Lecture Materials

LAW AND REGULATION IN BANKING

Nolan Zadra Managing Member

Commercial Credit Legal Advisors Cedarburg, Wisconsin

legaladvisors@wi.rr.com 414-333-5238

August 9, 2017

1

OBTAINING A PRIORITY SECURITYINTEREST IN PERSONAL PROPERTY

Presented By:

Nolan H. Zadra, Esq.

For

The Graduate School of Banking

2017

Nolan H. Zadra

2

PLEDGE + NOTICE OF THE PLEDGE = PERFECTION

2

RULE 1

3

SECURED PARTY (“BANK”) MUST BE PERFECTED IN ORDER TO ATTEMPT TO

GRAB ANY OF THE COLLATERAL IF THE BORROWER DEFAULTS

RULE 2

4

BANK MUST GIVE NOTICEOF ITS SECURITY INTEREST

EVERYTHING MUST BE EXACT; CLOSE IS NOT GOOD ENOUGH

3

D bt h i ht i th ll t l

ATTACHMENT

5

Debtor has rights in the collateral

Bank gives value ($)

Debtor signs security agreement

6

WHAT IS THE NOTICE BANK MUST GIVE?

4

7

FILE A FINANCING STATEMENT FOR MOST TYPES OF COLLATERAL

8

5

OSS SS O O

9

TAKE POSSESSION OF THE COLLATERAL, IF POSSIBLE

ENTER INTO A CONTROL AGREEMENT WITH

10

ENTER INTO A CONTROL AGREEMENT WITH A THIRD PARTY HOLDING THE COLLATERAL

Example: Enter into a control agreement withMerrill Lynch

6

FILE SPECIAL FORMS WITH THE STATE OR FEDERAL AGENCY GOVERNING PARTICULAR COLLATERAL

11

COLLATERAL

Example: File lien on motor vehicle with the state motor vehicle department (unless the vehicle is “inventory”).

Example: File a Mortgage of Copyrights with the United States Copyright Office (retain outside counsel).

WHAT NOTICE SHOULD BE GIVEN?

12

WHAT NOTICE SHOULD BE GIVEN? DEPENDS UPON HOW THE COLLATERAL

IS CLASSIFIED.

7

13

SEE EXHIBIT A

EXHIBIT A

SOUTHERN SHORES TERMINALJAN. - PRESENT 2000

Crane StructureConcrete WorkCrane

14

CraneInsuranceSignatureAttorneyEquip. RentalEngineeringElectricalPaintInterestOffi BldOffice Bldg.Maint. Bldg.Dock/ShelterRock

8

USE REVISED ARTICLE 9CATEGORIES WHEN POSSIBLE

FARM PRODUCTS

FIXTURES

ACCOUNTS

AS EXTRACTED COLLATERAL

15

FIXTURES

GENERAL INTANGIBLES

INSTRUMENTS

INVENTORY

INVESTMENT PROPERTY

LETTER OF CREDIT RIGHT

AS EXTRACTED COLLATERAL(Minerals, Oil or Gas)

CHATTEL PAPER

COMMERCIAL TORT CLAIM

CONSUMER GOODS

DEPOSIT ACCOUNT

MANUFACTURED HOME

TIMBER TO BE CUT

DOCUMENTS OF TITLE

EQUIPMENT

FOR DETERMINING THE PROPER CLASSIFICATION, IT IS IMPORTANT

TO DETERMINE THE CONTEXT IN WHICH GOODS ARE HELD BY THE PLEDGOR

16

Inventory - goods held for sale or lease

Consumer goods - goods used or bought primarily forpersonal, family or household purposes

Equipment - goods other than inventory, farm products orconsumer goods

9

17

18

10

19

INVENTORY EQUIPMENT CONSUMER GOODS

20

INVENTORY EQUIPMENT CONSUMER GOODS

11

21

ANNUITY

Perfect by:

T k i t f th it ith th i

22

Take an assignment of the annuity with the issuer.

Obtain possession of the original annuity.

File a financing statement on accounts, instruments and general intangibles.

12

23

24

13

TREE NURSERY

25

26

14

27

28

15

Security interest in accounts, inventory and equipment - obtain security agreement and file a financing statement on accounts, inventory and equipment.

Security interest in equipment leases - obtain security agreement, file a financing statement on chattel paper, inventory and equipment and take possession of the original leases.

29

q p p g

Bank Lessor Lessee

Caution: If the equipment lease is really a conditional sale (not a true lease), your lessor/borrower may no longer have a priority interest in the leased goods unless your lessor/borrower has, in fact, perfected its security interest in the underlying goods.

$ Lease of Equipment

Security Interest (LeasingCompany)

Security interest in cattle - obtain security agreement and file a financing statement on farm products.

Note: An EFS or Effective Financing Statement is not a financing statement. To perfect in the cattle, one must file a regular financing statement.

Security interest in CD issued by another bank and represented by a physical certificate of deposit - obtain a security agreement but then take possession of the CD, file a financing statement AND IN MOST INSTANCES, OBTAIN A CONTROL AGREEMENT.

Perfection depends upon whether the certificated CD is

31

Perfection depends upon whether the certificated CD is considered an instrument (take possession of the physical certificate) or a deposit account (enter into a control agreement with the issuer). Most CDs will be deposit accounts. However, a negotiable CD is usually an instrument, so possession will provide perfection. Also, a non-negotiable CD might still be considered to be an instrument, enter into a control agreement and take possession of the CD certificate.

Security interest in an uncertificated CD (held electronically by another bank) - obtain security agreement and, since the uncertificated CD is a deposit account, enter into a control agreement with the other bank issuing the CD.

16

Security interest in stock held at Merrill Lynch - obtain a security agreement, obtain a control agreement and recommend filing a financing statement as to investment

t

31

property.

Security interest in stock certificates - obtain a security agreement, take possession of the stock certificates, make an inquiry to make sure the certificates are not fraudulent, obtain signed stock powers for each certificate. Also file a financing statement as to investment property.

For sale - file financing statement as to inventory.

For use in the business - file under the certificate of title

Security Interest in motor vehicles held:

32

laws.

For lease (where the dealer also sells motor vehicles) - file financing statement as to inventory.

For lease (where the dealer does not sell but only leases motor vehicles) - file under the certificate of title laws.

17

33

GETTING THE NAME RIGHT

Test: Does the financing statement sufficiently provide the name of the debtors (in accordance with Section 9-503[a])? If not, it is seriously misleading, and the filing will be invalid.

E ti /S f t N t If h f th d f th

34

Exception/Safety Net: If a search of the records of the filing office under debtor’s correct name, USING THE FILING OFFICE’S STANDARD SEARCH LOGIC, would disclose a financing statement that fails to provide the name of the debtor (in accordance (with Section 9-503(a)), the name provided does not make the financing statement seriously misleading. (9-506(c))

18

Filed Name: Nittolo Land Development Associates, Inc.

Correct Name: Nittolo Land Development Association, Inc.

35

Filed Name: KWM Electronics Corporation

Correct Name: K.W.M. Electronics Corporation

Filed Name: Net work Solutions, Inc.

Correct Name: Network Solutions, Inc.,

Filed Name: Terry Kinderknecht

Correct Name: Terrance Kinderknecht

Fil d N R H

36

Filed Name: Roger HouseCorrect Name: Rodger House

Filed Name: Gu SangwooCorrect Name: San Woo Gu

19

37

2010 Amendments to Revised Article 9 Effective July 1, 2013 (in most states)

Registered Organization (corporations; limited liability companies; limited partnerships; limited liability partnerships; statutory business trusts):

File on name in “Public Organic Document” in state where formed and still registered.

Limited liability partnership is NOT a registered organization.

Name designated on Secretary of State website or Certificate of Good Standing is NOT reliable.

Personal Trusts

File on the exact name specified in the trust agreement (even if File on the exact name specified in the trust agreement (even if you receive a trust certification).

Example: The name of this trust is “John Doe Irrevocable Trust”

If trust has no name, file on the settlor/grantor of the trust.

Example: “John Doe”

38

If settlor/grantor has more than one trust, must identify specific trust information elsewhere in the financing statement.

Must check the box “held in Trust” in Section 5 of the new UCC financing forms (except in those few states that have not adopted or have delayed implementation of the 2010 Amendments that were to be otherwise effective July 1, 2013).y , )

Decedent Estate

File on the name of the deceased individual; not the “Estate of . . .”

Must check the box “being administered by a Decedent’s Personal Representative” in Section 5 of the new UCC financing statement forms (except in those few states that have not adopted or have delayed implementation of the 2010 Amendments that were to be otherwise effective July 1, 2013).

20

39

Individuals/Sole Proprietors - New Rules for Determining the Name

The new Amendments allow states to adopt Alternative A, the “Only If” rule or Alternative B, the “Safe Harbor” rule.

Alternative A, the “Only If” rule, requires the debtor’s name be CC flisted on the UCC financing statement exactly as stated on their

unexpired driver's license or if no driver’s license, on their state identification card (if a state so provides). If no unexpired driver's license or state identification card, the debtor’s name shall be listed on the UCC financing statement as their surname (i.e., family name) and first personal name or their individual name (not defined).

Alternative B, the “Safe Harbor” rule, requires a debtor’s name be listed on the UCC financing statement (i) exactly as stated on theirlisted on the UCC financing statement (i) exactly as stated on their unexpired driver's license or if no driver’s license, their state identification card (if a state so provides); or (ii) their surname (i.e., family name) and first personal name; or (iii) their individual name (not defined).

MOST STATES FOLLOW ALTERNATIVE A – the driver's license name being the defining name.

40

Determine if state has yet enacted 2010 Amendments. See:

http://csctransactionwatch.com/amendments

For individual/sole proprietor UCC financing statements filed

Go Forward Procedure On And After July 1, 2013

before July 1, 2013 in the enactment states, no need to amend filings to the current name of the debtor on their driver’s license); UNLESS one of the following occurs:

Debtor changes their name upon marriage, divorce, religious name change, etc., and the name on their driver’s license has changed or is different in any way from the original filing;

OR

Continuation statement is to be filed, and the name on the driver’s license is different from the name on the original filing.

21

41

Example: Bank files financing statement on the driver’s license name of Joanne Mary Williams on February 5, 2011. On November 10, 2014, Joanne gets married and changes her name to Joanne Mary Hobson on her driver’s license. Bank must amend prior filing to new driver’s license name within 4 months of the name change on the license.

Example: Bank files financing statement on the driver’s license name of Joanne Mary Williams on February 5, 2011. On November 10, 2014, Joanne gets married and changes her Social Security card and passport to Joanne Mary Hobson but does NOT yet change the name on her driver’s license. Bank should not amend prior filing at this time.

Caution: For UCC financing statements filed before AND afterJuly 1, 2013 in non-enactment states or states that have delayed the effective date beyond July 1, 2013, file at all times on all name variations by which the debtor is known!!!

42

For new UCC financing statements originally filed July 1, 2013or after in the enactment states, no need to amend filings tothe current name of the debtor on their driver’s licenseUNLESS one of the following occurs:

Debtor changes their name pon marriage di orce religio s Debtor changes their name upon marriage, divorce, religiousname change, etc., and the name on their driver’s license haschanged or is different in any way from the original filing;

OR

Debtor changes their name on their driver’s license at any timeor upon renewal;

OR

C ti ti t t t i t b fil d d th th Continuation statement is to be filed, and the name on thedriver’s license is different from the name on the original filing.

If debtor’s driver’s license expires without renewal or anyreplacement by a State ID card, then file on their correct lastname, first name, and any other name by which the individualis known.

22

43

On July 1, 2013 and after in the enactment states, for purposes of the correct name on a UCC financing statement, the name on the driver’s license controls, even if it is not correct or there is a typographical error!!

Example: Bank files on Paula Beth Jones in 2014. 2016, Paula divorces and her name changes on her Social Security card and g ypassport to Paula Beth Smithson, but she does not change her driver’s license. Bank should not amend 2014 filing to Paula Beth Smithson unless filing was in state that has not enacted the 2010 Amendments to Revised Article 9!

Example: Bank’s borrower is “Carlos Santana” but driver’s license in error states the name as “Carlos Santa”. Bank must file on “Carlos Santa”.

Be very careful to distinguish what is the first personal name Be very careful to distinguish what is the first personal name vs. additional or middle name!!

Example: Driver’s license reads: Jones, Mary Ann. Is “Mary” her first personal name or is it “Mary Ann”.

If any doubt on the name, file on multiple alternative names!!

44

SEARCH PROCEDURES At lease until July 1, 2018, and for all new UCC filing-type

secured loans to individuals, search under:

Driver’s license name

AND

Name by which the individual otherwise is general known

AND

Surname, First Name

CAUTION: A UCC filing predating July 1, 2013, could have priority over a later Bank filing even though the prior UCC filing was not filed on the current driver’s license.

23

45

CHANGES IN DEBTOR’S NAME, TYPE OF ENTITY, REVISED ARTICLE 9 LOCATION, COLLATERAL

LOCATION

CHANGES IN NAME

46

Bank has filed financing statement on Jane Higgins as thedebtor. Jane Higgins completes a divorce proceeding andchanges her name to Jane Baken, her maiden name.changes her name to Jane Baken, her maiden name.

Bank must file an amendment to its financing statement on thenew name, Jane Baken, within 4 months of the change in statesthat have enacted the 2010 Amendments, if, BUT ONLY IF, thename on the driver’s license has changed.

In states where the 2010 Amendments are not effective, a bankmust follow the law that requires a name change on a prior filingupon any name change of an individual.

Note: For all other debtors (e.g., corporations, LLCs, PSs, Trusts,etc.), when an entity name change occurs, Bank must amend theprior filing within 4 months of the name change.

24

CHANGES IN TYPE OF ENTITY TOONE LOCATED IN ANOTHER FILING LOCATION

47

If pledgor becomes another entity “located” in a new filing jurisdiction; then, within one year of the change (not one year from discovery):

File an Initial Financing Statement in the new location

48

Example 1: Bank lends to Smith Trucking, Inc., a Missouri corporation. Bank files a financing statement in Missouri. Smith Trucking, Inc. merges into an affiliate, Smith Trucking Company, an Illinois corporation. The new merged corporation retains the Smith Trucking, Inc. name upon which the bank had filed, BUT, because the newly merged corporation is an Illinois corporation, Bank has one year from the change to file a new financing statement in Illinois.

Smith Trucking, Inc., Merger Smith Trucking Corporation,a Missouri Corporation an Illinois corporation

New merged Illinois corporationknown as Smith Trucking, Inc.

25

49

Example 2: Bank lends to ABC Partnership, located in Des Moines,

CHANGE IN TYPE OF ENTITY TO ANOTHER IN THE SAME FILING LOCATION

Iowa. Bank’s loan is secured by accounts, inventory and equipment, and Bank files a financing statement in Iowa. ABC Partnership incorporates as ABC, Inc., an Iowa corporation. Bank has 4 months to refile in Iowa on ABC, Inc.

ABC Partnership, Incorporation ABC, Inc.,an Iowa partnership an Iowa

corporation

If the pledgor changes its location to a new filing jurisdiction;then, within four months of the change (not four months fromdiscovery):

CHANGE IN REVISED ARTICLE 9 (PLEDGOR’S) LOCATION

50

discovery):

File an Initial Financing Statement referencing back to theBank’s existing filing in the new location!

Example: Vincent Thomas Lombardi is a sole proprietoroperating Lake Forest Hardware. Vince resides in Lake Forest, Illinois, and Bank lending to Vince files a financing statement in Illinois on Vincent Thomas L b diLombardi.

26

Illinois Wisconsin

51

52

27

CHANGES IN COLLATERAL LOCATION

Bank lends to XYZ Corporation, an Ohio corporation, with its

53

Bank lends to XYZ Corporation, an Ohio corporation, with its manufacturing plant located in Cincinnati, Ohio. Bank’s loan is secured by accounts, inventory and equipment, and Bank files a financing statement in Ohio. XYZ Corporation moves its manufacturing collateral from Cincinnati, Ohio, to Louisville, Kentucky, but makes no other changes.

Inventory & Equipment

Ci i ti Ohi

54

L i ill K t kCincinnati, Ohio Louisville, Kentucky

Bank need NOT change its UCC filing in Ohio to Kentucky.

Caution: If borrower was instead a general partnership and movedCaution: If borrower was instead a general partnership and moved its chief executive office from Ohio to Kentucky, Bank would have 4 months in which to refile in Kentucky!

28

KNOW YOUR PLEDGOR

55

MORAL OF THE STORY

KNOW YOUR PLEDGOR

AND

BE AWARE OF ANY CHANGES TO YOUR PLEDGOR

OR

56

KISS YOUR

COLLATERAL

GOODBYE!!