Pub. 5 2017 Issue 2

www.uba.org 12 I n uncertain times, cash may be king for investors, but collat- eral—security pledged for the payment of an obligation—is king for all types of asset-based lenders. Prudent lenders routinely obtain personal guarantees from the principals of their borrowers, but more often than not, when a loan becomes troubled, both borrower and guarantor are unable to easily repay it. Accordingly, few asset-based lenders are willing to make loans without assured access to collateral to satisfy the underlying obligations. Personal property almost always constitutes an important, if not crucial, aspect of the collateral given to secure a loan. Whether the collateral is accounts receivable, inventory, equipment, the right to make capital calls for a subscription line of credit, mez- zanine equity interests, or the FF&E and contractual rights of a construction borrower, personal property can be the key to a successful loan recovery–whether independently or by unlock- ing the value of real property collateral. Unless a secured lender can realize the value of the collateral after a borrower default, the security of collateral is largely illu- sory. Secured lenders must fully understand the value of their personal property collateral, the process of properly securing the collateral, potential strategies for liquidating the collateral upon a default and the legal requirements and timelines involved in collecting and foreclosing on the collateral. Fortunately for secured lenders, the Uniform Commercial Code (which has been adopted by Utah with some amendments and is referred to herein as the “UCC”), provides a number of self-help and judicial remedies that can streamline and simplify the personal property foreclosure process for secured lenders. Consequently, it is important that secured lenders carefully con- sider their rights and options under the UCC as secured parties. The process is two-fold and intuitive in concept, even if more complex in practice. Secured lenders need to be mindful of the fact that some person- al property is outside of the scope of the UCC. Typically collat- eral that it outside the scope of the UCC includes life insurance policies, some intellectual property which must be pledged in accordance with federal law, deposit accounts in consumer transactions and some other limited types of personal property. After a borrower defaults, a secured lender must carefully ana- lyze its loan collateral. A secured party’s rights to intangible col- lateral such as accounts receivable, intellectual property rights and goodwill often follow specialized rules, and it is important that lenders carefully analyze their rights and remedies with the help of experienced counsel. In addition, if a lender’s collateral package includes real estate in addition to personal property, enforcement of rights and remedies simultaneously against per- sonal property and real property and the role of Utah’s so called One Action Rule and related laws must be carefully considered. With respect to tangible personal property, a secured lender must first either take possession or obtain control of the collater- al and then realize value from it. Taking Possession of Tangible Personal Property Collateral There are three ways a secured lender may take possession of tangible personal property collateral under the UCC: • Cooperative Borrower. In a perfect world, a defaulting borrower would simply deliver the collateral to the lender upon request. While defaults, by their very nature, occur in an imperfect world with imperfect borrowers, being fair, reasonable and transparent with a defaulting borrower encourages that borrower to respond in kind and can avoid the hassle, expense and uncertainty of forcible seizure. • Peaceful Seizure. A secured lender may also seize the col- lateral if it can do so without a breach of the peace. Unfor- tunately, the UCC does not define the term “breach of the peace,” and Utah case law on the issue is relatively sparse. However, many courts across the country have found that almost any resistance from the borrower—potentially even PERSONAL PROPERTY AND THE UCC: SECURED PARTIES’ RIGHTS AND REMEDIES IN TROUBLED TIMES By James H. Jones and Jonathan Kotter, Snell & Wilmer