Did you know that the IRS can prime your priority with a federal tax lien? The infamous 45-day rule allows the secured lender a brief period of time after the filing of a federal tax lien to become aware of such lien. After the secured lender has knowledge of the federal tax lien or upon expiration of the 45 day period, whichever occurs first, collateral acquired or related to any new financing by the lender will be subject to first priority provided to the federal government. As part of your initial due-diligence and filing process, talk to Capitol Services about setting up the important recurring searches that will ensure you are advised of any changes that could jeopardize your portfolio!
Alerts
Apostilles and Legalizations
In the current business climate, international transactions are becoming increasingly prevalent. The world is getting smaller and you may find in this global marketplace that various documents will need to be legalized or apostilled before being sent to another country.
The simplest way to look at legalizations is as a process of signature authentications, beginning either with a document signed by a notary or produced by a governmental agency and ending with the embassy or consulate of the country in which the document will be used. Each step authenticates the signature before it and the recipient in the target country should consider the document to be valid after it has been through this series of authentications.
In 1961, a group of countries came together under Convention 12 of The Hague. These jurisdictions agreed to recognize one another’s documents without the full legalizations process.
If the country that the documents are coming from and the country to which they are going are both member jurisdictions, the document is apostilled instead of legalized.
Capitol Services can handle each step of both the apostille and legalizations processes. Members of this team are well-versed in the intricacies and idiosyncrasies of the embassies and consulates throughout the country and are happy to help with any questions you may have.
A Very Costly UCC Filing Error
On June 28, 2017, the rollercoaster case with the billion-dollar mistake seems to have finally come to a close with the rendering of a decision by the Seventh Circuit Court of Appeals.
To bring you up to speed, the story begins with two transactions: (1) a secured financial agreement between a syndicate of lenders represented by JP Morgan and General Motors in 2001 for $300 million (the “2001 Synthetic Lease”) and (2) a $1.5 billion dollar loan by over 400 lenders (the “Lenders”), represented by JP Morgan, to General Motors (the “2006 Term Loan”). When the 2001 Synthetic Lease was reaching its maturity date, General Motors instructed its counsel, Mayer Brown, to prepare the documents to pay off the 2001 Synthetic Lease. Mayer Brown prepared the relevant closing documents, including a UCC-3 termination statement.
However, due to the faulty inclusion of the UCC-1 related to the 2006 Term Loan in the search by Mayer Brown paralegal, a UCC-3 termination statement was also prepared for the 2006 Term Loan. To quote the Seventh Circuit’s decision, which will be discussed momentarily, that’s a “a $1.5 billion (with a “b”) mistake.” Mayer Brown provided the draft to JP Morgan’s counsel, Simpson Thacher, for review. Simpson Thacher didn’t catch the billion (with a “b”) mistake and authorized the release. Consequently, both the remaining interest on the 2001 Synthetic Lease and 2006 Term Loan were released.
The mistake went unnoticed until General Motors’ bankruptcy proceedings in June 2009. After the mistake was uncovered, the bankruptcy court agreed to treat the Lenders as if they were still secured, since General Motors had continued complying with the terms of the 2006 Term Loan and the mistake had not led to any practical consequences. After the bankruptcy proceedings, General Motors brought suit in bankruptcy court, claiming that the security interest had been terminated and the Lenders were unsecured. Shockingly, the bankruptcy court found that the security interest had not been terminated.
General Motors appealed the decision to the Second Circuit, who reversed the decision of the bankruptcy court. The Second Circuit held that, even though the release was mistaken, the 2006 Term Loan was terminated when the UCC-3 statement was filed and JP Morgan knowingly terminated the security interest when it authorized the filing.
Unhappy with the Second Circuit’s decision, the Lenders filed a class action suit against Mayer Brown alleging that Mayer Brown committed legal malpractice and negligent misrepresentation. The Lenders alleged that Mayer Brown owed them a duty of care, breached that duty, and caused them harm. The district court disagreed and dismissed the case, holding that Mayer Brown did not owe a duty of care to the Lenders, who were not its clients but parties adverse to Mayer Brown’s client in the 2016 Term Loan transaction. The Lenders appealed to the Seventh Circuit of Appeals.
The Seventh Circuit agreed with the district court’s assertion that Mayer Brown owed no duty to the Lenders. The Seventh Circuit reasoned that Mayer Brown did not have an attorney-client relationship with the Lenders. Instead, the Lenders “were represented by counsel who were not prevented from reviewing the documents and had no valid justification for relying on Mayer Brown’s drafts.”
To B or Not to B
Making an appearance in 2010, benefit corporations are a fairly new type of business entity. Currently recognized in thirty-four states, as well as D.C. and Puerto Rico, benefit corporations pursue a mission that goes beyond that of the traditional corporation of solely making money for the shareholders. A benefit corporation’s leadership is required to achieve a public purpose while balancing shareholder interests with those of the employees, community, and environment.
In the jurisdictions that recognize such entities, a benefit corporation is formed by filing traditional articles of incorporation that include a statement that the corporation is formed to provide for a general public benefit. With shareholder approval, an existing corporation can change to a benefit corporation by filing amended or restated articles of incorporation. In jurisdictions that have not passed legislation, corporations have the option of domesticating or forming a new benefit corporation altogether.
A benefit corporation must be formed for the purpose of creating a general public benefit. Most jurisdictions define general public benefit as one having a material, positive impact on the environment or society. A few jurisdictions require a more specific public benefit, while some permit a combination with the addition of one or more specific benefits. Each jurisdiction defines or gives examples of permissible specific public benefits in its statute.
Subject to the same legal requirements as other for-profit entities, benefit corporations additionally have to voluntarily and formally meet higher standards of corporate purpose, accountability, and transparency. One such transparency provision requires benefit corporations to publish annual benefit reports of their social and environmental performance as assessed by an independent, third-party standard. Legislation does not specify a particular standard, but guidelines provide that the standard be comprehensive, credible, transparent, and developed by an independent entity that has no material or financial interest in the use of the standard. Some jurisdictions have dropped the third-party standard requirement entirely. Currently there are several companies available to perform these third-party standard assessments, including some that cater to benefit corporations only.
In addition to the requirement that the annual benefit report be posted on the company’s website, some jurisdictions require the annual benefit report be filed along with the regular annual report at the Secretary of State. This extra filing requirement often includes a fee. When the additional filing is required, noncompliance ranges from no penalty whatsoever to loss of status as a benefit corporation.
Benefit corporations are often referred to as “B Corps.” However, note the difference between a benefit corporation and a Certified B Corp. The benefit corporation is a business entity created under state law, similar to a traditional corporation. A Certified B Corp is a business of any type that has been certified by B Lab, a non-profit organization. A business does not need to acquire a B Lab certification to form or convert to a benefit corporation.
Continuing to gain momentum, with legislation introduced in another six states, a benefit corporation can provide a safe harbor for directors to pursue social and environmental benefits over profit. Additionally, they allow for the duration and protection of company values through unforeseen leadership change or acquisition. However, because not all jurisdictions recognize benefit corporations, and because of the varied laws of those that do, there is still much unchartered legal territory.
The jurisdictions that currently recognize benefit corporations or a similar type of social purpose corporation are: AR, AZ, CA, CO, CT, DC, DE, FL, HI, ID, IL, IN, KS, KY, LA, MA, MD, MN, MT, NE, NH, NJ, NV, NY, OR, PA, PR, RI, SC, TX, UT, VA, VT, WA, WI, and WV.
Arizona House Bill 2447
Publication can be time-consuming and costly so it brings great joy to the masses when this requirement is removed or simplified!
Effective January 1, 2017, Arizona entities with a known place of business in the two most populous counties, Maricopa and Pima, are no longer required to publish in a newspaper. Instead, the Arizona Corporation Commission now posts the required publications within a new database on their website: http://ecorp.azcc.gov/ under “Public Notice”. There is no fee associated with the posting and it is automatic when applicable documents are approved for filing. Entities with businesses located in all other Arizona counties must still publish as they have in the past.
Post-Closing UCC Searches
Did you know that following the filing of your financing statement, there are key events that could put your perfection and priority at risk? Because there is always a gap between the through date of an initial UCC search and the filing date of your filing, it’s important to run a post-closing search to make sure another secured creditor didn’t beat you to the front of the line.
This search to reflect is also an opportunity to verify that your financing statement was indexed correctly by the filing office, which is crucial to the perfection of a security interest.
If a transaction also involves an interest in after-acquired collateral, you’ll want to do more than just one post-closing UCC search. In order to maintain perfection, secured parties need to search their debtor’s corporate records regularly. If an entity debtor files a name change amendment in the public record, secured parties have only months to amend their financing statement before they become at risk of losing priority in after-acquired collateral. The same risks apply if a debtor re-organizes in a different state. Setting up recurring searches to monitor the corporate records should be standard practice for asset based lenders and factors dealing with revolving assets.