Download Security over Collateral USA - ARKANSAS Rose Law Firm

Security over Collateral
USA - ARKANSAS
Rose Law Firm
CONTACT INFORMATION
Tom Hardin
Gary Garrett
Rose Law Firm
120 East Fourth Street
Little Rock, Arkansas 72201-2893
(501) 375-9131
[email protected]
www.roselawfirm.com
1. Can assets be charged, liened and/or encumbered in your jurisdiction? Please
insert any exemptions, if any.
Yes, assets may be encumbered in Arkansas. Real property generally is encumbered by
mortgage liens created by mortgages or deeds of trusts; and personal property generally
is encumbered by consensual security interests under Revised Articles 1 & 9 of the
Uniform Commercial Code, as adopted in Arkansas (UCC).
Under certain
circumstances real and personal property also may be encumbered by non-consensual
liens created by statute other than the Uniform Commercial Code (e.g. materialmen &
artisan liens).
Encumbrances on certain forms of personal property excluded from the UCC may be
collaterally assigned subject to proper documentation and certain restrictions. [e.g.
wages (Ark. Code Ann. § 16-66-208) and insurance proceeds not covered by the UCC
(Ark. Code Ann. § 16-66-209)].
There are certain state constitutional and statutory exemptions for real property [e.g.
homestead (Ark. Const. art. 9, § 3)] and personal property [e.g. certain livestock, tools
& up to $500 (Ark. Const. art. 9, §§ 1-2)]; but generally these exemptions may be
waived by appropriate provisions in the granting documents.
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?
With respect to real property, mortgages and deeds of trust may contain choice of law
provisions which specify that the law of a jurisdiction other than Arkansas will control
as to certain terms and conditions. However, mortgage liens generally must be
foreclosed in a local (county or district) Arkansas Circuit Court for the County in which
the real property is located and Arkansas law will apply to the creation, perfection,
priority, and foreclosure of mortgage liens without regard to another choice of law
provision. RMP Rentals v. Metroplex, Inc., 356 Ark. 76, 146 S.W.3d 861 (2004). With
respect to personal property, Arkansas has adopted a non-uniform provision of the
UCC’s choice of law rule. Generally parties may choose the law of a state or nation
other than Arkansas to govern their transaction so long as the transaction bears a
reasonable relation to the state or nation whose law is chosen. Ark. Code Ann. § 4-1301. However, Arkansas law will govern the perfection and priority of security
interests and certain aspects of statutory agricultural liens under Ark. Code Ann. §§ 4-9301 to 309. Arkansas law also may govern if the choice of law is deemed by an
Arkansas court to be a sham or guise with no real purpose but to avoid an Arkansas law
which has a strong underlying policy, such as usury.
3. In your jurisdiction, are floating charges or security over the overall assets of
an entity accepted, and if so in what terms?
Floating security interests, as to both amount and property covered, are permissible as to
personal property security interests governed by the UCC. Ark. Code Ann. § 4-9-204.
Non-UCC assignments of personal property may, under the proper conditions, also
cover future advances and future rights in that property; but there may be priority issues.
As to real property, a properly drafted mortgage or deed of trust may cover “afteracquired” real property (provided it is properly described in the instrument) and future
advances. Again, there may be priority and perfection issues which will vary depending
on the form of the underlying transaction.
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:
Again, Arkansas has adopted Revised Article 9 of the UCC which governs most of the
below categories of assets. Ark. Code Ann. §§ 4-9-101 et seq. Generally, a security
interest or mortgage lien must be created and evidenced by a writing which is filed in
public records – for real property, in the county in which the real property is located; for
fixtures, crops and other farm products, timber and minerals to be severed, in the UCC
records of the county in which the real property upon which such fixtures, crops or
other farm products and minerals are located; for other personal property by possession
(if tangible) or UCC financing statement notice filings with the Arkansas Secretary of
State located in Little Rock, Arkansas.
Arkansas does not impose any taxes on the creation or perfection of real or personal
property liens and security interests. Nominal filing fees are state-wide and vary based
on the type of filing (e.g. real property or UCC) and number of pages.
Because the UCC rules which govern each of the below specific categories generally
are common to all 50 states and very complicated we have not tried to repeat them in
this summary.
(a) Aircraft - UCC, but perfection is governed by U. S. Federal law;
(b) Bank Accounts – UCC;
(c) Animals, Crops (in ground and severed) and Timber – UCC, if animals and
crops are farm products and for timber to be cut. Crops also may be subject to statutory
agriculture liens, which are partially covered by the UCC.
(d) Equipment - UCC
(e) Intellectual Property; - UCC, but perfection may be governed by U. S. Federal
law;
(f) Inventory - UCC
(g) Leases – A lessor may grant a security interest in the lessor’s rights under a
lease pursuant to the UCC; a lessee may grant a security interest in a lease of personal
property covered by the UCC pursuant to the UCC; a lessee may collaterally assign its
interest in a lease of personal property not covered by the UCC; and a lessee of real
estate may mortgage its leasehold interest in the same manner as a fee interest may be
mortgaged;
(h) Mineral Interests, including Hydrocarbons – Prior to extraction, such
interests are real property which may be subjected to mortgages or deeds of trust. If
minerals, including hydrocarbons, are “as-extracted collateral” as defined in Ark. Code
Ann. § 4-9-102(a)(6) then they may be subjected to security interests under the UCC;
(i) Promissory Notes and Chattel Paper – UCC;
(j) Real Estate – Generally liens are created by mortgages or deeds of trust; but, to
the extent that the real estate includes improvements which are defined as “fixtures”
under the UCC [Ark. Code Ann. § 4-9-102(a)(41)] then the liens are governed by the
UCC;
(k) Receivables (credit rights under contracts or invoices) – UCC;
(l) Rights under Contracts (excluding Receivables) - UCC;
(m)Shares (in book-entry and certificate form and other securities) - UCC;
(n) Vessels – UCC & applicable federal law;
(o) Vehicles – UCC & applicable Arkansas registration and licensing law;
(p) Business as an ongoing concern – Generally this is done by taking a security
interest in the ownership interest (whether shares, partnership interest or LLC member
interest) or in the specific assets of the ongoing concern.
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?
Security interests in personal property are enforced under the UCC, which includes
provisions for judicial foreclosure (Ark. Code Ann. § 4-9-601), self help repossession
followed by commercially reasonable sale (Ark. Code Ann. § 4-9-607), and court
ordered repossession through replevin followed by commercially reasonable sale (Ark.
Code Ann. § 4-9-609). A creditor may choose to not exercise self-help repossession or
sale and instead may request a court ordered repossession and sale.
Liens on personal property which are not governed by the UCC (e.g. collateral
assignments) may be enforced by judicial replevin or other proceedings or by self-help
in accordance with the specific agreement of the parties to the assignment.
Mortgage liens in real property can be enforced by judicial foreclosure, which is a
public sale under a court order (Ark. Code Ann. § 18-49-104), or by a non-judicial,
statutory foreclosure, which is a public auction initiated by the secured party (Ark. Code
Ann. § 18-50-101 et. seq.).
6. Can a trustee or security agent be used in your jurisdiction, or must security be
granted in favor of all lenders?
Yes, Arkansas recognizes the use of trustees and agents; but the better practice is to
name the principals of the agents and the beneficiaries for any trustees in the documents
creating the liens or security interests. Liens & security interests should expressly
specify that they are for the benefit of the agents/trustees and their
principals/beneficiaries.
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?
Arkansas follows U. S. federal bankruptcy law under 11 U.S.C. §§ 101 et seq.; but
Arkansas does have equitable insolvency laws involving receiverships, fraudulent
conveyance (generally a 3-year statute of limitations) and other non-bankruptcy creditor
remedies. However, except for fraudulent conveyance law, these state-law remedies
generally will not provide a preference over a properly created and perfected mortgage
lien or security interest which has priority.
8. In your jurisdiction, can borrowers or guarantors subordinate their claims and
if so in what terms?
Yes, subject only to equitable principals of subordination and other equitable remedies
such as fraud, rescission, etc.
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 mortgage liens and security interests follow the secured debt. With respect to
mortgage liens if the original secured debt is deemed to be paid or otherwise satisfied as
a result of the transaction (e.g. payment by novation) then the mortgage lien is no longer
effective; provided, however, that a properly prepared mortgage may secure a revolving
or multi-advance line of credit with a contractual commitment to lend. With respect to
security interests under the UCC, the underlying debt may be modified, transferred,
novated, paid and re-incurred in accordance with the UCC.
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?
Arkansas permits multiple mortgage liens and security interests in the same property to
different creditors to secure different debts. Whether such multiples are permitted by
the parties is a matter of contract between the parties. The granting of subsequent
mortgage liens or security interests in violation of a prior contractual provisions
generally does not invalidate the subsequent mortgage liens or security interests, subject
to certain equitable principals; and the subsequent mortgage liens or security interests
may be conditional upon default of the debtor in the prior mortgage lien or security
interest.
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?
Many mortgages and security agreements purport to grant step-in-rights of receivership
as a matter of right or as a matter of a power-of-attorney. Under Arkansas law a
receivership may only be created by court action. So, a provision providing for an
automatic receivership is not enforceable without court action and is just one factor a
court will consider upon a secured creditor’s application for receivership. As to powersof-attorney, properly drafted they may be effective without court action in limited
circumstances consistent with the UCC and other Arkansas law.