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Advanced Business Law BPP 433 CAPITAL Advanced Business Law (BPP433/85) 2007 Winter Quarter Week 5 Instructor: David Oliveiri.

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Presentation on theme: "Advanced Business Law BPP 433 CAPITAL Advanced Business Law (BPP433/85) 2007 Winter Quarter Week 5 Instructor: David Oliveiri."— Presentation transcript:

1 Advanced Business Law BPP 433 CAPITAL Advanced Business Law (BPP433/85) 2007 Winter Quarter Week 5 Instructor: David Oliveiri

2 Advanced Business Law BPP 433 Learning Objectives Just What is Capital? What Legal Rules Apply to the Acquisition and Use of Capital? Managerial Implications -- Constraints, Risks, Opportunities

3 Advanced Business Law BPP 433 What is Capital? “Money, property, or stock invested in any business…” Source: Webster The Market for Capital: Business Lifecycle Context FORM (VC1…VC2…IPO) SUCCEED FAIL OPERATE SELL SELL BANKRUPTCY WHICH STAGES INVOLVE ACQUISITION/SALE OF CAPITAL? WHICH STAGES INVOLVE BORROWING/FINANCING?

4 Advanced Business Law BPP 433 The Market for Commercial Financing SUPPLYDEMAND ShareholdersCEO’s, Senior ManagersPartnersMembers VC’sProprietor …Other “Investors”…Other “Managers” Banks AGENCY COSTS Monitors/Controls Government Policy (Statutes— E.G. Uniform Commercial Code) Contracts (E.G. Security Agreements)

5 Advanced Business Law BPP 433 Managerial View of Capital: VALUE Due Diligence Checklist (Potential Acquirer): (a) list all major machinery, equipment, office furniture, vehicles, intangibles, etc., owned, and location, if not in state of principal place of business; (b) list all leased property and terms of lease; (c) review security agreements, financing statements, tax, mechanics’ or other liens; (d) check UCC filings in each applicable jurisdiction; (e) determine if any property of third parties (government, contractors, lessors, etc.) in use and subject to return; and (f) determine if there is any pending litigation, liens, or claims re: personal property.” Rights, Title Issues – Buyers, Sellers “Financing” Issues – Debt/Debtor, Lender/Creditor, Collateral Capital = Personal Property –Different Type of Property –Yet, Similar to Real Property Concepts

6 Advanced Business Law BPP 433 TangibleGoodsLand Buildings Fixtures IntangibleCommercial Paper Stock Certificates Contract Rights Copyrights Patents Leases Easements Mortgages Personal Real Kinds of Property Mortgage/Assignment Security Interest FINANCINGMETHODS

7 Advanced Business Law BPP 433 Governing Law of Personal Property Mostly State Law – Uniform Commercial Code (UCC) Includes Concept of Consensual Lien on Personal Property – Granting “Quasi-Ownership Rights” –Non-Consensual Liens – Judicial Liens (Judgments), Statutory Liens (Mechanics’ Liens, IRS Liens, …) –Consensual Liens – Article 9 UCC Includes Special Protection for Unsecured Creditors (Article 6 UCC -- Bulk Sales Law) XYX Corp. XYZ Corp. Assets --OR-- ABC Corp. (Buyer) What Happens to XYZ Creditors if XYZ Insolvent? Difference Between “Secured” and “Unsecured Creditors” 10 Days Advance Bulk Sales Notice

8 Advanced Business Law BPP 433 Article 9 UCC – Secured Transactions Rules Article 9 UCC -- Set of “Default” Rules Imposed by Statute –Minimize Transactions Costs –Minimize Information Costs –Facilitate Financing Article 9 Basic Concepts –Agreement Required – Manifest Intent to Create Security Interest in Return for.. –Definition of Collateral –Attachment of Security Interest to Collateral – When, If, How –Perfection of Security Interest by Creditor – To Prevail Against Others –Resolution of Priorities, or Conflicting Claims, among Creditors –Default Rights of Creditor and Debtor

9 Advanced Business Law BPP 433 Transactional Context SP (1)Entitled to Recover Amount of Debt (2)Can Have Collateral Applied to Payment of Debt on Default Money/Credit …Property Security Interest in Collateral (1)Can Redeem Collateral by Paying Debt to SP (2)Has General Rights of Ownership as Limited by Security Agreement D EVIDENCE OF TRANSACTION: SECURITY AGREEMENT

10 Advanced Business Law BPP 433 Sample Security Agreement SECURITY AGREEMENT Daniel Debtor of 113 Hillsborough Street, City of Raleigh, County of Wake, State of North Carolina, hereinafter called the “Debtor,” does hereby grant to S.P. & Assoc., Inc., of Raleigh, North Carolina, hereinafter called “S.P.,” its successors and assigns, a security interest in the following described property, hereinafter called the “Collateral,” to-wit: One (1) Deluxe Personal Computer Serial number VDL16794321 Manufacturer: Apex Mechanical Equipment Co. Model 420A to secure the payment of Debtor’s note or notes of even date herewith in the aggregate principal or aggregate face amount of Seven Thousand Five Hundred Dollars ($7,500.00), together with interest and any renewal or extension thereof, in whole or in part, and any and all other debts, obligations, and liabilities of any kind of Debtor to S.P., however created, arising, or evidenced, whether direct or indirect, joint or several, whether as maker, indorser, surety, guarantor or otherwise, whether now or hereafter existing, whether due or not due, and however acquired by S.P. (all hereinafter called the “Obligations”). August 22, 1996

11 Advanced Business Law BPP 433 Sample Security Agreement (cont.) DEBTOR WARRANTS AND AGREES THAT: 1. Except for the security interest hereby granted, the Debtor will use the proceeds of advances made hereunder, which proceeds may be paid by the S.P. directly to the seller of the Collateral, to become the owner of marketable title to the Collateral free from any prior lien, security interest or encumbrance, and the Debtor will defend the Collateral against all claims and demands of all persons at any time claiming an interest therein. 2. The Collateral is and will be used primarily for personal, family, or household purposes, and the Debtor’s residence is that shown at the beginning of this Agreement. 3. The Collateral will be kept at the Debtor’s address shown at the beginning of this Agreement. 4. There are no financing statements covering any of the Collateral on file in any public office, and the Debtor has not executed in favor of other secured parties financing statements that could be placed on file prior to any of the S.P.’s financing statements.

12 Advanced Business Law BPP 433 5.DEBTOR AGREES THAT: A.He will pay to S.P. all amounts due on the note or notes mentioned above and the other Obligations secured hereby as and when same shall be due and payable, whether by maturity, acceleration, or otherwise, and will pay to S.P. reasonable attorney’s fees incurred by S.P. in collection of said Obligations or enforcement of this Security Agreement. B.He will maintain all mechanical equipment and machinery hereby covered in sound and efficient operating condition, including the procurement and installation of such new parts, attachments, and replacements as may be necessary or desirable to maintain said Collateral in proper operating condition. C.He will maintain such insurance upon all of the Collateral as S.P. may require, payable to Debtor and S.P. as their interest may appear, in an amount not less than the actual value of the Collateral. Sample Security Agreement (cont.)

13 Advanced Business Law BPP 433 D.He will pay all insurance premiums and taxes, licenses, or other charges assessed against the Collateral or required to be paid in connection with the use and ownership of the Collateral. If Debtor shall fail to pay such insurance premiums, taxes, licenses, or other charges when they are due, S.P., at its option, may pay the cost thereof, and the amounts so paid and advanced shall be added to the indebtedness secured hereby and shall bear interest at the maximum rate permitted by Law. E.He will not (a) permit any liens or security interest to attach to any of the Collateral; (b) permit any of the Collateral to be levied upon under any legal process; (c) sell or dispose of any of the Collateral without prior written consent of S.P.; (d) permit anything to be done that may impair the value of the Collateral or the security intended to be afforded by this Agreement. F.He will immediately notify S.P. in writing of any change of the Debtor’s place of residence, place or places of business, or the location of the Collateral. G.He will not remove the Collateral from the State of North Carolina without prior written consent by S.P. Sample Security Agreement (cont.)

14 Advanced Business Law BPP 433 6. IT IS FURTHER AGREED THAT THE DEBTOR SHALL BE IN DEFAULT UNDER THIS AGREEMENT: A.If the Debtor uses any of the Collateral in violation of any statute or ordinance or the Debtor is found to have a record or reputation for violating the laws of the United States or any State relating to liquor or narcotics; or B.If the Debtor shall fail to perform any covenant or Agreement made by him herein; or C.If the Debtor shall fail to make due and punctual payment of any of the Obligations secured hereby when and as any part or all of such Obligation becomes due and payable; or D.If any warranty, representation, or statement made or furnished to S.P. by or on behalf of the Debtor in connection with this Agreement proves to have been false in any material respect when made or furnished; or E.If the Collateral suffers material damage or destruction; or F.If any bankruptcy or insolvency proceedings are commenced by or against the Debtor or any guarantor or surety for the Debtor; or Sample Security Agreement (cont.)

15 Advanced Business Law BPP 433 G.If the Debtor dies, becomes incompetent, is dissolved, or the Debtor’s existence otherwise terminates. Upon the happening of any of the above events of default or in the event that S.P., in good faith, deems itself insecure, S.P. may, at its option, declare all Obligations secured hereby due and payable immediately and have, in addition to other rights and remedies, the rights and remedies of a secured party upon default under the North Carolina Uniform Commercial Code.The waiver of any particular default of the Debtor hereunder shall not be a waiver of any other or subsequent default of the Debtor. Any requirement of the North Carolina Uniform Commercial Code of reasonable notification of time and place of public sale, or the time on or after which private sale may be held, may be met by sending written notice by registered or certified mail to the above address of the Debtor at least five (5) days prior to public sale or the date after which private sale may be made. The Debtor shall be and remain liable for any deficiency remaining after applying the proceeds of disposition of the Collateral first to the reasonable expenses of re-taking, holding, preparing for sale, selling, and the like, including the reasonable attorney’s fees, incurred by S.P. in connection therewith, and then to satisfaction of the Obligations secured hereby. Sample Security Agreement (cont.)

16 Advanced Business Law BPP 433 This Agreement and all rights, remedies, and duties hereunder, including matters of construction, shall be governed by the laws of North Carolina. This Agreement shall apply to, inure to the benefit of, and be binding upon the heirs, administrators, executors, and assigns of S.P. and the Debtor. This is the entire agreement of the parties, and no amendment, alteration, deletion, or addition hereto shall be effective and binding unless it is in writing and signed by the parties. Debtor acknowledges that this Agreement is and shall be effective upon execution by the Debtor and delivery hereof to S.P., and it shall not be necessary for S.P. to execute or otherwise signify its acceptance hereof. Signed and delivered on the day first above written. _________________________(SEAL) Daniel Debtor S.P. & Assoc., Inc. (Secured Party) By: __________________________ Sample Security Agreement (cont.)

17 Advanced Business Law BPP 433 Agreement – Intent to Create Security Interest The Obvious Examples: Secured Loans, Revolving Credit Agreements, Purchases of Businesses or Assets (Equipment, Personalty, Intangibles, Accounts) … Loan + Security Less Obvious Examples: Leases & Consignments May Be Included –Example: Leased Copier (3 years); Option to Buy End-of-Term for $1; Buyer/Lessee Bears Risk of Loss = Disguised Credit Sale/Security Interest –Why Is This Distinction Important?

18 Advanced Business Law BPP 433 The “Security” – Collateral Goods – “Moveables” Including Inventory, Cruise Ships, Embedded Software (But Not Independent Software) Instruments and Documents – Notes, Checks, Stock Certificates, Letters of Credit, … Chattel Paper – [Example: Retail Installment Paper ] Accounts – [Example: Floor Plan Financing] General Intangibles – [Example: Trademarks, Patents ] BUT NOT Real Property

19 Advanced Business Law BPP 433 The “Attachment” Requirement Security Agreement Required – Writing (Record) + Signed (Authenticated) Debtor Must Have Property Interest In Collateral Creditor Must Give Value BUT: After-Acquired Property/Future Advances OK

20 Advanced Business Law BPP 433 Default Protections for Creditor Creditor’s “Perfection” of Security Interest – To Prevail Against Others – Notice –Filing Financing Statement –Possession –Automatically/Temporarily Priorities – The Value of “Perfection” –Perfected SI > Unperfected SI –Later Creditor Can Perfect First – Filing Order Matters –Statutory Lien > Perfected SI –Bankruptcy – Trustee’s Powers Default Rights –Repossession (A/R – Notify Debtors) –Strict Foreclosure or Resale –Redemption

21 Advanced Business Law BPP 433 Methods of Perfecting Security Interests

22 Advanced Business Law BPP 433 Recent Cases – Security Interests in Intellectual Property – Patents In re Cybernetic Services, Inc., 252 F.3d 1039 (CA9 2001): Does the federal Patent Act or California’s Article 9 of the UCC require the holder of a security interest in a patent to record that interest with the federal Patent and Trademark Office (PTO) in order to perfect the interest as against a subsequent lien creditor? NO ! The Patent Act requires PTO recording of ownership interests in patents, but it does not cover security interests or lien creditors at all; it does not therefore preempt the filing requirements of Article 9 of the UCC, as adopted in California. Bottom Line: Compliance with UCC sufficient to protect security interest; dual recording (USPTO and California Secretary of State) not required to protect security interest.

23 Advanced Business Law BPP 433 Recent Cases – Security Interests in Intellectual Property – Copyrights In re World Auxiliary Power Co., 244 BR 149 (BC ND Cal 1999) Issue: When a copyright is unregistered with the federal copyright office, can a secured creditor still perfect its security interest by filing a UCC-1 financing statement with the appropriate UCC office? YES. This case was a bankruptcy court proceeding brought by the bankruptcy trustee to avoid a bank's security interest in the debtors’ unregistered copyright, on the theory that the interest was not properly perfected as of the commencement of the debtor’s Chapter 7 case. Bottom Line: This bankruptcy court refused to believe that permitting a secured creditor to perfect its security interest in an unregistered copyright by filing a UCC-1 financing statement with the appropriate state UCC office would frustrate any federal policy reflected in the Copyright Act; dual recording not necessary.

24 Advanced Business Law BPP 433 Recent Cases – Security Interests in Intellectual Property – Trademarks Trimarchi v. Together Development Corp., 255 BR 606 (DC Mass 2000) A creditor objected unsuccessfully to the sale of a Chapter 11 debtor- corporation's assets, particularly a trademark in which the creditor claimed a security interest. The district court held that the Lanham Act's registration provision for trademarks does not preempt UCC filing requirements for the perfection of a security interest in a trademark, and that accordingly the creditor’s failure to file in accordance with New York's UCC was fatal to perfection of his security interest in the debtor's trademark. Bottom Line: Dual recording not necessary; recording only with the USPTO insufficient!

25 Advanced Business Law BPP 433 Requirements for Enforceability of Security Interests I.AttachmentIIPerfection A.Agreement writing (unless SP has possession), 2.providing a security int., described collateral, 4.signed by debtor, B.Value given by secured party, and C.Debtor has rights in collateral. A.Files a financing statement, or B.SP takes possession, or C.Automatically, or D.Temporarily.

26 Advanced Business Law BPP 433 Bottom Lines; Q&A Capital => Potential Financing Relationships Financing = f ( Uniform Commercial Code Article 9) = State Default Rules Management Perspectives – Capital Has Value as Collateral Management Opportunity – Maximize Collateralization Value; Avoid “Overcollateralization” of Debt

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