documentation 101 - part lien perfection: business collateral · lien perfection: business...

Your State Association Presents

Lenders LearnTM Chapter 4

Loan Documentation 101 - Part 2

Lien Perfection: Business Collateral

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 4 of the Lenders LearnTM secured lending guide is provided as a

separate handout.

Wednesday, February 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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Loan Documentation 101: Part Two

The UCC and Business Collateral

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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Notice

This presentation is designed to provide accurate andauthoritative information in regard to the subjectmatter covered. It is provided with the understandingthat neither the presenter nor your State BankersAssociation is engaged in rendering legal, accountingor other professional advice or service. If legal adviceor other expert assistance is required, the services ofa competent professional person should be sought —from a Declaration of Principles Adopted by theAmerican Bar Association and a committee ofPublishers and Associations.

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Business Collateral

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Business Collateral

Letter ofCredit Rights

Inventory

Warehouse Receiptsand Bills of Lading

Farm Products

InvestmentProperty

CashChattelPaper

DepositAccounts

InstrumentsAccounts

GovernmentContracts

Warehouse Receiptsand Bills of Lading

General Intangibles Tort Claims

Fixtures

Motor Vehicles Boats Vessels Aircraft

Equipment

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Inventory

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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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Special Situations: Inventory

Examples:

• In some states, perfection of a security interest in motorvehicle inventory held for sale is perfected by filing afinancing statement but individual motor vehicles arecontrolled by the certificate of title laws.

• Perfection of a security interest in aircraft inventory iscontrolled by the FAA.

• In some states, perfection of a security interest in mobilehomes held as inventory are perfected by filing with aspecial state agency.

• In some states, perfection of a security interest in boatsheld as inventory is perfected by filing a financingstatement but individual boats are controlled by specialstate law.

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“Floating Lien” on Future InventoryAn “after-acquired property” clause. This creates a security interest in new inventory that the borrower acquires in the future of the same type as that described in the security agreement. This is also called a “floating lien.”

Example:

All inventory of the debtor, whether presently existing or hereafter acquired and wherever located, including, without limitation, all raw materials, work in process and finished goods, including all products and proceeds of the foregoing.

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Perfection of a Security Interest in Inventory

• File a Financing Statement with the Secretary of State Central Filing Office of the state where the debtor is located

• Physical possession of the inventory by a field warehouse on behalf of the Bank

• Perfection of a security interest in a negotiable document of title covering the inventory, provided that the inventory remains in the possession of the issuer of the negotiable document

• Issuance of a non-negotiable document of title covering the inventory in the name of the secured party, provided that the inventory remains in the possession of the issuer of the non-negotiable document

• Receipt by a bailee provided that the inventory remains in the possession of the bailee

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Documents Required• Loan Application

• Current Financial Statement of Borrower

• Authorization Documentation

• Promissory Note

• Title Verification Documentation

• Security Agreement

• Form UCC-1 Financing Statement

• Lien Search: Information Request

• Insurance Policy

• Landlord’s Waiver

• Current Inventory Aging Statement

• Periodic Inspection Reports and Appraisals

• Documents of Title

• Periodic Reports Concerning Inventory Tax Payments

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Inventory Covenants

• possession

• payment of taxes

• access to inspect collateral

• notification of loss

• nondisposition (unless ordinary course)

• no commingling of proceeds

• insurance

• authorization of secured party to protect collateral

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Accounts

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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,

• for a secondary obligation incurred or to be incurred (A secondary obligation refers to the obligation of a person who (i) has a stake in the proper enforcement of a security interest because he/she has an obligation to pay the secured debt (i.e., a guarantor) or (ii) has a right of recourse against the debtor or another obligor with respect to an obligation secured by the collateral),

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Accounts (cont’d)• for energy provided or to be provided,

• for the use or hire of a vessel under a charter or other contract,

• arising out of the use of a credit or charge card or information contained on or for use with the card,

• as winnings in a lottery or other game of change operated or sponsored by a state, governmental unit of a state or person licensed or authorized to operate the game by a state or government unit of a state, or

• including health-care insurance receivables. A health-care insurance receivable is an interest in or claim under a policy of insurance that is a right to payment of a monetary obligation for heath care goods or services provided. [UCC 9.102(a)(2)]

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Exclusions

The definition of “account” expressly excludes:

• chattel paper

• instruments

• commercial tort claims

• deposit accounts

• investment property

• letter of credit rights

• loans other than under credit or charge cards

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Provisions Prohibiting Assignment

• not effective as to right of payment

• can prohibit assignment of duties

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Bank’s Interest Subject to Claimsand Defenses

• any claim or defense arising out of the contract against the borrower; and

• any other claim or defense which the customer has against the borrower before the customer is notified of the assignment. [UCC 9.404]

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Modification of the Contract

• Prior to notice of assignment may change any term(i.e., price, term)

• After notice modification must be

− in good faith

− commercially reasonable

− no material adverse effect on secured party

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Letter of Credit Rights

• Letters of credit are a method of financing the borrower’s acquisition of inventory.

• The Bank should determine if its borrower is the beneficiary of any letters of credit.

• If the borrower is a letter of credit beneficiary the Bank should take a lien on the letter of credit rights.

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Material v. Immaterial Account Debtor(a/k/a The Major Supplier v. The Exterminator)

Borrower:

Computer Component Inc.

Your Bank

Letter of CreditBank

Account Debtor:

Computer Products, Inc.

Sale of inventory

AccountsPayable

Letter ofCredit

secured loan

lien on all assets, including accounts

lien on letter of credit rights

Letter of Credit Control Agreement

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Copies of Contracts

The Bank should get, before each advance, a copy of:

• Any material contracts giving rise to an account (i.e., the Major Supplier); and

• A signed schedule, ledger or other record of the borrower’s initial accounts. A sample contract (i.e., The Exterminator).

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Letter of Credit Rights

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Letter-Of-Credit Rights

• A “letter-of-credit right” is a right to payment or performance under a letter of credit, whether or not the beneficiary has demanded or is at the time entitled to demand payment or performance.

• The term does not include the right of a beneficiary to demand payment or performance under a letter of credit.

• Article 9 covers written letters-of-credit and electronic letters-of-credit

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Structure of Letter Credit Transaction

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Letter of Credit Terminology

• Applicant. The “Applicant” is the customer of the Bank.

• Issuer. The “Issuer” is the Bank that issues the letter of credit for the account of its customer, the Applicant.

• Beneficiary. The “Beneficiary” is the person who is entitled to obtain payment under a letter of credit. It is the person for whose benefit the letter of credit is issued.

• Adviser. An “Adviser” is a bank institution that notifies the Beneficiary of the issuance of a letter of credit. An Adviser simply gives notice. An Adviser does not become obligated to the letter of credit.

• Confirmer. A “Confirmer” is a bank which becomes obligated on a letter of credit by engaging either that it will itself honor a credit issued by another bank or that such a credit will be honored by the Issuer or a third bank. The Confirmer is actually liable on each letter of credit it confirms.

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Transfers and Assignments of Letters of Credit

• A Beneficiary’s right to draw under a letter of credit is not transferable unless the letter of credit states that it is transferable.

• The magic word is “transferable.”

• Even if a letter of credit is not assignable the underlying letter of credit rights are assignable.

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Perfection of a Security Interestin Letter-Of-Credit Rights

• Perfection of a security interest in letter-of-credit rights is accomplished by “control.”

• Control occurs when the Issuer consents to an assignment of the proceeds of the letter-of-credit

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Documents Required forLetter of Credit Rights

• Loan Application



• Promissory Note


• Letter-of-Credit Control Agreement

• Copy of Original Letter-of-Credit

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Documents Required for Accounts




• Promissory Note


• UCC-1 Financing Statement filed at Central Office

• Lien Search

• Title Verification Documentation/Current Accounts Payable Aging Statement

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Account Covenants

• access to books and records

• proper collection and settlement of records

• notification of assignment of account

• direct payment of accounts receivable

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Borrowing Base

• The “borrowing base” is the amount of money a lender will loan to a company, based on the value of the collateral pledged by the company.

• A borrowing base can be tied to inventory, equipment, accounts receivable, oil and gas reserves.

• A borrowing base can be tied to EBITDA.

• A borrowing base is sometimes called a line of credit.

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Borrowing Base Calculation

• The loan commitment is the lesser of $_____ or the borrowing base.

• The Bank determines a discount factor i.e., a certain percentage which is multiplied against the value of the collateral or EBITDA.

• The resulting number is the maximum amount of money that can be available to the company under the borrowing base.

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

• The loan commitment is the lesser of $______ or the borrowing base.

• If collateral values go down it may trigger a mandatory prepayment.

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Borrowing Base Certificate

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.

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Borrowing Base Certificate (cont’d)

(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.

(f) The 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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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) the following 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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Lockbox

BankDebtor

AccountDebtor

revolving facility

pledge of accounts Lockbox

paymentobligation

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Lockbox

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US Government Contracts

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U.S. Government Contracts

• A lien on a government contract is an assignment of the monies due and to become due under contracts with the United States of America and its agencies.

• Government contracts are subject to the Federal Assignment of Claims Act of 1940.

• The Act allows monies owing under a contract with the federal government to be assigned to a lender.

• The Act does not apply to State or local government contracts.

• Compliance with both the UCC and the Assignment of Claims Act required.

• The Contractor can forfeit its right to full payment by violating federal labor laws.

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Central Contractor Registration

• The Central Contractor Registration (“CCR”) is the primary vendor database for the Defense, Transportation and Treasury departments, and NASA.

• Vendors must register in the CCR in order to be eligible for contracts from those departments and agencies.

• All federal government contractors must register in order to be paid by electronic funds transfer (“EFT”).

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Non-Assignability of Contracts

• A government contract may not be transferred/assigned.

• A claim against the United States may be assigned only after the claim has been allowed, its amount determined, and a warrant issued for its payment.

• The Act allows an assignment to the Bank of money due or to become due under a contract providing for payments totaling at least $1,000.

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Set-Off

Unless 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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Documents Required forGovernment Contracts



• Promissory Note



• Copy of each government contract and any amendments together with a Government Contract Information Sheet

• Notice of Assignment

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Government Contract Information Sheet

1. Contract No.:

2. Contracting Agency:

3. Contract Term:

4. Clause Preventing Assignment?YesNo

5. Payments are made byChecksElectronic Funds Transfer

6. Has the Contracting Agency been instructed to make payments to the Bank Collection Account:

YesNo

7. Address of Contracting Officer:8. Address of Disbursing Officer(s):

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Notice of AssignmentDATE: ________, 20___

[Government Agency] Certified Mail No. _____Return Receipt Requested

Attention: [Contracting official/agency-head]

This has reference to contract No. ___________________________ between [Borrower] whose address is_______________________________________ and ___________________________________ for [describe goods or services

under contract] (the “Contract”). This notice is being sent to you as [contracting officer] [disbursing officer] under the Contract.

All monies due or to become due under the Contract have been assigned to [Bank], all in accordance with the provisions of the Contract and the Assignment of Claims Act of 1940, as amended, 31 U.S.C. § 3727, 41 U.S.C. § 15.

A true copy of the instrument of assignment dated _____________, 20___ executed by [Borrower] is attached hereto.

Payments due or to become due under the Contract should be made to [Bank] by mailing such payments to ________________________.

Please return to [Bank] at ___________________________________, Attention: _____________ the three enclosed copies of this notice with appropriate notations showing the date and hour of receipt and signed by the person acknowledging receipt on behalf of the addressee.

Release of Assignment. A written notice of release of the assignor, [Borrower], by the assignee, [Bank], as agent, shall be necessary in order to release this assignment.

Very truly yours,

[BANK]

By:Name:Title:

ACKNOWLEDGMENT

Receipt is acknowledged of the above notice and a copy of such instrument of assignment. They were received at ____.m. on ___________, 20_____.

Signature:Name:On behalf of:

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Chattel Paper

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Chattel Paper

• Chattel paper is a record or records that evidence– a monetary obligation and

– a security interest in specific goods, a security interest in specific goods and license of software used in the goods, a lease of specific goods, or a lease of specified goods and license of software used in the goods. [UCC 9.102(a)(11)]

• Includes retail installment sales contracts.

• Can be either “tangible chattel paper” or “electronic chattel paper.”

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• The Bank may take possession of tangible chattel paper.

• The Bank may take “control” of electronic chattel paper.

• The Bank may file a Form UCC-1 Financing Statement covering the chattel paper.

• The Bank may require the borrower to assign to the Bank its rights under the financing statements it has on file and the related security agreements.

Methods of Perfecting a Security Interest in Chattel Paper

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• A purchaser of chattel paper who gives new value and takes possession of the chattel paper in the ordinary course of business without knowing of the prior security interest has priority over persons perfected only by filing a UCC-1.

• Avoiding “without knowledge” problem:

To prevent a third person from acquiring rights superior to the Bank’s, stamp the chattel paperwith a legend such as: “This item pledged and/orsold and assigned to the Bank under agreement dated __________, 20__.”

Priority Issue

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• Loan Application• Current Financial Statement of Borrower• Promissory Note• Authorization Documentation• Title Verification Documentation• Loan Agreement• Security Agreement• Lien Search • Form of Chattel Paper• Form UCC-1 Financing Statement• Delivery of Tangible Chattel Paper• Control of Electronic Chattel Paper

Documents Required for Chattel Paper

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Chattel Paper Covenants

• Payment of taxes

• Access to books and records

• Nondisposition (unless ordinary course)

• Recordation of security interest on chattel paper

• No commingling of proceeds

• Direct payment of chattel paper

• Insurance

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Equipment

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Equipment Defined

The UCC defines equipment as all tangible personal property (“goods”) other than inventory, farm products or consumer goods.

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Perfection

• Perfected by filing a UCC-1 Financing Statement with the Office of the Secretary of State in the state where the debtor is located.

• Equipment which is or is to become a fixture must be filed in the office of the County Clerk in the same Real Property Records where a mortgage on the real property would be filed.

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Equipment Covenants

• 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

• no commingling of proceeds

• direct payment of_________

• insurance

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Equipment Located on Leased Premises

• If the borrower leases its business premises or stores its equipment on leased premises, the Bank’s security interest may be subject to the prior interest of the borrower’s landlord.

• Landlord’s Waiver waives the statutory landlord’s lien.

• Landlord’s Waiver and Consent includes a waiver, obligates the landlord to notify the Bank of any defaults under the lease, gives the Bank the rights to cure the defaults and allows the Bank to conducts its foreclosure sale on the lease.

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Purchase Money Security Interest On Equipment

• If the Security Agreement creates a “purchase money security interest,” filing within 20 days after the borrower takes possession of the collateral gives the Bank priority over any other consensual liens arising during that period or subsequent thereto.

• It is best practice for the Security Agreement and UCC-1 to recite that it is purchase money.

• Funding check should be made jointly payable to borrower and vendor or payable just to vendor.

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Documents Required for Equipment




• Promissory Note




• Lien Search: Request for Information and Copies


• Insurance Policy

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Form of Landlord’s WaiverState of __________ §

§County of ___________ §

WHEREAS, _______________________ (the “Undersigned”) is the owner of the property commonly known

(LANDLORD)

as _____________________________________________________________________________________(No. and Street, City, County, State and Zip Code)

described on Exhibit A hereto and made a part hereof for all purposes (the “Premises”); and

WHEREAS, _______________________ (the “Bank”) has entered into a security agreement with_____________________________________ (the “Borrower”) dated _________________, 20___ whereinthe Bank is granted a security interest in all or part of the Borrowers ____________________________ (the“Collateral”).

WHEREAS, the Collateral is or may be located at the above-mentioned Premises and theUndersigned is the holder of a lease on said Premises and Bank is willing to make extensions of credit toBorrower only if the Undersigned will consent to Bank’s security interest in the Collateral and disclaim andwaive any interest therein:

NOW, THEREFORE, in consideration of the sum of One Dollar ($1.00) in hand paid to theUndersigned by Bank, the receipt whereof is hereby acknowledged, the Undersigned intending to be legallybound hereby, agrees as follows:

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The Undersigned consents to Bank’s security interest in said Collateral and disclaims andwaives any interest, privilege or right of the Undersigned therein, such consent, waiver and disclaimerto continue so long as any sum remains owing from borrower to Bank, including but not limited to anycontingent fees, expenses or interest charges therefore owing thereon and any further sums hereafteradvanced by Bank, and Bank may at any time, either before or after foreclosure of the lease held bythe Undersigned, enter said Premises or any other premises where the Collateral may be found andmay remove it. Said Collateral shall at all times be personal property and shall not constitute fixturesor be part of said Premises and shall not be subject to the lien of or security interest contained in theUndersigned’s lease or statutory landlord’s lien, and the provisions hereof shall apply notwithstandingthat any such Collateral may be attached or affixed to said Premises; provided, however, that in theevent Bank removes any such Collateral, Bank shall be responsible for, and agrees to promptly repairany damage to said Premises as a result of any such removal. The Undersigned will not seek to levyexecution on the Collateral and will notify any assignee of its lease of the existence of this disclaimerand waiver, which shall be binding upon the executors, administrators, successors and assigns of theUndersigned, and shall insure to the benefit of the successors and assigns of the Bank.

EXECUTED this ____ day of __________________, 20___.

(Landlord)

By:

Title:

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State of ____________ §§

County of ___________ §

This instrument was acknowledged before me on the ____ day of ______________________, 20____ by .

Notary Public in and forCounty,

My Commission Expires:

[SEAL]

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Fixtures

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Fixtures Defined• Goods become fixtures when they are so

tied to particular real estate that the law considers them to be part of the real estate.

• Examples:– equipment installed in a plant

– central air conditioning systems

– built-in file cabinets or shelving

– hospital equipment

– tenant trade fixtures

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PerfectionForm UCC-1 must be filed in the Real Property Records in each county in which the fixtures are or will be attached to real estate. This must contain:

• A statement that the collateral consists of fixtures.

• A statement that the financing statement is to befiled in the Real Property Records.

• A legal description of the real estate to which thefixtures are or will be affixed (a street address isnot sufficient).

• The name of the record owner of the real estate.

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Deed of Trust/Mortgage asFinancing Statement

• In most states a deed of trust or mortgage covering fixtures is effective as a financing statement if:

– The goods are described in the deed of trust byitem or type;

– The goods which are or are to become fixtures arerelated to the real estate described in the deed oftrust;

– The deed of trust complies with the requirementsfor a financing statement (other than a recital that itis to be filed in the Real Property Records; and

– The deed of trust is properly filed.

• Any deed of trust which is effective as a financingstatement remains effective until the mortgage isreleased or otherwise terminated.

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General Priority Rules on Fixtures• The Bank’s security interest in fixtures must be protected

against parties who may take a security interest in the borrower’s assets and against those who have or may acquire interests in the real estate on which the fixtures will be located.

• If the Bank perfects its security interest on fixtures by a fixture filing, then it is automatically protected against real estate interests created after the Bank’s perfection.

• If the Bank’s security interest is for purchase money and is perfected by a fixture filing before the goods become fixtures or within 20 days thereafter, then the Bank will have priority over any real estate interest which arose before the goods became fixtures (i.e. an existing mortgage on the property).

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Lien Search on Fixtures

Before closing any loan transaction involvingfixtures, the Bank should search the Real PropertyRecords in the Office of the County Clerk in thecounty where the real estate is located to identifyany possible conflicting security interest.

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General Intangibles

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• accounts• chattel paper• commercial tort claims• deposit accounts, documents, goods, instruments,

investment property• letter-of-credit rights• letters of credit, money, and• oil, gas, or other minerals before extraction• “Payment intangible” is a general intangible under which

the account debtor’s principal obligation is a monetary obligation.

General Intangible Defined“General Intangibles” is the catch-all category defined in the UCC to mean “any personal property (including things in action) other than:

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Special Situations

• Certain general intangibles, such as copyrights, trademarks and patents are subject to the UCC as well as federal law.

• The Bank cannot take a security interest in general intangibles such as business licenses and permits because they are non-assignable.

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Examples of General Intangibles:

● intellectual property (i.e. patents, trademarks and copyrights);

● payments under non-negotiable promissory notes;

● goodwill; literary rights; rights to the repayment of unsecured loans not evidenced by promissory notes;

● reversionary interests under true leases of goods;

● rights to payment to dealers for retroactive volume discounts;

● customer lists and trade names;

● assignments of beneficial interests in trusts;

● unearned extended warranty charges;

● an interest in a limited liability company; ● newsletters;

● tax refunds; ● membership in an agricultural co-op; and

● rights to performance; ● an interest in an annuity.

● payments under the federal payment-in-kind program;

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Patents

• A patent is a 17-year right to exclude others from making, using or selling products that are covered by a United States patent.

• A collateral assignment should be recorded in the U.S. Patent and Trademark Office to perfect the security interest.

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Copyrights

• A copyright is a right granted by the federal government under copyright law to the creator or owner of an original work of authorship that is in a tangible medium of expression by being recorded on magnetic tape, written, typed etc. such as paintings, plays, books, databases, advertising and certain types of computer programs.

• Perfection by filing a collateral assignment of federally protected copyrights in the Federal Copyright Office.

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Trademarks

• A trademark comes into existence as a “common law” right based on use.

• There are advantages obtained from federal or state statutory trademark registrations.

• Perfection by collateral assignment of the trademark(s) recorded

– if a federally-registered trademark, in the U.S. Patent and Trademark Office and

– if a Texas trademark, in the Office of the Secretary of State.

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Special Licensing Structure

Owner/Shareholder

Assets, including licenses and permits

Business Entity

BankPledge of 100% ownership Interest

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Losing a Lien on After Acquired Property: Inventory and Accounts

• A bank must amend its UCC-1 if it becomes “seriously misleading.”

• If a debtor changes its name the UCC-1 will likely become “seriously misleading.”

• A seriously misleading UCC-1 can result in the loss of a perfected lien on inventory, accounts and other after acquired property.

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What is Seriously Misleading?

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

no longer perfectedon after acquired

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

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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.

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Transfer of Collateral by Borrower

• The UCC does not require a refiling in the name of a transferee in the case of a transfer of the collateral by the borrower to a transferee located in the same state as the borrower.

• It is advisable for the Bank to file Form UCC-3 when the transfer is made subject to the Bank’s security interest or to file Form UCC-1 when a transfer is made by the borrower to a transferee who executes an assumption agreement.

• If the original debtor transfers the collateral to a transferee located in a different state, the Secured Party has one year to file in the new state to maintain perfection and priority.

Example: Delaware corporation transfers to California limited partnership – Bank has one year to refile in California.

HOU:3632196.1

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Agricultural Collateral/Farm Products

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Farm Products Defined“Farm Products” are goods other than standing timber, with respect to which the debtor is engaged in a farming operation and which are:

• crops grown, growing, or to be grown, including crops produced on trees, vines, and bushes; and aquatic goods produced in aquacultural operations;

• livestock, born or unborn, including aquatic goods produced in aquacultural operations;

• supplies used or produced in a farming operation; or

• products of crops or livestock in their unmanufactured states.

“Farming operation” means raising, cultivating, propagating, fattening, grazing, or any other farming, livestock, or aquacultural operation. “Ranching” is considered “farming” for UCCpurposes.

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Purchase Money SecurityInterest in Livestock

A perfected PMSI in livestock that are farm products has priority over a conflicting security interest in the same livestock, and in their identifiable proceeds and identifiable products in their unmanufactured states, if:

• PMSI is perfected when the debtor receives possession of the livestock;

• the purchase-money secured party sends an authenticated notification to the holder of the conflicting security interest;

• the holder of the conflicting security interest receives the notification within six months before the debtor receives possession of the livestock; and

• the notification states that the person sending the notification has or expects to acquire a PMSI in livestock of the debtor and describes the livestock.

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Documents Required forFarm Products

• Lien Search: Information Request

• Food Security Act List

• Food Security Act Prenotification


• Insurance Policy with endorsement naming Bank as loss payee





• Promissory Note


• UCC-1 Financing Statement

• Lien Search

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