BANK FINANCE AND REGULATION Multi-Jurisdictional Survey SECURITY OVER COLLATERAL USA - MINNESOTA Briggs and Morgan, P.A. CONTACT INFORMATION Steven J. Ryan Briggs and Morgan, P.A. 2200 IDS Center 80 S. Eighth Street Minneapolis, MN 55402 (612) 977-8400 sryan@briggs.com www.briggs.com 1. Can assets be charged, liened and/or encumbered in your jurisdiction? Please insert any exemptions, if any. Yes, with very limited exceptions such as non-assignable governmental licenses and permits, and certain government welfare and benefit payments. 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? As a general matter, the parties may elect to have a security arrangement be governed by the laws of a jurisdiction other than the State of Minnesota. Notwithstanding any such election, the laws of the State of Minnesota will generally govern perfection, the effect of perfection or non-perfection and procedural enforcement of any security arrangement covering collateral located in the State of Minnesota. The market practice in the State of Minnesota is for the local law of the jurisdiction where the secured party is located to govern the security arrangement, subject to the effect of laws of other
jurisdictions governing enforcement of liens against collateral located in such other jurisdictions. Any treaty regarding security arrangements would be entered into by the United States federal government (a description of which is beyond the scope of this abstract); individual States of the United States are prohibited under the United States Constitution from entering into any treaty with a foreign nation or power. 3. In your jurisdiction, are floating charges or security over the overall assets of an entity accepted, and if so in what terms? Yes, with regard to all assets of an entity that do not constitute real estate or interests in real estate. A lien against assets constituting real estate or interests in real estate must, under most circumstances, specify the principal amount of indebtedness secured, and are limited to the specified principal amount plus interest and certain costs of collection. 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: Type of Asset Aircraft Bank Accounts Animals, Crops and Timber Equipment Type of under Federal Aviation Act of 1958 ; Statutory Agricultural Lien Perfection Requirements File a notice of lien with the Federal Aviation Administration (FAA) central office in Oklahoma City, OK (to be filed within 90 days of last claim made). Perfect by a control agreement with the depository bank. Standing timber: file in office of state where realty is located. Farm products (livestock and crops): take possession or file in state where debtor is located. Separate rules may apply for non-ucc agricultural liens. where debtor resides or take possession. Estimate of Timing Cost $5.00 4-6 weeks to be recorded Varies based on depository bank Varies based on depository bank Special Considerations Federal Aviation Act of 1958 preempts Article 9. Also applies to aircraft replacement parts and accessories. If secured party is the depository bank, perfection is automatic. $20.00/filing 24 hours Financing statement for timber must contain description of related real estate. Crops remain farm products and security interest is retained as long as they have not been processed. $20.00/filing 24 hours
Type of Asset Intellectual Property Inventory Leases Mineral s (incl. Hydrocarbons) Type of ; Collateral Assignment Mortgage (before extraction) (upon extraction) Perfection Requirements where debtor is located. where debtor resides or take possession. where debtor resides or take possession. Note that Article 9 is not clear that the security interest of the lessor s financer in the inventory will carry over to the lease payments as proceeds. Thus, the prudent lender should include as collateral all chattel paper arising from lease of the debtor s inventory and take possession of the chattel paper. File or record mortgage in county where real property is located. County Recorder s office for abstract property; Registrar of Titles for registered (Torrens) property. Estimate of Cost Timing Special Considerations $20.00/filing 24 hours Prudent lender will also record notice of its security interest in the U.S. Patent and Trademark Office or U.S. Copyright Office (as applicable). $20.00/filing 24 hours $20.00/filing 24 hours Note that a lessee will take free and clear of a security interest in goods as inventory of the debtor provided that the goods are leased to a lessee in ordinary course of business. Recording costs vary by county $20.00/filing Varies by county 24 hours Financing statement must contain description of related real estate. Promissory Notes and Chattel Paper statement in office designated for the filing or recording of a mortgage on the subject real property. Method of perfection for instruments (including promissory notes) or chattel paper is filing or possession. $20.00/filing 24 hours An outright sale of a promissory note is automatically perfected.
Type of Asset Type of Perfection Requirements Real Estate Mortgage File or record mortgage in county where real property is located. County Recorder s office for abstract property; Registrar of Titles for registered (Torrens) property. Estimate of Cost Recording costs vary by county; Mortgage Registry Taxes of $0.23 (or $0.24 in Hennepin County) on each $100 or fraction thereof on the principal amount secured by the mortgage. In certain counties, there is an additional $5.00 conservation fee. Timing Varies by county Special Considerations Anti-deficiency statute applies following nonjudicial foreclosure. Redemption period varies based on method of foreclosure and type of mortgaged property. The name and address of the drafter must appear on the document. Signatures must be acknowledged before a notary public. If a married person holds title to property individually, the person s spouse may have or acquire an interest in the property under the statute governing marriage dissolution. Therefore, when a married person holds title to property, it is customary to require both spouses to sign a deed, mortgage or other instrument affecting title to bind the marital interest of the spouse. A mortgage of a homestead, other than a purchase money mortgage, is void without the signature of both husband and wife. The first page of the mortgage must include a statement as to the maximum amount secured by the mortgage, together with protective
Type of Asset Receivables Rights under Contracts (excl. Receivables) Shares and other Securities Vessels Vehicles Type of (general intangible); Collateral Assignment Ship Mortgage (or UCC, if UCC not preempted by federal law) Perfection Requirements where debtor is located. where debtor resides. Written collateral assignment of contract, together with consent of counterparty. Perfect by control, possession (if certificated), by control agreement with the issuer or securities intermediary, or become the holder of a securities entitlement. If the ship is covered by the federal Ship Mortgage Act of 1920, then filing of a ship mortgage with the Collector of Customs is required. However, it is prudent to also file a UCC financing statement. Consensual lien must be noted on the title pursuant to the state s certificate of title statute. Estimate of Cost $20.00/filing $20.00/filing Varies based on intermediary Timing 24 hours 24 hours Varies based on intermediary Special Considerations If secured party is the broker or securities intermediary, perfection is automatic. Unknown Unknown If the ship is a small pleasure craft that does not qualify under the federal statute, Article 9 or a state certificate of title statute will control perfection. $10.50 ($2.00 lienholder fee and $8.50 service fee) Mailing to Department is probably quicker. If taken in to Deputy, will take close to 2 months for deputy paperwork to reflect the lien. Customer has to acknowledge lien noted on title or fill out Grantor form and sign. Business as a going concern Separate security in all classes of assets (see above) See above See above See above See above 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?
Federal Statutes. For collateral covered by federal statutes (aircraft and certain vessels), refer to the applicable federal enforcement statutes. Real Property. Foreclosure of a security arrangement covering real property (sometimes referred to as a mortgage against real property) is strictly governed by state law. There are three forms of mortgage foreclosure: by advertisement, by action, and voluntary. Foreclosure by Advertisement. For a foreclosure by advertisement, the mortgage must contain a power of sale clause, default must have occurred, no action may be pending on any part of the debt, mortgage must be recorded, notice of foreclosure and power of attorney to foreclose must be recorded before first publication of the statutory form of Notice of Foreclosure, and such statutory form must be published for at least six weeks prior to sheriff s sale. A deficiency judgment in favor of the mortgagee may in some cases be precluded if the mortgage is foreclosed by advertisement and has a statutory redemption. In addition, state law may preclude foreclosure by advertisement if a proceeding has been instituted at law to recover the debt secured by a mortgage, unless such proceedings have been discontinued or a judgment therein has been returned unsatisfied in whole or in part. Foreclosure by Action. Foreclosure by action is conducted like an ordinary civil suit, with judgment for the amount due and a court-ordered sheriff s sale. The sale must then be confirmed by the court. During the statutory redemption period following foreclosure by action, interest is limited to (i) the rate specified in the mortgage but not in excess of 8%, or (ii) 6% if no rate is specified in the mortgage. Voluntary Foreclosure. The mortgagor and mortgagee can enter into an agreement for voluntary foreclosure if the mortgage was executed on or after August 1, 1993, the mortgage has been in default for at least one month, and the property is not classified as a homestead and is not used for agricultural purposes. Voluntary foreclosure is statutorily limited by a two-month redemption period for the mortgagor, the mortgagee waives any right to deficiency and surplus, and the mortgagee waives any right to contest the foreclosure or collect any rents during the period from date of the agreement through the redemption period. The mortgagee must record the voluntary foreclosure agreement within seven days of execution. If foreclosure by advertisement or by action, after foreclosure but prior to sale of the premises, the mortgage shall be reinstated and foreclosure proceeding abandoned if mortgagor pays the amount due under the mortgage (including certain fees and expenses). Advances by the mortgagee (other than advances representing disbursements of the proceeds of the loan) that are secured by the mortgage may be limited to prior mortgages, taxes and insurance. Also note that possession of real property requires compliance with the applicable receivership statute. Agricultural Collateral (Real and Personal Property related to Farming). Secured party may not enforce a security interest in certain agricultural property with a secured debt of more than $5,000 unless (a) a default has occurred and is continuing, (b) a statutory form of mediation notice is served on the debtor with a copy served on the director of the agricultural extension service, and (iii) debtor and secured party have completed statutorily mandated mediation.
All Other Collateral. For all other types of collateral, standard UCC enforcement provisions apply. Choice of Law Provision. Minnesota courts will generally enforce agreements that by their terms are governed by another jurisdiction s laws. 6. Can a trustee or security agent be used in your jurisdiction, or must security be granted in favour of all lenders? A trustee or security agent may be used; security need not be granted in favour of all lenders. 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? An action seeking to avoid a transaction that is constructively fraudulent as to either present or future creditors may be initiated at any time within 6 years after such fraudulent transfer occurs. Generally, courts will allow obligations to be reinstated to the extent payment on such obligations is later avoided. Certain provisions of Minnesota law give other types of rights preference over security granted. The most notable of these are liens and claims of unpaid "wholesale produce dealers" (as defined under Minnesota law), unpaid "producers" of "agricultural commodities" (as defined under Minnesota law), certain employees providing services prior to the date of attachment of the applicable security interest and certain parties in possession of property (storage companies, towing companies, transportation companies and other bailee's). 8. In your jurisdiction, can borrowers or guarantors subordinate their claims and if so in what terms? Yes. Terms are generally those agreed to by the applicable parties. 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.) In general, the transfer or assignment of the underlying indebtedness will also constitute a transfer of the security for that indebtedness, although additional filings in the applicable public records may be necessary to preserve the perfection and priority of the security. If the underlying indebtedness is discharged, subject to a novation or otherwise extinguished, a new security agreement would be required. 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? Generally, no. A deed or other instrument conveying title which is delivered at the time a transaction is consummated, but is not effective until such time as a default occurs, will generally not be enforced, except that such instrument may be recharacterized as an
equitable mortgage or reservation of a security interest, which must be foreclosed in accordance with applicable state law. 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? With respect to personal property, so long as there is no breach of the peace, creditors may take possession of collateral in accordance with the self-help remedies available to them under Article 9 of the Uniform Commercial Code (as enacted in Minnesota). With respect to real property, the creditor's mortgage must be foreclosed under applicable state law, unless title to such real property is voluntarily relinquished by the debtor in lieu of foreclosure.