UNIFORM COMMERCIAL
CODE FOR DIRT
LAWYERS
REAL ESTATE FINANCING 2017
TERMINOLOGY
• Parties
– Debtor
– Obligor
– Secured Party
– Secondary Obligor
TERMINOLOGY
• Collateral
– Accounts
– Deposit Accounts
– Investment Property
– Goods
• Equipment
• Inventory
• Farm Products
• Consumer Goods
Terminology
• General Intangibles
– Payment Intangibles
• Fixtures
SCOPE OF ARTICLE 9
• Any transaction that creates a security
interest in personal property
• Applies to certain sales
– Accounts
– Chattel Paper
– Payment Intangibles
– Promissory Notes
• Excludes interests in real property
ATTACHMENT
• Requirements
– Value be given
– Rights in the collateral
– Either
• Authenticated security agreement
• Possession of tangible collateral pursuant to
agreement
• Control of deposit account or investment
property pursuant to a security agreement
PERFECTION
• Most collateral can be perfected by filing
a financing statement
• Important Exceptions
– Getting Priority
• To be discussed later
– Deposit Accounts
– Letter of Credit Rights
FINANCING STATEMENT
• Contents
– Name of debtor
– Name of secured party or representative
– Indication of collateral
– Fixture Filings
• Description of real property
• If debtor has no record interest, the
name of the record owner
NAME OF THE DEBTOR
• Registered Organization
– An entity that requires filing of a “public
organic record” with a state
– Includes
• Corporations
• LLCs
• Many statutory trusts
NAME OF THE DEBTOR
• Registered Organization
– Name on the most recent public organic
record
– No tradenames
– Safe Harbor
• If it shows up on a certified search using
the correct name
• Practice tip: Do a post-closing certified
UCC search
WHERE TO FILE
• Registered Organizations
– The state of formation
• Non-registered organizations
– PPB, or CEO if more than one PPB
• Individuals
– Principal residence
• Exception: Fixtures
– Real property records of the local
jurisdiction
CONTROL PERFECTION
• Deposit accounts can only be perfected
by control
– Funds held by a depository bank
– Generally includes:
• Operating accounts
• Accounts with proceeds of leases and
rents
• Reserve accounts
DEPOSIT ACCOUNTS
• Methods of obtaining control
– The secured party is the depository
institution
• Practice Tip: Agented deals
– Secured party becomes bank’s
customer
– Control Agreements (DACA)
DACA
• Requirements
– Agreement between debtor, secured
party and depository bank that provides
that the depository bank will follow the
instructions of the secured party without
further consent of the debtor
INVESTMENT PROPERTY
• What is investment property?
– Securities
• Divisible into classes or series
• Type traded on exchanges
• Either
– Certificated – security certificate
– Uncertificated – book entry
– Securities Account
– Securities Entitlement
INVESTMENT PROPERTY
• Investment property does not include an
interest in an LLC ordinarily
– LLC can opt-in to article 8 and make the
membership interest a security
• It also can be “certificated”
• Mezzanine Financing
CONTROL
• Can perfect by filing, but perfection by
control takes priority over filing.
• Certificated securities
– Bearer form – delivery
– Registered Form
• Delivery with any necessary
endorsement
• SP becomes registered owner
CONTROL
• Uncertificated securities
– SP becomes registered owner on the
books of the issuer
– Issuer agrees it will comply with
directions of SP with further consent of
the debtor/owner
CONTROL
• Brokerage Accounts
– SP becomes the registered owner
– Securities intermediary agrees to
comply with orders originated by SP
with out further consent of debtor
• Like a DACA
PERFECTION BY
POSSESSION • Instruments
– Written promise to pay not including
security agreement or a lease
• Promissory notes
– Instrument that is not a check, draft or
CD
– Sales of promissory notes included in
Article 9, including:
• Promissory note secured by mortgage
INSTRUMENTS
• Perfection in Instruments
– Filing
– Upon attachment for sale of promissory
notes
– Possession
• May need possession of promissory
notes for foreclosure
AUTOMATIC PERFECTION
• Payment Intangibles
– A general intangible in which the primary
obligation is a payment of money
• Sales of payment intangibles are covered by
Article 9
• Perfection
– Filing
– Sales are perfected upon attachment
AUTOMATIC PERFECTION
• Payment intangibles and real estate
financing
– A sale of a participation interest is a sale
of a payment intangible under Article 9
– Automatic perfection
– Recharacterization issues
• Should always file as well
PRIORITY
• Fixture priority
– Generally interest in real estate takes
priority over a fixture filing
– Important exception – PMSI
• A PMSI takes priority if the security
interest is perfected before the goods
become fixtures
PRIORITY
• First to file or perfect rule
– Need a UCC search
• Non-temporal exceptions
– Purchaser of instrument (including a
promissory note) who has possession
takes priority over prior filer
– Control/possession of investment
property takes priority over prior filer
INSTRUMENTS
• Promissory notes secured by
mortgages
– Take possession for priority purposes
• Automatic perfection does not help
– Bailee can take possession on behalf of
a secured party, but Bailee must
acknowledge that it is possessing on
behalf of secured party
INVESTMENT PROPERTY
• General Rule
– Control takes priority over prior filer
• Certificated securities
– Need possession to take priority over
prior filer
• Even if there is no necessary
endorsement
CERTIFICATED SECURITIES
• Mezzanine lending
– Many times the mezzanine lender does
not get an interest in the real estate, but
gets a “pledge” of the sponsor’s interest
in the SPE real estate owner
– Most SPEs are LLCs now.
• An LLC membership interest is a
general intangible not a security.
LLC INTERESTS
• SP can perfect by filing as a general
intangible
• Practical tip: To ensure priority
– Opt-in to article 8 • In the articles and operating agreement make the
membership interest a security under article 8
• Then also make it a “certificated security”
• Last, take possession of the certificated security
• Possession (even without necessary endorsement)
insures priority over other non-control perfection methods
LLC INTERESTS
• Opt-in language: All issued Units of the Company shall be represented by
certificates. All Units of the Company shall be a
security governed by the Uniform Commercial Code –
Investment Securities (La. R.S. §§ 10:8-101 et seq.).
Each issued Unit is a “certificated security” as defined in
La. R.S. § 10:8-102(a)(4) and the certificate
representing any Unit or Units is a “security certificate”
as defined in La. R.S. § 10:8-102(a)(16)
MISCELLANEOUS
• Multi-lender transactions
– Examples
• Lender 1 - term loan on fixed assets;
Lender 2 – revolver on accounts and
inventory
• First lien/second lien
– Need to establish relative priorities
• Intercreditor agreements
MISCELLANEOUS
• Proceeds
– Security interest in collateral continues in
proceeds
– Proceeds are
• Whatever is obtained on disposition
• Rights arising out of the collateral
• insurance proceeds
– Priority in original collateral is priority in
“cash” proceeds
MISCELLANEOUS
• Security interest in contracts (like construction
contracts, etc.) and licenses/permits (liquor,
etc.) are often required
• Most contracts and license agreements
contain restrictions on assignment
• There are also legal restrictions on
assignment for governmental licenses and
permits
RESTRICTIONS ON
ASSIGNMENT • Generally rights under a contract, such
as a construction contract or franchise
agreement, or licenses or permits are
general intangibles
– Any restriction on assignment (or
creation of default) are ineffective.
– But the secured party cannot enforce
such rights against the obligor.
RESTRICTIONS ON
ASSIGNMENT • Practical Results of Article 9
– The SP can create and perfect a
security interest
– The SP cannot enforce the security
interest against the obligor
– The SP has a security interest in the
proceeds of the general intangible
• So has priority on the proceeds of the
sale, in bankruptcy or otherwise
LETTER OF CREDIT RIGHTS
• Many lessors accept LCs as a security
deposit
• A secured party can get a security
interest in the payment rights under an
LC by control if:
– The issuer consents to the assignment
of proceeds
CONCLUSION
Questions?