017 Seminar Title: Structuring & Drafting for Asset-based Financing, Part 2 Location: Teleseminar - LIVE Credits: 1.0 MCLE General Credit Program Minutes: 60 General Luncheon addresses, business meetings, receptions are not to be included in the computation of credit. This form denotes full attendance. If you arrive late or leave prior to the program ending time, it is your responsibility to adjust CLE hours accordingly.
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UCC Article 9: Basic Building Blocks | 21767247.1 1
UCC Article 9: Asset-based financing
Steve Weise
Proskauer Rose LLP – Los Angeles
(310) 284-4515
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UCC Article 9: Basic Building Blocks | 21767247.1 2
Overview
•Review of Article 9
o Scope
o Creation
o Perfection
o Priority
o Enforcement
•Specific types of loans and transactions and how they interact with Article 9
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UCC Article 9: Basic Building Blocks | 21767247.1 3
Overview
•Asset based v. cash flow
•Types of loans
•Structures
•Lender fees
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UCC Article 9: Basic Building Blocks | 21767247.1 4
Overview
•Equipment financing
•Inventory financing
•Receivables financing
•Anticipating enforcement
•Bankruptcy
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UCC Article 9: Basic Building Blocks | 21767247.1 5
Does Article 9 apply to the transaction?
•Applies to all personal property
•Meaning of ‘security interest’ (§ 1-201(b)(35))
•Hidden secured transactions
o ‘Dirty’ leases (§ 1-203)
o ‘Sales’ transactions
•Consider taking protective measures, e.g., filing of financing statement (§ 9-505)
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UCC Article 9: Basic Building Blocks | 21767247.1 6
Sales of payment rights (§ 9-109(a)(3))
•Accounts
•Chattel paper
•Payment intangibles
•Promissory notes
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UCC Article 9: Basic Building Blocks | 21767247.1 7
Consignments (§ 9-109(a)(4))
•Consignment creates a ‘security interest’ (§ 1-201(b)(35))
•Consignor is ‘secured party’ (§ 9-102(a)(74))
•Consignee is ‘debtor’ (§ 9-102(a)(28))
•Purchase money security interest treatment
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UCC Article 9: Basic Building Blocks | 21767247.1 8
Exclusions
•Government debtors in some states (§ 9-109(c)(2))
•Consumer deposit accounts (§ 9-109(d)(13))
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UCC Article 9: Basic Building Blocks | 21767247.1 9
Basic building blocks
•Attachment
•Perfection
•Priority
•Security interest only as good as weakest link
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UCC Article 9: Basic Building Blocks | 21767247.1 10
Attachment (§ 9-203)
•Security agreement (§ 9-203(b)(3))
•Rights in the collateral (§ 9-203(B)(2))
•Give value (§ 9-203(b)(1))
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UCC Article 9: Basic Building Blocks | 21767247.1 11
Security agreement (§ 9-203(b)(3))
•Agreement that creates or provides for a security interest (§ 9-102(a)(73))
•In transactions covered by Article 9, includes:
oConsignment agreement
oSales agreement
oLease
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UCC Article 9: Basic Building Blocks | 21767247.1 12
Oral security agreement?
• ‘Pursuant to debtor’s security agreement’
o Possession of tangible collateral (§ 9-203(b)(3)(B)
o Delivery (possession) of certificated security (§ 9-203(b)(3)(C)
o Control (§ 9-203(b)(3)(D))
• Deposit accounts
• Electronic chattel paper
• Investment property
• Letter-of-credit rights
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UCC Article 9: Basic Building Blocks | 21767247.1 13
Security agreement
•‘Grant’ of security interest (§ 9-203(b)(3)(A))
•Consignment, lease, or sales language ‘creates or provides’ for ‘security interest’ in consignment and sales transactions
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UCC Article 9: Basic Building Blocks | 21767247.1 14
Description of collateral (§ 9-108)
• Must ‘reasonably identify’ the collateral
• May not use ‘all assets’ description in security agreement
• OK to describe collateral by ‘type’ or ‘category’
• Description by ‘type’ not sufficient in some circumstances:
o Commercial tort claims
o Consumer transaction involving consumer goods, securities entitlement, or securities account
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UCC Article 9: Basic Building Blocks | 21767247.1 15
Authentication (§§ 9-102(a)(7) and 9-203(b)(3)(A))
•Allows electronic ‘authentication’
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UCC Article 9: Basic Building Blocks | 21767247.1 16
Rights in the collateral or power to transfer (§ 9-203(b)(2))
•‘Power’ to transfer
oBuyer with voidable title
oConsignee (if consignor not perfected)
oSeller of accounts, chattel paper, or instruments where buyer is not perfected (§ 9-318(b))
•Non-transferable property
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UCC Article 9: Basic Building Blocks | 21767247.1 17
Limitations on transferability of collateral
•Generally overridden in full for rights to payment (§ 9-406(d) and (f))
•For other kinds of rights, can create security interest, but cannot force counterparty to acknowledge rights of secured party (§ 9-408)
•IP under federal law
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UCC Article 9: Basic Building Blocks | 21767247.1 18
Give value (§ 9-203(b)(1))
•Meaning of ‘value’ (§ 1-204)
o ‘Any consideration sufficient to support a simple contract’
o Commitment to make a loan
•To whom?
o OK if value goes to third party, e.g., when security interest granted by guarantor and loan made to borrower
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UCC Article 9: Basic Building Blocks | 21767247.1 19
Supporting obligations + underlying collateral
•Security interest automatically created when security interest is created in:
oSupported obligation (§ 9-203(f)) or
oSecured obligation (§ 9-203(g))
•Especially important for chattel paper
•Due diligence on underlying collateral
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UCC Article 9: Basic Building Blocks | 21767247.1 20
Proceeds (§ 9-102(a)(64))
•Security interest in proceeds automatically attaches if security interest has attached to original collateral (§ 9-203(f))
•Security interest may ‘detach’ after 20 days if certain requirements are not met (§ 9-315)
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UCC Article 9: Basic Building Blocks | 21767247.1 21
After-acquired collateral
•Generally allowed (§ 9-204(a))
•Not permitted (§ 9-204(b)):
o Commercial tort claims
o Consumer goods, unless acquired within ten days of secured party giving value
•In security agreement should refer to ‘after-acquired’ collateral or the like (§ 9-108, Comment 3)
•Bankruptcy Code § 552 issues
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UCC Article 9: Basic Building Blocks | 21767247.1 22
Future advances
•Security interest may also secure future advances (§ 9-204(c))
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UCC Article 9: Basic Building Blocks | 21767247.1 23
Perfection (§§ 9-308 et seq.)
•Establishes rights against third parties:
oLien creditors
oTrustee in bankruptcy
oRelevant to priority
•Does not exist unless attachment has occurred (§ 9-308(a))
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UCC Article 9: Basic Building Blocks | 21767247.1 24
Automatic perfection (§ 9-309)
• Sales (§ 9-309(3) + (4)):
o Promissory notes
• Do not need possession
o Payment intangibles (§ 9-102(a)(61))
o Not automatic for sales of accounts or chattel paper
• May still be subject to non-temporal priority rules
• For non-filing, perfection and priority usually dates from date of perfection
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UCC Article 9: Basic Building Blocks | 21767247.1 25
Financing statement – when to use
•Available for all types of collateral (§ 9-310(a)), except:
o Money
o Deposit accounts
o Letter-of-credit rights
o Required federal or other state filings
•Sometimes subject to non-temporal priority rules
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UCC Article 9: Basic Building Blocks | 21767247.1 26
Financing statement – where to file
•File at location of debtor (§ 9-301(1))
•Fixture filing recorded in real property records where fixtures are located (§ 9-301(3)(A))
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UCC Article 9: Basic Building Blocks | 21767247.1 27
What is the ‘location’ of the debtor? • ‘Location’ of debtor:
o Registered organization (corporation, LLC, LP): state of organization (§ 9-307(e))
• New rules for certain business trusts
o Partnership: state of chief executive office (§ 9-307(b)(3))
o Individual: state of principal residence (§ 9-307(b)(1))
o Non-US entity: country of chief executive office, if country has filing system for the collateral (§ 9-307(c))
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UCC Article 9: Basic Building Blocks | 21767247.1 28
Financing statement – content (§ 9-502(a))
•Debtor name
•Secured party name
•‘Indication’ of collateral
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UCC Article 9: Basic Building Blocks | 21767247.1 29
Financing statement – debtor name (§ 9-503)
•Must be exactly correct
•For registered organization: copy exactly from organizational documents
•Individuals
oWhat is the ‘name’?
oNew rules discussed below
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UCC Article 9: Basic Building Blocks | 21767247.1 30
Financing statement – examples of mistakes
Debtor name Mistaken financing statement
C. W. Mining Company CW Mining Company
EDM Corporation EDM Corporation d/b/a EDM
Equipment
Michael Erwin Mike Erwin
Terrance Joseph Kinderknecht Terry J. Kinderknecht
Rodger House Roger House
Michael Barry Mike Barry
Andrew Fuell Andrew Fuel
Silver Dollar, LLC Silver Dollar Stores, LLC
Jim Ross Tires, Inc. Jim Ross Tire Inc.
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Financing statement: registered organization name
•Registered organization
oConfirm that look at actual organizational document (‘public organic document’)
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UCC Article 9: Basic Building Blocks | 21767247.1 32
Financing statement: individual’s name •Alternative A (waterfall) or Alternative B
(safe harbor): o Driver’s license (or other state ID from
same office) from state of filing o ‘Name’ o First personal name and surname
•No guidance on what is ‘first personal name’ and ‘surname’
•California: likely to be either of: o ‘Name’, or o First personal name and surname
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UCC Article 9: Basic Building Blocks | 21767247.1 33
Financing statement – secured party’s name
•When is agent the ‘secured party‘?
•OK to name ‘representative’ of secured party (§ 9-502(a)(2))
•Do not have to indicate representative status (§ 9-503(d))
•Less stringent rules as to getting secured party’s name exactly right (§ 9-506, Comment 2)
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UCC Article 9: Basic Building Blocks | 21767247.1 34
Financing statement – ‘indication’ of collateral
•OK if would satisfy security agreement (§ 9-504(1))
•May use ‘all assets’ as ‘indication’ (§ 9-504(a)(2))
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UCC Article 9: Basic Building Blocks | 21767247.1 35
Financing statement – post-closing events
•Change in debtor’s name (§ 9-507(c))
•Debtor becomes located in different jurisdiction (§ 9-316(a)(2))
•Collateral transferred to a different debtor
o Same jurisdiction (§§ 9-315(a)(1) + 9-507(a))
o Different jurisdiction (§ 9-316(a)(3))
•Some changes in recent amendments
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UCC Article 9: Basic Building Blocks | 21767247.1 36
Financing statement – amendments
•Change name
•Change collateral
•Change other information
•Assign
•Terminate
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UCC Article 9: Basic Building Blocks | 21767247.1 37
Possession (§ 9-313)
•Applies only to tangible collateral
•Through agent is OK (§ 9-313, Comment 3)
•Bailee (§ 9-313(c))
o Not effective unless bailee authenticates record (§ 9-102(a)(69)) that it has possession for ‘benefit of’ secured party
o Bailee may not be too ‘closely connected’ to debtor (§ 9-313, Comment 4)
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UCC Article 9: Basic Building Blocks | 21767247.1 38
Control (§ 9-312(b))
•Deposit accounts (§ 9-104)
•Investment property (§§ 9-106 + 8-106)
o Security entitlements
o Securities
o Securities accounts
•Letter-of-credit rights (§ 9-107)
•Electronic chattel paper (§ 9-105)
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UCC Article 9: Basic Building Blocks | 21767247.1 39
Methods of control
• Deposits accounts (§ 9-104) and securities accounts (§§ 8-106 + 9-106):
o Control agreement
• Need for affirmantive agreement to listen to secured party
• Effect of interpleader
o Secured party is customer of deposit account or entitlement holder of securities account
o Bank or securities intermediary is secured party
o Especially important for proceeds
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UCC Article 9: Basic Building Blocks | 21767247.1 40
Compliance with other laws (§ 9-311) • Certificate of title (§ 9-311(a)(2))
o Cars
• File financing statement for dealers with respect to inventory (seller or lessor of cars) (§ 9-311(d))
• File financing statement if car dealer not in the business of selling cars (as well as leasing, if leasing is what it does) (§ 9-311(d))
• Airplanes (§ 9-311(a)(1))
o FAA filing
o UCC still applies to non-perfection issues
o Capetown Convention
• Ships
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UCC Article 9: Basic Building Blocks | 21767247.1 41
Federal law filing (§ 9-311(a)(1))?
•Copyright
o File in Copyright Office for registered copyright and under UCC for unregistered copyrights
•Patents
o File under UCC
o Precautionary PTO filing (to beat buyers)?
•Trademarks
o File under UCC
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UCC Article 9: Basic Building Blocks | 21767247.1 42
Supporting obligations and underlying collateral
•Security interest automatically perfected when security interest is perfected in supported obligation or secured obligation (§ 9-308(d) + (e))
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UCC Article 9: Basic Building Blocks | 21767247.1 43
Proceeds
•Perfected if security interest in original collateral was perfected (§ 9-315(c))
•May lose perfection after 20 days if certain requirements are not met (§ 9-315(d))
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UCC Article 9: Basic Building Blocks | 21767247.1 44
Priority: other secured creditors
•First to file or perfect (§ 9-322(a)(1))
•OK to file before elements of attachment have occurred
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UCC Article 9: Basic Building Blocks | 21767247.1 45
Priority: Perfection by control
•Generally first to ‘obtain’ control (§§ 9-327(2) (deposit accounts) and 9-328(2) (securities account)
•Many non-temporal exceptions
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UCC Article 9: Basic Building Blocks | 21767247.1 46
Perfection by possession
•First to ‘perfect’ if both secured parties perfected by possession (§ 9-322(a)(1))
•This means that possession without attachment is not sufficient to set priority because ‘perfection’ has not occurred yet
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UCC Article 9: Basic Building Blocks | 21767247.1 47
Non-temporal priorities
• Instruments (§ 9-330(d)):
o Possession plus other conditions
• Investment property
o Control (§ 9-328(1))
o Possession of certificated security (§ 9-328(5))
• Chattel paper (§ 9-330(b) + (c))
o Possession plus other conditions
• Deposit accounts (§ 9-327(1)
o Control
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UCC Article 9: Basic Building Blocks | 21767247.1 48
Purchase-money security interests (§ 9-324)
•Goods only (§ 9-103(a)(1))
•Inventory
o Notice to earlier secured party before deliver (§ 9-324(b))
o File before deliver (§ 9-324(b)(1))
•Equipment and no notice to earlier secured party (§ 9-324(a))
o File within 20 days of delivery
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UCC Article 9: Basic Building Blocks | 21767247.1 49
Effect of other articles of UCC
•Article 3
o Holder in due course of negotiable instruments takes free of security interest (§ 3-306)
•Article 8
o Protected purchaser takes free of security interest and similar rules for security entitlements (§ 8-303(b))
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Lien creditors against perfected secured party • Generally perfected security interest has priority over
later lien creditor (§ 9-201)
• Priority between lien creditor and unperfected security interest discussed below
• Future advances have priority over subsequent lien creditor if any of the following apply (§ 9-323(b)):
o Advance made within 45 days after person becomes a lien creditor
o Advance made without knowledge of lien of lien creditor, or
o Advance made ‘pursuant to commitment’
• Lien creditor may give notice to secured parties
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Certain transferees against perfected secured party
•Buyer in ordinary course of business takes free of earlier perfected security interest (§§ 9-320 + 1-201(b)(9))
•Lessee in ordinary course of business takes free of earlier perfected security interest (§ 9-321(c))
•Non-exclusive licensee in ordinary course of business takes free of earlier perfected security interest (§ 9-321(b))
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Proceeds (§ 9-322(b) – (e))
•Generally follow priority of original collateral
•Special rules for non-temporal priority (§ 9-322(c))
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Effect of unperfected security interest
•Security interest is ‘subordinate’ to lien creditor that becomes a ‘lien creditor’ before earlier of (§ 9-317(a)(2)):
o Perfection of security interest
o Financing statement filed and security agreement in place (even though value has not jet been given)
•Trustee in bankruptcy and debtor in possession have same rights (Bankruptcy Code § 544)
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UCC Article 9: Basic Building Blocks | 21767247.1 54
Effect of unperfected security interest
• Buyer of tangible collateral takes free if gives value and receives delivery without knowledge of security interest and before it is perfected (§ 9-317(b))
• Lessee of goods takes free if gives value and receives delivery without knowledge of security interest and before it is perfected (§ 9-317(c))
• Licensee of general intangible and buyers (not secured party) of intangibles take free if give value without knowledge of security interest and before it is perfected (§ 9-317(d))
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Third-party rights
•Account debtor (§ 9-102(a)(3)) on payment obligation:
o Can recoup claims arising out of same contract or transaction (§ 9-404(a)(1))
o Can use set off rights that arise before account debtor notified of assignment (§ 9-404(a)(2))
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Enforcement
•Follow rules in Part 6 of Article 9
•Failure could result in:
o Reduced or no deficiency
o Liability to owner or persons with interests in collateral
o Reduced rights against guarantor
•Effects of Bankruptcy Code §§ 362 and 552
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Asset based v. cash flow borrowing
•Representations and warranties
o Ownership and authority to act
o Absence of other rights in collateral
o Financial statements
•Covenants in loan documents
o Dispositions (carve out for BIOCOB?)
o Insurance
o Operations
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Types of loans
•Revolving loans based on inventory and receivables
oCollateral more important
oNeed to maintain review of status of collateral
oPMSI issues
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Types of loans
•Terms loans based on equipment
oPMSI less of a problem
oPay attention to notices
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Types of loans
•Chattel paper financing
oSpecial priorities
oElectronic chattel paper
•Effect of characterization of collateral on non-temporal priorities
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Structures
•Bilateral v. syndicated loans
oDirect rights against borrower?
oDuties of lead bank
•Agent v. participation
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Structures
•Letter of credit facilities
oEffect on availability
oReimbursement rights and agreements
•Collateral for these obligations
oSubrogation rights
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Structures
•Second liens
o Different credit evaluation
•Inter-creditor agreements
o Payment
o Priority
o Standstill
o Treatment of proceeds
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Lender fees and other compensation
•Commitment fees
•Administrative fees
•Attorneys fees
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UCC Article 9: Basic Building Blocks | 21767247.1 65
Equipment financing
•Attachment
•Perfection
•Priority
oPMSI issues
oProceeds questions
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UCC Article 9: Basic Building Blocks | 21767247.1 66
Inventory financing
• Eligibility
• Lending formula
• Attachment
• Perfection
• Priority
o Priority in proceeds issues
o BIOCOBs
• Monitoring collateral
• PMSI
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Accounts financing
• Dealing with account debtors
o Assignability?
o Notice?
o Set off?
o Direction to pay
• Identifiable cash proceeds
• Lockbox arrangements
• Proceeds issues
• Control agreements
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Chattel paper financing
•Dealing with account debtors – see accounts
•Proceeds issues
•Non-temporal priorities – § 9-330
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Anticipating enforcement
• Monitoring the collateral
o Perfection certificates
o Compliance certificates
o Other post-closing changes
• Repossession
o Need to move quickly
• Disposition
• Retention
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Bankruptcy
•Automatic stay
•Effect of non-perfection
•Court power to modify terms