advanced loan documentation · • for lease • to be furnished under a service contract • as...

Your State Association Presents

Advanced Loan Documentation

Program Materials

Use this document to follow along with the webinar. Please test your system before the broadcast. Be sure to

print enough copies for all listeners. Chapter 11 of the Lenders LearnTM secured lending guide is provided as a

separate handout.

May 17, 2016 Presenter: Robin Russell

Technical Support (for faster service please submit inquiries via email or online): (Registration & Tech Support): Email- [email protected], Phone- (877)988-7526 FOR ADDITIONAL ASSISTANCE PLEASE REFER TO OUR FAQs

mailto:[email protected]

https://bankers.confedge.com/ap/eSite/?i=faq

About Lenders LearnTM

Lenders LearnTM provides lenders and compliance officers with a deep understanding of secured lending. For each of the 15 core courses (30 hours total), attendees receive a copy of the slides and at least one chapter from Robin’s new 2016 Multistate Secured Lending Guide.

Once you have completed the core curriculum, you will have a 17 chapter reference. Whether your bank registers for one or all 15 webinars, you will find the information practical and valuable. See below for 2016 broadcast dates.

1: Basic Business Entities (1/21)2: The UCC for Lenders (2/3)3: Loan Doc 101: The Basics (2/10)4: Loan Doc 101: Business Collateral (2/23)5 & 6: Loan Doc 101: Perfection by Possession & Control (2/18) 7 & 8: Basic RE Loan Documentation (3/2 & 3/3)9: Oil & Gas Lending (4/6) 10: Agricultural Lending (4/18)11: Commercial Loan Documentation (5/3 & 5/4)12: Letters of Credit (5/17)13: Lending to Municipalities (8/24)14, 15, 16: Basic Bankruptcy for Bankers (11/2)17: Loan Participations (11/15)

Also Recommended: • Top Loan Documentation Mistakes (TBD),• Advanced Commercial Loan Documentation (6/1)• Understanding Commercial Loan Documents (9/20)• Understanding Real Estate Loan Documents (9/22)• Commercial Real Estate Loan Documentation (12/7)

All programs will be recorded and available for viewing after the broadcast date. If you would like to complete the Lenders LearnTM curriculum and missed the webinar, please visit the on-demand catalog to register.

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Advanced Loan Documentation

Robin RussellAndrews Kurth LLP

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Robin Russell

ROBIN RUSSELL Robin is a fellow in the American College of Bankruptcy. She combines a depth ofexperience in bankruptcy restructuring and litigation with financial transactions. She has representedcorporate debtors, liquidating trustees, bondholders, unsecured creditors' committees, bank groups,private equity funds, landlords, trade creditors and bidders for estate assets in Chapter 11 and Chapter 7bankruptcy proceedings and has litigated fraudulent conveyance and preference claims in bankruptcy anddistrict court. She has also represented banks, institutional lenders and corporate borrowers in commercialloan transactions and debt restructurings. Robin is the principal author of Thomson Reuters’ Texas PracticeGuides for both Creditors’ Rights and Financial Transactions and the Texas Bankers Association’s TexasSecured Lending Guide, Texas Real Estate Lending Guide, Texas Problem Loan Guide and Texas AccountDocumentation Guide. She is a frequent speaker on banking, bankruptcy and financial restructuring relatedtopics, an elected member of the American Law Institute and has served as a Chapter 7 Trustee. Robinreceived her LL.M. in Banking Law from Boston University and her J.D. from Baylor University where shewas Editor in Chief of the Baylor Law Review and the highest ranking graduate in her class. Prior to joiningthe firm she clerked for the Texas Supreme Court.

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This presentation is designed to provide accurate andauthoritative information in regard to the subject mattercovered. It is provided with the understanding that neitherthe presenter nor your State Bankers Association is engagedin rendering legal, accounting or other professional advice orservice. If legal advice or other expert assistance is required,the services of a competent professional person should besought — from a Declaration of Principles Adopted by theAmerican Bar Association and a committee of Publishers andAssociations.

Notice

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1. Your Collateral Package2. Borrowing Base Calculations and Certificates3. Security Agreements and UCC Financing Statements4. Lien Priority5. Lien Subordination6. Authorization and Signature Requirements7. Guarantors, Cosigners and Third Party Pledges of

Collateral8. Amendments and Waivers to Loan Documents9. Collateral Receipts and Responsibilities10. Loan Monitoring: Documents Going Forward

Ten Topics for Today

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1. Collateral Classifications and Descriptions

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Collateral Description• Real property description must be specific: metes and bounds or map

and plat

• UCC Collateral may be described by item or type.

• A collateral description in the UCC-1 (but not the security agreement) on commercial collateral may simply state “all assets” or “all property”.

• A UCC-1 on a commercial tort claim requires a specific description of the claim.

• A UCC-1 on consumer goods requires a description of the specific consumer good.

• A security interest in a consumer’s investment property requires

specific identification of the account.

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The UCC covers five types of tangible personal property:• Inventory• Equipment• Fixtures• Farm Products• Consumer GoodsIntangible personal property is divided into the following classification types under the UCC:• Accounts• Chattel Paper• Documents (of Title)• General Intangibles• Investment Property• Instruments• Commercial Deposit Accounts• Letter of Credit Rights• Commercial Tort ClaimsIf accounts represent amounts due from the U.S. government, they may be subject to special rules, see Government Contracts

Types of Collateral AreCovered by the UCC-1

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Tangible personal property includes the following types of collateral not exclusively covered by the UCC:

• Motor Vehicles

• Manufactured Homes

• Boats and Vessels

• Aircraft

• Rolling Stock

Intangible personal property also includes the following types of collateral not subject to the UCC:

• Life Insurance

• Consumer Deposit Accounts

• Non-Commercial Tort Claims

Interests in real property

• Fee/Leasehold

• Oil & Gas

Types of Collateral Not Covered by the UCC-1

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Lien a/k/a Attachment + Perfection = Secured Status

Security Agreement + UCC-1

Deed of Trust + Recording in County

Ship Mortgage + Coast Guard Filing

Aircraft Security Agreement + FAA Filing

Investment Property + Account Control Agreement Security Agreement

Achieving Secured Creditor Status

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• Bank gives value

• Debtor has rights in collateral

• Debtor has signed written agreement granting lien

Attachment of Lien: Contract Basics

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• File UCC-1

• Possession

• Control

• Notation on Title

• Non-UCC Filings

Methods of Perfection

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2. Borrowing Base Calculationsand Certificates

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Borrowing Base• Maximum amount of money a lender will loan to a company,

based on EBITDA and/or collateral values.

• Collateral can include inventory, equipment, accounts receivable or oil & gas reserves.

• Bank determines a discount factor (i.e., a certain percentage which is multiplied against the value of the collateral). The resulting value is the amount of money that will be available to loan to the company.

Example: If a company has inventory worth $100,000, and the lender’s discount factor is 50%, the borrowing base if $50,000.

• Credit available is lessor of (i) $_____________ and (ii) borrowing base

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Inventory“Inventory” is defined by the UCC as goods leased by a person as lessor or held

• for sale

• for lease

• to be furnished under a service contract

• as raw materials

• as work in process or

• as materials used or consumed in a business

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AccountsAn “Account” is defined by the UCC as a right to payment ofa monetary obligation, whether or not earned byperformance,• for property that has been or is to be sold, leased,

licensed, assigned, or otherwise disposed of,

• for services rendered or to be rendered,

• for a policy of insurance issued or to be issued,● ● ●

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Set-OffUnless the Bank obtains a “no setoff” provision, payment due by the government under the contract can be set off against unrelated government claims against the contractor.

Bank

Borrower

Borrower Dept. ofDefense

IRS

set-off

owes$

owes$

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Set off Issues: Liens on Inventory and Accounts

Borrower:

Computer Component Inc.

Your Bank

Account Debtor:

Computer Products, Inc.

Sale of inventory Accounts

secured loan

lien on accounts

• Bank takes lien on account subject to all of account debtor’s claims against borrower and defenses against payment

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"Eligible Inventory"“Eligible Inventory” means, at any time, all inventory (as such term is defined in Section 9-109(4) of the UCC) of the Company for which each of the following statements is accurate and complete (and the Company by including such inventory in any computation of the Borrowing Base shall be deemed to represent and warrant to the Bank the accuracy and completeness of such statements as to said inventory):

• Said inventory shall be valued in accordance with GAAP and (i) shall include raw materials and finished goods but (ii) shall not include goods that are classified as “work-in-progress”;

• Said inventory is in good condition, meets all standards imposed by any governmental authority having regulatory authority over it, its use and/or sale and is either currently usable or currently salable in the normal course of business of the Company;

• Said inventory is not (i) located outside the United States of America or (ii) in the possession or control of any warehouseman, bailee, or any agent or processor for or customer of the Company or, if it is in any such Person’s possession, such warehouseman, bailee, agent, processor or customer and such warehouseman, bailee, agent, processor or customer has waived or subordinated any rights to payment secured by any Lien it may have to the prior payment of the obligations to the Bank;

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"Eligible Inventory" (cont'd.)• Each of the representations and warranties set forth in the

Security Agreement with respect to said inventory is true and correct in all material respects on such date;

• Said inventory is, and at all times will be, free and clear of all liens other than the lien of the Bank;

• Said inventory does not include goods that have been damaged or returned;

• Said inventory does not include goods that are not owned by the Company or that are held by the Company pursuant to a consignment agreement.

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Eligible Accounts“Eligible Accounts” means, at any time, the net invoice or ledger amount owing on each account (which shall mean any “account” as such term is defined in Section 9-106 of the UCC and any “chattel paper” as such term is defined in Section 9-105(1)(b) of the UCC) of the Company arising from the sale, lease or exchange of goods or the rendering of any service by the Company (net of any credit balance, returns, trade discounts or unbilled amounts or retention) for which each of the following statements is accurate and complete (and the Company by including such account in any computation of the Borrowing Base shall be deemed to represent and warrant to the Bank the accuracy and completeness of such statements):

• Said account or chattel paper is a binding and valid obligation of the obligor thereon in full force and effect;

• Said account or chattel paper is genuine as appearing on its face or as represented in the books and records of the Company;

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Eligible Accounts (cont'd.)• Said account or chattel paper is free from claims regarding

rescission, cancellation or avoidance, whether by operation of law or otherwise;

• Payment of said account or chattel paper is less than 90 days past due as determined by the due date stated on the invoice therefor (or if said account or chattel paper is not paid by reference to an invoice in the ordinary course of business but instead by reference to the terms of the agreements creating said account or chattel paper, said account or chattel paper has not remained unpaid beyond 90 days after the due date there for);

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Eligible Accounts (cont'd.)• Said account or chattel paper is net of concessions, offset

(excluding any accounts payable offset supported by a letter of credit) or understandings with the obligor thereon of any kind;

• Said account or chattel paper is, and at all times will be, free and clear of all Liens;

• Said account or chattel paper is derived from goods sold or leased or services rendered to the obligor in the ordinary course of business of the Company;

• Said account or chattel paper is not (i) carried on the books of the Company, as an “exchange account receivable” or (ii) subject to an exchange agreement with another Person;

• Said account or chattel paper is not payable by an obligor who is more than 90 days past due with regard to 20% or more of the total accounts and chattel paper owed by such obligor or any of its Affiliates;

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Eligible Accounts (cont'd.)• The obligor on said account or chattel paper has been sent an invoice

within 10 days after said account or chattel paper has been entered on the financial records of the Company;

• All consents, licenses, approvals or authorizations of, or registrations or declarations with, any Governmental Authority required to be obtained, effected or given in connection with the execution, delivery and performance of said account or chattel paper by each party obligated thereunder have been duly obtained, effected or give and are in full force and effect;

• The obligor on said account or chattel paper (i) is not the subject of any bankruptcy or insolvency proceeding, has not had a trustee or receiver appointed for all or a substantial part of its property, has not made an assignment for the benefit of creditors, admitted its inability to pay its debts as they mature or suspended its business; and (ii) is not affiliated, directly or indirectly, with the Company as a subsidiary or other affiliate, employee or otherwise;

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Eligible Accounts (cont'd.)• The goods sold or leased or services rendered resulting in the right

to payment in connection with said account were sold, leased or rendered in a state or territory of the United States of America (excluding, however, such goods which are sold or leased for export outside of the United States of America), said account or chattel paper is payable in the United States of America, and the obligor thereon is subject to the jurisdiction of federal, state or provincial courts in the United States of America, unless said account or chattel paper is backed by a letter of credit in form and substance acceptable to the Agent and issued by an issuer, having capital and surplus in excess of $500,000,000 and having ratings of A1 and P1 by Standard & Poor’s Rating Group and Moody’s Investors Service, Inc., respectively;

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Eligible Accounts (cont'd.)• In the case of the sale of goods, the subject goods have been sold to

an obligor on an absolute sale basis on open account and not on consignment, on approval or a “sale or return” basis or subject to any other repurchase or return agreement and no material part of the subject goods has been returned, rejected, lost or damaged, the said account is not, evidenced by chattel paper or an instrument of any kind;

• Said account or chattel paper has not been otherwise determined by the Bank in its good faith discretion, to be unacceptable in accordance with its customary practices for facilities of this nature;

provided, that, if any account, when added to all other accounts that are obligations of the same obligor and its Affiliates, results in a total sum that exceeds 15% of the total balance then due on all Eligible Accounts, the amount of said account in excess of 15% of such total balance then due shall be excluded from Eligible Accounts.

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Borrowing Base Certificate(Accounts)

TO: [BANK]

Ladies and Gentlemen:

The undersigned is an authorized representative of ___________, a _____________, “(Borrower”), and is authorized to make and deliver this certificate pursuant to that certain Credit Agreement dated as of the ____ day of __________, 20___ (the “Effective Date”) between the Borrower and ___________________ (the “Bank”). (Such Credit Agreement, as it may be amended is referred to as the “Credit Agreement”). All terms defined in the Credit Agreement shall have the same meaning herein.

Pursuant to the terms and provisions of the Credit Agreement, the undersigned hereby certifies that the following statements and information are true, complete and correct:

(a) The representations and warranties contained in Article ____ of the Credit Agreement and in each of the other Loan Documents are true and correct on and as of the date hereof with the same force and effect as if made on and as of such date.

(b) No Default or Event of Default has occurred and is continuing. Borrower acknowledges that if an Event of Default exists Bank is not obligated to fund any request for a Revolving Credit Loan.

(c) Since the date of the financial statement of Borrower most recently delivered to Bank pursuant to the Credit Agreement, there has been no Material Adverse Effect.

(d) The amount outstanding under the Revolving Credit Loans does not exceed the lesser of: (i) the Borrowing Base minus the Letter of Credit Exposure or (ii) the Commitment minus the Letter of Credit Exposure.

(e) The total Eligible Accounts Receivable referred to below represent the Eligible Accounts Receivable that qualify for purposes of determining the Borrowing Base under the Credit Agreement. Borrowers represent and warrant that the information and calculations set forth below regarding the Eligible Accounts Receivable and the Borrowing Base are true and correct in all respects.

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Calculation of Borrowing Base1. Total Accounts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $__________2. Ineligible Accounts

(i) more than 30 days past due . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $__________(ii) accounts subject to dispute, setoff, defense, counterclaim or discount . . . $__________(iii) accounts of any local, state or U.S. government agency. . . . . . . . . . . . . . $__________(iv) foreign accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $__________(v) accounts from partners, employees, members, parents, subsidiaries

or affiliates. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $__________(vi) accounts of insolvent or bankrupt parties . . . . . . . . . . . . . . . . . . . . . . . . . $__________(vii) accounts for progress billing or work in progress. . . . . . . . . . . . . . . . . . . . $__________(viii) account debtors. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $__________(ix) accounts from parties with 20% or more of accounts ineligible

pursuant to (i) above . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $__________(x) accounts from parties with more than 25% concentration . . . . . . . . . . . . . $__________(xi) other accounts deemed ineligible by Bank. . . . . . . . . . . . . . . . . . . . . . . . . $__________Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $__________

3. Eligible Accounts(line (1) minus line (2)) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $__________

4. Borrowing Base (80% of line (3) (80% subject to change by Bank)). . . . . . . . . . $__________5. Commitment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $__________6. Amount available to be borrowed (Lesser of line (4) or line (5)) . . . . . . . . . . . . . $__________7. Amount of outstanding Revolving Credit Loan . . . . . . . . . . . . . . . . . . . . . . . . . . $__________8. Letter of Credit Exposure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $__________9. Total utilization of Revolving Credit Commitment – (Sum of line

(7) plus line (8)) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $__________10. Remaining unused Revolving Credit Commitment (line (6) minus line (9)). . . . $__________

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Calculation of Borrowing Base(f) Attached hereto as Schedule 1 is a list of Borrowers’ accounts

payable and their accounts receivable, designating Eligible Accounts, in each case aged in intervals of ___________.

DATED this _____ day of ___________________, 20___.

BORROWER:

By:

Name:

Title:

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BORROWING BASE CERTIFICATE

(Inventory and Accounts)

Reference is made to the Credit Agreement dated as of _________, ____ (as maybe amended from time to time, the “Credit Agreement”) between _______________ (the“Company”, and ______________ (the “Bank”). Capitalized terms used herein and nototherwise defined herein shall have the meanings assigned to such terms in the CreditAgreement. The undersigned, being the ____________________ of the Company, does herebycertify as follows:

BORROWING BASE CALCULATIONS

AS OF _____________, 20___

Accounts Receivable: $_______________

Less:

Receivables more than 60 days past dueReceivables not from sale of

Inventory/performance of serviceSale is not legally bindingNo legal title to ReceivableReceivables subject to setoff/disputeReceivable not payable in $ in USReceivable in excess of 10% from single

account debtorReceivables from account debtor not

acceptable to Bank

_______________

_______________

______________________________

_______________

_______________

Eligible Accounts _______________

Eligible Accounts X 80% $_______________

1.

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Inventory: _______________

Less:

Inventory shipped or on consignmentInventory subject to any Lien other than

Permitted Collateral LiensInventory subject to dispute

_______________

______________________________

2.

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Allowances, Reserves or IllegalInventory located outside USInventory not saleableInventory subject to Non-negotiable

Document of TitleInventory that has been damaged or returnedPermitted Consigned InventoryOther (See Credit Agreement definition of

Eligible Inventory)

______________________________ _______________

______________________________

_______________

Eligible Inventory _______________

Eligible Inventory X 50% $_______________

Cash exceeding $20,000,000 maintained in deposit accounts by the Company $_______________

Total Borrowing Base(sum of lines 1, 2 and 3)

_______________

Total Outstandings:Revolving Credit LoansStated Amount of Letters of Credit

_______________ _______________ _______________

Excess (Deficiency) of Borrowing Base(Line 4 minus Line 5)

_______________

Availability ($[Loan Amount] minus Line 5) $_______________

In WITNESS WHEREOF, the Company has caused this certificate to be executed this ____ day of ____________, 20___ by an Authorized Officer

By: __________________________Name: _______________________Title: _______________________

3.

4.

5.

6.

7.

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EBITDA

A company’s earnings before interest, taxes,

depreciation and amortization.

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Borrowing Base Certificate(EBITDA)

Additionally, the undersigned hereby certifies and represents and warrants to the Bank that (i) as of the date hereof, each representation or warranty contained in or pursuant to any Loan Document, any agreement, instrument, certificate, document or other writing furnished at any time under or in connection with any Loan Document, and as of the effective date of any advance, continuation or conversion requested above is true and correct in all material respects (except to the extent any representation or warranty expressly related to an earlier date), (ii) each of the covenants and agreements contained in any Loan Document have been performed (to the extent required to be performed on or before the date hereof or each such effective date), (iii) no Default or Event of Default has occurred and is continuing on the date hereof, nor will any thereof occur after giving effect to the request above, and (iv) all of the foregoing is true and correct as of the effective date of the calculations set forth above and that such calculations have been made in accordance with the requirements of the Credit Agreement.

BORROWER

By:

Title:

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Effective Date of Calculation: ___________________

A. Borrowing Base Calculation

1. ____1 times EBITDA for the immediately preceding 12-month period $__________

2. Outstanding principal balance of:

a. Term Loan A $__________

b. Term Loan B $__________

c. CapEx Term Loans $__________

d. Sum of items 2.a., 2.b. and 2.c. $__________

3. Reserves on deposit with Bank

a. Bank Products Reserve $__________

b.The sum of the aggregate amount of reserves, if any, established by Agent under Section 2.1(b) of the Credit Agreement $__________

c. Sum of Items 3.a. and 3.b. $__________

4. Borrowing Base (Item 1 minus Item 2.d., minus Item): $__________

5. Availability Calculation

a. (i) Maximum Revolver Amount $__________

(ii) Letter of Credit Usage $__________

(iii) Outstanding Advances $__________

1 Insert Applicable Borrowing Base Leverage Multiple

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(iv) Item 5.a.(i) minus Item 5.a. (ii) minus Item 5.a. (iii) $__________

b. (i) Borrowing Base $__________

(ii) Letter of Credit Usage $__________

(iii) Outstanding Advances $__________

(iv) Item 5.b.(i) minus Item 5.b.(ii) minus Item 5.b.(iii) $__________

c. Lesser of Item 5.a. and 5.b. $__________

B. Letters of Credit Calculation

1. Maximum L/C amount $__________

2. L/Cs permitted under Borrowing Base

a. Borrowing Base (from Section A, Item 4) $__________

b. Amount of current outstanding Advances $__________

c. Item 2.a. minus Item 2.b. $__________

3. L/Cs permitted under Maximum Revolver Amount

a. Maximum Revolver Amount $__________

b. Amount of current outstanding Advances $__________

c. Item 3.a. minus Item 3.b. $__________

4. Letter of Credit Usage plus the amount of any proposed Letters of Credit $__________

5. No L/C Availability if Item 4 is greater than Item 1, Item 2.c. or Item 3.c. $__________

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FORM

OF

NOTICE OF BORROWING

[Date]

Bank

Attention: ____________________

Ladies and Gentlemen:

Reference is made to the Credit Agreement dated as of ______________, 20___ (asamended from time to time, the “Credit Agreement”), between ________________ (the “Company”)and _________________ (the “Bank”). Capitalized terms used herein and not otherwise definedherein shall have the same meanings assigned to such terms in the Credit Agreement.

The Company hereby requests a Borrowing under the Credit Agreement and in thatconnection sets forth below the information relating to such Borrowing (the “Proposed Borrowing”)as required by the Credit Agreement:

(a) Aggregate Principal Amount of Proposed Borrowing $_____________

(b) Borrowing Date of Proposed Borrowing1 $_____________

(c) Type of Loans to comprise the Proposed Borrowing2 _____________

(d) Interest Period and last day thereof3 _____________

1 Must be a Business Day.

2 Alternate Base Rate Loans or Eurodollar Rate Loans.

3 Applicable only to a Proposed Borrowing of Eurodollar Rate Loans, which shall be for one, tow, three or six months duration and shall end not later than the Stated Maturity Date.

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(e) Availability for Loans:

(i) Amount of Borrowing Base as shown on the Borrowing Base Certificate dated4:

$__________

(ii) Sum of aggregate Loans outstanding and Stated Amount of all issued and outstanding Letters of Credit

$__________

(iii) Borrowing Base Availability(Line (i) minus Line (ii))

$__________

(iv) Unused Availability(Lesser of (a) Loan Amount minus Line (ii) and Line (iii))

$__________

By the delivery of this Notice of Borrowing and the acceptance of any or all of theLoans made by the Bank in response to this Notice of Borrowing, the Company shall be deemedto have represented and warranted that the applicable conditions to lending specified in theCredit Agreement have been satisfied with respect to the Proposed Borrowing.

Very truly yours,

THE COMPANY

By: _____________________________

Name: ____________________________

Title: ____________________________

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Borrowing Base Redetermination

• If calculation shows outstanding debt exceeds borrowing base then excess must be repaid

• Bank may allow repayment plan over several months or quarters. (usually does not go over six (6) months)

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3. Security Agreements and UCC-1 Financing Statements

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Mandatory Requirements of a Lien Document

• Identify parties

• Identify what obligation is being secured

• Identify collateral by item or type

• Contain “words of grant” granting lien on collateral

• In writing

• Signed by owner of collateral

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Optional Requirements of a Lien Document

• Representations/Warranties

• Covenants

• Events of Default

• Remedies

• Applicable Law

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Representations and Warranties• valid existence as entity

• authorization to execute and perform

• all necessary government approvals

• no violation of any law or order

• past, present and future name

• location/address of debtor

• Location of collateral

• ownership of collateral

• priority of Bank Lien

• PMSI

• use of property (personal, business, agricultural)

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CovenantsDuties Toward Property• possession• good repair• payment of taxes• access to inspect collateral• notification of loss• access to books and records• nondisposition (unless ordinary course)• recordation of security interest on chattel paper• proper collection and settlement of accounts• no commingling of proceeds• direct payment of accounts receivable• insurance

Other Duties• authorization of secured party to file financing statement• authorization of secured party to perform (i.e., protect collateral)• advance notice of changes (name, location, form of organization)

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Defaults under Lien Document

• failure to pay principal and/or interest

• breach of covenant

• rep or warranty untrue

• bankruptcy/insolvency

• deemed insecure

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Remedies under Lien Document

• charge default interest

• turn over collateral

• enter and take possession of collateral

• foreclose

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UCC-1 Financing Statement Requirements

To be effective, a Financing Statement must:

• give the name of the debtor(s),

• give the name of the secured party,

• give a description of the collateral,

• provide a mailing address for the debtor and the Secured Party of record,

• indicate whether the debtor is an individual or an organization, or,

• if the debtor is an organization, provide the type of organization and the jurisdiction of organization of the debtor,

• signature of debtor not required.

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Debtor Name• The most important element when preparing a

financing statement is the debtor name.

• The debtor name should be nothing more and nothing less than the legal name of the debtor.

• Do not abbreviate words in the debtor name unless the legal debtor name contains abbreviations.

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Name of Record Owner• If the name of the record owner is required in the UCC-1, it

should be obtained through an abstract or title company or from a recent real estate tax bill or some similar document.

• A mailing or street address is not sufficient as a description.

• The following is an example of a legal description of real property:

Lot Fifty-Six (56), in Block Five (5), Plat of Bayou Woods, Section (8), in Harris County, Texas, according to the map thereof recorded in Volume 224, Page 15, of the Map Records of Harris County, Texas.

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4. Lien Priority and Permitted Liens

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The “Covered Dish Supper” Rules of Priority

EquityUnsecuredSecuredPMSIPossessoryLien Holder

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Bankruptcy 101

Assets fmv 500,000

Liabilities 2,000,000

Bank Debt 500,000

Trade Debt 750,000

Judgment 750,000

___________________________________________

If Bank is secured and perfected - 100% recovery

If Bank unsecured or unperfected - 25% recovery

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General Rules of Priority

• possession v. filing > possession wins

• first to file > wins

• pre-existing security > winsinterest

• purchase money security > wins as to interest (PMSI) specific collateral

• secured v. unsecured > secured wins

• perfected v. unperfected > perfected wins

• future advance limitation

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First-to-File (Subordination)

John’s Auto, Inc. 9/8/03 UCC-1 filed by John Doe, Sr.

John’s Auto, Inc. 8/10/07 UCC-1 filed by Bank #1

Subordination

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Purchase Money Security Interest

Equipment and Fixtures• file UCC-1 within 20 days of possession

Inventory• file UCC-1 before debtor takes possession (i.e.,

pre-filing)• notification to other lien holders within last five years

Farm Products• pre-filing• notification to other lien holders within last six months

Consumer Goods

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Purchase Money Security Interest

John’s Auto, Inc. ← 9/8/03 UCC-1 John Doe, Sr.

John’s Auto, Inc. ← 8/10/07 UCC-1 filed by Bank #1on all assets

John’s Auto, Inc. ← 12/8/09 UCC-1 filed by Bank #2PMSI on specific office equipment

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Risk of Future Advances in Face of Judgment Lien

9/1/12 Bank loans $2 million to Borrower, takes lien on all assets and files UCC-1

8/10/13 ABC Corp. gets judgment lien against Borrower/Bank has knowledge 45 days pass

9/27/13 Bank is no longer secured on advances to Borrower unless advances made pursuant to a commitment to lend entered into without knowledge of judicial lien

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Permitted Liens“Permitted Liens” means:a) liens imposed by law for taxes that are not yet due or are being contested in good faith;b) carriers’, warehousemen’s, mechanics’, materialmen’s, repairmen’s and other like Liens

imposed by law, arising in the ordinary course of business and securing obligations that are not overdue by more than thirty (30) days or are being contested;

c) pledges and deposits made in the ordinary course of business in compliance with workers’ compensation, unemployment insurance and other social security laws or regulations;

d) deposits to secure the performance of bids, trade contracts, leases, statutory obligations, surety and appeal bonds, performance bonds and other obligations of a like nature, in each case in the ordinary course of business;

e) easements, zoning restrictions, rights-of-way and similar encumbrances on real property imposed by law or arising in the ordinary course of business that do not secure any monetary obligations and do not materially detract from the value of the affected property or interfere with the ordinary conduct of business of the Company or any Subsidiary;

f) judgment and attachment liens not giving rise to an event of default or liens created by or existing from any litigation or legal proceedings that are being contested in good faith;

g) any interest or title of a lessor in property subject to any capital lease obligation or operating lease which, in each case, is permitted under this Agreement; and

h) liens in favor of collecting or payor banks having a right of setoff, revocation, refund or chargeback with respect to money or instruments of the Company or any Subsidiary on deposit with or in possession of such bank;

Provided that, except as provided in clause g) above, the term “Permitted Liens” shall not include any lien securing borrowed money.

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5. Lien Subordination

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Conducting a Lien Search• Lien searches should be done in the locations

for UCC-1 Financing Statements in the state where the debtor is located.

• When farm products are taken as collateral the Bank should also conduct a lien search in each state in which farm products are located.

• A lien search must be done on the legal name of the Debtor and should be considered on all legal and assumed names used by the debtor within the last five (5) years.

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Names to Search• An incomplete debtor name may result in a failure

to disclose all the desired information.

Example #1: Real Name: Autoworld, Inc. Name Searched: Autoworld, Corp Result: Filings against Autoworld Inc. will be shown because Inc. and Corp. are currently considered ancillary information by the Texas Secretary of State.

Example #2: Real Name: Autoworld of Texas, Inc. Name Searched: Autoworld of California; Result: Filings against Autoworld of Texas not shown.

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PERFECTION QUESTIONNAIRE

The undersigned, (the “Debtor”), hereby certifies with reference to the Security Agreement datedas of _________, 20___, between the Debtor and ____________ (the “Bank”) (terms defined therein beingused herein as therein defined), to the Bank:

1. Names.

(a) The exact legal name of the Debtor as it appears in the Debtor’s Certificate of Formationis as follows:

(b) The Debtor’s state of formation is:

(c) The Debtor was formed as the following type of entity:

(d) The Debtor’s organizational identification number, if any, is:

(e) The Debtor’s Federal Tax Payer Identification Number is:

(f) The Debtor has not changed its identity or organizational structure in any way within the pastfive years.

(g) The following is a list of all other names (including trade names) used by the Debtor or anyother business organization to which the Debtor became the successor by merger,consolidation, acquisition, change in form, nature or jurisdiction of organization or otherwiseat any time during the past five years:

(h) Set forth below is each other name the Debtor has had since its creation, together with thedate of the relevant change:

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2. Current Locations. (a) The chief executive office of the Debtor is located at the following address:

(b) The following are all locations where the Debtor maintains any books or records relating to anyCollateral:

(c) The following are all the places of business of the Debtor not identified above:

(d) Set forth below are all the locations where the Debtor maintains any Inventory, Equipment orother assets not identified above. If the Debtor does not maintain Inventory or Equipment atany other location, please insert the word “None” below.

(e) Set forth below are the names and addresses of all Persons other than the Debtor, such asleases, cosigns, warehousemen or purchasers of Chattel Paper, which have possession of any ofthe Debtor’s Collateral consisting of Instruments, Chattel Paper, Equipment or Inventory. If noother person is in possession of any of the Debtor’s Inventory, Equipment, etc. please insert theword “None” below.

3. Prior Locations. Set forth below is mailing address for each location or place of business maintainedby the Debtor at any time during the past five years:

4. Other Real Property. Set forth below is a list of the Debtor’s material real property, other than thelocations and places of business listed above. If the Debtor has no other real estate please insert theword “None” below.

Mailing Address County State

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Customer BillingsPercentage

of Gross Billing

Bank or Broker Address Account No.

Debtor or Issuer Amount Security Agreements

5. Major Customers. Set forth below is information on each customer of the Debtor (i)whose annual billings exceed 5% of the gross billings of the Debtor, (ii) who isorganized as a foreign entity, or (iii) which is a governmental unit.

6. Bank Accounts. Set forth below is a list of all bank, time deposit and other similar accounts maintained by the Debtor.

7. Instruments and Other Securities. Set forth below is a list of all Chattel Paper (i.e., adocuments that evidencing both monetary obligation and a security interest in goodssuch as an installment sales contract), letters of credit issued in favor of the Debtor,promissory notes and securities (debt and equity) held by or on behalf of the Debtor(including loans to partners, employees and other affiliates), if such item has a fairmarket value greater than $[insert amount deemed relevant]).

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Attached is a copy of a file search report from the Uniform Commercial Code filingofficer in each jurisdiction identified in paragraph 2 or 3 above with respect to each name setforth in paragraph 1 above and a copy of each financing statement or other filing identified insuch file search reports. [Bank officer attach]

IN WITNESS WHEREOF, I have hereunto set my hand this ___ day of ___________,20___.

_______________________________________

Name: _________________________________

Title: __________________________________

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Liens Not Disclosed By UCC Lien Search

• Liens filed at the county level such as state tax liens and liens on fixtures.

• Liens perfected by possession, such as liens on chattel paper and certificated securities.

• Liens on special classes of collateral such as ships, aircraft, rolling stock, motor vehicles and manufactured homes.

• UCC-1 filings on the debtor in a state not searched.

• Nonownership of the collateral by the debtor.• A lien against the prior owner of the collateral.

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Future Liens Which Can “Prime” The Bank

Certain liens which arise after the Bank perfects its lien can “prime” the Bank

• A purchase money security interest (PMSI).

• A possessory lien created by state law such as an automotive repair shop’s lien on an automobile in its possession.

• A landlord’s lien for past due rent.

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Issues with Tax Return Names

• John’s Auto d/b/a Autoworld FIN 123456• Tax return filed under name Autoworld FIN 123456• IRS files lien against Autoworld• Bank conducts lien search for John’s Auto• Bank loans to John’s Auto taking lien on all assets• John’s Auto filed Bankruptcy• IRS asserts priority over assets of taxpayer 123456• IRS wins

Moral: Check your Borrower’s tax returnsDo lien searches under d/b/a’s too!

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Subordination

“The process by which a creditor is placed in a lower priority for collection of its debt.”

• Subordination of debt

• Subordination of lien position

• pari passu (“on equal footing”) compared

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Lien Subordination

• Prior UCC-1 filing

• Landlord’s lien or other statutory lien

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First-to-File (Subordination)

John’s Auto, Inc. 9/8/03 UCC-1 filed by John Doe, Sr.

John’s Auto, Inc. 8/10/07 UCC-1 filed by Bank #1

Subordination

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6. Authorization Documentation and Signature Requirements

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Sole Proprietorship

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Sole Proprietorship

d/b/a

• An individual doing business under an assumed name

John Lee Doe

d/b/aJohn’s Auto

d/b/aAutoworld

d/b/aJohn’s Flowers

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Sole Proprietorship

• A sole proprietorship is not a legal entity (even if it has its own Federal Tax I.D. Number).

• The borrowing entity is the individual who is operating the business as a sole proprietor.

• The person who is the sole proprietor is personally liable for all debts.

• The sole proprietor reports all profit or loss on his/her personal income tax (Form1040, Schedule C).

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What if my loan officer wants to put the d/b/a in the loan documents?

Correct > John Lee Doe*

* individually and doing business under any assumed name including, without limitation, John’s Auto

Wrong > John Lee Doe d/b/a John’s Auto

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Signature Style

___________________

John Lee Doe

• A person’s signature is whatever he or she has adopted as his or her mark

John

Doemarkhis

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Authorization Documents Required

for Sole Proprietorship

• Most states require Assumed Name Certificate

• Sole Proprietorship Resolution of Authority

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General Partnership

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• If all partner’s surnames are not in partnership name (i.e.,Doe & Brown Auto) then in some states the partnership name (i.e., John’s Auto) is considered an assumed name and an assumed name certificate should be filed.

personally liable for partnership

debts

John’s Auto

John Doe Robert Brown

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Signature Style

John’s Auto

By: _________________________

John Lee Doe, General Partner

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Authorization Documents Required forGeneral Partnership/Joint Venture

• Partnership Agreement

• Partnership Resolution of Authority

• Assumed Name Certificate required in most states

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Limited Partnership

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John’s Corporate Shell, Inc.General Partner

John’s Auto, LP

JohnDoe

JaneDoe

BobSmith

Limited Partners

Liable for debts of limited partnership

Not liable for debts of limited partnership

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Signature Style

John’s Auto, L.P.

Individual General Partner By: ____________________________John Lee Doe, General Partner

John’s Auto, L.P. by its general partner

John’s Corporate Shell, Inc.Corporate General Partner By: ___________________________

Title: John Doe, President___________

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Authorization Documents Required for Limited Partnership• Limited Partnership Agreement

• Certificate of Limited Partnership or Certificate of Formation

• Partnership Resolution of Authority

• Tax Certificate

• Certificate of Authority to Transact Business if conducting business outside its state of incorporation

• Assumed Name Certificate, if appropriate

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Corporation

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ShareholderShareholderShareholder

John’s Auto, Inc.

Directors

Chief Executive Officer/President

OfficerOfficer Officer

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Signature Style

John’s Auto, Inc.

By: ____________________

John Lee Doe, President

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Resolutions of Business Entity• A meeting was held on a certain date• The company made a decision to request a loan

from the lender• The loan will benefit the company• Certain officers designated by name and title are

authorized to execute loan documents on behalf of the company

• Pledging of company assets as collateral is authorized

*Funding of any loan should not occur prior to receipt of a properly executed company borrowing resolution. Otherwise, the borrowing could be challenged as unauthorized.

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Authorization Documents Requiredfor Corporation

• Certificate of Formation or Articles or Certificate of Incorporation

• Bylaws• Certificate of Corporate Status• Certificate of State Tax Status• Resolutions of the Board of Directors• Certificate of Authority to Transaction Business in

all states outside its state of formation in which it does business


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Limited Liability Company

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John’s Auto, L.L.C.

Member Member Member

Manager(s)

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Signature Style

John’s Auto, LLC

By: ___________________

John Lee Doe, Manager


Authorization Documents Required forLimited Liability Company

• Articles of Organization or Certificate of Formation• Regulations or Company Agreement (content

similar to Bylaws)• Certificate of Formation Status• Certificate of Franchise Tax Account Status• Resolutions of the Members• Certificate of Authority to Transact Business in all

states outside its state of formation where it conducts business


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7. Guarantors, Cosigners

and Third-Party Pledges of Collateral


Types of Guaranties• Guaranty of Payment

• Guaranty of Collection

− collection efforts required

− collection efforts excused

• Continuing Guaranty = all debt now hereafter owed to Bank

• Limited Guaranty

− dollar amount

− percentage amount

• Joint Guaranties = each guarantor liable for pro rata share

• Joint and Several Guaranties = all guarantors liable for entire debt

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Requirements of Guaranty• Mandatory

− In writing

− Signed prior to funding (DO NOT BACK DATE)

− Supported by consideration

− Capacity to execute

• Optional

− Waivers

− Collateral

− Subordination


Guaranties in Bankruptcy• Automatic stay protecting debtor does not apply to

guarantor(s)

• Discharge of debtor does not discharge guarantor(s)

• Modification of underlying debt does not effect guaranty if guarantor(s) consented to rearrangements, renewals and extensions

• Guaranty may be a fraudulent transfer (guarantor insolvent when executed)

• Payment on a guaranty may be a preference (guarantor insolvent when paid)

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Subsidiary Subsidiary SubsidiaryA

SubsidiaryB

Parent Parent Parent

Downstream Upstream Sidestream

Affiliate Guaranty Issues


Constructive Fraudulent Transfer

• Debtor made a transfer or incurred an obligation to or for the benefit of transferee and

• Debtor did not get reasonably equivalent value and

• Debtor was insolvent or became insolvent as a result of the transfer; or

• Debtor was engaged in a business for which the remaining capital was unreasonably small; or

• Debtor’s managers knew or should have known that company was incurring debts beyond its ability to repay

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Subsidiary

Parent

Bank

Parent Creditors

Downstream Guaranty

guaranty value presumed


Subsidiary

Parent

SubsidiaryCreditors

Bank

Upstream Guaranty

guaranty value not presumed

How did Sub benefit from loan?

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SubsidiaryA

SubsidiaryB

ParentParent Creditors

Sidestream Guaranty

Bank Subsidiary BCreditors

guaranty


Third Party Pledge of Collateral

• Liability limited to value of collateral

• Pledgor may have no obligations with respect to collateral (i.e., affirmative covenants)

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Guaranty is Better than Cosigner?

• Guarantor does not have defenses of borrower

• Cosigner is borrower


8. Amendments and Waivers

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When Do I Need to Amend a UCC-1?

• Add collateral

• Delete collateral (i.e., a partial release)

• Reflect an address change

• Anytime the UCC-1 becomes “seriously misleading”


What is Seriously Misleading?

no longer perfectedon after acquired

8/21/10 Bank #2files UCC-1 onAutoworld, Inc.

John’s Auto Inc. UCC-1

5/8/08

Jane Anne Doe

Autoworld, Inc. 1/1/10 Jane Anne Smith

4 months

5/1/10

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Change Corporate Structure of Debtor• If the debtor changes its location to another jurisdiction the Bank must

refile in the new location within four months.

EXAMPLE: Debtor is a general partnership whose chief executive office is in Texas. Bank perfects a security interest by filing in Texas. Debtor moves its chief executive office to New Mexico. Bank has four months to refile in New Mexico.

• If the original debtor merges with another entity resulting in a “new debtor” located in a different state (example, Delaware corporation merges into Texas corporation), the following rules will apply: The Secured Party has one year to file a UCC-1 in the new state (in the above example, Texas) unless the name of the new debtor is seriously misleading when compared to the name of the original debtor. In this event the Secured Party has only four months to file in the new state to file or risk the loss of a perfection with respect to after-acquired property.


Addition of Collateral

• An “Amendment” filed on Form UCC-3 may be used to add other collateral.

• A clear description of any collateral to be added must be included.

• An Amendment adding collateral is effective as to the added collateral only from the date of filing the Amendment.

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Documenting Default Waivers• Defaults

− monetary = payments

− nonmonetary = covenants, representations, etc.

• Cure Periods

− None (principal payment, voluntary bankruptcy)

− 3 to 90 days for others

• Under some agreements “Default” becomes “Event of Default” after expiration of cure period


The Alternatives

• Bank waives default for specified period to allow borrower to come back into compliance

• Bank begins to negotiate workout, renewal, extension, etc.

• Bank begins collection process (i.e., sue, foreclose, etc.)

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Legal Action upon Default• Notice of Default

• Demand for Payment

• Notice of Intent to Accelerate

• Notice of Acceleration

• Abandonment of Acceleration

• Reinstatement


Elements of Waiver• A right of the bank (i.e., to call default and

accelerate)

• Knowledge of its existence

- Right set forth in loan document

- Bank aware of breach

• Bank engages in conduct inconsistent with claiming

the right

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Course of Dealing

• Effect of Failure to Take Action could

constitute a waiver

• Waivers should be limited and documented

• Effect of Acceptance of Post-Default

Payments


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9. Collateral Receipts and Responsibilities

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Duties Owed by Bank to Borrower• The Bank must use reasonable care to preserve all

collateral in its possession. For example, if the Bank fails to convert debentures after receiving notice that the bonds have been called for redemption, it may be liable for any losses.

• When a loan secured by convertible securities is granted, the Bank should be aware of and set forth in detail in the loan documents the circumstances that would permit conversion of the securities.

• Similarly, if the borrower directs the Bank to sell the stock to pay off the debt at a time when the stock can be sold and the proceeds would be sufficient to pay off the loan and the Bank refuses, the Bank may bear the loss if the stock later decreases in value.


10. Loan Monitoring

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Post-Closing Documentation• Monthly, Quarterly or Annual Financial

Statements (audited/unaudited)

• Borrowing Base Certificates

• Evidence of Insurance (property, general liability, keyman)

• Evidence of Taxes Paid

• Appraisals/Inspections annually

• Notices of Borrowing

• UCC-3 Continuations

• Amendments and Waivers

HOU:3671307.2