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The Top 10 Loan Documentation

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September 7, 2016 Presenter: Robin Russell

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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: • Advanced Commercial Loan Documentation (6/1)• Top Loan Documentation Mistakes (9/7)• 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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RRussell©2016

The Top 10 Loan

Documentation Mistakes

Robin Russell

Andrews Kurth LLP

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RRussell©2016RRussell©20162

Robin Russell

ROBIN RUSSELL Robin is a fellow in the American College of Bankruptcy. She combines a depth of experience in

bankruptcy restructuring and litigation with financial transactions. She has represented corporate 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 7 bankruptcy proceedings and has litigated fraudulent conveyance

and preference claims in bankruptcy and district court. She has also represented banks, institutional lenders and

corporate borrowers in commercial loan transactions and debt restructurings. Robin is the principal author of Thomson

Reuters’ Texas Practice Guides for both Creditors’ Rights and Financial Transactions and the Texas Bankers

Association’s Texas Secured Lending Guide, Texas Real Estate Lending Guide, Texas Problem Loan Guide and Texas

Account Documentation Guide. She is a frequent speaker on banking, bankruptcy and financial restructuring related

topics, an elected member of the American Law Institute and has served as a Chapter 7 Trustee. Robin received her

LL.M. in Banking Law from Boston University and her J.D. from Baylor University where she was Editor in Chief of the

Baylor Law Review and the highest ranking graduate in her class. Prior to joining the firm she clerked for the Texas

Supreme Court.

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Notice

This presentation is designed to provide accurate and

authoritative information in regard to the subject matter

covered. It is provided with the understanding that

neither the presenter nor your State Bankers

Association is engaged in rendering legal, accounting

or other professional advice or service. If legal advice

or other expert assistance is required, the services of a

competent professional person should be sought —

from a Declaration of Principles Adopted by the

American Bar Association and a committee of

Publishers and Associations.

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How Do I Become A Secured Creditor?

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 AgreementSecurity Agreement

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Attachment

• Bank gives value

• Debtor has rights in collateral

• Debtor has signed written agreement granting lien

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So Why Do I Want To Be A Secured Creditor?

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The “Covered Dish Supper”Rules of Priority

EquityUnsecuredSecuredPMSI

Possessory Lienholder

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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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Top 10 Mistakes

1. Misclassification of collateral

2. Filing the perfection document in the wrong location

3. Using the wrong borrower/debtor name

4. Not obtaining the proper authorization documentation

5. Having a bad collateral description

6. Improper assessment of lien position

7. Failing to amend your UCC-1

8. Failing to continue or terminate your UCC-1

9. Leaving items to post closing or making exceptions

10. Inadvertently waiving rights

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Avoiding Mistake #1:

Proper Classification of Collateral

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Business Collateral

Letter of

Credit Rights

Inventory

Warehouse Receipts

and Bills of Lading

Farm Products

Investment

PropertyCash

Chattel

Paper

Deposit

AccountsInstrumentsAccounts

Government

Contracts

Warehouse Receipts

and Bills of Lading

General Intangibles Tort Claims

Fixtures

Motor Vehicles Boats Vessels Aircraft

Equipment

Rolling Stock

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Types of CollateralInventoryAccountsU.S. Government ContractsChattel PaperEquipmentFixturesLeasehold ImprovementsGeneral IntangiblesInstrumentsDeposit AccountsInvestment PropertyDocuments: Warehouse Receipts and Bills of LadingAgricultural Collateral/Farm ProductsConsumer GoodsLife InsuranceMotor VehiclesManufactured HomesBoats and VesselsAircraftRolling StockOil and GasTort ClaimsLetter of Credit RightsGuaranties and Third Party Pledges of Collateral

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What Types of Collateral Are

Covered by the UCC-1?The UCC covers five types of tangible personal property:

• Inventory• Equipment• Fixtures• Farm Products• Consumer Goods

Intangible personal property is divided into the following classifications under the UCC:

• Accounts – (If accounts represent amounts due from the U.S. government, theymay be subject to special rules for Government Contracts)

• Chattel Paper• General Intangibles• Instruments• Investment Property• Deposit Accounts (Commercial)• Letter of Credit Rights• Commercial Tort Claims

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What Types of Collateral are

Not Covered by the UCC-1?

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 (i.e., railroad cars)

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

• Deposit Accounts (Consumer)

• Non Commercial Tort Claims

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Avoiding Mistake #2:Filing in the Right Location

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Methods Of Perfection

• File UCC-1

• Possession

• Control

• Notation on Title

• Non-UCC Filings

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Basic UCC-1 Filing Location Rules

• A debtor who is an individual is located in the state of the individual’s principal residence.

• A registered organization that is organized under the law of a state is located in that state.

• A debtor that is a nonregistered organization (i.e., a general partnership) and has only one place of business is located in the state of its place of business.

• A debtor that is a nonregistered organization and has more than one place of business is located in the state of its chief executive office.

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Additional UCC-1 Filing Locations

• A registered organization that is organized under the law of the United States and a branch or agency of a bank that is not organized under the law of the United States or a state are located:

– in the state that the law of the United States designates, if the law designates a state of location;

– in the state that the registered organization, branch, or agency designates, if the law of the United States authorizes the registered organization, branch, or agency to designate its state of location; or

– in the District of Columbia, if neither of the above applies (ex. Citizen of foreign country).

• A branch or agency of a bank that is not organized under the law of the United States or a state is located in the state in which the branch or agency is licensed, if all branches and agencies of the bank are licensed in only one state.

• The United States is located in the District of Columbia.

• A foreign air carrier is located at the designated office of the agent upon which service of process may be made on behalf of the carrier.

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Special UCC-1 Filing Location Issues

• A registered organization continues to be located in the

jurisdiction notwithstanding:

– the suspension, revocation, forfeiture, or lapse of the

registered organization’s status as such in its jurisdiction of organization; or

– the dissolution, winding up, or cancellation of the existence of the registered organization.

• A debtor who ceases to exist, have a residence or have a

place of business continues to be located in the jurisdiction where it last existed, resided or did business.

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At What Point in Time Do I File a

UCC-1?

• May file before security agreement signed

• Should file before funds advanced

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Avoiding Mistakes #3 and #4:Using the Debtor’s Name Right and

Obtaining Proper Authorization Documentation

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Who is your Debtor?

• The person who owns the property being

pledged to you.

• This is not always the borrower.

• It may be a guarantor or a third party only

pledging collateral.

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Debtor Name

• The most important element when preparing a

UCC-1 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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Individual

= John Lee Doe

= J.L. Doe

= Bubba Doe

Exact full legal name

Goes By

Nickname

Debtor for UCC-1 = John Lee Doe

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Sole Proprietorshipd/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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Authorization Documents Required

for Sole Proprietorship

• Assumed Name Certificate

• Sole Proprietorship Resolution of Authority

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

personally liable for partnership

debts

John’s Auto

John Doe Robert Brown

General partner general partner

UCC-1

UCC-1 ?UCC-1 ?

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Authorization Documents Required for General Partnership/Joint Venture

• Partnership Agreement

• Partnership Resolution of Authority

• Assumed Name Certificate

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John’s Corporate Shell, Inc.

General Partner

John’s Auto, LP

John

DoeJane

Doe

Bob

Smith

Limited Partners

Liable for debts of limited partnership

Not liable for debts of limited partnership

John’s Auto, L.P. by its

general partner

John’s Corporate Shell, Inc.

Signature By: ___________________________

Title: John Doe, President___________

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for Limited Partnership

• Limited Partnership Agreement

• Certificate of Limited Partnership or Certificate

of Formation

• Certificate of Fact: Status

• Partnership Resolution of Authority

• Certificate of Authority to Transact Business in all states in which entity does business

• Certificate of Fact: Assumed Name

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ShareholderShareholderShareholder

John’s Auto, Inc.

John’s Auto, Inc.

Signature By: _________________________

Title: _________________________

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for Corporation

• Certificate of Formation or Articles or Certificate

of Incorporation

• Bylaws


• Certificate of Franchise Tax Account Status

• Resolutions of the Board of Directors

• Certificate of Authority to Transaction Business


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Corporate Resolutions

• A meeting was held on a certain date

• The corporation made a decision to request a loan from the lender

• The loan will benefit the corporation

• Certain officers designated by name and title are authorized to execute loan documents on behalf of the corporation

• Pledging of corporate assets as collateral is authorized

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

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Best Practices Checklist

Has the Bank satisfied itself prior to funding that:

� The borrowing under consideration is permitted

� Officers who are signing have been properly authorized

� Corporation does not have a maximum indebtedness clause which will be violated (from another credit arrangement or board action)

� All conditions precedent to borrowing have been met

� Exact corporate name on loan documents matches with

documents on file related to the corporation,

� Liens and security interests in collateral are proper and within the powers of the corporation as granted by its Board.

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John’s Auto, L.L.C.

John’s Auto, L.L.C.

Signature By: _________________________

Title: Manager__________________

Member Member Member

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Authorization Documents Required forLimited Liability Company

• Articles of Organization or Certificate of Formation

• Regulations or Company Agreement


• Certificate of Franchise Tax Account Status

• Resolutions of the Members

• Certificate of Authority to Transact Business in all states in which entity does business


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• durable v. nondurable powers of attorney

• broad powers v. limited powers

• effective now v. effective later

• a P of A cannot survive the death of the principal

and later even if the principal

becomes incompetent or

incapacitated

when the principal becomes

incompetent or incapacitated

Agent Acting under Power of Attorney

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Trust/Custodial RelationshipsTrustee Custodian

Trust Property UTMA Property

Beneficiary Minor

income stream

(general intangible)

John Doe, TrusteeThe Doe Family TrustName

Diana Doe as Custodian under UTMA for Sterling Doe

legal

title

beneficial

owner

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for Trust

• Trust Agreement

• Confirmation that loan proceeds are for benefit of beneficiary

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Beneficiary of a Trust

• A trust interest is a general intangible

• A “spendthrift” trust prohibits the beneficiary from

pledging the trust interest as collateral for a loan

• The Bank may take a lien on the property purchased with loan proceeds as collateral but not the trust interest

• The Bank may consider the trust distributions in determining creditworthiness

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Avoiding Mistake #5:Correct Collateral Description

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Requirements Of A Lien Document

Mandatory

• Identify parties

• Identify what obligation is being secured

• Identify collateral

• Contain “words of grant” granting lien on collateral

• In writing

• Signed by owner of collateral

Optional

• Representations/Warranties

• Covenants

• Events of Default

• Remedies

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COVENANTS

Duties 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• list of buyers for Farm Security Act notices• insurance

Other Duties• authorization of secured party to file financing statement• authorization of secured party to protect collateral

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Representations and Warranties

• valid existence as entity

• authorization to execute and perform

• past, present and future name

• ownership of collateral

• use of property (personal, business,

agricultural)

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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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Collateral Description

• 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 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.

• A commercial tort claim must be specifically described.

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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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Proper Assessment of Lien Position

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Types of Lien Searches

• UCC – Secretary of State or other Central Filing Office

• County Real Estate Records

• Review of Certificate of Title

• Special Filing Office

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Where Do I Conduct a Lien Search?

• Lien searches are done in the locations for UCC-1 Financing Statements in the state where the debtor is located.

• A lien search is done on the legal name of the Debtor.

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What Names Do I 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 AutoworldInc. 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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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 states not searched.

• Nonownership of the collateral by the debtor.

• A lien against the prior owner of the collateral.

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General Rules of Priority

• secured v. unsecured > secured wins

• perfected v. unperfected > perfected wins

• possession v. filing > possession wins

• first to file > wins

• pre-existing security interest > wins

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

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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 #1

on all assets

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

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Possessory Liens

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

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

on all assets

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

John’s Auto, Inc. ← 4/15/12 Equipment taken to repair shop

John’s Auto, Inc. ← 1/10/14 Rent is unpaid

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What are Proceeds?

• “Proceeds” include whatever is received upon the sale, exchange, collection or other disposition of collateral or proceeds of collateral.

• Insurance payable due to loss or damage to collateral is proceeds if the debtor is the beneficiary.

• Money, checks, deposit accounts and the like are “cash proceeds.”

• All other proceeds of collateral are “noncash proceeds.”

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Requirements for Continued Perfection of a Security Interest in Proceeds

• The Bank’s security interest continues in collateral, notwithstanding the

sale, exchange or other disposition thereof by the borrower unless the

disposition was authorized by the Bank in the security agreement or

otherwise.

• Bank’s security interest continues described below, in any identifiableproceeds of the collateral, including collections received by the borrower.

• The Bank’s security interest in proceeds becomes unperfected on the 21st

day after the borrower receives the proceeds unless:

– A UCC-1 covers the original collateral and the proceeds are collateral in which a

security interest may be perfected by filing a UCC-1 in the same office in which the original UCC-1 was filed.

– The proceeds are identifiable cash proceeds; or

– A security interest in the proceeds is perfected before the expiration of the 20-day period.

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Illustration of Perfection

Requirements For Proceeds

• If the Bank has a security interest in medical equipment which it has

perfected by the filing of a financing statement describing medical

equipment and the borrower exchanges some of the medical equipment for

office equipment, the Bank will have a continuously perfected security

interest in the office equipment.

• On the other hand, if the borrower sells the medical equipment and uses the

cash to buy a car, the Bank’s perfected security interest in the car will lapse

at the end of the 20 days, because there will be no notation on the

certificate of title to indicate that the Bank has a security interest in the office

equipment.

• If the borrower sells an x-ray machine for cash and then uses the cash to

buy the vaccine, the Bank will have a continuously perfected security

interest in the vaccine because it is inventory as described in the financing

statement.

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Personal Property Lien

Subordination

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Examples of Title Verification

Documentation

• Bill of Sale

• Invoice

• Title

• Deed of Trust

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Knowing When to Amend Your UCC-1

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UCC-3

• Form UCC-3 is used to make changes in the original UCC-1 Financing Statement.

• A UCC-3 is a multipurpose form used to renew, transfer, amend or terminate a UCC-1.

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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”

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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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What is Seriously Misleading?

John’s Auto Inc. UCC-1

5/8/08

Jane Anne Doe

Autoworld, Inc. 1/1/104 months

5/1/10

Jane Anne Smith

no longer perfectedon after acquired8/21/10 Bank #2files UCC-1 on

Autoworld, 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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Refiling of Expired Financing Statements

• A new Financing Statement may be filed where the original filing has lapsed.

• Priority established with the original filing would not be maintained as the new filing would not relate back to the

file date of the original filing.

• An intervening lien would take priority over the lapsed financing statement

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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.

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Avoiding Mistake #8:Knowing When to Continue or

Terminate Your UCC-1

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How Long Does My UCC-1 Last?

• A Form UCC-1 Financing Statement is effective for five (5) years and may be extended for additional five year periods during the six-month “window” prior to expiration of the previous five-year period.

• A UCC-1 filed in connection with a public-finance transaction is effective for 30 years.

• A UCC-1 on fixtures filed in the County Real Property Records is effective for five years.

• A fixture financing statement contained within a mortgage or deed of trust it is effective for the term of the mortgage or deed of trust.

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Termination/Total Release

• A “Termination Statement” may be filed

– where all secured parties wish to terminate a financing statement, or

– where one or more, but not all, secured parties wish to totally release their lien against the debtor.

• The termination is only effective as to the secured parties who are named in item 9 of form UCC-3.

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Termination

• Consumer – Bank (i.e., secured party) must file termination

– within 20 days after “authenticated” demand but

– no later than one month after

• no outstanding obligation and

• no commitment to advance

• Business – Bank must send debtor termination statements or file them within 20 days after

“authenticated” demand if

– no commitment to advance

– no outstanding obligation

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Continuation

• Central Filing: UCC-1 good for five (5) years

• County Real Estate Records (on fixtures) in most states good for longer of UCC-1 or

length of deed of trust

• Bankruptcy filing continuation does not violate automatic stay

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Total or Partial Assignment

An assignment may be made by • One or more secured parties

• A secured party may assign all (Total Assignment) or part (Partial Assignment) of their interest under a Financing Statement.

• The Form UCC-3 must set forth the name and address of the assignee and identify the secured party making the assignment (Item 9).

• For a Partial Assignment, a description of the specific collateral assigned must be included.

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Don’t Make Exceptions or Leave Items Until Post Closing

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Guarantees

• Must be in writing

• Must be supported by consideration

• Guarantees signed after funding are not supported by consideration

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Review Checklists

� Make certain promissory note, lien document and

guaranty contain no errors, all blanks have been

filled in, all blocks checked and all signatures

obtained and witnessed or notarized, if required.

� Loan officers or their counsel must review the lien

searches so the bank will be in first lien position.

� Check collateral specific documents required.

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Review Checklists (continued)

� Obtain Borrower’s affidavit regarding no bankruptcies, judgments or other legal actions pending.

� Existing insurance policies should be reviewed for adequacy of coverage. Bank to be named as mortgagee and loss payee on casualty policy.

� Prepare regulatory disclosures and notices (if consumer).

� Determine valuation of collateral is acceptable to bank prior to closing.

� Take assignment of any building leases.

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Review Checklists (continued)

� Get up-to-date financial statements from all makers,

co-makers and guarantors.

� Obtain authorizing documents for non-natural

person borrowers (corporation, partnership, LLC)

� Confirm UCC-1s and/or mortgage/deed of trust are

properly filed.

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Avoiding Mistake #10:Documenting Default Waivers

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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

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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

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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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HOU: 3628064.2

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