Country Q&A - - - A leasehold leasehold A An assignment of leases www.practicallaw.com/9-501-2871 In all states, each security instrument granted granted instrument security each states, all In A deed of trust is a variant of the mortgage and and mortgage the of variant a is trust of deed A In most states, the security instrument must be

Assignments of leases and rents. over the rents and rents grants the lender a security interest This grant is contained in received from the real property. also be a grant most commercial mortgages, though it can the lender in its own right. Usually an assignment provides tenants following with the right to collect rents directly from the lender to an event of default, but many states require or appoint a receiver either take possession of the property, to exercise its rights under the assignment. against a bankruptcy trustee. In bankruptcy, against certain other creditors and third Outside bankruptcy, parties. In a minority of states, however, a mortgage transfers title to to title transfers mortgage a however, states, of minority a In met. are obligations secured the until lender the trust. of Deeds convey a involves usually It place. its in states many in used is who party, third a to borrower the by property real the of ance debt. the for security as lender the for trust in it holds trust. of deeds in mortgages/leasehold security a take Leasehold to lender a enables trust Upon of lease. deed a or under mortgage tenant a as interest borrower’s the leasehold in its on terest foreclose can lender the the default, of transfer or event an lease, the under tenant the mortgages become and such mortgage prohibit often Leases entity. another to consent. tenancy landlord’s the require or trust, of deeds or „ „ „ „ „ Perfection. recorded in the applicable real estate lender’s security records interest to in the perfect real the estate. These usually records located are in the county where the property is legal located. description A of the real records. property the in indexed must accurately is it be that so instrument security attached to the „ Formalities a obtains lender a which by process the is attachment or Creation Perfec asset. borrower’s a in interest security enforceable legally tion is the process by which the lender ensures that its security interest remains effective: „ „ Creation/attachment. borrower. the by executed and writing in be must property real over the in or, property real the of owner legal state the be Each must borrower lease. The the under tenant the mortgage, leasehold a of case not does lender the Generally, requirements. signature own its has records. required and all signatures need estate to instruments, sign the security real the in document the record to notarised be must witnesses. and signatories multiple require states Some „ „ Cross-border Finance Handbook 2011 Handbook Finance Cross-border PLC - - - - - and is reproduced with the permission of the publisher, Practical Law Company. Company. Law Practical publisher, the of permission the with reproduced is and © This article was first published in the the in published first was article This ©

The mortgage grants the lender a lien (in the US US the (in lien a lender the grants mortgage The made valid and enforceable)? jurisdiction. What are the most common forms of security granted over it? How are they created and perfected (that is, developments in the lending market in your jurisdiction in the last 12 months. Please briefly state what is considered real estate in your Please give a brief overview of the main trends and important and trends main the of overview brief a give Please formance of certain obligations. The lender does not gain title title gain not does lender The obligations. certain of formance foreclosure. valid a been has there unless property real the to Mortgages. inter security with synonymously used often is lien term the property personal any (and property real the on charge) or est per and payment the for security as fixtures) constitutes that „ „ Common forms of security Each state has its own form of real property security instrument. The most common are: chapter considers the general rules that apply in with particular reference to the state of New York. most states, Real estate Real estate consists of an ownership land or or tenements (real property). Real leasehold property law is governed interest in by the law of the state where the real property is located. This 2. increasingly concerned with collateral coverage for leveraged loans. leveraged for coverage collateral with concerned increasingly SECURITY: REAL ESTATE on terms similar to deals completed during the boom years preced years boom the during completed deals to similar terms on on focused more are banks However, crisis. financial global the ing are and facilities, loan on defaults borrower for protection downside Increased Increased competition among lending institutions and investors than to borrowers favourable aremore terms financing that means those at available the of beginning 2010, with some deals done new syndicated loan financings have become more prevalent, in the of size The transactions. acquisition concerning those cluding has increased. deals that banks are willing to underwrite new loans. At the beginning of 2010, much of the loan market ac market loan the of much 2010, of beginning the At loans. new facilities loan existing of maturity the extending on focused tivity through amend and extend transactions, as few investors were willing to make new money loans. As the year has progressed, The US loan market has experienced some volatility over the past the over volatility some experienced has market loan US The 12 months, being marked by rapid swings in market demand for 1. OVERVIEW OF THE LENDING MARKET George E Zobitz, Paul H Zumbro and Christopher J Kelly Paul H Zumbro and Christopher George E Zobitz, & Moore LLP Cravath, Swaine Country Q&A Country States United Finance Handbook 2011 Handbook Finance Finance Handbook 2011 Country Q&A

SECURITY: TANGIBLE MOVABLE PROPERTY assets” or “all personal property” description is not sufficient for a security agreement. 3. Please briefly state what is considered tangible movable Once attachment of a security interest in an asset occurs, certain relat- property in your jurisdiction, for example, machinery, trading ed assets are also automatically attached to the security. For example: stock (inventory), aircraft and ships? What are the most common forms of security granted over it? How are they „„ Supporting obligations (secondary obligations that support created and perfected? payment or performance).

„„ Identifiable proceeds of any secured asset. Tangible movable property The Uniform Commercial Code (UCC) (a form of which has been Principal methods of perfecting security interests. The principal enacted in each state) defines goods to include most forms of tangible methods of perfecting security interests in personal property and movable property with respect to which a lien is granted in the United fixtures are as follows:

States. Goods are all assets that are movable when a security interest „„ Filing a financing statement in the office of the Secretary (see Common forms of security) attaches, such as equipment, of State (or alternative state-designated central office) of inventory, farm products (including crops) and fixtures. The UCC the state under whose laws the borrower is organised. The defines fixtures as goods that have become so related to particular financing statement must include: real property that an interest in them arises under real property law. „„ the borrower’s name and type (for example, a corpora- Common forms of security tion), address, jurisdiction of organisation and (depend- ing on the state law of the jurisdiction of organisation) A security interest (that is, an interest in personal property or fixtures organisational identification number; that secures payment or performance of an obligation) is the only form of security that is contemplated under the UCC. While the terms lien „„ the lender’s name and address; and and pledge are often used in legal documentation, they are not UCC „„ a description of the secured asset. In contrast to the terms. A pledge is usually used to refer to the granting of a security position with a security agreement, it is sufficient to interest in equity interests. A lien is often used to refer to general indicate secured assets as all assets or all personal security interests, as well as related concepts such as title retention property (when all assets that can be secured under the agreements and, with respect to securities, a purchase option, call or UCC have been granted as security). similar third-party rights relating to those securities (see Question 7). „„ Possession or delivery of the secured asset. Formalities „„ Obtaining control of the secured asset. Attachment of security interests. A security interest in personal property and fixtures must attach to become valid and enforce- Some types of assets can be perfected by only one of the three able against the borrower. The security interest only attaches if all principal methods, while others can be perfected by more than the following criteria are met: one. The federal and state law of each state governing any aspect of a particular transaction must be reviewed to determine the „„ Value has been given by the secured creditor to the borrower (for example, the borrower has received the proceeds of the precise rules (see below, Special rules). loans under the credit facility). Security interest in proceeds. If a security interest over an asset

Country Q&A „„ The borrower has the right to transfer rights in the asset (the is perfected, then a security interest in the proceeds of that asset security interest will attach only to the rights that the bor- automatically remains perfected for 20 days after the borrower rower has in the asset, for example the borrower’s ownership receives those proceeds. After that the security interest in the right, or leasehold right). proceeds becomes unperfected unless one of the following applies:

„„ There is a security agreement, and an evidentiary require- „„ A financing statement was filed to perfect the security ment is satisfied, for example: interest in the original asset and the proceeds are:

„„ authentication (for example, the borrower has signed „„ assets over which a security interest can be perfected the security agreement); by filing a financing statement in the office where the original financing statement was filed; and „„ possession (for example, collateral, other than certifi- cated securities, is in the possession of the secured „„ not acquired with cash proceeds. party pursuant to the debtor’s security agreement); „„ The proceeds are identifiable cash proceeds. „„ delivery (for example, certificated securities in regis- „„ The security interest in the proceeds is perfected as an tered form are delivered to the secured party pursuant original secured asset before the expiry of the 20-day period. to the debtor’s security agreement); and

„„ control (for example, the secured party has control of Automatic perfection over related assets. Perfection of a security collateral that is deposit accounts, investment property, interest in a secured asset also constitutes automatic perfection electronic chattel paper or letter of credit rights pursu- in certain related assets. For example, a security interest in ant to the debtor’s security agreement). “supporting obligations” (letter-of-credit rights or other secondary obligations that support payment or performance) of any secured The security agreement must provide a description of the secured asset is automatically perfected by perfection of a security assets that reasonably identifies what is described. An “all interest in that asset.

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The two principal methods of perfection in The two principal methods of perfection in commodity contract (for example, a commodity futures contract or option on a commodity futures contract) or commodity account. certificated security (a security represented by a certificate); uncertificated security; security entitlement (the rights and property interest of an entitlement holder in relation to a specified financial asset) or securities account; † † † † † † † † obtaining physical possession of the security certificate; filing a financing statement; possession or delivery of the financial instrument. filing a financing statement; obtaining control of the investment property. investment property is a: „ „ „ „ „ financial instruments, such as shares and other securities (both in certificated and dematerialised form)? How are they created and perfected? What are the most common forms of security granted over Instruments (a writing evidencing a right to payment, which Instruments (a writing evidencing a right to is transferred is not a security agreement or lease and which by delivery with endorsement). and the Investment property (securities, security accounts securities entitlements credited to them, commodities contracts and commodities accounts). obligation Chattel paper (records that evidence a monetary and a security interest in specific goods). In relation to certificated and uncertificated securities, the For a certificated lender can also perfect by taking delivery. delivery can be achieved by one of the following: security, „ Instruments. instruments are: „ „ Investment property. perfection in investment property are: „ „ The rules regarding control depend on whether the „ „ „ „ „ Formalities Creation of security interests interests Question 3, Formalities: Attachment of security in financial instruments. Perfection of security Perfection depends on the type of property: interests in „ financial instruments. „ Although vehicles are goods under the UCC, certificate of title statutes in each state govern perfection of security interests over vehicles unless they constitute inventory. Typically, perfection is achieved by noting the existence of the lien on the vehicle’s certificate of title. INSTRUMENTS FINANCIAL AND SHARES SECURITY: 4. Common forms of security A security interest over the following is commonly created in a security agreement: „ „ „ - - about this publication, please visit please publication, this about 46 A lender A ); about Practical Law Company, please visit visit please Company, Law Practical about The Federal ); and ; A lender’s filed financing filed lender’s A The Surface This includes certain intel This includes certain Question 6 . 49 U.S.C. § 44107

49 U.S.C. § 11301 See Question 5, Formalities: Security ). The Secretary of Transportation ( The Secretary of Transportation See Certain property has requirements falling outside the outside falling requirements has property Certain Transportation Board ( Board Transportation Certain vessels. U.S.C. § 31321 Intellectual property. Aircraft and certain aircraft-related assets. Administration ( Aviation Railroads and related assets. „ „ „ „ in those goods. name. Issuing the document in the lender’s The bailee receiving notice of the lender’s security interest security The bailee receiving notice of the lender’s Filing a financing statement that covers that document. Obtaining possession of that document. secured party). Filing a financing statement. (either directly or by an agent of the possession Taking interests in insurance policies „ Insurance policies. „ „ „ Federally pre-empted property. Federally pre-empted and ships. lectual property and certain aircraft, railroads requires filing The perfection of a security interest generally in the following specialised registries: „ „ „ „ „ „ „ „ For more information more For „ A security interest over goods held by a bailee and represented by a non-negotiable document can also be perfected by either: „ „ „ by a negotiable document can also be perfected by perfecting a security interest in the negotiable document, which is done by the lender by either: bailee’s written acknowledgement that the bailee holds the goods the holds bailee the that acknowledgement written bailee’s benefit. for the lender’s A security interest over goods held by a bailee and represented filings to perfect security interests in goods that are fixtures). A security interest over goods held by a bailee sented and by not a repre document can also be perfected by obtaining the The usual procedure is to perfect by filing (special rules govern covered by a certificate of title) can be perfected by either: covered by a certificate of title) can be perfected „ „ Perfection of security interests in A tangible security interest movable over property. goods (other than non-inventory goods Set-offs, landlord liens, workmen’s liens and materialmen’s liens liens and materialmen’s Set-offs, landlord liens, workmen’s are also outside the UCC. „ „ Special rules. Special lending: syndicated of context the UCC in under state and federal law. The significant (apart from following most real the are property) that receives an assignment of a perfected security interest is not is interest security perfected a of assignment an receives that required to make an additional filing tomaintain the perfection of that security interest. to) the disposition. party. secured by assignment after perfection Continued Continued perfection in disposed assets. disposed in perfection Continued statement remains effective in relation to assets disposed of by the borrower in which the lender’s security after interest the disposition, continues even if the lender knows of (or consented Country Q&A Country Finance Handbook 2011 Handbook Finance Finance Handbook 2011 Country Q&A

„„ having a third party (other than a securities „„ Commercial tort claims (a claim arising in tort regarding the intermediary) do so on the lender’s behalf; claimant’s business, but which does not include personal injury or death). „„ having a securities intermediary do so if the security

is registered in the lender’s name, payable to the „„ Letters of credit and letter of credit rights (a right to lender’s order or endorsed to the lender (and not to the payment for performance under a letter of credit). securities intermediary or blank). „„ General intangibles (any personal property other than the For an uncertificated security, delivery can be achieved by types of personal property listed in Article 9 of the UCC, having the uncertificated security registered in the issuer’s but including payment intangibles, contracts, intellectual records in either the: property and software).

„„ lender’s name; Formalities „„ name of a third party (other than a securities Creation of security interests in claims and receivables. See intermediary) on the lender’s behalf. Question 3, Formalities: Attachment of security interests. „„ Chattel paper. A security interest over tangible chattel paper can be perfected by either: For commercial tort claims, the security agreement must also specifically identify the claims subject to the security interest. „„ filing a financing statement;

„„ taking possession. Perfection of security interests in claims and receivables. The following are the methods by which a security interest can be A security interest over electronic chattel paper can be perfected in accounts, general intangibles and letter of credit rights: perfected by: „„ Accounts. A security interest is perfected only by filing a „„ filing a financing statement; financing statement. „„ obtaining control, which is accomplished when the records composing the paper: „„ Commercial tort claims. A security interest is perfected only by filing a financing statement, which must specifically †† establish a single, authoritative, unique and identi- identify the claims subject to the security interest. fiable original copy; „„ General intangibles. A security interest is perfected only by †† make clear that copies of the one authoritative copy filing a financing statement, unless filing in a specialised are copies; and register is required to perfect security interests over certain †† make readily identifiable as authorised or unauthor- federally pre-empted property (see Question 3, Formalities: ised any revisions to the authoritative copy. Special rules).

The UCC provides for certain circumstances under which „„ Letter of credit rights. A security interest over a letter of chattel paper can be sold free of a security interest that was credit right (other than a letter of credit right that consti- perfected by filing. The safest commercial practice, there- tutes a supporting obligation for another secured asset) can fore, is to take possession or control (as applicable) and file be perfected only by the lender obtaining control of that as a precautionary measure. right. This happens if the issuer or nominated person has consented to an assignment of the proceeds of the letter of credit under Article 5 of the UCC (or other applicable law). Country Q&A SECURITY: CLAIMS AND RECEIVABLES However, perfection of the lender’s security interest does not entitle the lender to draw under the letter of credit. 5. What are the most common forms of security granted over claims and receivables (such as debts or rights under Security interests in insurance policies. The UCC applies to insur- contracts)? How are they created and perfected? ance policies only to the extent that payments under a policy con- stitute proceeds of a lender’s other secured assets. State insur- ance laws, in general, do not otherwise specifically address how Common forms of security a lender creates and perfects a security interest in an insurance A security interest over the following is commonly created in a policy. However, judicial decisions in New York suggest that the security agreement: following steps should generally be taken:

„„ Accounts, that is, rights to payments of monetary obligations: „„ The lender should give notice to the borrower’s insurer that the security interest exists and ask the insurer to „„ for property sold or otherwise disposed of; acknowledge the interest and agree to make payments as „„ for services rendered; the lender directs. „„ for policies of insurance issued; „„ The lender should seek to have itself named as a loss payee „„ for secondary obligations incurred; (that is, an individual entitled to receive insurance monies) or as an additional insured under the borrower’s insurance „„ for energy provided; policy. „„ for use or hire of a vessel; „„ The insurer should represent that it has received no other „„ arising out of the use of a credit or charge card; or notification of a grant of a security interest in the insurance

„„ as winnings in a government sponsored lottery. policy.

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- ). see ) IN SECURED s www.practicallaw.com/about/practicallaw www.practicallaw.com/about/handbooks

). see Question 3, Formalities: Security interest in proceeds in interest Security Formalities: 3, Question see shares of an SPV set up to hold certain of the debtor’s assets, debtor’s the of certain hold to up set SPV an of shares rather than to take direct security over those assets? If so, please give brief details of the practice and risks associated with it. Is it common in your jurisdiction to take security over the Negative pledge. Other structures. Establish one or more SPVs to hold those assets. Establish one or more SPVs to hold those obligations. Prohibit the SPV from incurring debt or other for the Pledge the capital stock of the SPV as collateral of a direct loans (resulting in the functional equivalent pledge of the assets of the SPV). structures used instead of taking security but which have a similar effect to security) are common in your jurisdiction? Is there a risk of such structures being recharacterised as a details brief give and following the Consider interest? security of the structure and risks associated with it: Sale and leaseback. Factoring. Hire purchase. Retention of title. What types of quasi-security structures (that is, legal „ „ „ „ „ „ „ „ „ „ „ Sale and leaseback This involves the sale of property with a concurrent lease from the buyer on sale. „ „ „ Federal with connection in example, for used, is structure SVP The federal US that given licences, (FCC) Commission Communications holder the by security as licence FCC an of pledge the prohibits law as (such however industries, regulated Certain SPV. of the FCC licence. the of interests equity the of pledge the prohibit insurance), QUASI-SECURITY 9. „ „ „ „ SPECIAL PURPOSE VEHICLES (SPV LENDING 8. that issues regulatory address specifically to used often are SPVs prevent creditors from taking a direct security interest in certain borrowers to: assets. As a result, lenders frequently require proceeds of pre-bankruptcy assets to which the security interest attached. has already Fungible assets A can interest security be over granted However, assets. fungible nota (most assets fungible certain in interest security a perfecting additional take to party secured the require can proceeds) cash bly, ( steps Other assets as such licences, certain in granted be cannot interest security A ( Commission Communications Federal the by issued licences Question 8 - ) - - about this publication, please visit please publication, this about ). Question

The term 17 U.S.C. 17 25 U.S.C. ) indicating indicating ) about Practical Law Company, please visit visit please Company, Law Practical about See 15 U.S.C. § 1060 C.D.Cal. 1990 C.D.Cal. , ,

see see Question 5, Common forms of security ) and registered trade marks ( ). In Re Peregrine Entertainment Inc. Entertainment Peregrine Re In patents, trade marks, copyright and designs)? How are they created and perfected? registered and unregistered intellectual property (such as What are the most common forms of security granted over Other assets. Future assets. Fungible assets. granted or is difficult to grant? Consider the following and give brief details of any additional requirements: The US Copyright Office for registered copyrights ( copyrights registered for Office Copyright US The § 205 Office for patents ( The US Patent and Trademark § 261 Copyright (and licences of copyright). Copyright (and licences Patents (and licences of patents). Patents (and licences marks). trade of licences (and secrets trade and marks Trade Are there types of assets over which security cannot be „ „ „ „ „ „ „ „ For more information more For Additionally, a security interest does not attach to assets that the that assets to attach not does interest security a Additionally, borrower acquires after unless bankruptcy, the future assets are Additional filings or other steps are required for certain categories certain for required are steps other or filings Additional of after-acquired property, such as commercial tort claims. intellectual property and A security interest can be granted over future assets. However, security interests in assets that will be acquired do in the not future attach until the borrower actually acquires the asset. „ Future assets „ „ 7. SECURITY: PROBLEM ASSETS „ „ be perfected by recording the security interest at the federal level. level. federal the at interest security the recording by perfected be Prudent lenders record against intellectual property at the state registries: following the at record and level (UCC) ies ies and in some cases is For example, there unclear. is US case ( law can only copyrights that a in registered interest federally security assets (for example, inventory and master recordings) are perfected perfected are recordings) master and inventory example, (for assets recording the for provide statutes federal level, (UCC) state at the of trade copyright, registered mark and patent security interests. the scope However, of rights over their pre-emptive the UCC var general general intangibles ( includ property, intellectual of forms certain covers UCC the under secu While copyrights. and secrets trade marks, trade patents, ing property of intellectual embodiments in the physical interests rity Creation of security interests in intellectual property. intellectual in interests security of Creation 3, Formalities: Attachment of security interests. Perfection of security interests in property. intellectual „ Formalities „ „ Common forms of security A security interest over the a security agreement: commonly created in following intellectual property is SECURITY: INTELLECTUAL PROPERTY 6. Country Q&A Country Finance Handbook 2011 Handbook Finance Finance Handbook 2011 Country Q&A

A bankruptcy court can recharacterise a sale and leaseback as a Other structures financing and grant of a security interest instead of a lease, so that Conditional sale. This involves the sale of property or goods which the buyer (lessor) of the subject property would lose its ownership is completed only if certain conditions (typically, payment in full interest over the property and become a secured creditor of the of the purchase price) are met by one or both parties to the trans- seller (lessee). In determining whether a sale and leaseback action. The UCC treats a conditional sale in the same way as a should be recharacterised, a bankruptcy court examines the completed sale with the buyer’s grant of a security interest. substance of the transaction, including whether the:

„„ Sale price was based on the fair market value of the property. Set-off. US law recognises a debtor’s right to reduce the amount of debt by any sum the creditor owes the debtor. „„ Rent reflects the fair rental value of the property.

„„ Term of the lease is for the entire (or nearly the entire) GUARANTEES useful life of the property.

„„ Seller (lessee) has an option to purchase the property at a 10. Are guarantees commonly used in your jurisdiction? How are price below fair market value at the time of the purchase. they created?

Lenders should ensure that their loan documents prohibit the borrower from subsequently creating security interests in favour Guarantees are commonly used in the US as a form of credit sup- of other creditors (see below, Negative pledge). port for the debtor’s obligations. Guarantees are typically provid- ed by each of the debtor’s US subsidiaries (under US federal in- Factoring come tax law, the provision of guarantees by the debtor’s non-US subsidiaries can raise adverse tax consequences for the debtor) This involves the sale of accounts receivable at a discount. The and by any of the debtor’s US parent companies. Guarantees are discount assumes the risk for delay and the possibility of non- created by the creditors (or their agent) entering into a guarantee payment. Whether there is a risk that a bankruptcy court will treat agreement with each entity providing the guarantee. an accounts receivable factoring as a true sale (as opposed to a disguised secured transaction) depends on several factors, including: RISK AREAS FOR LENDERS „„ Which party bears the credit risk if the account debtor does not fulfil its obligations or is insolvent. 11. Do any laws affect the validity of a loan, security or guarantee „„ The intention of the parties transacting to create either a (or the terms on which a loan, security or guarantee are true sale or a secured transaction. made)? For example, rules on:

Hire purchase „„ Financial assistance.

Hire purchase (known as closed-end leasing or lease purchase) „„ Corporate benefit. is a type of lease of property where ownership of the property is transferred to the lessee at the end of the lease. „„ Loans to directors.

„„ Usury. Retention of title This is a contract for the sale of goods where title to the goods re-

Country Q&A mains vested in the seller until the buyer fulfils certain obligations Financial assistance (usually payment of the purchase price). Retention of title clauses The applicable rules prohibit the company from purchasing its own are less common in the US than in the UK. This may be because: shares. No specific rules apply to the grant of security (or the provi- „„ The UCC limits the effectiveness of these clauses by treat- sion of a guarantee) by a company to secure (or guarantee) debt ing a retention of title contract as the grant of a security to purchase its own shares (or the shares of its holding company). interest and imposing the same attachment and perfection requirements on it. Corporate benefit Generally, under state law, if the directors of the subsidiary „„ Under US bankruptcy law, a stay of creditors’ rights under Chapter 11 counters the effectiveness of the retention of company decide to grant security (or provide a guarantee) in title clause. respect of a loan to its parent, the courts traditionally defer to the directors’ business judgement if the decision was made:

Negative pledge „„ On an informed basis. This is a provision in the loan documentation prohibiting the debtor „„ In good faith. from encumbering its assets with additional liens, other than certain permitted liens arising by operation of law, in the ordinary „„ With loyalty to the company. course of business or as otherwise agreed among the parties. Actual notice of the negative covenant ensures that subsequent (See also Question 23, Fraudulent conveyances.) creditors take security subject to the existing lender’s security. Loans to directors The loan documentation can be structured so that, if the borrower Companies with publicly traded securities in the US are grants a security in violation of the negative pledge, the creditor prohibited from extending credit (in the form of a personal loan) in respect of that loan documentation is automatically granted a to any director or executive officer of that company, with certain security interest in the affected assets. limited exceptions (Securities Exchange Act of 1934).

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mechanisms are used? How do obtain the benefit of the security buyers and guarantees associated ensure that they with the transferred debt? If so, how can it be achieved, for example by an inter-creditor inter-creditor an by example for achieved, be it can how so, If agreement between senior, mezzanine and junior creditors? Is structural subordination possible? Is debt traded in your jurisdiction? If so, what transfer Is contractual subordination of debt possible and common? syndicated loan) recognised in your jurisdiction? If not: Is an agency arrangement created under the law of another country recognised in your jurisdiction? Can a facility agent enforce rights on behalf of the other syndicate lenders in the courts in your jurisdiction? The Environmental Protection Agency and the courts retain and the courts Protection Agency The Environmental lender when a secured discretion to determine considerable the and controls into the shoes of management has stepped determinations These operations of the facility. day-to-day basis. are made on a case-by-case exemption does not affect liability that The security interest sections of CERCLA or comparable can arise under other can be incurred, for example, if the Such liability state law. a generator of hazardous waste by secured lender becomes waste disposal during the period controlling the borrower’s the borrower is winding-up. Is the agent concept (such as a facility agent under a „ „ „ „ Facility agents for the syndicated lender group are common for syndicated loans and are recognised interests under are granted to a facility agent US on behalf of the secured law. Security parties (for example, the lenders and agents to whom the debtor secured the by authorised is agent facility The obligations). owes Structural subordination can be achieved by structuring the debt the structuring by achieved be can subordination Structural com holding a by incurred is subordinated be to debt the that so operat the by incurred is senior be to is that debt the while pany As ing a subsidiary. result, the debt to the holding company will only be satisfied following the payment in full of the obligations of the operating subsidiary and the distribution of any remaining assets to the holding company. 14. secu this, facilitate To US. the in traded actively is debt Secured rity interests are held by an agent for the benefit of the secured trans the in results also obligations debt the of Transfer lenders. action any for need the without interest security related the of fer on the part of the new buyer of the secured debt. 15. „ „ „ „ STRUCTURING OF DEBT AGREEMENTS 13. Contractual subordination is possible and common. It is commonly achieved by most including subordination provisions in the instrument governing the debt that will be subordinated. These provisions specifically state that they are for the benefit of the holders of the senior debt. - about this publication, please visit please publication, this about about Practical Law Company, please visit visit please Company, Law Practical about

agent; or basis monthly a least at on sale for property the advertises circulation. general of newspaper or publication trade a in lists the property for sale with an appropriate broker or „ „ a security or guarantee, be liable under environmental laws guarantor? or provider security borrower, the of actions the for Can a lender, merely by making a loan or holding or enforcing enforcing or holding or loan a making by merely lender, a Can the security interest exemption to a subsequent purchaser This of contaminated or potentially contaminated property. can make it difficult to obtain full value from the sale of a facility after foreclosure. lender liability under state superfund statutes, many of which do not include a security interest exemption. There is no shelter provision to transfer the protections of The federal CERCLA scheme does not necessarily preclude consideration for the property which is received after six months from the time it acquired title. It does not reject, or fail to act for more than 90 days in relation to, any written, bona fide and firm offer of fair „ „ Within 12 months of the date on which the foreclosed-on Within property is available for sale, the secured lender: Exercises control so that it has responsibility for the day-to- Exercises control so that it has responsibility compliance, day decision making regarding environmental of the or substantially all of the operational aspects business other than environmental compliance. Exercises decision-making control over the borrower’s borrower’s Exercises decision-making control over the environmental compliance. „ „ „ „ „ „ For more information more For „ The following considerations and potential lender are also relevant: problems for the „ „ facility’s management if it complies with both of the following: management if it complies with both facility’s „ Post-enforcement A secured lender is not considered to be participating in a „ „ Pre-enforcement A secured lender is not management unless it either: facility’s considered to be participating in a ownership primarily to protect its security interest. ownership primarily to protect its security has been enforced. Liability depends on whether the security Liability Act (CERCLA) imposes strict, joint and several liability on (among others) owners or operators without if, of exemption interest security the facilities. under exempt is lender A secured participating in a facility’s management, it holds indications of The Comprehensive Environmental Response, Compensation, and Compensation, Response, Environmental Comprehensive The 12. theless, many loan documents contain “usury savings clauses” interest of amount the will circumstances no under that providing the maximum legal rate. charged or received exceed criminal usury statement sets the maximum interest rate at 25%. at rate interest maximum the sets statement usury criminal Certain jurisdictions, do however, not have usury law limitations in connection with loans made to commercial enterprises. None Usury generally statutes, civil or criminal be can which laws, usury State at interest receiving or charging knowingly from creditors prohibit York’s New example, For percentage. specified a exceeding rate a Country Q&A Country Finance Handbook 2011 Handbook Finance Finance Handbook 2011 Country Q&A

parties, pursuant to the terms of the security agreement, to „„ Default in the performance of the remaining affirmative enforce remedies under the UCC and otherwise on behalf of the covenants (subject to a short grace period). secured parties. „„ Cross-default in relation to other debts.

„„ Insolvency or certain bankruptcy proceedings. 16. Is the trust concept (such as a security trustee holding security on behalf of two or more creditors) recognised in „„ Change in control. your jurisdiction? If not: „„ Failure of validity, perfection or priority of security.

„„ Is a trust created under the law of another country recognised in your jurisdiction? If an event of default occurs, lenders can typically terminate fur- ther lending commitments, accelerate principal and interest on „„ Can a security trustee enforce its rights in the courts in your loans and/or enforce their security, if necessary (see Question 20). jurisdiction?

20. How are the main types of security interest usually enforced? What requirements must a creditor comply with (for example, Trusts are recognised under US law. However, the UCC will gener- a mandatory public sale of the secured asset through the ally treat a trust whose purpose is to secure payment or perform- courts)? ance of an obligation as the grant of a security interest, subject to the same rules for attachment and perfection as a security interest. Personal property and fixtures Trusts created under the law of another jurisdiction are recognised in US courts and the rights of a security trustee can generally be If an event of default occurs, there are a number of contractual enforced. remedies available. A secured party also has rights under the UCC and can reduce a claim to judgment, foreclose, or otherwise enforce the security interest by any available judicial procedure 17. Do the different types of security in your jurisdiction need to (Article 9, Part 6, UCC). be documented separately or does your jurisdiction allow a single security document? If every aspect of the disposition of the secured assets (includ- ing the method, manner, time, place and notice) is commercially reasonable, a lender can dispose of the asset by public or private Security interests in real property are documented separately proceedings, and apply the proceeds of sale to repay the debt. from security interests in other assets. However, security interests in most personal property can be governed by a single document. The automatic stay provisions under the Bankruptcy Code (see Question 22) and state law impose additional limitations on a lender’s exercise of remedies in relation to the secured asset. 18. Are there any rules on how loans (including syndicated loans) should be documented for the loan to be enforceable? Real property Enforcement is also not limited to a public sale of the secured This is governed by US general contract law: there are no other assets through the courts. If an event of default occurs, available specific rules outlining how to document loans to ensure that they remedies include: Country Q&A are enforceable. „„ Action to pay debt. Most mortgages contain an acceleration clause that permits the lender to declare the entire debt ENFORCEMENT OF SECURITY INTERESTS AND due. Assuming it is a recourse loan, the lender can institute BORROWER INSOLVENCY an action against the borrower to collect the debt. However, in some states, if the mortgage lender sues the borrower for 19. Please briefly state the circumstances in which a creditor can a personal judgment without first foreclosing its mortgage enforce its loan, guarantees or security (for example, when on the real estate, it loses its lien on the real estate.

an event of default occurs). What requirements must the „„ Power of sale. In certain states, a power of sale is available. creditor comply with? Without need for court action and after certain statutory notice requirements are met, the property can be sold at a public sale, either by a public official, the lender, or, in the In addition to statutory and common law remedies for breach case of a deed of trust, the trustee. of contract, the circumstances in which a secured creditor can enforce its security are generally set out in the loan agreement as „„ Possession. Most commercial mortgages grant the lender events of default. Typical events of default include: the right to take possession of the property on an event of default. The lender can operate the property and apply „„ The failure to pay the principal or (subject to a short grace the revenues to payment of the debt. However, in many period) interest on loans, or other fees or amounts due. states this remedy is unenforceable without first obtaining a

„„ A representation or warranty that is false or misleading in judicial order awarding possession or appointing a receiver. any material respect when made (or deemed to be made). In addition, this remedy can subject the lender to possible tort and other liability as a mortgagee-in-possession of the „„ Default in the performance of certain affirmative covenants real estate. that cannot be remedied (for example, a non-permitted use of loan proceeds) or of any negative covenant.

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If perfection If perfection Questions 2 If a borrower subse A transfer in property is not made made not is property in transfer A www.practicallaw.com/about/practicallaw www.practicallaw.com/about/handbooks This occurs when both:

This occurs when the transfer is made with This occurs when the transfer is made with the borrower was or became insolvent; the borrower had or was left with unreasonably small capital with which to conduct its business; or the borrower believed it would incur debts beyond its ability to pay as they matured. † † † the borrower did not receive fair consideration or the borrower did not receive fair consideration and reasonably equivalent value for the transfer; or as a result of the transfer: at the time of the transfer, † † † „ „ Actual fraud. delay or defraud creditors. the actual intent to hinder, Constructive fraud. „ „ borrower’s insolvency, assuming the security interests have been validly perfected. Consider: The secured creditors considered in Statutory claims. Unsecured creditors. Subordinated creditors. Delayed perfection of initial security interests. of initial security Delayed perfection the date of transfer (that than 30 days after occurs more lien), then it arguably constitutes a is, the creation of the pre-existing indebtedness. In that transfer on account of files for bankruptcy protection within case, if the borrower security of perfection, the lender’s 90 days after the date to a preference attack. interest is vulnerable property. After-acquired Therefore, property. that in rights acquires borrower the until more perfected was interest security lender’s the if even bankruptcy borrower’s the before year) one (or days 90 than assets to relation in interest security lender’s the filing, before year) one (or days 90 within borrower the by acquired are There attack. preference to vulnerable be can filing the inventory of acquisitions for rule this to exceptions special is that property of proceeds for and receivable, accounts and interest. security lender’s the to subject already Future grants of security interests. that were not quently grants a security interest over assets to the lend subject to the security interest initially granted period begins ers, a new 90-day (or one-year) preference the lender’s (to the extent the new security interest secures existing indebtedness). Please list the order in which creditors are paid on the „ „ „ „ „ „ „ „ „ Generally, Generally, the secured lender’s claims have priority over all un secured claims of the other creditors (including trade creditors, employees, landlords and senior unsecured noteholders) to the extent that the relevant secured assets have realisable value. Fraudulent conveyances of fraudulent transfer: State and federal law recognise two types „ „ 24. „ „ „ „ is one year. The situations in which a is preference one attack year. are most relevant are: likely to be „ „ „ - - - - about this publication, please visit please publication, this about ). Subject to about Practical Law Company, please visit visit please Company, Law Practical about

Bankruptcy Code § 362 Most commercial mortgages grant the lender mortgages grant Most commercial borrower is committing waste (impairing the value of borrower is committing the for example, failing to maintain the real estate by, taxes). property or pay real estate lender has inadequate security for the debt; or lender has inadequate „ „ briefly state the time limits that apply and the conditions that that conditions the and apply that limits time the state briefly void. made be to transaction the for met be must interests can be made void if the entity that received the loan loan the received that entity the if void made be can interests Please insolvent? becomes security or guarantee the granted or rights to enforce its loan, guarantees or security? of insolvency proceedings) available in your jurisdiction? If yes, please give brief details, including voting requirements to approve such procedures. How do they affect a creditor’s rights to enforce its loan, guarantees or security? What What transactions involving loans, guarantees, or security How does the start of insolvency procedures affect a creditor’s creditor’s a affect procedures insolvency of start the does How Are company rescue or reorganisation procedures (outside „ „ payment of the debt. Each state has its own requirements payment of the debt. and certain states prohibit the for appointing a receiver unless the: appointment of a receiver the right to a court-appointed receiver on an event of on an event of a court-appointed receiver the right to to possess and operate receiver has the right default. The to the and other revenues and apply the rents the property Receivership.

„ For more information more For of the borrower (for example, someone who is a director or officer or director a is who someone example, (for borrower the of period time this company), the of control in is or company the of er’s properly perfected er’s security interest if the grant or perfection of the security interest was made on account of pre-existing in debtedness while the borrower was insolvent and within 90 days insider an is lender the If filing. bankruptcy borrower’s the before Preferences lend a invalidate to able be may trustee bankruptcy borrower’s A 23. State law imposes other limitations on a secured lender’s exercise lender’s secured a on limitations other imposes law State of remedies in relation to its security. from the automatic stay. For example, under a Chapter 11 bankrupt 11 Chapter a under example, For stay. automatic the from the and property certain in equity have not does borrower the if cy, secured the reorganisation, effective an stay. to the necessary not is terminate or property modify to court the of order an seek can lender before the filing of the bankruptcy petition. a Under secured lender can circumstances, specific obtain relief a few limitations, the automatic stay provides a period of time in which all litigation, collection activities, foreclosures and re possessions of property are suspended. A secured lender cannot pursue any enforcement action on any debt or claim that arose Once a bankruptcy petition is filed, an automatic stay of creditor actions comes into effect ( 22. of debt (for which the voting requirements documents are set for out in that the debt), proceedings. reorganisation procedures outside of insolvency there are no company rescue or Other than in connection with private consensual restructurings 21. Country Q&A Country „ Finance Handbook 2011 Handbook Finance Finance Handbook 2011 Country Q&A

Although perfection of a security interest is necessary for a lender to obtain priority, it does not assure priority over all third parties. 28. Are there exchange controls that restrict payments to a The UCC, state law and federal law contain extensive rules that foreign lender under a security document, guarantee or loan determine when a lender’s security interest in a secured asset has agreement? priority over competing interests in that asset. These rules are complex and beyond the scope of this chapter. There are no exchange controls in force that would prevent the Generally, in corporate insolvency, property is distributed in the repatriation of proceeds realised in the US through the enforce- following order: ment of security or other payments to a foreign lender under the security document or loan agreement. „„ Secured creditors (see Question 25 for general rule on priority among secured creditors). 29. Is a foreign choice of law clause in a security, guarantee „„ Expenses of insolvency proceedings. or loan document recognised and applied by the courts in

„„ Certain employee claims, tax claims and government claims. your jurisdiction? Does local law always apply in certain circumstances? „„ Unsecured creditors (subject to priority rules under the Bankruptcy Code). State law governs recognition of choice of law clauses. In New „„ Subordinated creditors. York, the parties to a secured transaction generally have freedom „„ Shareholders. to select the law that governs the creation of a security interest. When a transaction bears a reasonable relation to New York and Under certain circumstances, however, this order can be altered to another jurisdiction, the parties to the transaction can choose by a bankruptcy court, which can: the law that will govern their rights and duties. The UCC generally

„„ Subordinate one claim to another claim. imposes certain limitations on the ability of the parties to select the law that governs (among other things): „„ Recharacterise certain debt as equity. „„ Perfection. „„ Confirm a reorganisation plan that varies the distribution rules. „„ The effects of perfection or non-perfection.

„„ The priority of the lender’s security interests (including 25. If more than one creditor holds the same security interest over certain aspects of the attachment and perfection of security the same asset, how is priority between them determined? interests in securities). Please briefly set out any specific ranking rules that apply. „„ The enforcement of the security interest.

In general, when two creditors hold perfected security interests However, it does not limit the law governing the creation and in the same asset, the creditor that is first either to perfect its attachment of the lender’s security interests. security interest or file its financing statement covering that asset has priority (see Question 24). TAX AND FEES ON LOANS, GUARANTEES OR SECURITY INTERESTS

Country Q&A 26. If a security interest has not been validly perfected, where does the security holder rank on the borrower’s insolvency? 30. Are taxes or fees paid on the granting and enforcement of a loan, guarantee or security? Consider the following and state the tax rates and fee amounts, if they are more than a Generally, in a bankruptcy case, any lender that has failed to per- nominal amount: fect its security interest before bankruptcy will be in the position of an unsecured creditor. Outside of bankruptcy, in some circum- „„ Documentary taxes (for example, stamp duty). stances, a secured lender that has failed to perfect its security „„ Registration fees. interest still may be able to enforce its security interest. „„ Notaries’ fees. CROSS-BORDER ISSUES ON LOANS

27. Are there restrictions on the making of loans by foreign Generally, state and local, not federal, taxing authorities impose lenders or granting security (over all forms of property) or any documentary, filing and other taxes payable in connection guarantees to foreign lenders? If yes, please give brief details, with the granting, taking or enforcement of security. for example registration requirements. Taking security The expenses associated with the filing of financing statements are: In general, there are no restrictions on granting security interests „„ State filing fees and filing service charges. These are to foreign lenders. However, it may be necessary for a foreign generally modest in amount, unless there is a very large lender to meet certain state requirements (for example, qualify number of debtors or a large number of local filings (for to do business in the state) if it wants to exercise rights and rem- example, relating to fixtures). edies as a secured creditor.

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- - Syndicated lending. New York, 2000 New York, [email protected] www.cravath.com +1 212 474 1406 +1 212 474 3700

CHRISTOPHER J KELLY Cravath, Swaine & Moore LLP T F E W www.practicallaw.com/about/practicallaw www.practicallaw.com/about/handbooks

Qualified. Areas of practice. on the granting and enforcement of a security? loan, guarantee or into force and, if so, when. they are likely to come Are there strategies to minimise the costs of taxes and fees whether state and reform for proposals any summarise Please 31. or granting the with connection in strat payable fees those and taxes require to Generally, expensive sufficiently not are security of mort taking local and state York New however, instances, certain In egies. of tax taxes may gage minimising consideration recording require basis. case-by-case a on designed usually are these but strategies, REFORM 32. Article 9 of the UCC underwent the near future. 2001, and major reform is not expected in substantial reorganisation in Syndicated lending, about this publication, please visit please publication, this about - New York, 1998 New York, [email protected] www.cravath.com +1 212 474 3700 +1 212 474 1036

about Practical Law Company, please visit visit please Company, Law Practical about F E W PAUL H ZUMBRO Cravath, Swaine & Moore LLP T CONTRIBUTOR DETAILS Qualified. Qualified. Areas of practice. bankruptcy.

Syndicated lending. Some states impose a mortgage recording tax impose a mortgage Some states New York, 1996 New York, [email protected] www.cravath.com +1 212 474 1996 +1 212 474 3700

GEORGE E ZOBITZ Cravath, Swaine & Moore LLP T F E W US$500,000 (as at 1 November 2010, US$1 was about US$500,000 (as at 1 commercial real property can be EUR0.7) or more securing city and state rate of 2.8%. taxed at a combined the total value of all the secured assets. In certain cases, the total value of all the tax in relation to real property the mortgage recording for example, a mortgage of York, can be material. In New being secured. In a multi-state transaction where only part being secured. In a multi-state is located in the state that levies the of the secured assets be paid according to the ratio that tax, the tax can often asset located in the state bears to the value of the secured or documentary stamp tax on filings of financing state stamp tax on filings or documentary the assets are subject to not all types of ments, although amount of indebtedness is measured by the tax. The tax Filing taxes. Areas of practice. Qualified. „ For more information more For under the UCC or in connection with real property may also be payable. actions. Court costs and professional fees foreclosure Enforcing security Expenses may be payable in connection with the disposing secured assets in of the commercially reasonable manner required Country Q&A Country „ Finance Handbook 2011 Handbook Finance