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AGENDA
1. Welcome/Overview
2. Blanket Liens: How Lenders use them
3. Changing Credit Marketso Economic Forecasto Succession issues
4. Blanket Lienso Attachmento Releaseo How to Find them
5. Best Practiceso Trade In / Sales Documentso UCC Searcho Waivers
6. Questions
Historical Treatment of Blanket LiensBlanket Liens:
o Generally used by primary credit provider of farmer/ranchero Bank takes a security interest in “all assets, all accounts, all tangibles/intangibles, and all equipment of farmer
o Bank files a UCC‐1 Financing Statement with the Secretary of State in state the farmer operates
Lien Priority: o UCC‐1 filing date gives Bank priority over any other lender or credit providero Lien attaches to equipment trades unless Dealer gets lien waiver from Bank
Historical Treatment of Blanket Liens (cont.)Common practices in strong economic cycles:
o Longtime customers trade in good used equipment;o Dealer takes in equipment he knows he can sell quicklyo Never runs UCC searcho Sells used equipment with UCC lien on it to new buyer
Fixes and Patches:o In strong economic cycles Banks willing to release liens;
o Asset base high; oro Replacement Equipment covered
Credit Markets◦ Prior Blanket Lien Practice has troubled outlook:◦ Credit Markets◦Market forecasts indicate continued depressed commodity prices◦ Falling Farm Income forecasted◦ Farmer/Rancher balance sheets expected to be stressed relative to the last decade
Customer Business Succession◦Ag Business Succession◦ Lots of “new blood” in family farming and ag business◦Unfamiliar with:◦ Prior business practices◦ Existing credit obligations
◦ Perfect storm for lien dispute litigation
Exampleo Customer A trades in tractor for $40,000 and buys new tractor for $100,000
o Community Bank has blanket lien on all of Customer A’s assets including equipment
o Customer A finances with OEM credit arm to purchase new tractor $100,000o New tractor is not replacement equipment for Community Bank as OEM has Purchase Money Security Interest (PMSI) due to new
sale
o Dealer sells used tractor to Customer B for $55,000o Dealer never runs UCC search and does not know that Community Bank has blanket lien
o Customer A defaults on loan to Community Bank and Bank starts collection lawsuit and seeks to repossess the used tractoro Lawsuit names Customer A, Customer B (current owner) and Dealer in order to regain Tractor or receive damages for sold collateral
o Dealer now has multiple problems:o Legal Costs for lawsuito Relationship repair with Customer A and Customer B
How Blanket Liens Survive Pay Downs
oCommon problem as Farmer (borrower) believes significant pay downs equate to release of liens
oAsset Base of Farmer supports itoPrior practice likely accommodated such a release
oCommonly, in good economic times, Banks will be amenable to releasing liens on a specific piece of equipment
Community Bank RegulationsoNew lending regulations
oClassified Loan versus unclassifiedo Increased scrutiny on loans secured by commodities:
oGrainoCattleoCustom Farming Receivables
oNew blood at Banks as well
Blanket Lien AttachmentBlanket Liens always attach unless a lien waiver is obtained
o Assurance of your customer is not sufficiento Verbal assurance of lender, loan officer is not sufficient
o Banks often have a credit officer or credit committee that have final say on releasing collateral
o Assumption of loan or “work out” with new buyer (Customer B) is not sufficient o Problems often come from Bank personnel that doesn’t have the relationship with Farmer/Borrower
Owner of AssetUCC Search:oNeed to know the Name(s) of your seller
oAlways signed “John Smith”oMay have formed LLCoMay have started doing business as Smith & Sons
oEven without forming LLC – just acknowledging next generation
Owner of Asset: Common IssuesoEstate Planning
oMany Farmers start Estate Planning before Succession Planningo Assets in name of Trusto Family Limited Partnershipso Other Estate Planning Vehicles
oSuccession planningoForm LLC or Corporation for next generation
o Instructive to form checklist to ask if they are doing business in either names or if they transferred ownership
Ounce Of Prevention◦ Sale and Trade Documents should include statement from Customer that equipment is not subject to lien
◦ Sale and Trade Documents should include authorization line from Customer allowing UCCSearch◦ Note: Customer authorization is not needed, but this is a red flag to any Customer who makes an intentional omission versus an innocent one
UCC SearchHow to Start a Lien Search:◦ The vast majority of States have UCC Database housed through Secretary of State◦ Some may have Search Fee associated with it
◦ UCC Search, if solely online, should only take minutes and can be down at time of Trade
◦ Pull name from Trade‐In Documents◦ Search all variables of Name:
UCC Search (cont.)◦ Example:◦ Customer is John Smith, but his checks say Smith Farms, and his prior trades were to Smith Enterprises
◦ Search:◦ John Smith◦ Smith Farms◦ Smith Farms, LLC◦ Smith Enterprises◦ Registered Agent: John Smith◦ Registered Agent searches are a subset of UCC◦ Would tell you any entities your customer is the contact person for◦ Helpful if Secretary of State provides Registered Agent in same database
UCC Search: What You Are Looking ForUCC Search is designed to pull all lien hits on Customer
Likely you will pull hits on excluded collateral:
Example: Monsanto entity will have lien on accounts receivable as collateral for financing seed purchase. This would not extend to Tractor in our example.
Dealer is looking for UCC Financing Statement that states:
“Lender….has lien on all assets, equipment, accounts, tangible or intangible property…”
Any version of this language that says “Assets” or “Equipment” will be a blanket lien on that equipment
Does not have to list specific equipment
What To Do: Blanket Equipment HitIf your UCC Search reveals a hit for a Blanket Lien: o Thankfully the resolution is very simple:
o Dealer simply needs to obtain a one‐page lien waiver from Banko Most Banks prefer to use their own form for this, but if not, many states have “model” forms for useo Bank simply needs to sign formo Form is part of Sale/Trade‐In Document package, all parties keep a copyo Does not need to be recorded with UCC
What to do: Specific Equipment HitoIf UCC Search reveals a hit for a Specific Equipment Lien
oNormal lien clearing procedures must be usedoUCC‐1 Termination Statement must be filed by Lender or UCC‐1 AmendmentoSimply no way around this lien
What to do: Bank won’t releaseIn tightening credit markets Bank’s will use a Customer request for a lien release as leverage◦ Customer could have covenant default or non‐payment default
Best Practice: ◦ The Dealer cannot be swayed by a Customer who claims he’ll work it out with Bank◦ Red Flag that Bank won’t release one piece of equipment when assuming Customer has other assets to secure Bank’s loan
◦ If Dealer moves ahead, it’s doing so with knowledge of existing lien on equipment and both Bank and new buyer of Equipment have claim against Dealer in litigation
Best Practices:◦ Affirmative line in Trade‐In documents for Customer to state no lien◦ Affirmative line in Trade‐In documents for Customer Name/affiliate names◦ Affirmative consent in Trade‐in documents for UCC Lien Search of Customer◦ Train sales reps to quickly and efficiently search UCC◦ Ensure multiple names searched