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Maybe We Should Call Legal??
Wednesday, January 17, 2024

This article presents those occasional but recurring questions that come up from time to time from various lenders. They are the kind of questions that make one stop for a moment and (usually) say, let’s talk to legal about that. 

1. My guarantor died – what do I need to do?

Answer: The death of a guarantor will often be an event of default under the loan documents – whether laserpro or attorney prepared. There may be a grace period so that the borrower can provide a substitute guarantor acceptable to the Lender. 

Whether the lender chooses to call the loan and exercise remedies will depend on various factors such as whether the loan is otherwise performing, if the business is sustainable in the absence of this guarantor, if the collateral is strong, if the LTV is low and the property is cash-flowing.

An estate is not going to be a reliable guarantor. The whole purpose of estate administration is to distribute assets in accordance with the estate planning documents or laws of intestancy if there was no will. Therefore, the value of the estate diminishes over time. Not only that, but other creditor claims or fights among heirs may make an estate less than desirable as an obligor.

When someone dies, notice is published and potential creditors of the estate should be informed so that they can file a claim against the estate to be paid. If the individual is a guarantor and the lender is not currently in “default mode” and exercising its remedies against guarantor (i.e., a deficiency), lenders should still file a claim within the period for filing in order to preserve their rights. Depending on circumstances (e.g., the loan/collateral was becoming weak or guarantor was the sole operator of the business) this could be crucial to lender’s ability to recover from the estate.

Whether to file is a business and credit risk decision for the lender. There are many variables that need to be considered and you should consult with legal counsel about the specific details of any matter.

See our last newsletter for a question about using a trust as a borrower for related information.

2. I filed a UCC-3 termination by mistake. What do I do now?

Unfortunately the UCC is pretty unforgiving on this point. Once a termination is filed, the lien on that collateral is done.

The best course of action is to immediately file a new UCC-1 and then run a lien search to check that there wasn’t an intervening filing that would interrupt your priority.

I recently reviewed a series of filings in which a UCC-1 was filed in 2012. A UCC-3 termination was then filed in 2013. Then a continuation statement was filed in 2016, another termination statement was filed in 2020 and finally a continuation statement was filed in 2021. After the 2013 UCC-3 termination was filed, this lien was ended and all of the subsequent filings were of no effect. If the 2013 UCC-3 was an error, this lender should have immediately filed a new UCC-1 and then run a lien search to check on the priority.

As it turned out in this case, our lender client gained priority with their 2020 filing because of the 2013 termination filed by the prior lender. (That lender’s security interest was not perfected after the 2013 termination and they may have had a difficult time enforcing their security interest had there been a default.)

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