PRIMER ON FINANCING INVENTORY R. Marshall Grodner

Transcription

1 PRIMER ON FINANCING INVENTORY 2014 R. Marshall Grodner

2 COLLATERAL Equipment v. Inventory Security Interests Attachment Description After Acquired Property Proceeds

3 GENERAL SCENARIO Revolving Credit Facility Term Loans Fixed Assets Revolving Loans AR and Inventory Inventory - Valuation Includes Raw Materials and Finished Products Generally Excludes WIP

4 FLOOR-PLANNING Manufacturer of Goods provides Inventory to its Dealers on Credit Dealer sells goods to its customer on credit Credit Company (an affiliate of Manufacturer) purchases Dealer s receivable from Dealer s customer. Credit Company pays off Manufacturer on behalf of Dealer

5 DOCUMENTS OF TITLE Governed by Article 7 Warehouse Receipts/Bills of Lading Issued by custodian or bailee Equivalent of Inventory

6 ATTACHMENT Enforceable against Debtor Value given Rights in Collateral Agreement Authenticated Security Agreement Possession by Agreement

7 PERFECTION Filing Financing Statement Location of the Debtor Possession By Secured Party Bailee Authenticated Record by Bailee

8 PRIORITY Standard Rules First to File Continues upon Sale Continues in Proceeds Buyers Consent of Secured Party Without Knowledge BICOB

9 PMSI IN GOODS: UCC 9-103(a) THE BASICS Purchase Money Collateral Purchase Money Obligation UCC (b) It is a PMSI in goods if: is Purchase Money Collateral Cross-collateralization no longer matters

10 PMSI IN EQUIPMENT: UCC 9-324(a) THE BASICS All that is required is that the security interest is perfected (i.e. usually filing) before or within 20 days after debtor receives possession.

11 PMSI IN INVENTORY: THE BASICS 9-324(b) Requirements Perfected before debtor receives possession PMSI Notice to prior filers stating that you have or intend to acquire a PMSI Renew PMSI notice at continuation that s what (b)(3) really means

12 INVENTORY FINANCING Revolving Credit Facility Secured Party relies on First to File Rule UCC Search Exclusion from Borrowing Base Termination Intercreditor/Subordination

13 FIRST STEP: FLOOR- PLANNING What should Manufacturer do before delivering goods? Since it is held for sale or lease it is inventory UCC Search Location of Debtor issues. PMSI Notice File Financing Statement

14 WHAT ELSE SHOULD MANUFACTURER DO? Set up system to file continuation statements Run new UCC searches before filing continuation to see if old filings have been continued or assigned. Send out new PMSI notices before filing continuation

15 OTHER MANUFACTURER ISSUES What to do if Manufacturer screws up its PMSI? UCC get subordination from conflicting creditors.

16 MANUFACTURER SELLS/LEASES THE GOODS Usually through a Retail Installment Contract (RIC) can be a sale or lease What is a RIC under the UCC Not an Instrument 9-102(a)(47) usually includes a security agreement or a lease

17 CHATTEL PAPER 9-102(a)(11) a record that evidences both: a monetary obligation, and a security interest or lease of specific goods What if the RIC includes a more generic security interest? account?

18 PERFECTION IN CHATTEL PAPER Electronic Chattel Paper control under UCC Tangible Chattel Paper Filing UCC and 9-312(a) Possession UCC 9-313(a) Bailee Possession 9-313(c) Bailee acknowledgement Issue: Can an principal or employee of Dealer be a bailee?

19 PRIORITY IN CHATTEL PAPER UCC 9-330(a) Perfection by Possession takes priority over conflicting claims of proceeds of inventory if: good faith ordinary course for new value no indication otherwise assigned

20 PRIORITY IN CHATTEL PAPER, CONT. UCC 9-330(b) - Possession takes priority over all others if: good faith, ordinary course, for new value No knowledge violates rights of secured party

21 GOODS COVERED BY CERTIFICATE OF TITLE When goods are inventory with the Dealer, then it is inventory under the UCC and perfected by filing (d) Sale by Manufacturer to Customer Need to be noted on Certificate of Title Does an assignee need to be noted on Certificate of Title

22 BACK TO GENERAL SCENARIO Manufacturer sells/leases to Customer enters into RIC with Customer Manufacturer sells RIC to Credit Company Credit Company pays off Manufacturer

23 BACK TO GENERAL SCENARIO Manufacturer sells/leases to Dealer Dealer enters into RIC with Customer Dealer sells RIC to Credit Company Credit Company pays off Manufacturer

24 ISSUES IN GENERAL SCENARIO Does Credit Co. have PMSI in the customers goods? If the goods are equipment, then nothing has to be done. What if customer is another dealer? It would be inventory Manufacturer needs to send PMSI notice

25 LEASING COMPANY SCENARIO If Dealer desires to convert inventory held for sale to inventory held for lease, the Credit Co. pays off Manufacturer and becomes the floorplanner for the inventory held for leases Two Scenarios Dealer and Leasing Co. are the same company Dealer and Leasing Co. are different sister companies

26 DEALER AND LEASING CO. ARE THE SAME When Credit Co. pays of Manufacturer does Credit Co. maintain Manufacturer s PMSI status? UCC 9-103(f)(3) provides that a PMSI does not lose its status if: the purchase-money obligation has been renewed, refinanced, consolidated, or restructured

27 THE REFINANCE ISSUE UCC 9 does not define the word refinance, and this is new in Revised Article 9. Comment 7(a) to UCC indicates that a refinancing by the same lender is a refinance Case law under Old Article 9 mostly says that in this scenario Credit Co. loses its PMSI status

28 ASSIGNMENT OF SECURITY INTEREST Does Manufacturer have to assign its security interest to Leasing Co. by a UCC-3? What if Manufacturer has described its collateral by type, and it is only a partial assignment?

29 DEALER AND LEASING CO. ARE DIFFERENT General Scenario: Dealer sells Leasing Co. the goods under a RIC Credit Co. buys RIC from Dealer and pays off Manufacturer Basically same as sale to a customer

30 ISSUES PMSI The goods are inventory in the hands of the Leasing Co. not equipment (b) requires perfection before the debtor receives possession If the collateral is remains at the same location when does the Leasing Co. get possession?

31 ISSUES CONT. Certificate of Title UCC 9-311(d) providing that the goods are inventory applies only if the debtor is in the business of selling goods of that kind. Leasing Co. is not in the business of selling Must note Dealer s security interest on certificate of title What about Credit Co. as assignee?

32 ISSUES CONT. Is Leasing Co. a buyer for purposes of 9-317(a) As a sister company does it have knowledge? Is Leasing Co. a BIOCOB under 9-320(a) and 1-201(a)(9)?

33 DOCUMENTATION Loan and Security Agreement All Assets Description Eligible Inventory For Inclusion in Borrowing Base Promissory Note Not Necessary

34 DOCUMENTATION (CONT.) Financing Statement Where to File Subsequent Changes Entity Formalities Waivers Landlord Liens Mortgagee Licensor

35 OPERATING RISKS Sales out of Trust Monitoring Loss of Proceeds Deposit Account DACA Accessions

36 OPERATING RISKS (CONT.) Conflicting Liens Statutory Tax Liens Fair Labor Standards Hot Goods Consensual Inferior

37 Consignments A consignment is a transaction where goods are delivered to a merchant for purposes of sale and: The merchant: deals in goods of that kind under a name other than the consignee is not an auctioneer is not generally know to sell goods of others

38 Consignment (cont.) The goods are worth over $1000 Goods are not consumer goods before delivery The transaction does not create a security interest to secure the obligation

39 Consignment (General) Article 9 covers consignments The interest of the consignor in the property delivered is a PMSI A consignor can use the terms consignor and consignee in a financing statement There is no obligation to terminate except when good are returned to consignor/debtor

40 CONSIGNMENT (PERFECTION AND PRIORITY) Perfection is governed by the general rule on goods Need to file financing statement Remember it is a PMSI in inventory Need to do a UCC search and send the requisite PMSI notices

41 CONSIGNMENTS (ISSUES) Transformation of Collateral Recharacterization Counting Creditors

42 AGRICULTURAL FINANCE Goods include farm products. Farm Products are: crops growing or to be grown crops produced on trees and vines aquatic goods livestock supplies used in farming operations products of livestock and crops in their unmanufactured state.

43 AG FINANCING (CONT.) Article 9 covers not only consensual security interests in farm products, but agricultural liens as well.

44 AG FINANCING (CONT.) An Agricultural Lien is an interest other than a security interests that: secures payment for an obligation for: goods or services provided to a farming operation rent of real property for the farming operation; and

45 AG FINANCING CONT. The lien must be created by statute in favor of a person who regularly provides goods and services to farming operations; or rents land for farming operations; and The statute does not require possession to perfect

46 AG FINANCING (CONT.) Attachment The interest is created by the statute no security agreement necessary Perfection: Filing

47 AG FINANCE (CONT.) Priority Generally the rules on goods applies to both security interest and agricultural liens except where the statute creating the agricultural lien provides otherwise Security Interest/Ag Liens in goods other than livestock treated like equipment PMSI

48 AG FINANCE (CONT.) Livestock PMSI Similar to inventory Search Give PMSI Notice

49 AG FINANCE (CONT.) Other issues PACA/PSA Similar State Laws Farm Security Act

50 CONCLUSION QUESTIONS