Glass & Goldberg | Financing, Property & Bankruptcy Law

California law states that, with exception, a security agreement may create or provide for a security interest in after-acquired collateral. However, a security interest does not attach under a term constituting an after-acquired property clause to either consumer goods in most circumstances or commercial tort claims. Of course, one may argue that such provisions may make it difficult to finance growth through future borrowing.

A security agreement may also provide that the collateral subject of the security interest secures future advances or other value, whether or not the advances or value are given pursuant to commitment. It may also provide that accounts, chattel paper, payment intangibles, or promissory notes are sold in connection with future advances.

Property in which the debtor had no rights at the time of the original loan transaction, but in which it subsequently acquires rights, is considered after-acquired property. For a security interest to attach to after-acquired property, the security agreement must contain an express statement creating a security interest in after-acquired property.

Of course, much debate has occurred regarding the language necessary to include after-acquired property in a secured transaction. There is really no better way to effectively express the intent that a security interest includes after-acquired property than to include a “simple” clause explicitly providing such. A statement that secured property is “now owned or hereafter acquired” in the security agreement’s description of collateral is sufficient. Note that financing statements do not require a similar statement for perfection of a security interest in after-acquired property.

While some property such as inventory and accounts receivable by their nature revolve and, thus, after-acquired property clauses may seem unnecessary, it always wise to expressly rather than impliedly “create” a contract term, especially regarding the security of an asset.

The attorneys at Glass & Goldberg in California provide high quality, cost-effective legal services, and advice for clients in all aspects of commercial compliance, business litigation, and transactional law. Call us at (818) 888-2220, send an email inquiry to info@glassgoldberg.com or visit us online at glassgoldberg.com to learn more about the firm and to sign up for future newsletters.

A “security agreement” is a document that provides a lender with a security interest in a specific asset that acts as collateral for the original loan made by the lender. If the borrower defaults on repaying this loan, the secured party may seize and sell this collateral. Thus, a security agreement mitigates the default risk encountered by lenders in every loan transaction.

A security agreement sets forth various rights in the collateral granted by the debtor to the secured party in addition to any rights granted by California state law primarily influenced by revised Article 9 of the Uniform Commercial Code. The agreement should contain language showing an intent to grant the security interest, as well as terms that detail the advancement of funds, insurance requirements, and, of course, repayment of the loan. Such terms may allow a lender to possess or control the collateral until repayment of the loan is complete.

Security agreements may pertain to all types of property, including intangibles such as intellectual property and receivables. However, a security agreement is not used to transfer any interest in real property, only personal property. The security agreement must be authenticated by the debtor, evidenced by the debtor’s signature or electronic marking.

The security agreement must reasonably identify the collateral that is subject to the security interest. A supergeneric description such as “all assets” or “all personal property” is insufficient, whereas a listing of the collateral by category, such as all equipment, inventory and accounts will meet legal requirements.

A loan agreement, promissory note, or deed of trust may contain a security agreement. Any document may contain a security agreement, provided that it includes language granting a security interest where there is a present grant of a security interest evident from the language of the document. While a UCC-1 financing statement contains all of the information required by a security agreement, it is not a security agreement on its face since it does not contain any language specifically granting a security interest.

California law does not always require that a debtor and secured party have a security agreement to legally evidence their arrangement. A security agreement is not required for attachment if the collateral is in the possession of the secured party or the collateral is deposit accounts, electronic chattel paper, investment property or letter of credit rights over which the secured party has control.

The attorneys at Glass & Goldberg in California provide high quality, cost-effective legal services, and advice for clients in all aspects of commercial compliance, business litigation, and transactional law. Call us at (818) 888-2220, send an email inquiry to info@glassgoldberg.com or visit us online at glassgoldberg.com to learn more about the firm and to sign up for future newsletters.

In 2012, the State of California reorganized various state bodies, including those related to mortgage loans and licensing. Two new agencies were created to assume supervisory roles of the state’s mortgage loan industry. In the summer of 2013, the California Department of Business Oversight (DBO) was created. With its numerous oversight responsibilities related to the financial services industry in California, the DBO’s intended purpose is to protect all of the state’s consumers and business entities.

These responsibilities include:

• Supervision of licensees’ compliance with state and federal law;
• Enforcement of regulations by suspending, revoking, or refusing to renew a license of entities that violate the law;
• Ensuring registration of all state-licensed mortgage loan originators with the Nationwide Mortgage Licensing System (NMLS);
• Establishing a procedure that allows licensees to appeal the accuracy of NMLS database information related to the licensee;
• Reporting important, relevant information to the NMLS including violations of the law by licensees and any ensuing enforcement actions;
• Establishing a procedure for imposing civil penalties on individuals who act as mortgage loan originators without a license;
• Creating minimum net worth, surety bond requirements, or establish a recovery fund paid into by mortgage loan originators.

The DBO supervises the operations of state-licensed financial institutions such as banks, credit unions, and money transmitters. The DBO also licenses and regulates many other providers of financial services such as securities brokers and dealers, investment advisers, payday lenders and other consumer finance lenders.

The Department of Business Oversight has the responsibilities that are typical of any regulatory agency, including responsibilities to:

• Draft implementing regulations;
• Conduct examinations of regulated individuals and entities;
• Conduct investigations when there is evidence of any violations of the law;
• Conduct hearings for legal violations committed by licensees, as well as issue subpoenas and administer oaths for such hearings;
• Assess penalties for legal violations; and
• Issue cease and desist orders.

Consumers of financial services are encouraged by the California DBO to submit complaints if a DBO licensee has violated state law or if a company or person is conducting unlicensed activity within the jurisdiction of the DBO.

The attorneys at Glass & Goldberg in California provide high quality, cost-effective legal services, and advice for clients in all aspects of commercial compliance, business litigation, and transactional law. Call us at (818) 888-2220, send an email inquiry to info@glassgoldberg.com or visit us online at glassgoldberg.com to learn more about the firm and to sign up for future newsletters.

Recent blogs have addressed the role of UCC financing statements in regard to secured transactions. Once filed, these UCC forms allow a creditor to establish a relative priority with other creditors of the debtor. The effectiveness and authority of these notices and statements are not infinite. At some point in time, the filing party must review the interest and take further action, otherwise, the initially-filed financing statement will lapse and no longer be effective.

In most cases, a filed financing statement is effective for a period of five years after the date of filing. If the financing statement indicates that it is filed in connection with a public finance transaction or manufactured home transaction, the initial financing statement is effective for a period of 30 years after the date of filing.

The “further” action related to a UCC-1 financing statement must be taken before the expiration of its effective period, otherwise, it will lapse and become ineffective. Before the date of expiration of the UCC-1, continuation statement in the form of a UCC-3 must be filed pursuant to California state law requirements.

Upon lapse, a financing statement ceases to be effective and any security interest therein becomes unperfected, unless the security interest is alternatively perfected in some other way such as possession or control of the collateral. If the security interest becomes unperfected upon lapse, it is deemed never to have been perfected as against a purchaser of the collateral for value.

A continuation statement may not be filed too early in time and may only be filed within six months before the expiration of the five-year period or the 30-year period in the case of a public finance transaction or manufactured home transaction.

Upon the timely filing of a continuation statement, the effectiveness of the initial financing statement continues for a period of five years commencing on the day on which the financing statement would have become ineffective in the absence of the filing. Upon the expiration of the five-year period, the financing statement lapses unless, before the lapse, another continuation statement is filed. Successive continuation statements may be filed in the same manner to continue the effectiveness of the initial UCC-1 financing statement.

There are some other considerations related to a specific secured party or debtor regarding the duration of filed financing statements. If a debtor is a transmitting utility and this fact is indicated on an initially filed financing statement, the financing statement is effective until a termination statement is filed. In some cases, a record of a mortgage that is effective as a financing statement filed as a fixture filing remains effective as a financing statement filed as a fixture filing until the mortgage is released or satisfied of record or its effectiveness otherwise terminates as to the real property.

The attorneys at Glass & Goldberg in California provide high quality, cost-effective legal services, and advice for clients in all aspects of commercial compliance, business litigation, and transactional law. Call us at (818) 888-2220, send an email inquiry to info@glassgoldberg.com or visit us online at glassgoldberg.com to learn more about the firm and to sign up for future newsletters.

A security interest provides lenders with the promise of repayment if a borrower defaults on a loan. In this instance, the lender may recover the amount of the loan by seizing and selling the asset used as the loan’s underlying collateral. A security interest is typically significant in debtor bankruptcy cases since, in most cases, it allows secured creditors to collect their debts before unsecured creditors, those obligors of a debtor who do not possess a security interest.

Perfection is an important component of a secured transaction and in many cases achieved by the filing of financing statements with the California Secretary of State. These forms are referred to as UCC financing statements. UCC stands for “Uniform Commercial Code” which is the model text for many laws affecting secured transactions in California. Once the UCC-1 form has been filed, the creditor establishes a relative priority with the debtor’s other creditors.

Financing statements such as a UCC-1 are used to effectively give third parties initial notice of the filing party’s interest in the subject collateral. UCC-3 financing statements are used to terminate, continue, amend, or assign an interest identified under a UCC-1. A creditor’s rights against the debtor are based on the parties’ loan agreement rather than the financing statement. A financing statement does not create a lien nor does it create any additional rights against the secured party. Typically, a debtor authorizes the filing of a financing statement for the collateral described in the security agreement when it enters into the security agreement.

The attorneys at Glass & Goldberg in California provide high quality, cost-effective legal services, and advice for clients in all aspects of commercial compliance, business litigation, and transactional law. Call us at (818) 888-2220, send an email inquiry to info@glassgoldberg.com or visit us online at glassgoldberg.com to learn more about the firm and to sign up for future newsletters.

To perfect a security interest is to obtain rights against the “world.” Thus, perfection is a crucial part of a secured transaction as it allows secured parties to have priority over competing parties with interests in the collateral. The first step in the process of perfection of a lien is “attachment” of the collateral, which then permits the creditor to “perfect” the security interest, which is the ultimate goal of ensuring that a security interest serves its intended purpose – properly securing the collateral to ensure its rights against other parties.

Once attachment of the collateral has taken place, and the security interest has properly attached to the collateral, it is enforceable against the debtor. Once perfection is achieved, it will ensure that the secured party’s lien is enforceable against other creditors and third parties that subsequently acquire a lien in the collateral.

Under California law, and the law in most states, a security interest attaches when three events have occurred in their entirety. The first is that value must be given, a concept that in terms of the law of secured transactions is broader than the contractual concept of consideration. With secured transactions, the value given by the secured party is fairly obvious as a lender gives value to a debtor by loaning money to the debtor to buy equipment or inventory. A seller also gives value to a debtor when it sells equipment to the debtor.

Second, the debtor must have rights in the collateral. The debtor must have some power to transfer rights in the collateral to the secured party. The debtor may have only limited rights in and in some cases, need not own the collateral.

Finally, certain conditions must be met that complete the process including the execution of a security agreement authenticated by the debtor describing the collateral; control over letters of credit, deposit accounts, investment property, chattel paper, or electronic documents; and, if the collateral is a certificated security in registered form, delivery of the security certificate to the secured party.

The attorneys at Glass & Goldberg in California provide high quality, cost-effective legal services, and advice for clients in all aspects of commercial compliance, business litigation, and transactional law. Call us at (818) 888-2220, send an email inquiry to info@glassgoldberg.com or visit us online at glassgoldberg.com to learn more about the firm and to sign up for future newsletters.

Lenders perfect their security interests to ensure that no other creditor, party in interest, or bankruptcy trustee will be able to claim the same collateral. The perfection of a security interest allows secured parties to have priority over other parties regarding the collateral. Thus, perfection is a crucial part of a secured transaction and typically achieved through the use of financing statements such as a UCC-1.

UCC stands for “Uniform Commercial Code” which is the model text for many laws in California related to sales of goods, secured transactions and commercial paper. Perfection of a security interest in most types of collateral is usually accomplished by filing a UCC-1 financing statement. The financing statement is filed with the California Secretary of State which provides notice of the filing party’s security interest in the collateral.

In many cases, by entering into a security agreement, a debtor authorizes the filing of a financing statement for the collateral described in the security agreement. A financing statement may be filed without the debtor’s signature if the debtor authorizes the filing. The UCC financing statement must contain both the name and mailing address of the debtor and secured party. It must also indicate whether the debtor is an individual or an organization while identifying the type of organization (i.e., corporation, partnership, LLC), the state or jurisdiction of organization and a registration number.

A financing statement must contain an adequate description of the collateral but, unlike a security agreement, it may use a generic description of collateral. A description of collateral in a security agreement as “all the debtor’s assets” or “all the debtor’s personal property” or using words of similar import does not reasonably identify the collateral. However, a financing statement sufficiently indicates the collateral if it has a description of the collateral or if it indicates that it covers all assets or personal property of the debtor.

The debtor’s correct name is significantly important to the validity of the financing statement since state filing records are indexed in alphabetical order by name. Yet, it is noteworthy that many secured parties make errors simply related to providing a sufficiently specific and correct name on the financing statement. If the name on the statement is incorrect, the statement will not provide adequate notice of the true and correct party claiming the security interest and perfection will fail. If the debtor is a “registered organization” created under California state law, then the name on the financing statement must match the name of the debtor as registered with the State of California.

The attorneys at Glass & Goldberg in California provide high quality, cost-effective legal services, and advice for clients in all aspects of commercial compliance, business litigation, and transactional law. Call us at (818) 888-2220, send an email inquiry to info@glassgoldberg.com or visit us online at glassgoldberg.com to learn more about the firm and to sign up for future newsletters.

Typically, financial lending institutions such as banks prefer real estate as collateral. While fixed assets such as land or developed real estate are the preference, the bulk of capital stock of most investors consists of movable assets. Thus, moving forward in the 21st Century, movable collateral is an important tool for companies to gain access to finance and increase growth.

Lenders and other creditors must have the ability to rely on a filing system that protects their contract rights. Private market growth and development may not be realized otherwise. Because the value of movable collateral typically depreciates quickly, efficient enforcement procedures related to security interests are necessary to protect and properly determine property rights.

Financial institutions prefer to provide loans in return for immovable collateral, whether raw land, residential property or commercial property. Since deeds of title are formally registered, they may be presented as proof of ownership of any immovable property, thus leaving less room for doubt when determining the legality of the property’s liens and encumbrances. Of course, immovable property also makes it impossible for a debtor to abscond with the asset. It is primarily for these reasons that immovable property is more attractive than movable assets as security for a loan.

When creating a security interest, the process of defining the asset so that it satisfies legal requirements should not be complex. The procedure for perfecting a security interest must instill confidence that there are no superior claims to the asset. A compulsory filing with a publicly accessible registry of assets offered as collateral ensures that both of the aforementioned issues are not viable concerns.

A collateral registry is a tool of notification that tracks all security interests related to a property or borrower. A reliable collateral registry system reduces the risk that a borrower may utilize the same movable property as collateral to secure other loans without the lender’s knowledge. A movable collateral registry increases access to finance by allowing the leveraging of movable assets, such as inventory, equipment, and crops, into capital for future growth and investment.

The attorneys at Glass & Goldberg in California provide high quality, cost-effective legal services, and advice for clients in all aspects of commercial compliance, business litigation, and transactional law. Call us at (818) 888-2220, send an email inquiry to info@glassgoldberg.com or visit us online at glassgoldberg.com to learn more about the firm and to sign up for future newsletters.

Congress, as a remedial response to industry-wide malfeasance by residential mortgage brokers, enacted the Secure and Fair Enforcement for Mortgage Licensing Act (SAFE Act) in 2008. Along with the Truth-In-Lending Act (TILA), both pieces of legislation regulate, and thus affect, mortgage loan originators.

The SAFE Act requires that individuals “engaging in the business of loan originator” must satisfy requirements related to education, licensing, registration, and background checks. States are directed by the SAFE Act to establish licensing and registration systems that meet the requirements of the Act and federal Regulation H. As the SAFE Act preempts contradictory state law, states may impose requirements that exceed the minimum imposed by the Act but may not require fewer.

Under the Act, a “loan originator” is defined as someone who “takes a residential mortgage application and offers or negotiates terms of a residential mortgage loan for compensation or gain.” The Act excludes those who only perform real estate brokerage activities and are licensed as real estate brokers unless compensated. The Act also excludes those who perform purely administrative or clerical functions.

Loan originators who meet the above definition are divided into 1) registered loan originators, and 2) loan originators who require a state license. The former are those individuals that work for a bank, federally regulated subsidiary of a depository, or a lender regulated by the Farm Credit Administration. They are not subject to state regulation but, like all other loan originators who are required to be state-licensed, must be registered with the National Mortgage Licensing System (NMLS).

The attorneys at Glass & Goldberg in California provide high quality, cost-effective legal services, and advice for clients in all aspects of commercial compliance, business litigation, and transactional law. Call us at (818) 888-2220, send an email inquiry to info@glassgoldberg.com or visit us online at glassgoldberg.com to learn more about the firm and to sign up for future newsletters.