BANK FINANCE AND REGULATION Multi-Jurisdictional Survey SECURITY OVER COLLATERAL. USA - LOUISIANA Lemle & Kelleher, L.L.P.

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1 BANK FINANCE AND REGULATION Multi-Jurisdictional Survey SECURITY OVER COLLATERAL USA - LOUISIANA Lemle & Kelleher, L.L.P. CONTACT INFORMATION Patrick Johnson Lemle & Kelleher, L.L.P. 21st Floor, Pan American Life Center 601 Poydras Street New Orleans, Louisiana pjohnson@lemle.com 1. Can assets be charged, liened and/or encumbered in your jurisdiction? Please insert any exemptions, if any. Generally, all assets can be made the subject of a consensual lien or security interest. Security interests on most types of movable (personal) property are governed by the Uniform Commercial Code ( UCC ) as enacted in Louisiana Revised Statutes Title 10, Chapter 9 and any other relevant jurisdiction. Liens on immovable (real) property in Louisiana are governed by Louisiana s law pertaining to immovable property. Liens on certain types of assets may be ineffective or of limited effectiveness under the law of Louisiana or the laws of the United States relating to those types of assets, such as the protections accorded certain pension benefits by the federal Employee Retirement Income Security Act of 1974, as amended. Louisiana law also shields certain property from seizure in enforcement of a judgment. Louisiana s list of exempt property is moderately generous to debtors. Louisiana has a homestead exemption of $25,000, which can be consensually waived. Various Louisiana statutes exempt other property of individuals from seizure, such as property necessary for the exercise of the debtor s trade or profession, household furniture, $7,500 in equity value of a motor vehicle and pension and other retirement plans.

2 2. In your jurisdiction, under what circumstances may security arrangements be subjected to choice of law and/or choice of forum clauses (does it matter, whether the security itself is located abroad and/or governed by foreign law [e.g. a pledged claim])? What is the market practice in your jurisdiction? Is there a treaty on this in your jurisdiction, whether bilateral or multi-lateral? Are there any requirements for enforcement in your jurisdiction? Choice of law provisions are generally recognized in security documents covering movable property so long as the transaction bears a reasonable relation to the jurisdiction whose law is specified, but under the UCC certain matters (such as where financing statements must be filed to perfect the security interest and the ordering of priorities among multiple claims to the same assets) are subject to mandatory rules as to applicable law regardless of the law specified in the security document. Financing statements usually are required to be filed in accordance with the laws of the jurisdiction where the debtor is deemed to be located, which determination depends on whether the debtor is a natural person or an organization and, if an organization, the type of organization. Reasonable forum selection clauses are also generally recognized, subject to judicial discretion. Lenders frequently specify Louisiana law or the law of the jurisdiction in which the relevant loan office is located as the governing law and specify the courts in the same state as the forum for dispute resolution. In mortgages on immovable property in Louisiana, Louisiana law is usually stated as the governing law and will, in any event, be applied to most matters relating to the effectiveness, recordation and enforcement of the lien. 3. In your jurisdiction, are floating charges or security over the overall assets of an entity accepted, and if so in what terms? No, in the case of immovable property. Yes, in the case of most types of movable property; however, aircraft, bank accounts, vessels and vehicles are examples of types of collateral subject to special rules, discussed below in items (a), (b), (n) and (o) that require treatment on an item by item basis. 4. In relation to the following types of assets, please explain in your jurisdiction the types of security that can be created or granted, if the security requires any type of registration or perfection requirements, an estimate of cost (including applicable taxes and any other duties/ costs) and timing for granting such security, and any special considerations regarding the asset type: (a) Aircraft: Liens on aircraft registered with the Federal Aviation Authority and certain engines and spare parts are subject to the recordation provisions of the Federal Aviation Act (which requires recordation in Oklahoma City, Oklahoma). Such liens on airframes, helicopters and engines subject to the Convention on International Interests in Mobile Equipment and the related Protocol on Matters Specific to Aircraft Equipment ( Cape Town Treaty ) must also be registered in accordance with the treaty. Aircraft not subject to these provisions are subject to the normal rules applicable to goods under the Uniform Commercial Code as enacted in Louisiana.

3 Additionally, a privilege (statutory lien) has been established in Louisiana for any person who repairs, restores, performs maintenance work or other services to or on an aircraft, or provides fuel or materials in connection therewith. The privilege is in the aircraft to secure payment due under the contract for the repairs or maintenance performed and the fuel or materials in connection therewith. However, the depositary must file a notice of privilege with the FAA in Oklahoma City and in the mortgage records of the parish where the hangar is located not later than the ninetieth day after the labor, services, fuel, and materials were furnished. (b) Bank Accounts: A creditor can perfect a security interest in a deposit account only by establishing control over that account in one of three ways. First, if the secured creditor is the bank where the deposit account is maintained, it has control automatically. Second, the creditor can get control through a control agreement between the bank, the debtor and the secured party, stating that the bank will comply with instructions from the secured party without the necessity of obtaining consent from the debtor. This agreement must be memorialized in an authenticated record, which means that it must be signed by the debtor. Third, the creditor can gain control by having the account put in the name of the secured party. (c) Animals, Crops (in ground and severed) and Timber: Security interests in crops (growing crops in the field) and farm products (crops once harvested and livestock, but before being processed, manufactured, sold or delivered to others) can be created under the UCC and perfected by filing a UCC-1F effective financing statement in any parish in Louisiana in a manner similar to traditional UCC-1 financing statements. The parish clerk of court s office transmits such filings to the Agricultural Central Registry maintained with the Louisiana Secretary of State. A security interest in standing timber that is to be cut and removed by someone other than the landowner and subject to a recorded timber conveyance, can be created by filing a UCC-1F effective financing statement in any parish in Louisiana in a manner similar to traditional UCC-1 financing statements. A security interest in all other standing timber can be taken by using an immovable property mortgage. (d) Equipment: A security interest in equipment can be perfected by the secured party through possession or by filing a financing statement in the jurisdiction in which the debtor is located. If the debtor is located in Louisiana, the financing statement must be filed in any parish clerk of court s office (or the office of the recorder of mortgages in Orleans Parish). The basic fee for filing a standard financing statement for one debtor in Louisiana is $ If the collateral is related to land (i.e., as-extracted collateral or component parts), then a financing statement must be filed as a fixture filing in any parish clerk of court s office (or the office of the recorder

4 of mortgages in Orleans Parish). In a fixture filing, the collateral must be described, as well as the related immovable property with sufficient detail to support a mortgage. Additionally, the owner of the immovable must be indicated if someone other than the owner of the fixture. The creditor must also check the box on the UCC-1 financing statement to indicate that it is a fixture filing. The fixture filing must be made before the component part becomes affixed or no security interest will exist. (e) (f) (g) (h) (i) Intellectual Property: All types of intellectual property are covered by the Uniform Commercial Code except to the extent that coverage is preempted by United States federal law. Thus, perfection of security interests in patents, trademarks, and copyrights not registered under the Federal Copyright Act is by filing a financing statement in any parish. Perfection of a security interest in registered copyrights requires filing with the Copyright Office in Washington, D.C. Inventory: A security interest in inventory can be perfected by the secured party through possession or by filing a financing statement in the jurisdiction in which the debtor is located. If the debtor is located in Louisiana, the financing statement must be filed in any parish clerk of court s office (or the office of the recorder of mortgages in Orleans Parish). Leases: Liens or collateral assignments affecting leases of immovable property are governed by Louisiana s law pertaining to immovable property and must be recorded in the parish recording office in which the affected immovable property is situated. Leases of movable property are considered chattel paper, discussed in (i) below. Mineral Interests, including Hydrocarbons: Minerals may be the objects of security interests, but such interests do not attach until the minerals are extracted from the ground. Louisiana s law governing perfection of security interests in as-extracted collateral differs substantially from the law of other states. Perfection of as-extracted collateral may be accomplished by making a fixture filing. In a fixture filing, the collateral must be described, as well as the related immovable property with sufficient detail to support a mortgage. Additionally, the owner of the immovable must be indicated if other than the owner of the fixture. The creditor must also check the box on the UCC-1 financing statement to indicate that it is a fixture filing. The financing statement must be filed in any parish clerk of court s office (or the office of the recorder of mortgages in Orleans Parish). Promissory Notes and Chattel Paper: A security interest in a promissory note may be taken by the secured party through possession of the promissory note. A security interest in a promissory note may also be perfected by the secured party by filing a financing statement in the jurisdiction in which the debtor is located. If the debtor is located in Louisiana, the financing statement must be filed in any parish clerk of

5 court s office (or the office of the recorder of mortgages in Orleans Parish). A security interest in chattel paper in tangible form (i.e., not electronic form) can be perfected by the secured party taking possession or by filing a financing statement in the jurisdiction in which the debtor is located. A security interest in electronic chattel paper is perfected by the secured party taking control over the electronic chattel paper, which requires, inter alia, alteration of the electronic records evidencing the chattel paper so as to indicate the secured party s interest. (j) (k) (l) (m) Real Estate (Immovable Property): A security interest in immovable property can be perfected by recording a mortgage in the recording office of the parish in which the affected immovable property is situated. The fee for such recording varies based upon the parish of recordation. Receivables (credit rights under contracts or invoices): A security interest in accounts (including receivables from sales and the provision of services) can be perfected by filing a financing statement in the jurisdiction in which the debtor is located. If the debtor is located in Louisiana, the financing statement must be filed in any parish clerk of court s office (or the office of the recorder of mortgages in Orleans Parish). In certain situations a security interest in accounts can also be perfected for limited periods without filing, including when the receivable is deemed to be the proceeds of inventory or other collateral in which the secured party had a perfected security interest. Rights under Contracts (excluding Receivables): Rights under contracts (excluding the receivables generated from performance) generally fall into the catch-all category of general intangibles under the UCC. Security interests in general intangibles are perfected by filing in the jurisdiction in which the debtor is located. If the debtor is located in Louisiana, the financing statement must be filed in any parish clerk of court s office (or the office of the recorder of mortgages in Orleans Parish). Shares (in book-entry and certificate form and other securities): Under the UCC, most debt instruments are securities if they are one of a class or series or are divisible into a class or series or interests. Equity interests in an entity are classified as either securities or (as in the case of many but not all partnership and limited liability interests) general intangibles. Securities can be either certificated (represented by a writing) or uncertificated (evidenced by book entry). In addition, an interest in securities can be held indirectly by credit to the account of a broker or other securities intermediary. Perfection of a security interest in general intangibles is generally by filing in the jurisdiction in which the debtor is located. Perfection of a security interest in a certificated security is generally either by the secured party taking possession of the security (and obtaining any necessary endorsement) or by filing of a financing statement in the jurisdiction in which the debtor is located.

6 Perfection of a security interest in an uncertificated security is by notation on the books of the issuer; and perfection of a security interest in a securities entitlement is generally by entering into a control agreement with the broker or other securities intermediary. (n) Vessels: Vessels built in the United States and wholly owned by a citizen of the United States, and seagoing vessels, wherever built, wholly owned by a citizen of the United States, are eligible to be documented as vessels of the United States. With certain statutory exceptions noted in the Section of the federal regulations issued under Title 46 of the United States Code, all vessels that are engaged in trade between ports in the United States are required to be so documented. The federal laws of the United States govern liens on documented vessels. See Chapter 313, Title 46 of the United States Code - Commercial Instruments and Maritime Liens. Vessels valued in excess of two thousand five hundred dollars, to be principally operated on the waters of this state, required to be numbered, not held as inventory for sale or lease, transferred for the first time on or after July 1, 2008, and not titled by the United States may receive a certificate of title pursuant to the Vessel Titling Act, Title 34, Chapter 4 of the Revised Statues of Louisiana. A security interests in such vessels shall be perfected by filing a financing statement with the Department of Wildlife and Fisheries, provided that the receipt of the financing statement is validated by the Secretary of the Department. Security interests must be shown on the face of the certificate of title issued by the Department. (o) (p) Vehicles: A security interest in a motor vehicle covered by a certificate of title shall be perfected by filing a financing statement with the Department of Public Safety and Corrections, office of motor vehicles, provided that the receipt of the financing statement is validated by the Secretary of the Department. The financing statement must contain more specific descriptive information on the car (make, model, VIN). The Department may include the security interest on the face of the certificate of title issued by the Department. Business as an ongoing concern: A security interest in an ongoing business can be taken and perfected either (i) by taking and perfecting a security interest in each of the different types of assets of the business or (ii) indirectly, by taking and perfecting a security interest in the ownership interests in the business in manner described in (m) above. 5. Please explain briefly for each type of assets the procedure for enforcement (judicial and extra-judicial). Is it possible to enforce security governed by another jurisdiction? If yes, what is the procedure? Liens on movable property may be enforced judicially by instituting an action in the jurisdiction in which either the collateral or the debtor is located (except in instances where the financing documents contain an enforceable forum selection clause). Except

7 in limited circumstances, extra-judicial enforcement is not permitted. Extra-judicial remedies include the right to instruct debtors on pledged accounts receivable to make payment directly to the secured party. Additionally, under the new Additional Default Remedies Act, (Title 6, Chapter 10-A of the Revised Statues of Louisiana) chartered financial institutions, licensed consumer credit lenders, and licensed motor vehicle sales lenders can engage in self-help repossession only with respect to motor vehicles and subject to several limitations. After default, the debtor may agree to abandon the collateral to the secured party. The enforcement of liens on movable property is accomplished in the same manner as for immovable property set forth below. The enforcement of liens on immovable property may be accomplished by instituting a foreclosure action by ordinary judicial proceedings. Typically, mortgages and security agreements expressly permit the creditor to proceed by an expedited procedure called executory process which allows the court to issue an order to have the collateral seized and sold at a public sheriff s sale without the delays inherent in ordinary judicial proceedings. If a lien covers both movable and immovable property, the secured party may either proceed against each separately or proceed against both in accordance with applicable law. It is possible to enforce security governed by another jurisdiction in Louisiana, but Louisiana s foreclosure proceedings must be used. 6. Can a trustee or security agent be used in your jurisdiction, or must security be granted in favour of all lenders? Liens on both personal and real property can be granted in favor of a trustee or security agent for the benefit of a group or class of creditors. 7. In bankruptcy or insolvency scenarios, what are the suspect periods, is clawback possible, and what other types of rights (tax debts, employees, etc.) have preference over security granted? Pursuant to the United States Code (the Bankruptcy Code ), a trustee (or debtor-inpossession) has certain rights and powers to avoid any transfer or obligation of a debtor that might be avoidable under nonbankruptcy law. Specifically, under the Bankruptcy Code, a trustee may avoid: (i) a transfer or obligation of the debtor that is avoidable by a hypothetical creditor on a simple contract with a judicial lien on property of the debtor that is unsatisfied as of the date the debtor files for bankruptcy protection; (ii) a transfer or lien avoidable by a hypothetical bona fide purchaser of real property of the debtor as of the date the debtor files for bankruptcy protection; and (iii) transfers or obligations of the debtor that are avoidable by an actual, existing, unsecured creditor under nonbankruptcy law. A trustee also has the rights and powers of a hypothetical creditor with a writ of execution returned unsatisfied at the date of the commencement of the case. Pursuant to the Bankruptcy Code, the trustee (or debtor-in-possession) may also avoid any transfer of an interest of the debtor in property (which includes the granting of liens and encumbrances) to or for the benefit of a creditor for or on account of an antecedent debt owed by the debtor before the transfer was made, made while the debtor was

8 insolvent 90 days before the commencement of the case (or up to one year if the creditor was an insider), that enables such creditor to receive more than such creditor would receive if the case was a case filed under Chapter 7 of the Bankruptcy Code, the transfer had not been made, and such creditor received payment of such debt to the extent provided by the Bankruptcy Code. Similarly, the trustee (or debtor-in-possession) may recover transfers made within one year of the filing of bankruptcy for less than reasonably equivalent value. Generally, in bankruptcy cases filed under the Bankruptcy Code, administrative claims and statutory priority claims such as tax claims are paid before secured claims. 8. In your jurisdiction, can borrowers or guarantors subordinate their claims and if so in what terms? The claims of creditors can be contractually subordinated to the claims of other creditors against the debtor. This can be done as part of the terms of the initial obligation undertaken by the debtor or by subsequent agreement on the part of the creditor. 9. What are the consequences of a transfer, assignment or novation of an underlying credit in your jurisdiction (is new security necessary, is the security automatically transferred, etc.)? Generally, collateral security for an obligation continues following the transfer of the obligation to another creditor regardless of whether the security is also specifically transferred or any filing or recordation made with respect to the lien is amended to reflect the transfer. However, unless the assignment is reflected by an amendment to the filing or recordation, the secured party of record retains the power to amend or terminate the filing and enforcement by the assignee may be made more difficult or delayed. 10. Can you have on top of a security in your jurisdiction, another layer consisting of an assignment of the collateral concerned conditional upon default by the debtor? Liens that become effective in the future upon the happening of specified events are permitted, but such liens can be subject to attack as preferential transfers since they secure a previously existing obligation at the time they become effective. Generally, Louisiana favors freedom of contract, and we know of no statutory prohibition to an assignment of collateral conditioned upon default by the debtor. There may be defenses to such transfers, such as claims by competing creditors that such transfers are against the public policy of the State of Louisiana prohibiting the use of self-help repossession without judicial oversight. 11. Are step-in rights lawful in your jurisdiction or does any action to take control require the creditors to go through a court process? In most situations, court action is required. Please see response to Question 5 above.

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