LLC Alert! Updated LLC Forms

By: Tamara B. Pow, Esq.

The Secretary of State recently updated some of their LLC forms for the second time in several months. They were last updated in July of 2016 and were revised again for 2017.

The forms that have been revised include:

  1. Certificate of Dissolution (LLC-3)
  2. Certificate of Cancellation (LLC 4/7)
  3. Short Form Certificate of Cancellation (LLC 4/8)
  4. Application to Register Foreign LLC (LLC-5)

If you are planning on filing any of the above forms you must use the new forms. Out of date versions will be rejected resulting in additional cost and delays.

No more counterpart signature pages – In the past the Secretary of State has allowed counterpart signature pages for these forms. Effective immediately, counterpart signature pages will no longer be accepted for these forms and any filing submitted with a counterpart signature page will be rejected. All signatures must be on the same piece of paper.

Filing LLC forms with the Secretary of State and getting them back in a timely manner can have a serious impact on your business. Filing a form incorrectly can cause significant delays that can make or break deals. It is important to be familiar with these forms and the Secretary of State’s up to date requirements to prevent delays.

Tamara B. Pow is a founding partner of Strategy Law, LLP in downtown San Jose, California where she practices business and real estate law including representing real estate LLCs and other business entities. Her personal experience managing and investing in real estate limited liability companies as well as her MBA and real estate brokers license help her in advising owners of limited liability companies and other business entities.

The information appearing in this blog does not constitute legal advice or opinion. Such advice and opinions are provided by the firm only upon engagement with respect to specific factual situations. Specific questions relating to this article should be addressed directly to Strategy Law, LLP.

How to Become a Secured Creditor on Personal Property

By: Serge Filatov, Esq.

A mistake that I often see inexperienced lenders make when making secured loans is that they do not take all the steps necessary to become a secured creditor. There are numerous traps for the unwary and people should be careful when documenting secured loans to make sure that they actually end up secured. It’s always hard having to tell a new client after reviewing their documents that they are unsecured because they didn’t follow some step or didn’t draft their documents properly.

Before diving into specifics of how to become a secured creditor on personal property, please note that the rules for securing real property (ie. real estate) are different. If you plan to take real property as collateral, the following is not entirely applicable to your situation.

Securing Collateral – A Two Step Process

One mistake that people often make in securing personal property is that they simply state that the loan agreement or promissory note is secured without doing anything further. Simply stating that a loan is secured is not enough to make it secured!

In order to become a secured party, one must (i) prepare a document which grants a security interest (which is the agreement between the parties) and (ii) also perfect on that security interest (which is the notice to the world of the security interest). Without both steps occurring, the lender will be unsecured.

Step 1 – Attachment

To grant a security interest in personal property, one must have a security agreement which contains (i) a statement granting the security interest and (ii) the description of the collateral. There is no specific requirement that the security agreement be a standalone document.

In order to properly grant a security interest, one must use language which explicitly grants the security interest. In order to properly describe the collateral, a lender must use language which reasonably identifies the collateral. One common mistake that people make in describing collateral is that they forget to include “proceeds” of the collateral as part of the description of the collateral. What occurs in such instances is that once the collateral is sold (assuming, for example, that the collateral is equipment), the money received is no longer part of the collateral pool and the lender is therefore unsecured as to that money unless the money itself is separately identified as collateral.

Step 2 – Perfection

To perfect a security interest, one generally files a UCC financing statement at the state level where the debtor lives or where the debtor was formed. Filing a financing statement does not perfect a security interest in all types of collateral, however. One should talk to an attorney to make sure that a UCC financing statement is appropriate for their needs. For instance, perfecting a lien on someone’s shares of stock requires physical possession of the stock certificates. Also, there are special rules for vehicles, boats, mobile homes, and aircraft.

If there’s one major point to take away, remember that becoming a secured creditor requires both the grant of security and the perfection of that security interest. Simply stating that you have a security interest in an agreement is not enough.

The information appearing in this blog does not constitute legal advice or opinion. Such advice and opinions are provided by the firm only upon engagement with respect to specific factual situations. Specific questions relating to this article should be addressed directly to Strategy Law, LLP.

Not So Fast Getting Out of that Guaranty! (A story about a real estate loan and guaranty.)

By: Jack Easterbrook, Esq.

The enforceability of the guaranty of a commercial real estate loan is a question presented to the courts with regularity. A new case, LSREF2 Clover ** testing whether a lender can enforce its guaranty, was decided by a California Court of Appeals in October 2016. Broadly speaking, the court held that under California law properly written guaranties will be enforced notwithstanding the fact that, among the borrower and guarantor, a complicated structure of affiliated entities and control is involved. This is precisely the sort of sophisticated structure often found when the borrower is a special or single purpose entity (SPE). The court rejected the argument that these loan structures are intended to avoid California’s single action and anti-deficiency rules, which could leave the guaranty unenforceable.

Some of the “take away” points made by the court, which provide guidance to lenders and guarantors alike, are highlighted in the last section below.

Summary of the Loan

A limited partnership known as Festival Fund entered into a purchase and sale agreement to buy commercial property and then approached the Lender to obtain a loan. A term sheet was issued by the Lender indicating the borrower was to be a single purpose entity to be determined and Festival Fund was to be a limited guarantor. (The original lender was Anglo Irish Bank, but after several assignments and by the time of the lawsuit, the lender was RSLEF Clover Properties 4, LLC. We will refer to these collectively as the Lender.) Festival Fund subsequently set up 357 LP to be the borrower and FRF1 LLC to be the general partner of the borrower. Festival Fund entirely controlled general partner FRF1 LLC, which held a .01% interest in borrower 357 LP while Festival Fund itself retained the remaining 99.99% interest in 357 LP.

The loan was made for approximately $25 million in 2007 and Festival Fund signed a limited, $1.5 million guaranty, but by 2011 the loan was in default and Lender commenced foreclosure proceedings. As well, Lender made demand under the guaranty by Festival Fund and it was this guaranty that was eventually litigated.

The Guarantor’s Position

Guarantor Festival Fund asserted that it was actually the primary obligor on the loan and the guaranty was a sham and, therefore, not enforceable. In support of its position Festival Fund made a number of arguments, including: (1) the Lender required it to enter into the guaranty; (2) FRF1 LLC was entirely controlled by Festival Fund and there was a unity of interest between FRF1 LLC and Festival Fund making Festival Fund the de facto general partner of borrower 357 LP (and, thus, the primary obligor); (3) the Lender had required Festival Fund to submit its organizational documents and financial information for review and was actually relying on Festival Fund for repayment; (4) the Lender had drafted all of the loan documents; and (5) some of the loan document provisions could be interpreted to say that Festival Fund was an obligor on the loan, not just a guarantor.

The Court’s Decision and the Take-Aways

The Appeals Court did not buy these arguments and the opinion provides lenders and guarantors with some guidance concerning the situations in which guaranties will be enforced, as was the case here.

  1. The guarantor created and implemented the SPE-borrower and guarantor structure, including establishment of a new borrower and its general partner, before the time the loan was granted. The organizational architecture, the court held, was designed by the guarantor and not the Lender.
  2. Both lenders and borrowers can benefit from the SPE structure and it does not imply an intention to circumvent single action-anti deficiency rules.
  3. The fact the Lender requires submission of financial information of a guarantor does not mean the guarantor is the borrower. There is a significant difference between a Lender requiring for review the organizational and financial documents of a guarantor and positioning the provider of that information – the guarantor – as a primary obligor of a loan.
  4. The lender’s analysis of the project and property is evidence that it is primarily relying on the cash flow of the property and the SPE borrower for loan repayment, not the guaranty.
  5. Guarantor Festival Fund was not a party to the loan agreement and could not use the purported language of the loan agreement referring to it as an obligor to claim it is the primary obligor.

In short, the court said that the fact a guarantor may have control over a borrower through direct or indirect interests does not mean it is the borrower. The use of the SPE borrower structure with partial or full guaranties by principal parties is not improper if appropriately done. This sort of loan and guaranty structure is frequently used today by institutional and commercial lenders for real estate loans.

Caveat: We continue to note that the recent cases, LSREF2 Clover included, do not delve into the situation in which the lender requires the intended borrower to switch positions and become a guarantor, and set up or identify a wholly new borrower for the loan immediately before closing. If the purported guarantor can show real duress resulted from a lender’s last minute demand to change the loan and guaranty structure, the outcome could possibly be different. This is the situation described in the often cited 1995 case of River Bank America v. Diller . Thus, a final tip for lenders might be to make decisions about the acceptable loan structure early in the process and stick to it.

** See, LSREF2 Clover Property 4, LLC v. Festival Retail Fund 1, LP, 2016 Cal App Lexis 844 and 2016 WL 5765423

The information appearing in this blog does not constitute legal advice or opinion. Such advice and opinions are provided by the firm only upon engagement with respect to specific factual situations. Specific questions relating to this article should be addressed directly to Strategy Law, LLP.

Oh No! I don’t own what I thought I did – saving your deal when you are the infringer

By: Robert Hawn, Esq.

As a business lawyer to many technology start-ups in Northern California, I work with software companies to assist them in licensing their code to OEMs and end users. When providing code to large company licensors, the licensing agreements are often extensively negotiated, particularly when it comes to determining what happens if my client’s software infringes someone else’s technology. In past blogs discussing infringement clauses and indemnification , I’ve described how license agreements deal with this issue through a provision that requires the licensor to indemnify the licensee.

One of the discussions that often occurs in crafting intellectual property infringement indemnification language is what will happen if an infringement claim arises, or, in some cases, if the licensor believes a claim will occur. The first issue is determining who will deal with the claim. Typically, the licensor will be responsible for handling the matter in court, or otherwise. The licensor is believed to be in the best position to deal with the matter because it is their technology. An obligation to handle the matter is also part of the risk the licensor takes on when providing indemnity to the licensee.

There are two additional clauses that accompany a licensor’s obligation to defend. One addition, which is relatively common, is where the licensee wants to be involved in dealing with the claim. The licensor will usually allow this if the licensor retains ultimate control over the matter and the fees of the licensee’s counsel are paid by the licensee. A second addition occurs where a licensee believes that a licensor does not have resources, or is not sufficiently responsive, to the claim. In this situation, the licensee can completely take over the defense of the claim, all at the licensor’s expense. A licensor will typically resist this, because it wants to have control over the matter if it is paying the bill.

The second issue is what happens if an infringement is found to have occurred or is suspected of occurring. In this situation, a licensor often requests three options. The first option is for the licensor to provide a workaround that has the same functionality but resolves the infringement issue. As a practical matter, this type of provision is useful when the licensor’s code is not infringing a patent, although each situation is different.

The second option is for the licensor to get a license, either from the holder who sued in the first place, or from another owner who may have non-infringing code that can be used. In these cases, the licensor is expected to pay the additional royalties that will need to be paid as a result of the secondary license.

The third option is for the licensor to refund the licensee for the cost of the software, less an amount to account for licensee’s use, and terminate the license without further liability. Licensors sometimes resist this approach. The parties can compromise by allowing the refund right, but providing that the licensor must still cover the licensee for the claim that initially gave rise to the indemnification obligation.

Intellectual property indemnification provisions are very much like the proverbial “black swan”. A black swan is a term used in the financial world, among other places, to describe a rare event that can have catastrophic consequences. Because of the existential threat an infringement claim can create for a small start-up company, agreements will often limit the licensor’s liability in an infringement, whether it arises from a no infringement representation in the license or otherwise, to the indemnification obligation specially contained in the license. Although licensees may initially object to this, many will recognize that the vast amount of their exposure in an infringement is covered by the indemnification claim, and ultimately agree to the limitation.

Bob Hawn is a founding partner of Strategy Law, LLP in downtown San Jose, California. His practice focuses on emerging growth technology companies, technology licensing, angel and venture capital financing, business entity formation, corporate governance, mergers and acquisitions, and U.S. market entry. He speaks regularly on technology law related issues and was the 2014-15 Chair of the Business Law Section of the State Bar of California.

The information appearing in this blog does not constitute legal advice or opinion. Such advice and opinions are provided by the firm only upon engagement with respect to specific factual situations. Specific questions relating to this article should be addressed directly to Strategy Law, LLP.