Embed Size (px)
Citation preview
Perfecting Security Interests in Deposit
Accounts, Securities Accounts, and Other
Investment PropertyEstablishing Control Under the UCC with Special Types of Collateral
Today’s faculty features:
1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific
The audio portion of the conference may be accessed via the telephone or by using your computer's
speakers. Please refer to the instructions emailed to registrants for additional information. If you
have any questions, please contact Customer Service at 1-800-926-7926 ext. 1.
THURSDAY, OCTOBER 17, 2019
Presenting a live 90-minute webinar with interactive Q&A
Mark B. Joachim, Shareholder, Polsinelli, Washington, D.C.
Craig S. Unterberg, Partner, Haynes & Boone, New York
Tips for Optimal Quality
Sound Quality
If you are listening via your computer speakers, please note that the quality
of your sound will vary depending on the speed and quality of your internet
connection.
If the sound quality is not satisfactory, you may listen via the phone: dial
1-877-447-0294 and enter your Conference ID and PIN when prompted.
Otherwise, please send us a chat or e-mail [email protected] immediately
so we can address the problem.
If you dialed in and have any difficulties during the call, press *0 for assistance.
Viewing Quality
To maximize your screen, press the ‘Full Screen’ symbol located on the bottom
right of the slides. To exit full screen, press the Esc button.
FOR LIVE EVENT ONLY
Continuing Education Credits
In order for us to process your continuing education credit, you must confirm your
participation in this webinar by completing and submitting the Attendance
Affirmation/Evaluation after the webinar.
A link to the Attendance Affirmation/Evaluation will be in the thank you email
that you will receive immediately following the program.
For additional information about continuing education, call us at 1-800-926-7926
ext. 2.
FOR LIVE EVENT ONLY
Program Materials
If you have not printed the conference materials for this program, please
complete the following steps:
• Click on the link to the PDF of the slides for today’s program, which is located
to the right of the slides, just above the Q&A box.
• The PDF will open a separate tab/window. Print the slides by clicking on the
printer icon.
FOR LIVE EVENT ONLY
Perfecting Security Interests in Deposit Accounts, Securities Accounts, and Other Investment Property
October 17, 2019
Mark B. JoachimPolsinelli
Craig S. UnterbergHaynes and Boone, LLP
6
Topics – UCC framework
• Choice of law
• Creation of security interest
• Perfection, effect of perfection or nonperfection, and priority of security interest
• Secured party duties and exercise of remedies
• Comparison of security interests in deposit accounts and security interests in securities accounts
• Legal opinions
7
Topics – control agreements
• Drafting and negotiating control agreements▪ Deposit accounts▪ Securities accounts / security entitlements
• Control agreement provisions▪ Related to UCC provisions / requirements▪ Commonly negotiated business terms
• Considerations in representing indenture trustees and collateral agents
• Considerations in representing banks and securities intermediaries
8
Exclusion from Article 9
• UCC § 9-109(d)(13) excludes from Article 9 a security interest in a deposit account in a consumer transaction
• UCC § 9-102(a)(26) consumer transaction:▪ individual as pledgor▪ purpose of the borrowing▪ size of transaction not relevant
• In excluded transactions, non-UCC law applies to choice of law, creation, perfection, and priority of collateral assignment (common law ‘dominion and control’ and exclusion of debtor)
9
What is a ‘security’ – shares?
•‘Security’: share or similar equity interest issued by:
▪ Corporation/business trust/ statutory trust
▪ ‘Similar entity’
10
What is a ‘security’ – other interests?• Not a ‘security’:
▪ Partnership interest▪ LLC interest▪ Series LLC interest?
• Exceptions to exclusion of LLC and partnership interests:▪ Override exclusion by ‘opting in’ (UCC § 8-103)▪ Held as a security entitlement▪ Registered investment company / publicly traded
• Debt (if a ‘security’)▪ Highland Capital Management LP v. Schneider (N.Y. 2007)▪ 2010 Revisions – UCC § 8-102, Comment 13▪ PEB Commentary
11
Deposit account v. securities account – does it matter?•Requirements for control agreement
•Description of the account
•Choice of law
•Available perfection methods
•Protected purchaser / “takes free” rules
•Transaction excluded from Article 9
•Credit risk
• In re Gem Refrigerator Co., 512 B.R. 194 (Bankr. E.D. Pa. 2014)
12
What is an ‘account’?
• No definition in the UCC for the ‘account’ element of a ‘securities account’ or ‘deposit account’
• Reliance on the books and records of the securities intermediary or bank, whether or not designated by it as an ‘account’
▪ Except, in the case of a deposit account, a certificate of deposit that qualifies as an instrument. See UCC § 9-102(a)(29)
13
What is a ‘deposit account’?
• Debt of a bank to its customer
• Includes certificates of deposit (CDs) that are not represented by an instrument▪ Can include some certificated CDs (In re Perez (Bankr. D.
N.J. 2010))
14
What is a ‘securities account’/security ‘entitlement’?• Custodial arrangement for holding customer assets
• Security entitlement – bundle of rights with respect to asset that a securities intermediary has agreed to hold for its customer and is a financial assets or securities intermediary has agreed to treat as a financial asset▪ Credited or accepted for credit to the customer's
securities account▪ Intermediary obligated to credit to the account
• Securities account – a collection of security entitlements▪ May also include other rights of the customer against the
intermediary
15
In what ‘capacity’ is the bank or securities intermediary acting?• Example:
▪ Bank is the depositary bank for Customer.▪ Bank is also the agent on a syndicated loan facility to
Customer.▪ Under a security agreement authenticated by Customer,
Customer has granted to Bank, as agent for the benefit of the syndicate lenders, a security interest in all of Customer’s customers deposit accounts maintained at Bank.
• Is a control agreement required for the Bank, as agent for the benefit of the syndicate lenders, to have a security interest in the deposit accounts perfected by control?▪ See Comment 1 to UCC § 9-104 (2010)
16
Treatment of ‘financial assets’
• Securities account▪ ‘Financial assets’ other than securities. See UCC § 8-102(a)(9)(iii); Article 8, Prefatory Note, III.C.1.✓ ‘Cash’
▪ Duty to maintain under UCC § 8-504.▪ Question about ‘cash balance’ credited to a
securities account if no election to treat ‘cash’ as a financial asset. ✓ Investment in U.S. treasuries or money market
shares✓Use of deposit account
17
Choice of law – deposit account
• Local law of the bank’s jurisdiction governs perfection, the effect of perfection or nonperfection, and priority of a security interest in a deposit account at that bank (UCC § 9-304)
• Bank’s jurisdiction is determined as provided in UCC § 9-304(b)▪ Can select bank’s jurisdiction in the control
agreement▪ If not in a control agreement, UCC § 9-304(b)
provides rules▪ No ‘reasonable relationship’ requirement ((see
UCC § 1-301 (former UCC § 1-103)
18
Choice of law – securities
• Certificated security▪ Local law of the jurisdiction where certificated security is
located governs perfection, the effect of perfection or nonperfection, + priority (UCC § 9-305(a)(1))
• Uncertificated Security▪ Local law of the issuer’s jurisdiction (as specified in UCC § 8-110(d)) governs perfection, the effect of perfection or nonperfection, + priority (UCC § 9-305(a)(2))
• Perfection by filing▪ Location of debtor (UCC § 9-305(c)(1))
19
Choice of law – Securities Account– Hague Securities Convention
• Effective April 1, 2017 in U.S.▪ Applies to existing and new secured transactions
• Substantive law of jurisdiction whose law governs the underlying account agreement governs perfection and priority of a security interest in a securities account (Article 2(1))▪ Agreement can specify different law to govern Article 2(1)
issues ▪ Account agreement v. control agreement
• Chosen law must be that of a jurisdiction in which securities intermediary has an office that deals in securities (“qualifying office test”).
20
Choice of law – Securities Account– Hague Securities Convention
• Perfection by control – references in account agreement to the “securities intermediary’s jurisdiction” are irrelevant
• Perfection by filing▪ If chosen law is a non-UCC jurisdiction, secured party must
perfect under law of the chosen jurisdiction, whether by filing or otherwise
▪ If chosen law is a UCC jurisdiction, secured party must file in chosen jurisdiction, even if debtor is located elsewhere
• U.S. as a “multi-unit” country▪ If chosen law is a U.S. state, Articles 8 and 9 choice-of-law rules
apply for perfection by filing within the U.S.
▪ Transition rules for agreements entered into prior to April 1, 2017
21
Creation of security interest
• Usual requirements (UCC § 9-203):▪ Debtor has rights in the collateral▪ Value (UCC § 1-204 (Former UCC § 1-201(44)))▪ Security agreement evidenced by an
authenticated record▪ Legally sufficient description of collateral
• Exceptions to requirement for authenticated record (UCC § 9-203(b)(3)(C) - (D))▪ Control▪ Possession of certificated security
22
Description or indication of investment property as collateral• UCC § 9-108 description is sufficient, whether or not it is specific, if it
reasonably identifies what is described▪ UCC § 9-108(b) examples of reasonable description
(including by UCC type)▪ UCC § 9-108(d) description of a security entitlement, securities
account, or commodity account is sufficient if it describes:✓ by those terms or as investment property, or✓ the underlying financial asset or commodity contract
▪ UCC § 9-108(e) consumer transaction rule
• Monticello Banking Co. v. Flener (W.D. Ky. 2010) (affirmed in unpublished opinion by 6th Circuit)▪ Must use UCC § 9-108(d) language▪ Decision widely criticized
23
Perfection and priority by ‘control’
•Control as a method of perfection▪ Alternative to filing for securities,
security entitlement, and securities account as original collateral
▪ Only method of perfection for a deposit account as original collateral
•Control as establishing non-temporal priority over a security interest not perfected by control
24
Other benefits of control
•Requirement for protected purchaser status
•Control allows secured party to exercise remedies without court involvement
25
Security agreement v. control agreement• Security agreement
▪ Between debtor and secured party▪ Grants security interest and describes the collateral and secured
obligations▪ Specifies defaults and remedies (with loan agreement) ▪ Choice of law for creation of security interest
• Control agreement▪ Among debtor, secured party and depositary bank / securities
intermediary where account is maintained▪ Gives secured party right to direct the bank / securities intermediary
as to the account▪ Deals with priority as between secured party and bank / intermediary▪ Choice of law for perfection/priority/effect of perfection or
nonperfection of security interest
• Practice pointer: keep them separate
26
Meaning of ‘control’ – general
• Control means the ability of secured party to direct transfer or disposition of funds / assets without further consent or action of debtor
• Control exists even if debtor retains right to make substitutions, originate instructions or otherwise deal with collateral (UCC §§ 9-104(b), 8-106(f))
• Traditional ‘blocked’ account agreement may not suffice
27
Control – certificated security
• UCC § 8-106(b) ‘purchaser’ (including a secured party) has control of a certificated security in registered form if:▪ Certificated security is ‘delivered’ to the
purchaser (possession) and▪ Certificate is either:
✓ Indorsed to the purchaser or in blank by an effective indorsement or
✓Registered in the name of the purchaser (upon original issue or registration of transfer by the issuer)
28
Control – uncertificated security
•UCC § 8-106(c) ‘purchaser’ (including a secured party) has control of an uncertificated security if:▪ Uncertificated security is ‘delivered’ to
the purchaser (registered in purchaser’s name) or
▪ Issuer has agreed that it will comply with instructions originated by the purchaser without further consent by the registered owner
29
Control – securities account/security entitlement
• UCC § 8-106(d) purchaser (including a secured party) has control of security entitlement if:▪ Purchaser becomes the entitlement holder▪ Securities intermediary has agreed that it will comply
with entitlement orders originated by purchaser without further consent by entitlement holder or
▪ Another person has control of the security entitlement on behalf of purchaser or, having previously acquired control of the security entitlement, acknowledges that it has control on behalf of purchaser
• UCC § 8-106(e) if security interest in a security entitlement is granted by entitlement holder to entitlement holder’s own securities intermediary, securities intermediary has control
30
Control – deposit account
• UCC § 9-104(a) secured party has control of deposit account if:▪ Secured party is the bank with which the deposit
account is maintained▪ Debtor, secured party and bank have agreed in
an authenticated record that bank will comply with instructions originated by secured party directing disposition of the funds in the deposit account without further consent by debtor or
▪ Secured party becomes the bank’s customer with respect to the deposit account
31
Type of agreement
•Securities account
▪Oral agreement? (see UCC § 8-113)
•Deposit account
▪Authenticated record
32
Bank/intermediary’s rights
• Bank not required to:▪ Enter into control agreement▪ Confirm existence of control agreement (UCC §
9-342)
• Securities intermediary not required to:▪ Enter into control agreement▪ Confirm existence of control agreement (UCC §
8-106(g))
• Securities intermediary may not enter into control agreement without consent of entitlement holder (UCC § 8-106(g))
33
Who are the parties?
•Securities account/security entitlement
▪Agreement of only the securities intermediary?
•Deposit account
▪ Three-party agreement in a single agreement?
34
Control – securities account /security entitlement
•Who is the securities intermediary?▪ Referring and clearing brokers▪ National Consumer Cooperative Bank v.
Morgan Stanley & Co. (M.D. Pa. 2010)▪ Fifth Third Bank v. Lincoln Financial
Securities Corp. (WD Ky 2009)
•Practice pointer: If can’t determine who is the intermediary, have all sign the control agreement
35
Key control agreement provision –deposit accounts
•‘The bank agrees to comply with instructions originated by the secured party, without the debtor’s further consent.’
36
Key control agreement provision –security entitlement/account
•‘Intermediary agrees to comply with all entitlement orders originated by secured party, without debtor’s further consent.’
37
Effect of other provisions on present ‘control’ – general
•Watch for provisions that amount to a debtor ‘consent’ right
38
Effect of other provisions on present ‘control’ – conditions
•Example: The control agreement states that the secured party may not give an entitlement order or instruction to the securities intermediary or bank unless the secured party certifies to the securities intermediary or bank that the debtor is in default.
▪ See Comment 7 to UCC § 8-106 and Comment 3 to UCC § 9-104
39
Effect of other provisions on present ‘control’ – conditions
•Example: The control agreement states that the junior secured party may not give an entitlement order or instruction to the securities intermediary or bank unless the senior secured party consents.
▪ See Comment 7 to UCC § 8-106
40
Effect of other provisions on present ‘control’ – debtor default
•Confirmation from debtor as to:
▪Occurrence of a default
▪Amount that can be withdrawn
41
Effect of other provisions on present ‘control’ – interpleader
•Contractual interpleader rights?
▪ Compare to statutory interpleader rights
42
Effect of other provisions on present ‘control’ – termination
•Debtor’s right to terminate the agreement before bank is required to act on secured party’s instructions
▪ Provide that upon termination by debtor funds or financial assets transferred to secured party
43
Effect of other provisions on present ‘control’ – delays
•Delays before bank required to act?
44
Priority – general rules
•Perfection by control has priority over perfection by other means
•First to obtain control has priority
•Depositary bank or securities intermediary as secured party will have priority even if it obtains control later in time (See UCC §§ 9-327(3) and 9-328(3))
45
Other bank rights
•UCC § 9-340 depositary bank rights:
▪Right of set off
▪Right of recoupment
46
Subordination issues
•Fees and expenses of the securities intermediary or bank
•Reversals of provisional credits/returned items
•New advances by the securities intermediary or bank
•Margin
•Indemnities from account holder
47
Control agreement: subordination
•‘Bank/intermediary subordinates in favor of secured party any security interest, lien or right of setoff or recoupment bank may now or in future have against the account.’
•Absent agreement to the contrary, the bank or intermediary can exercise its subordinated remedies
48
Investment property: protected purchaser and ‘takes free’
• Applies to secured parties▪ ‘Purchaser’/‘purchase’ (UCC § 1-201(b)(29), (30))
• UCC § 8-303(a) protected purchaser▪ Gives value (UCC § 1-204 (Former UCC § 1-
201(44)))▪ Does not have notice of any adverse claim to the
security (certificated or uncertificated)▪ Obtains control of the security
• Analogous protection for securities accounts / security entitlements▪ UCC §§ 8-502, 8-503, 8-510
49
Deposit accounts: transferee of funds
•Transferee ‘takes free’ of security interest in deposit account, unless transferee acts in ‘collusion’ with debtor to violate rights of secured party
▪UCC § 9-332(b)
50
Deposit account control agreement: choice of law
• Review for purposes of (i) selecting US jurisdiction and (ii) law covered in perfection by control and control priority opinion
▪ Also amend choice of law provisions of the account agreement and other agreements between bank and customer governing or relating to the account?
51
Securities account control agreement: choice of law
• Review for purposes of (i) selecting US jurisdiction and (ii) law covered in perfection by control and control priority opinion
▪ Also amend choice of law provisions of the account agreement and other agreements between intermediary and customer governing or relating to the account?
52
Control agreement: status of account• ‘Intermediary maintains securities account [identify] for
debtor.’
• ‘All property credited to the account and all other rights of debtor against Intermediary arising out of the account, including any free credit balances, will be treated as financial assets under Article 8 of the [jurisdiction] UCC.’▪ Securities intermediaries that are banks often will not
agree to treat cash as a financial asset, unless they are acting through their trust department
• Confirming what is in the account or value of the account (or not) (Fifth Third Bank v. Lincoln Financial Securities Corp. (WD Ky 2009))
• Monitoring account and transactions
53
Control agreement: other control agreements• ‘Intermediary does not know of any adverse claim to
the account, except for claims and interests of [parties to the control agreement].’
• ‘Bank represents and warrants that no third party has a right to give instructions with respect to the account.’
• ‘Bank will not agree with any third party that bank will comply with instructions originated by the third party.’
• No third party has control (or priority) or will obtain control
54
Control agreement: status and transfer issues
•Status of bank as a ‘bank’/securities intermediary as a ‘securities intermediary’ for UCC purposes?
•Successor and renumbered accounts
•Assignee or successor to secured party
55
Control agreement: indemnity + duties
•Indemnification and expense reimbursement of bank/securities intermediary
•Exculpation, standards of care
•Time in which bank / intermediary is required to act on secured party instructions (‘outside time’)
56
Control agreement: miscellaneous
•Secured party access to statements, on-line info
•Monitoring of debtor activity re account
•Notice of claims made by third parties to account
57
Sweep investments
• Example:▪ Secured party has a control agreement with depositary
bank and debtor over debtor’s deposit account maintained with bank
▪ Funds in the deposit account are swept each evening into an investment vehicle maintained by bank and deposited to the deposit account the next morning with the overnight return.
• Does secured party have control over debtor’s interest in the funds in the investment vehicle when the funds are in the investment vehicle rather than the deposit account?▪ See ABA BLS Sweep Investment Form.
http://apps.americanbar.org/dch/committee.cfm?com=CL710060
58
Repledge
•Securities account
▪ Right of secured party to repledge. UCC § UCC 207(c)(3); but see UCC §8-504(a)
▪ Control during the period of repledge. See UCC § 9-314(c)
•Deposit account
▪ Debtor/creditor relationship
59
Insolvency of the secured party
•‘Pledgor access rights’
▪ ISDA IA Seg. working group project
•Automatic stay v. ‘safe harbors’
•Secured party as broker-dealer being liquidated under SIPA
▪ Sec. Investor Prot. Corp. v. Lehman Bros. Inc., 433 B.R. 127 (Bankr. S.D.N.Y. 2010)
60
Insolvency of the securities intermediary or bank
•Broker dealer under SIPA
▪ Treatment of ‘cash’ and securities
•Federally insured bank under FDIA
▪ Treatment of securities
▪ Treatment of ‘cash’
•Allocation of credit risk between the secured party and the debtor
61
Secured party remedies
• Without control of collateral secured party may have difficulty effecting a transfer or liquidation of collateral or exercising other remedies following default
• UCC § 9-607 determines the rights between secured party and debtor in the exercise of secured party remedies, but not the duties of an account debtor, bank or other person obligated on the collateral (Comments 6 and 7 to UCC § 9-607)
62
Legal Opinions
• Creation
• Perfection▪ By filing▪ By possession▪ By control
• Control priority
• Protected purchaser (certificated or uncertificated security) and ‘takes free’ (security entitlement / securities account)
• TriBar report
63
Control – Deposit Account
•In re Hawaiian Telecom Communications, Inc. (Bankr. D. Hawaii 2009)
•FTC v. Transcontinental Warranty, Inc. (N.D. Ill. 2009)
•Full Throttle Films, Inc. v. National Mobile Television, Inc. (Cal. App. 2010)
•In re Perez (Bankr. D. N.J. 2010)
64
Resources
• Model Deposit Accounts Control Agreement, Inserts and Reports
▪ http://apps.americanbar.org/dch/committee.cfm?com=CL710060
• Securities Account Control Agreement
▪ Annotated agreement (included with course materials)
• Legal Opinion Resource Center
▪ http://apps.americanbar.org/buslaw/tribar/
