Puerto Rico Case Highlights Need For Secured Parties To Adhere To Good Practices In Documenting Secured Transactions

Author:Ms Heidi M. Furlong and Heba Hazzaa
Profession:Foley & Lardner

Manufacturers encounter financing statements in many contexts - as a borrower, as a supplier of goods sold on credit, as a seller in a leveraged acquisition, as a seller of equipment where financing is provided to the buyer (purchase money financing), or as a supplier providing secured credit to a distributor. As simple and commonplace as they may seem, the requirements for financing statements are technical and the consequences of failure to satisfy them are draconian.

Secured parties and debtors alike enter into their deals with expectation that the deal will "hold up": payments will be made when due and ultimately the collateral will be released as agreed. But often times, breaches occur and secured parties turn to the debtor's assets to satisfy their debts. In such situations, the secured party with the higher priority will, in most cases, get access to the debtor's assets before more junior and unsecured creditors. With bankruptcies and reorganizations continuing to make headlines, understanding the foundations of filing a valid financing statement and perfecting your interest, could save your company from losing its priority battle.

In order to properly perfect your interest, your financing statement must (i) provide the correct legal name and exact spelling of your debtor's name; (ii) provide the name of the secured party or a representative thereof; and (iii) include sufficient description of the collateral. Additionally, the financing statement must be filed with the correct filing office. While satisfying those seemingly innocuous requirements seems easy, there are also some easy ways to get it wrong. In this blog post, we discuss the two deficiencies found in Puerto Rico's case and provide a concise guide on good practices for preparing and filing a financing statement.

  1. Perfection Problems

    Last month, the First Circuit decided a case arising out of the restructuring of Puerto Rico's ballooning debt. Certain financing statements securing Puerto Rico's bond debt (valued at $2.9 billion) were held inadequate for failure to sufficiently describe the collateral. In re Financial Oversight and Management Board for Puerto Rico v. Puerto Rico AAA Portfolio Bond Fund, 914 F.3d 694 (2019). In addition to the collateral description issue, the court ruled that relying on the English translation of the debtor's name as it appears in the organic documents is sufficient to accurately describe the debtor.

    First Perfection Problem: Collateral...

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