Matthijs: Good morning and thank you for joining our Third Annual Cross-Institutional Lending Conference. I am Matthijs van Gallen, and I'm a banking and financing lawyer at Gowling WLG, and I specialize in mid-market lending transactions. As many of you may know, Gowling is one of the largest national firms in Canada with 8 offices across our country, as well as many international offices as well. Today you're going to be meeting only a couple of our over 700 legal professionals across Canada. What I find really sets Gowling WLG apart, particularly in the lending space, is our ability to complete very large sophisticated lending transactions but also our specialist team focuses on the mid-market, or streamlined transactions. Very few national firms have the ability to service the breadth of transactions like Gowling WLG. Often bankers have to choose between costly big firms or small firms that may not be able to address the complexities as they arise, even on small delas. Sometimes complexities come up that you don't expect and it's good to have a large firm with a lot of legal talent and insight and thought leadership to back you up when that takes place. At Gowlings we're able, and very proud of our ability, to bridge this gap through effective staffing, the application of automation technology and process refinement that delivers the quality that bankers expect from national firms at a competitive speed and price. On top of this competitive advantage, Gowling WLG is proud to provide opportunities for our banking clients to be able to access both thought leadership and practical insights that empower our clients with the knowledge to be able to better engage with their managers and with their clients. Whether this is your first time attending, or you're a returning guest, we hope that you learn something new today and then maybe you also walk away with some connections formed during the networking portion of our event. Before I introduce our first speaker I'd like to note that for the duration of the presentation we're going to be in the stage mode, which is this view that you see right now, which means your microphones and cameras will not be active and if you want to engage in the presentation, or ask questions, you can do so in the Q&A and chat functions on the right side of your screen. We encourage you to ask questions throughout the presentation but some of our presenters will address them at the end of the presentation and some will address on an ongoing basis throughout their presentation. So feel free to ask any questions as they arise.
Now, we move off to our first presentation which is covering US/Canada cross-border lending. Which I see more and more of these issues and questions arising so we're very pleased to have a partner from Phillips Lytle joining us today. He's based in Buffalo, New York, and he focuses his practice on banking and finance and has a very similar practice to my own. He concentrates on secure lending transactions and commercial real estate transactions, asset based financing and small business lending. But more specifically, Jeff is one of the partners of US lawyers that I've trusted over the last 6, 7 years when there are US components in my transactions, or I just have to refer my clients to him because it's only a US based transaction. So with that I'm really pleased that Jeff is going to join us today and why don't we first just start off with a very overview question which is, what have you been seeing when it comes to US/Canada cross-border lending, recently?
Jeff: Yeah, it's a great question, Matthijs, and thanks again for allowing me this opportunity and thanks to everybody for allowing me to present today during this presentation. I would say recently, in terms of trends, probably within the last 4 or 5 years I've seen a shift from Canadian lenders only being concerned with maybe accounts receivable or cashflow operations in the US to more concrete tentacle in the US where there's hard assets here. Whether there's machinery or equipment or maybe a manufacturing facility here. So I would say within the past couple of years I've seen more volume of, not only just a general security agreement here in the United States, whether it's New York or somewhere else, another state, but a more emphasis on perhaps going after land waivers or warehousing waivers because the overall collateral here in the United States, it's tangible and it's integral to the overall collateral pool. So that's certainly a shift I've seen maybe in the last 4 or 5 years and I suspect it's probably reactionary to the Canadian borrower's tendencies. How are they treating their cross-border transactions? Whether it's their Canadian parent entity or US subsidiary. Maybe there's been a shift that they're just focusing some more operations here in the United States, probably because it's been cheaper, especially recently. So that's probably the first trend I've seen maybe in the past 3, 4, 5 years.
Another one is certainly intellectual property, especially within the past couple of years. IP has taken a greater role in the overall cross-border deals. It used to kind of be an afterthought where we would have a general security agreement which would cover general intangibles. So in the US you're protected by UCC Financing Statement. It may be the Canadian banks were aware that they might have a trademark or a patent filed with the US Patent and Trademark Office but they weren't really concerned about it. They were perfectly fine just relying on a general security agreement and UCC Financing Statement and we'll get into some of this more in depth when we go through the presentation summary. I would say recently there's been more emphasis, for whatever reason, again it's probably just based on the nature of the Canadian borrowers and their activities in the United States, but the patents and trademarks have become more valuable in some of these cross-border deals, where we're taking the extra step and we're having maybe a patent security agreement, and filing a notice of security interest with US PTO. So that's certainly something I've seen maybe in the past couple of years where IP has become more of a strategic part of the collateral pool here in the United States.
I would say briefly, and this is kind of along that again we'll talk about later too, there has been more of a acceptability for the Canadian banks to go after real estate here in the US. Traditionally that's kind of been maybe the last resort. If there's a collateral shortfall Canadian lenders typically wanted to stay away from real estate in the United States because it's so different with our title insurance requirements, and our survey requirements, and even in New York State we've got mortgage tax too. We can talk about this more in depth as well. I would say maybe, just recently within the past 18 months or so, for whatever reason, I've seen more mortgage loans come about in the context of a cross-border deal. Probably because comparatively speaking our real estate here in Western New York, maybe even Upstate New York and rural parts of New England, it's so much cheaper comparatively speaking to what some of the Canadian borrowers are dealing with in your part of North America. So for these folks up there that's got a US subsidiary it's probably cheaper just to buy the manufacturing facility here outside of Buffalo or Rochester or Albany. So I've seen that come about more and more in the past couple of years. Interest rates in the US, like Canada, historically low. I think a lot of cross-border borrowers and debtors wanted to take advantage of the interest rate market and very low, comparatively speaking, commercial real estate prices in the US.
Maybe the last trend, Matthijs, really quickly and again we'll talk about this, is a greater emphasis on legal opinions. Whether that's an opinion from someone like me, as lender's US counsel, or a combination of my opinion with your Canadian borrower's US counsel's opinion. I think folks have started to realize the importance of having appropriate legal opinions, whether it's a combination of a couple different law firms giving them, but like with all of these trends when the tentacle in the US has become more and more important, the collateral here is more valuable. There's a greater nexus of the transaction here. I've seen a greater emphasis and a greater willingness of the Canadian banks wanting to pursue the proper legal opinions.
Matthijs: Yeah, for sure, there's a couple key things there that I've seen as well and you and I have worked on a couple, which is as you mentioned it's the cashflow where you want to at least take the accounts and solidify that because they might have a US company there. Also inventory in warehouses across the United States and intellectual property and those are things we're going to be chatting about a little bit later. For everyone's benefit, actually Jeff put together some speaking notes, and instead of having a PowerPoint presentation we thought it would be helpful to actually put that in the chat. So you guys can keep notes along the way and highlight things in our notes that we're using for today's presentation and we also thought it would be very helpful as a takeaway after this presentation for you to be reminded of some of the points that we've been discussing. I hope everyone can see the link that I've put into the chat that you can download onto your computer as we go. Why don't we just start off right from the top which is when someone has assets in the United States. We get this asked all the time and they say, we need to file a UCC filing. What does that look like? Where do they file? Sometimes it's a Canadian entity, sometimes it's a US entity. Can you provide us with some guidance as to how does a bank get comfortable that they filed in the right place?
Jeff: Absolutely and that is probably the first primary question that comes about is, where is the debtor from? Are we talking about a Canadian entity that has some assets located in the United States? That's kind of option number one. Option number two is, is it a US foreign entity? Most cases it's a US subsidiary of a Canadian parent entity and that US entity is formed in New York or Delaware or Florida. So I think we'll kind of talk about each option independently of one another because typically you're in one or the other world. So for option one, if it's a Canadian entity, all the local rules say you look back to the home jurisdictions perfection rules. So the most basic case is an Ontario corporation. You look back to the PPSA, you're perfected by filing up there. So arguably nothing's needed in the United States. You do not perfect down here even if there are assets located here. Now that's not what we recommend, as a cross-border law firm, whether we're on the lender deal or borrower deal. We recommend at a minimum, as an abundance of caution, you'd file in the District of Columbia. So when you have a foreign entity that has assets in the United States, you're first level out of an abundance caution filing, is in DC. If you want to get some due diligence you might get a UCC search in District of Columbia just to see if there's any other lender out there that may have a perfected security interest in that collateral in the United States. Again that does not perfect against that collateral here. The Canadian banks are perfected by the PPSA filing up in Canada, but at a minimum we always recommend it's the best practice to file in District of Columbia and keep in mind, this always comes up in these cross-border deals, whether it's the Canadian bankers or the Canadian debtors, is how much is it going to cost? If it's not legally necessary, we understand it's a good idea, how much does it cost? In most States it's minimal. New York it's $20.00 to file. You electronically file UCC Financing Statement. In Delaware it's $40.00 to file. The one caveat I have there is in some very small handful of States, I think Tennessee is one of them, they impose almost like a mortgage tax or a filing tax, and you have to have an approximate valuation of the assets you're trying to file against, and they tax at some percentage. So it's not always a really slam dunk easy question, that it's a $20.00 filing in DC. Maybe $150.00 for UCC search. You might as well just get it. Complete the first level of the abundance of caution filing and pay a couple of hundred dollars to get it done. In some States there may be a cost analysis to that. So that's kind of the first level.
Matthijs: I'd like to focus on one point that you made which I think is really important for people to takeaway. Whenever you're doing lending transactions there's the idea of what is enforceable to get your security. The other point is, what is good to let other people know that you're out there because if you're enforceable, that's great. But you never want to be in a situation where you have to unwind a transaction and that sometimes drives some of these filings in the District of Columbia. It's like you're registering it to do your best to make people know that you're out there so that you don't get in a situation that's litigious. It might not be the thing you rely on but it's a thing that stops you from getting into a bad situation. I think that's a really important point for people to make.
Jeff: Absolutely. I think the UCCs overall purpose is very similar to the PPSA where it's a notice, statutory lobby of law, where they're putting people on notice especially with these cross-border deals with the DC filings. That kind of gets me into the second level of what we recommend, again, it's sometimes not very cost prohibitive, is you sometimes will file a UCC Financing Statement wherever your Canadian debtor has assets located. So it could be an Ontario corporation and it's got leased locations in New York, California, Florida. You file in DC, and maybe if the Canadian bankers want to do it, you would file in New York, California and Florida. Again, maybe it's only another $80.00 in filing fees. Back to your point, Matthijs, it's a notice provision where if someone knows that this Canadian corporation has operations outside of Los Angeles, and they're searching the UCC Financing Statements in California, they're going to see maybe BMO or HSBC Bank Canada, some Canadian bank, might have a lien on these assets. We've got to do a little bit more due diligence. So that kind of wraps up option number one. It's the easier of the two when the component in the US stems from a Canadian corporation then, arguably, nothing is really needed to perfect in the United States but best practice is, at a minimum, probably filing in the District of Columbia and then even perhaps filing in each State where assets are located.
Matthijs: For sure. Onto the US entities. What if it's incorporated in the United States?
Jeff: It is also pretty easy. I mean, basically you're dealing with just a State wherever the US subsidiary is formed. So if you have a New York corporation or a New York limited liability company, your due diligence, your certificate of good standing, your UCC judgment, bankruptcy searches, you're going to be confined within New York. You don't need to go elsewhere even if there are assets located in Connecticut or Delaware of Florida. You're perfected by UCC Financing Statement in New York State. So it's enforceable there, back to your initial point about the primary focus is it's good to be enforceable against those assets, and two, obviously you put everybody on notice in the proper jurisdiction, where it's a New York company, you have the UCC Financing Statement in New York State.
Matthijs: Another question that often comes up is when we get the UCC Finance, we send them to the bank, we always have these questions. When does it expire? It's not entirely clear when you look at the searches or the UCC filing as to when these registrations expire. Can you speak to that?
Jeff: That's an excellent question and you're right. It does come up a lot and it's 5 years from the date of filing. So whenever you have a UCC Financing Statement, typically right on it you'll get, if you filed electronically, the Secretary of State, whichever jurisdiction you're in, will have like a stamp on it saying the date it was filed and the filing number on it. It is 5 years to the day of that filing is when that UCC Financing Statement will lapse. So that's another critical thing that we like to point out on these cross-border deals is when you get within the 6 month window, to that last date, is when you can file a continuation statement. Again, for another $20.00 in New York State, you just file a continuation statement. It kicks it down the road another 5 years. So that 6 month window leading into that lapse state is when you would file a continuation statement. It's an excellent question because that comes up all the time where sometimes if I'm directly engaged by the Canadian banker they'll say, I don't see the expiration date on it. I always have to remember to tell them it's 5 years. When we're engaged to give an opinion in those circumstances, we can talk about that, we put their rate in our legal opinion too as a reminder you've got 5 years and if you want us to continue it, reach back out to us in that 6 month window.
Matthijs: Before we move off of this section I'm just going to address a couple of questions that are in the chat, which I think we've touched on briefly but let's touch on them one more time, which is in the United States, to clarify, you file where it's incorporated, not where the assets are.
Matthijs: So that answers one question. That is different than necessarily Ontario, which is you where you want to file in the place of incorporation for intangible assets, and the place of location for tangible assets. So in the United States you don't have to worry about where they're located. You just go into the place of incorporation and you file there and then you're good. But to emphasize that point, some people still want to file in all the other jurisdictions, just out of an abundance of caution to other creditors when they're coming to the table, have a better chance of seeing they are there so they don't walk into a difficult situation and a fight. Then the importance of filing in the District of Columbia, which Jeff mentioned. It's just to let people know that seems to be where everyone's filing for international entities. So you file in a jurisdiction in the United States just to increase the chances of people being aware and flagging the fact that more due diligence is needed. Does that summarize it, Jeff?
Jeff: That is absolutely correct. One other thing I'll just mention, it's in the summary too on the UCC Financing Statements and this comes up a lot too because it's kind of a unique scenario where, again getting back to the notice component of this thing, of a UCC Financing Statement, the address of the debtor always comes up and I would say 9 out of 10 times when you're dealing with these cross-border deals, there really isn't a physical US location here. Even if there is, say the do have a manufacturing facility here, in their minds their address, their US address, is their service of process address they've listed in their filing. The Certificate of Incorporation, you have to list a service of process address in Delaware or New York. That's not the address you would list on the UCC Financing Statement because it's not a true address or location of your US debtor or your Canadian debtor. If there's no physical US operation you would revert back up to the parent company's address in Canada. So that's something we do see as well. It's not a fatal flaw but it's something that we do see that it's not best practice to list that designated registered agents address on the UCC Financing Statement. If there's nothing else here in the US, we'll list the Canadian address on it.
Matthijs: Just to change a little bit. So going back. So now we've chatted about registrations but one of the things a lot of bankers ask is, I have a US entity. Does my document need to be governed by US law, and if it has to be governed by US law, which State should it be governed by?
Jeff: Yeah, great question. The answer is it doesn't have to be but it's certainly much better to have a US governed law for purposes of enforceability. I would say 98% of the time, even if New York isn't the location of the cross-border interaction, New York is picked as the governing law. Most times the Canadian borrowers, if they have US counsel, that US counsel will have at least maybe an office in New York, or licenced attorneys in New York, to be able to give you the proper opinions. But I would say maybe the 98% of the time New York is picked as the governing law. It doesn't have to be. It can be Connecticut law, if US subsidiary is formed in Connecticut, and the assets are located there. I think when you get into governing law considerations you have to think about, what does the Canadian parent and it's US subsidiaries have as US counsel? Can they give us an opinion of counsel that the New York governing law instruments are enforceable? If they can't, can Phillips Lytle? Can Jeff Monaco give it to us? The answer to that is, of course, yes. But I think there's a little bit of room for maneuvering when you get to governing law but certainly having New York, or US, is definitely better than having Canada because it's going to be easier to go through the courts and enforce against that collateral.
Matthijs: So why don't we speak about some of the scenarios that you've put out there. One of the things I see regularly is, there's a Canadian company, it sells a lot to the United States, and for tax reasons they've set up a US entity. That money is going to be flowing through and sometimes it'll be pooling in that US entity. So, in that situation, what do you see? How do bankers get security?
Jeff: There's no actual physical location here. There's no tangible machinery and equipment or anything in the United States. In those circumstances we would still file a general security agreement. Again, just as an abundance of caution you would cover things like general intangibles in case they maybe one day did have IP. It would cover machinery and equipment in case they expand operations to the United States, but more importantly for your scenario, it would cover accounts and accounts receivable. So it would capture the cashflow and the operations flowing through US subsidiary upstream to the Canadian parent. So that's a circumstance, Matthijs, you and I have come across many times, especially recently where you've got your job security agreement, you've got your UCC Financing Statement but for accounts, unless you're in possession of those accounts, you're the depository financial institution in the United States, the way you put that is having a DACA, or a deposit account control agreement, in place with the bank that has the deposits. So that's kind of another step in the analysis and security in the US where you would go above and beyond a GSA and UCC. You'd have to go to the depository institution and get a deposit account control agreement in place, where that bank acknowledges the Canadian bank security interest in that deposit account, and agrees to act in accordance with the certain set of rules. We'll continue to do business with our depository customer, unless and until you Canadian bank tell us, don't listen to these people anymore. They can't withdraw funds. There's been an account default on a facility letter in Ontario and we're basically on a blockage notice and now we're going to respond to you, Canadian bank. You're in the driver's seat with respect to these accounts because it's your collateral and there's been a default. So that's a whole other analysis and I don't know if you want me to go into more detail about that now.
Matthijs: That's good but I think it's important that people know that they're not always easy to get. Right?
Jeff: Correct. There's certain things and we can talk about this towards the end of the presentation too, where some of the larger US banks won't even offer that service for their depository customers unless there's certain thresholds met. It could be they must have a rolling 12 month average of 5 million dollars in those accounts. So lots of times, if it's not a big enough depository customer for the big banks in the US, they might not even entertain this situation because there's some risk to that bank. The deposit account control agreements say, we've got maybe anywhere from a 2 day window to a 5 day window of when we can still act with our customer. After that we've got to act to the Canadian bank. So there is some risk there to the US depository institution. They don't even want to take on that risk and perform that service unless maybe their customer is big enough. So we run into this situation where we've had to make it a post-closing condition and the US debtor, or the Canadian debtor, had to switch financial institutions because who they had their deposit accounts with just wouldn't play ball. They said, no we don't do this for this type of customer at the bank. We're sorry but we don't offer it. So certainly something to be aware of. It impacts timing. It's a little unusual and I would say even if you're in a circumstance where the US bank does entertain deposit account control agreements, or DACAs, they always require use of their own form. So it's not something Phillips Lytle will be drafting on behalf of the Canadian bank or it's not something the Canadian borrower's US counsel will draft. It's usually, I would say 98% of the times, it's the US depository institution that's going to require employment of their own form. Again, it's a risky situation. They don't like to do it. If they're going to do it, they're going to use their own form. So it's certainly something to be aware of when you're setting up these deals and you're identifying the collateral in the United States.
Matthijs: I think the next most common one is where you have a Canadian entity that is mostly intellectual property based, in terms of the value of the company, and it's decided to start moving to the United States and they've started registering their intellectual property in the United States. So how are you seeing that issue addressed?
Jeff: Certainly. That was one of the ones I talked about in the trends component at the very beginning. In the US, if the IP is not overly integral to the collateral pool, you are perfected with a general security agreement because it will cover general intangibles which covers intellectual property, and your UCC Financing Statement and the collateral description either will say, all assets or it will include the typical three or four line description of all assets which will include general intangible. So, at its base layer, you are perfected against general intangibles with the GSA and UCC Financing Statement, but best practice, what we recommend in the United States, is if that IP, whether it's trademarks or patents or a combination of both, if they are important to the bank and the bank wants to go after them and eliminate any risk that maybe somebody gets in the way, we recommend taking an additional step and filing with the US Patent and Trademark Office. So it's not necessary but it's best practice so we recommend it when the IP is important to the overall collateral pool. It's not really that expensive. It's an extra security agreement. We'll draft a specifically tailored patent or trademark security agreement. There's a notice of security interest which is like a one page quick little summary, almost like a UCC Financing Statement, that gets electronically filed with US PTO office and that filing is only, I think for patents it's $50.00, flat fee, and then maybe $5.00 for every patent after it. So, again, it's not overly cost prohibitive. So our recommendation on these cross-border deals is always to complete the belt and suspenders approach, if the IP's important, go above and beyond a general security agreement and UCC, and complete your US PTO patent.
Matthijs: There's a question here that says, if you have just a Canadian GSA do you need to have US GSA as well to perfect against the intellectual property or can you rely on the Canadian GSA, with a UCC filing?
Jeff: Yeah, you do not. If it's a Canadian entity, and there's a GSA which covers general intangibles, then we can rely on that. What you don't want to do, is you have to upload something to the US PTO office, so sometimes if it's like in the facility letter and there's other proprietary or confidential information in there, we wouldn't take that entire document and upload it to the US PTO to put everybody on notice that this Canadian bank's got this security interest in this patent or this trademark. Sometimes we would come in after the fact and have an ancillary document signed just to summarize that security, list the patents or trademarks on a schedule, we'd have that filed with US PTO. So best case scenario, something like that is available, that's signed up, that we could just upload and perfect at the US PTO level. But more often than that we usually have to add at least a very simple document or two, just to have something to upload that doesn't have financial covenants in it or pricing or fees on it. Overall the answer to the question is, no. If it's a Canadian entity that's got US PTO filings, we can file, so long as there's a proper security interest up in Canada.
Matthijs: I think it goes back to theme as well. The more important the asset, it's preferred to have the security document closer to the assets. So the more important the US security is, if you ask a lawyer they'll probably say, yeah you might not need it but we probably prefer to get the US GSA or the US filings. Right?
Jeff: Yes, absolutely.
Matthijs: Because these things are not only just done to perfect, they're also done out of an abundance of caution to notify.
Jeff: That's always the question even in domestic transactions where our US banks have the same analysis of, maybe we're kind of close. The IP is not driving this overall credit but it's certainly a sizeable component of it. What's the risk here if we only rely on a GSA and a UCC Financing Statement? The risk is say your borrower tries to sell that IP, obviously it's an event of default under your facilities letter, your credit agreement, but if there's a bonafide third purchaser out there, then good faith only relies on US PTO search, and purchases those trademarks or patents, and you've got a nasty situation on your hands where you're going to have to go to the courts and figure it out. So that's obviously time sensitive. It's going to cost money and it could have been avoided by maybe spending another 500 hours with another agreement or two and a couple of filings, you could have put that third party purchaser on notice that we've got a security interest in these trademarks or these patents, and save yourself a lot of heartache.
Matthijs: Now let's shift again and imagine you have a Canadian manufacturing company. Or it might have US locations but the main thing is inventory where they'll ship, store it in warehouse, or they'll have a manufacturing location that they lease out. No real estate assets, just personal property assets in the United States. How do you address that situation?
Jeff: That's probably the most common of these cross-border transactions. Certainly there, depending on the nature of the relationship between the US debtor, and whether it's a landlord or whether it's a warehouseman, lots of times we would recommend pursuing a landlord waiver or a warehouseman waiver, because if those assets here, that inventory in the US, is important you want to be able to enforce against it and enforce quickly. You don't necessarily need a landlord waiver or a warehouseman waiver. You can go to the courts and still get recourse against your collateral but it's going to take time. So in event of default and liquidation event you want to be able to move quickly as a bank. So we always recommend pursuing those landlord waivers or warehouseman waivers up front. It can be a time consuming endeavour especially when you're dealing with the national landlords. The big shopping mall plazas. They don't want to negotiate. It's take my form or nothing at all. So sometimes they're made post-closing but certainly they can be very, very important and one thing to clarify there is, for the Canadian bankers you've got to understand whether or not your customer is a tenant, under a lease, or has a relationship with the warehouseman. So warehouseman in the United States have almost a super priority lien on the goods they're storing in the warehouse in the event that they're not paid for the storage services. So that's something statutory that's different for warehouseman compared to landlords because they're automatically protected by the UCC. So they don't get everything that's in their warehouse but they have a super priority lien to be able to sell some things to offset losses if the US debtor is not paying its warehouseman fees.
Jeff: So that's a why a warehouseman waiver, in that circumstance, is very important because they will waive that statutory lien and acknowledge that the Canadian bank's first position, or the senior lender, and they will waive their lien with respect to the banks. So warehouseman waivers are very important and it's important to know when you're dealing with a warehouse as opposed to a landlord/tenant relationship.
Matthijs: I think for most of our guests are familiar with purchase money security interest and insurance and those are commented in our speaking notes. It's very similar to what's required in Canada. If you're doing a purchase money security interest, you have to put as much detail in as possible to define the asset to make sure you get your priority. With insurance you make sure there's sufficient insurance the lenders put in as loss payable, in regards to the property insurance, and then additional insured in regards to the liability. That's a fair summary?
Jeff: Correct. One other difference there with respect to the insurance and I haven't seen this as often lately. Maybe going back 5, 6 years ago there was always, I forget the name of the instrument, I think each cross-border call it something different, maybe a collateral transfer of insurance. Collateral documents signed up among the parties where the debtor acknowledged that these are policies, these are our coverages, we are collaterally signing to the bank in connection with this transaction. That's not necessary in the US. We have ACORD insurance forms. They're just kind of one page certificates summarizing the coverages, the named insured, the amounts and on those certificates is where we have the bank properly named. In the US those separate collateral documents aren't necessary. Sometimes we'll do them on these cross-border deals but it's perfectly normal, it's customary here, to just rely on the insurance certificates from the carrier, so long as it's got the proper information on there and the bank's named properly.
Looks like we got a question.
Matthijs: The question came up and I was thinking about moving or addressing it. So I will just read the question. What about when the moving assets, if you have Canadian GSA but assets going back and forth through the US, do you need to register UCC wherever the assets could be located?
Jeff: Yeah. That kind of goes back to the earlier discussion about if it's a Canadian entity and you're perfected up there with a PPSA filing, the answer is no. You don't need to file any UCCs here even if the goods are coming back and forth. Going to New York, going to Massachusetts, going wherever, the answer is no. You don't need to worry about perfecting here and filing a UCC because you're perfected up in Canada. Best case scenario, when it's a caution you'd file in DC. Again, that's your first level of notice. You're putting everybody else in the US on notice that you've got a perfected security interest up in Canada on these US assets. Then, if you wanted to as a second layer of protection, you could file in New York, if that's where the assets are coming down. Or you could file in Massachusetts. So again, the answer is no, you don't need to do that but it is a good idea and typical here that at a minimum you'd probably have a DC filing and you may have filings wherever the assets are going.
Matthijs: So you and I are ... in real estate quite regularly and it always surprises me how many different considerations there are depending on the State. So you can speak kind of how to take security in real estate assets?
Jeff: Sure, absolutely. I think it's the most different component of collateral compared to Canadian. I think maybe conceptually the components are the same. But from a timing perspective and cost perspective, it's a much higher ... than the US when talking about real estate. I'll focus in New York just for my first example. We have something called mortgage tax here. New York has it. Florida has a similar thing. A couple of other States throughout the US have it. It's not normal but New York certainly has it, where in Erie County for example, where I am in Buffalo, it's 1% of a lien amount. So if you've got let's say a 50 million dollar revolving credit facility, under the facilities letter, even if the property is worth 50 million dollar which will never happen, say the property is only worth 5 million, you're still going to have a 1% tax that's paid at the time you go record that mortgage to Erie Country Court. So it's considerable cost when you go to record a mortgage, depending on what your lien value on it imposed on the real estate. So that's something that's very unique to the US and specifically to New York. So when the Canadian bankers and the borrowers are setting up their transactions and thinking about how can we make this work? What type of collateral do we have? Oh geez, we own our manufacturing facility outside of Buffalo. It's worth 3 and a half million dollars, why don't we put a mortgage on that? We don't have a lien on it. Right off the bat there's $35,000.00 mortgage tax that's due when you go to record that mortgage. So it's certainly something that factors in right off the bat.
Matthijs: Is the mortgage tax like a replacement of title insurance or do you need to get mortgage tax plus title insurance?
Jeff: Both. Yeah, it's really a money grab and the percentage varies. So I would say in Upstate New York it's anywhere from 1% to 1.5% of the lien amount. But when you get to Downstate, certainly in Westchester Counties, it's much bigger and it's tiered. So if you're talking about a New York City property, which happens a lot sometimes in these cross-border deals, the mortgage tax can be huge. It can be something very significant. But on top of that, to get back to your question, you absolutely need title insurance. It would be so unusual in the US. In 10 years of practice I've maybe seen it a handful of times and it was only when the real estate was purely an abundance of caution. It was not vital to the collateral pool. But you always have title insurance which, one, will take time. You've got to engage a title insurance company here to search the records and go back 4 years and, two, it's costly. Again, it's formulaic based on the lien amount but it can be anywhere from $1,000.00 to, for a valuable piece of property if you're talking about 4 or 5 million dollar lien, it can be $10, $15,000.00. That's on top of mortgage tax. So certainly there's a cost factor with that and there's a timing consideration because it will take, if I had a new deal starting right now and I engaged Chicago Title Insurance Company here to get me title commitment, it could take 3 or 4 weeks just to get the opening commitment for our review. Certainly something to think about and kind of a component of the title insurance are surveys. In the US surveys are very, very important because without an accurate, updated survey the title insurance will have a big hole in it. So again, customary in the US, you have title insurance with a current survey and if you're a Canadian debtor or a US subsidiary, it doesn't have a survey or it's been 10 years since their last one, they need to get a new one, it could be another 4 or 5 or 6 weeks. So something to really think about when you're evaluating whether to take commercial real estate. I see a great question here. To avoid mortgage tax can you assume the mortgage of a prior lender? The answer to that is yes. That is something's that quite regular here but you only assume the current outstanding principal balance. That's the only part that you can save mortgage tax on. So say I have a mortgage on my commercial real estate and it's coming on maturity. It's 4 years and 6 months and I'm looking to switch banks. My initial loan was 5 million. I've paid it down to 1 million. I only saved the mortgage tax on that 1 million dollar balance. If I go and re-fi and take out new money, you're taxed on that new money. So certainly assignments of mortgage are very unique to New York, because of mortgage tax, but they happen all the time. It's kind of another little niche market, but that can get kind of very complex, but it's a very common thing so long as the chain of the mortgage doesn't have any gaps in it. That you can trace the continuity up until the new lender, we routinely accept existing mortgages by assignment. I would say almost every lender in the United States, if you ask them to assign the mortgage and to accept the mortgage, the answer is yes, for the benefit of the borrower to save on mortgage tax. So it's a great question, but it's still something that comes up quite often, is the burden of paying mortgage tax.
Matthijs: You also mentioned that sometimes you need a notary even.
Matthijs: It's not the case in Ontario. It is in Quebec.
Jeff: Right, and that can change too. So certainly in Erie County, because of our proximity to the border, our County Clerk is much more familiar with these complex cross-border transactions where they will accept a Canadian notary for filing here. But if you get into some rural counties, or like out in Vermont or different States, they may be less familiar with the cross-border notarization requirement. But to get that mortgage, or assignment of leases and rents recorded, you need to satisfy your local County Clerk, whichever State you're in, whichever jurisdiction you're in, to get them to accept it, to record it. Otherwise you don't have title insurance. You don't have perfected lien and we can't authorize closing. So maybe a week or two leading into our closing is when I will broach that subject with the US debtor's counsel to say, where are your signers? I know we're dealing with Canadian parent entities, where are the folks who are going to sign these documents? If they're in Canada, let's jump on the phone with the title insurance agent down in Tennessee or here in Erie County. Let's figure out what's going to be required from a notarization perspective to get this thing recorded so that we can close and fund, because until we're all set and we're insured from a title insurance perspective, we as outside counsel, we can't authorize the bank to fund.
Matthijs: Another one you and I have been working on regularly is share pledges or membership interests. Can you just explain what that, first of all, is it shares or is it membership interests? Can you explain to that us because that's a relatively not known concept in Ontario. Then also, why would you get a pledge when you've got all this other security already?
Jeff: Sure. I guess I'll answer the why question first. The answer is to just streamline the control. So if there's a event of default and the bank wants to enforce, having the control of the corporation, the stock certificates of the corporation or the LLC membership interest, if it's a limited liability company, that streamlines your control and enforcement. You literally can just step into the shoes of your debtor and you're running that company. You are the sole shareholder. You are the sole member of that LLC. So to answer the why question, it's purely to increase your control over your debtor in the unfortunate circumstances of event of default. Two, just to streamline things. You're the decision maker now. You're the sole shareholder. You're the sole member. So I think it's two prong. It's control and streamline in time. Now the difference is, as I think I just kind of hit on, is if you're dealing with a corporation you've got shares of stock. You've got stock certificates. If they're represented by physical, tangible certificates then you would perfect by taking possession of those. So the debtor would submit them to closing in escrow. They would accompany them by executed blank stock power, basically saying the bank now is the owner of this 100 shares of my stock and in the event of default the bank is perfected. They've got control of that physical stock certificates and they've got the blank and executes that power. So they become the sole shareholder in the event of default. If it's not certificated, not well represented by a stock certificate, you would perfect by filing a UCC. You would specifically reference your list debtor, this individual or this entity is pledging 100% of the shares of stock in this corporation's collateral. So that's how you'd perfect if there's no physical certificate represented. Similarly for limited liability companies, it's pretty rare to actually have certificates. Sometimes people will do it if it's like a closely held LLC. It's two sisters or father/son, maybe they'd represent it with some certificates. Typically it's not so, again, you would file a UCC Financing Statement specific to Jeff Monaco pledges 100% of the limited liability company interest in XYZ LLC. So that's kind of the difference between certificates and LLC membership interest on how you perfect in the US on each.
Matthijs: When we were preparing this presentation you told me about kind of a unique situation where you have a Canadian company that's owned by a US company, and if you were to pledge the shares of the Canadian company, it can have some big implications. I just want to chat through this. It might not come up all the time but it kind of speaks to the importance of getting US legal counsel so that they're aware of some of these things.
Jeff: Definitely. This is kind of coming at it from the inverse position where you've got a direct US borrower and maybe there's a collateral shortfall and the bank wants to take a pledge of shares of the Canadian company. Well, the IRS, the Internal Revenue Service, will say if you pledge more than 66 and 2/3% of that Canadian entity, it will deem it as a pass through entity for income tax purposes. Any income on the Canadian side will be attributed to the US side. So when you see that inverse scenario where it's a US entity pledging shares of foreign subsidiaries as collateral, there's always a limitation, and usually it's 65% just to stay well under the IRS limitation. So those are called CFCs, controlled foreign corporations. That certainly can become a huge issue and that's really where folks in my corporate department get pulled into some of those deals when, again, on the borrower side and not so much on the lender side. But certainly for the Canadian bankers at the presentation, it's something to be aware of if you find yourselves kind of in an inverse scenario where the nexus of the transaction's in the US, and we're reaching up there to take collateral from a foreign subsidiary up there.
Matthijs: There's one question that came in saying, what about the shares of a public company with many, many shareholders? How do you take control of those shares? ... it's an interest in it?
Jeff: That's very less common. My only experience with that is actually on the borrower's side where my firm represents a couple of publicly traded companies. It always comes up where we push back heavily on those types of restrictions because it's impossible. I will say most of the time, if it's a publicly traded company like that, or even a large closely held corporation with hundreds or maybe thousands of shareholders, typically they're not represented by physical stock certificates. They're uncertificated. Kind of just tracked on a ledger or in the corporate book. In that case, again, you'd file a UCC specific to those interests. If they're represented by physical shares, I suppose you'd have to try and gather up as many as you can to have control, again, because you're perfected in the US by control. It just doesn't happen that much when you're talking with large publicly traded companies or even larger closely held corporations with hundreds or thousands of shareholders. Typically what you would have is maybe a primary set of 4 or 5, maybe 10 shareholders that hold a majority of the shares. Maybe 51% as the magic threshold and you would be satisfied with that threshold because then that gives you the control you're looking at. You're the majority shareholder and, maybe in accordance with the bylaws, you're in the driver seat. So it can get really kind of layered in that analysis but that is typically less common than the normal court ordered deal and there's a pledge of shares where you're dealing with maybe 5, 10 folks or entities that own the shares of stock, or the membership interest in an LLC.
Matthijs: As you said, one of the key drivers to get a share pledge is getting control of the company, and in that situation where you have a public company with so many shareholders that may not be there. That incentive to go down the path of share pledge or issue a control agreement or similar document. It just might not be there.
Jeff: It might not be there and it might not be allowed pursuant to the bylaws, if it's a corporation, or the operating agreement if it's an LCC. There may be restrictions on pledge of shares like that. That's common. You wouldn't be able to do that. You've got SCC filings. It's just not a practical mechanism to try and improve the bank's collateral pool.
Matthijs: So ... very important to a bank security, definitely get legal advice on that point, as it would be a custom analysis. There was a question up that I missed because we moved onto another section. Someone had asked about DACAs and if there's some sort of universal DACA form in the United States or if there's a preferred form for banks? What does that look like? Is it always going to be custom? Is there something that most lawyers accept in the United States?
Jeff: Yeah, the answer to the question is no. There's not like a universal form like a UCC Financing Statement. They all kind of look alike. But I would say they all sort of say the same thing where the depository bank agrees to acknowledge that another bank has a security interest in the deposit account and will agree to act in accordance with written instructions. I would say the one thing that always at the center of all of those negotiations, and again, there's very limited negotiation because if the depository institution will allow DACA it's pretty much here's our form, take it or leave it. But the one thing you can push on a little bit is the time frame for how long they have to act upon receipt of written notice there's been an event of default. I typically see anything from 2 to 5 business days. If I'm the secured party, and I'm coming at a DACA from the perspective of, I'm the secured party, I want to be able to go after those accounts, I want to limit that timeframe. I want the depository bank to have to listen to me within 2 days, not 5 days. I don't want to give my debtor the ability to have a longer period of time to go there, or to pick up the phone, or go onto their electronic platform and transfer funds to another account. I want to limit that timeframe as much as possible. I've seen some depository institutions, some smaller ones, maybe accept 1 business day. That's very, very unusual. Typically it's anywhere from 2 to 5 business days because if you think about it from the depository institution's perspective, they've got to have a grace period where they have to be able to continue to act to the benefit of their customer before they act for the benefit of the secured party. So if there's one spot you can typically push back on, it's those timeframes in there.
Matthijs: So we just have 5 minutes left in this presentation. So I have two more questions. If anyone else has questions that they want to have answered, happy to entertain one or two, if we have time. Somebody will hit every transaction, and we dealt with since the pandemic in Ontario, is can you close on electronic signatures? Can you close on PBS wet signatures? What's the rule on signing documents?
Jeff: Great question. If it's a deal that involves real estate, and you've got a mortgage, you've got an assignment of leases and rents that needs to get recorded, you're going to have wet signatures. There's just no way around it because there's going to be a County Clerk somewhere, whether you're filing electronically or you're filing in person, and in some States you actually have to physically go or send a fax, to the County Clerk's office for recording, they're going to require wet signatures. So if you're dealing with real estate, you're stuck. If you're dealing with personal property, GSAs, IP sharing equipment, I would say especially within the past 2 years, electronic signatures are acceptable so long as ultimately you end up getting wet signatures. So we can close on PDFs. We can close off on electronic signatures and it really comes down to the bank requirements. I always defer to my banking clients and say, especially in the past 2 years this has become pretty prevalent, depending on what your eternal team tells you, it is acceptable I would say 9 out of 10 times, it usually is fine. I do say, after the fact, from debtor's US counsel, I want to end up with the ultimate original signature pages. So it's just something that I will track on a post-closing basis and some people some reminder emails. Hey, even though we closed this, this deal is done, I haven't received your ... yet, can you make sure you follow up with your client and I get the original signature pages.
Matthijs: Two more questions. One is, discharge of liens. Should people expect that on closing, instantaneously? How long does it take and is there is special process?
Jeff: No. If it's real estate, when you get title insurance involved, you can kind of take comfort in knowing that the title company will chase that down. It is not customary to have like a discharge of mortgage, or a termination of assignment of leases and rents, right there at the closing table because the exiting bank hasn't received its funds yet. So I would say in those types of situations, when there's a title agent involved, title insurance, you usually get the final title policy in about 2 or 3 weeks and in that timeframe they will have received the discharge of mortgage and the termination instruments and then recorded them. For business personal property with UCCs, again because they don't need to be signed, a termination statement, I like to try and get those or get a handle on those up front so that they're ready and in the payoff letter from the bank that's being paid off, they'll be an authorization usually to the borrower and its designees, which would be either their counsel or bank counsel, to terminate them upon confirmation they got their payoff proceeds. So with UCCs it's a little easier because termination statements don't need to be filed so I like to try and get ahead of those and have those available at the closing.
Matthijs: How expensive is it to search real estate just to give a lender a quick understanding of what's out there?
Jeff: Just to search without title insurance to get like, they call it last owner searches, so like I own the real estate and I bought it 5 years ago, it might go back to when I took the Deed 5 years ago and search up to date, probably in Erie County, anywhere from $300.00 to $500.00 to kind of give you a quick snapshot of the property, who owns it, the existing liens on it and the tax status, which is typically all we would need if we weren't pursuing it as like a main part of collateral. Title insurance is obviously much more expensive. It would include that kind of preliminary step. Title insurance obviously would go back 40 years and search the records but you would have that built into a full blown title insurance policy. If you just want to evaluate a piece of property in the US, figure out who owns it, what's the lien status, what's the tax status, anywhere from $250.00 to maybe $500.00, something like that.
Matthijs: So there is a question here about taxes. I encourage you to chat with Jeff during the networking portion or send him a quick note. On that point as well, Jeff and I have spoken about it's important to consider taxes. You can't just assume your buying a piece of land and it's treated the same. So whenever you're going to the United States you should consider getting a US attorney. There's 15 second left so I just want to thank Jeff for his time, putting together this presentation and the speaking notes, which I think will be very useful to everybody. I encourage everyone to reach out to Jeff as questions arise. He's a resource that I've trusted and he's also a resource that I've entrusted my clients with. His contact information is contained inside the speaking notes which I encourage you to download and feel free to reach out to him whenever you're encountering US issues. I know he's happy to answer questions before transactions, just like I am, and also happy to help people with transactions as they're alive. So thank you so much, Jeff, for your time.