Equipment Financing. Christine Gould Hamm February 27, 2015

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1 Equipment Financing Christine Gould Hamm February 27, 2015

2 Equipment Equipment means goods other than inventory, farm products, or consumer goods. UCC 9-102(a)(33). Inventory goods held for sale or lease or to be furnished under contract of service, raw materials, work in process and materials used or consumed in a business (see UCC 9-102(a)(48)) Farm Products crops, livestock, supplies used or produced in a farming operation, or products of crops or livestock in their unmanufactured states (see UCC 9-102(a)(34)) Consumer Goods primarily for personal, family, or household purposes (UCC 9-102(a)(23))

3 Equipment as Fixtures Look to state law other than the UCC to determine whether equipment is a fixture. Generally, if it is affixed to the real estate and would be extremely difficult to remove, it is probably a fixture. Safe approach is to treat the equipment as both a fixture and a non-fixture.

4 Types of Equipment Financing Purchase Money Financing of Specific Equipment Working Capital Loan with Blanket Lien on all Equipment Purchase of conditional sale contracts from equipment dealers Lease of equipment or purchase of equipment leases

5 Lease Lease means a transfer of the right to possession and use of goods for a term in return for consideration, but a sale, including a sale on approval or a sale or return, or retention or creation of a security interest is not a lease. UCC 2A- 103(1)(j).

6 True Lease or Security Interest? Fundamental questions (UCC 1-203): Is lessee prohibited from terminating the lease during the term? Does term = entire economic life? Does lessee have option to renew or to purchase for no additional consideration or nominal consideration? If yes, it s a disguised security interest.

7 True Lease vs. Security Interest Lease Security Interest Governed by Article 2A Article 9 Perfection Remedies No filing required (but precautionary filing recommended ) Retake Possession Damages Filing required Foreclosure (or retention in partial or full satisfaction) Deficiency

8 Finance Lease Lessor doesn t select, manufacture, or supply the goods Lessor acquires the goods in connection with the lease Either: Lessee receives copy of lessor s acquisition contract before signing lease Lessee s approval of lessor s acquisition contract is a condition of the lease Before signing lease, lessee receives a statement of the supplier s warranties Before signing lease, lessor provides non-consumer lessee written notice identifying supplier (unless lessee selected), that lessee s entitled to supplier s warranties, and that lessee may receive a statement of supplier s warranties from supplier UCC 2A-103(g)

9 Benefits of Finance Lease No implied warranty of merchantability No implied warranty of fitness for particular purpose Lessee s obligations are hell or high water obligations (i.e., unconditional and irrevocable) Lessee looks to supplier (rather than lessor) for any warranties

10 Hell or High Water Clause Upon lessee s acceptance of the equipment, lessee s obligations hereunder shall be unconditional, irrevocable and not subject to cancellation, termination, reduction, or setoff for any reason whatsoever. The comments to UCC 2A-407 make it clear that a nonconsumer finance lease is HOHW even without a HOHW clause Still generally include a HOHW clause in case the lease is not deemed a Finance Lease

11 Due Diligence Audited Balance Sheet Appraisal Lien Searches Debtor s current and previous legal names Names of entities merged into Debtor Names of entities that sold Collateral to Debtor outside the ordinary course of business

12 Due Diligence Review bills of sale and invoices Review state law for secret (unfiled) liens and verify Debtor s payment of obligations that would give rise to such liens Review certificates of title Obtain copy of insurance policy and endorsements

13 Documentation Lease leasing language Subject to the terms and conditions of this Lease, Lessee agrees to lease from Lessor, and Lessor agrees to lease to Lessee, the following equipment for a term of months in consideration of lessee s payment of $ per month. Subject to the terms and conditions hereof, X shall have the right to possession and use of the following equipment for a term of months in consideration of X s payment to Y of $ per month.

14 Documentation Loan security interest language Grant language Debtor hereby grants, transfers, assigns and conveys to Secured Party a security interest in all of Debtor s right, title and interest in and to the following equipment Description of the collateral Authenticated Description of the obligations secured

15 Equipment Scope of Collateral Avoid serial numbers, if possible Avoid defining collateral with reference to its current location Include substitutions and replacements Proceeds Patents and Trademarks Contract Rights and Leases Accessions Supplies

16 Precautionary Security Interest To protect Lessor s interest in the equipment in the event this Lease is deemed to be intended as security rather than a true lease, Lessee hereby grants, transfers, assigns and conveys to Lessor a security interest in the Equipment.

17 Perfection of the Security Interest General Rule File a UCC financing statement in Debtor s location (usually, jurisdiction of organization or principal residence) UCC Description of Collateral Same issues to avoid as security agreement Avoid describing collateral completely on an attached exhibit

18 Perfection of the Security Interest PMSI File before or within 20 days after the delivery of the equipment PMSI if secures obligations incurred as purchase price or value given to enable acquisition Use pay proceeds letter (or issue payment jointly to debtor and seller), rather than reimbursing or advance-funding debtor for purchase price

19 Perfection of the Security Interest Fixture File fixture financing statement (including legal description and name of record owner) in the real estate records Lease Precautionary Filing Vehicles and Other Titled Equipment (other than dealer inventory) follow certificate of title laws (generally, notation of lien on title)

20 Warranty of Title Debtor has good title, free from liens not permitted by this Agreement, to all of the Equipment. Appraisal: to all Equipment which it purports to own, including the Equipment located in Debtor s facilities at the time of inspection thereof by Secured Party s appraiser, Appraisal schedule: to all Equipment which it purports to own, including the Equipment described on schedule X Balance-sheet: to all Equipment which it purports to own, including the Equipment accounted for in the most recent balance sheet heretofore delivered to Secured Party, except for equipment disposed of since that date and described on schedule X

21 Maintenance Debtor shall maintain, preserve and protect the equipment and keep the same in good repair, working order and condition, except for ordinary wear and tear, and from time to time make all needful and proper repairs thereto in compliance with all manufacturer specifications. Maintenance or service agreement with the supplier, manufacturer or other third party

22 Insurance Debtor shall maintain insurance on the equipment in amounts and against such risks as Secured Party may reasonably require and with a lender s loss payable endorsement acceptable to Secured Party, naming Secured Party as lender s loss payee. In addition, Debtor shall maintain public liability insurance in amounts reasonably required by Secured Party and naming Secured Party as additional insured. Such insurance policies shall provide Secured Party with at least 30 days notice of termination. Debtor shall provide Secured Party with evidence of such insurance from time to time, in form and substance acceptable to Secured Party. Property insurance Public liability insurance Lender s loss payable and additional insured Notice of termination

23 Force-Placed Insurance If Debtor shall fail to maintain the insurance required above, Secured Party may (but shall not be required to) obtain and maintain such insurance and Debtor shall reimburse Secured Party for the premiums therefor. Debtor s reimbursement obligations shall be payable upon demand and shall be considered additional indebtedness secured by the security interest granted herein. May include disclosures that the force-placed insurance might not protect Debtor s interests, that the premiums may not be at the lowest available rate, and/or that the insurance may be obtained through Secured Party s affiliate

24 Financial Reporting Representation regarding financial statements reviewed during due diligence Debtor s financial statements as at and for the year ended December 31, 2013 are complete and correct and fairly present in all material respects the financial condition of Debtor for the fiscal year then ended in accordance with GAAP. Covenant regarding provision of future financial statements

25 Appraisals Representation regarding any assumptions in appraisal or facts relied on by appraiser and secured party Agreement regarding periodic appraisals Secured Party, in its discretion, may obtain one or more appraisals or reappraisals of the equipment from time to time, at Debtor s cost and expense.

26 Maintaining Loan-to-Value Mandatory prepayment In the event the appraised value of the equipment shall be less than X percent of the outstanding Loan balance at any time, Debtor shall prepay the Loan in an amount that will result in the Loan balance not exceeding Y percent of the appraised value. Provision of additional collateral In the event the equipment declines substantially in value, Secured Party, in its discretion, may require Debtor to grant a security interest to Secured Party in additional collateral satisfactory to Secured Party with a value at least equal to the decline in value of the equipment.

27 Substitutions and Disposals Mandatory prepayment At the request of Debtor, Secured Party shall release its security interest in any Equipment comprising part of the Collateral without substitution therefor so long as (a) prior to the release of Secured Party s security interest, Debtor shall pay to Secured Party (i) the proceeds from the sale or (ii) the fair market value of the Equipment or (iii) an amount equal to the original cost of the Equipment to Debtor less depreciation calculated on a straight-line basis for the useful life of the Equipment, whichever amount is higher; and (b) the value, marketability and operating integrity of the remaining Collateral after such action is not impaired. Amounts paid to Secured Party hereunder shall be applied to principal payments in inverse order of maturity. Substitution Debtor shall have the right from time to time to substitute equipment for any portion of the Equipment; provided that the equipment so substituted shall not impair the aggregate value of the Equipment. Any such substituted equipment shall become part of the Equipment.

28 Protection of the Collateral Limitation or Prohibition on Junior Liens Debtor shall not create, incur, assume or permit to continue in existence any mortgage, lien, charge or encumbrance on, or security interest in, or conditional sale or other title retention agreement with respect to, any equipment now owned or hereafter acquired by Debtor, other than the security interest of Secured Party pursuant to this Agreement. Maintenance of Patents, Trademarks, Contract Rights and Leases Inspection Rights Debtor will permit Secured Party, or its designee, to inspect the equipment at any reasonable time, wherever located.

29 Protection of the Security Interest Covenants and on-going diligence to address the following changes: Change in Debtor Name Substitution of Collateral Change in Debtor s Location New Debtor

30 Protection of the Security Interest Subordination of Existing Secured Party s Interest Landlord and Mortgagee Waivers or Subordinations Waivers of Liens for Storage or Repair Judgment and Tax Liens

31 Remedies Require Debtor to Assemble Collateral must be specified in the documents (see UCC 2A- 525, 9-609) Take Possession must be without a breach of the peace (see UCC 2A-525, 9-609) Public or Private Sale or Lease (see UCC 2A- 527, 9-610) Retain in Full Satisfaction or Partial Satisfaction of the Debt (see UCC 9-620) Judicial Enforcement under applicable state law

32 Additional Lease Remedies Cancel the Lease (UCC 2A-523) Recover any liquidate damages specified in the Lease (see UCC 2A-503, 504) Specific performance (UCC 2A-507A) Repossess and retain equipment (UCC 2A- 528) Finance leases generally include a waiver of lessee s rights under UCC 2A-508 through 522 arising from lessor s default