USA Law and Practice Contributed by: Stelios G Saffos, Dan Seale, Peter Sluka and Alfred Xue, Latham & Watkins LLP
considered secondary trading are generally exempted from such rules, irrespective of continuity or regularity. As such, foreign lenders should take care to limit the extent and scope of their origination activities. If for - eign lenders that are engaged in extensive origination activity are also qualified for the benefits of a double taxation treaty and do not have a permanent estab - lishment in the United States, the foreign lenders may be protected under the rules of such treaty. Relatedly, payments of various fees under US financing transac - tions may subject foreign lenders to US withholding tax and/or US income taxes depending on the char - acterisation of the fee income as well as the eligibility of the fee recipient for treaty relief. As is the case with syndicated loans, private credit lenders typically take a security interest in substan - tially all of the property and assets of the company group. These assets can be broadly divided into real property interests and personal property interests. Where real property constitutes collateral, a lend - er takes a valid security interest by execution of a mortgage, deed of trust, or similar security interest under applicable state law where the real property is located. The creation and enforcement of a security interest in real property is governed by the law of the state where the real property is located, so engage - ment of counsel in such jurisdiction is important to ensure that necessary local law requirements are adhered to. Security interests in personal property are governed by Article 9 (Secured Transactions) of the Uniform Commercial Code (UCC) of the applica - ble jurisdiction. To create a valid security interest in personal property, including equipment, inventory, deposit accounts, investment property, instruments, intangibles, receivables, and shares in companies (as well as the other categories of collateral governed by Article 9), (a) a security provider (the grantor) must execute or authenticate a written or electronic security agreement that provides an adequate description of the collateral, (b) the grantor must have rights in the collateral or the power to transfer such rights, and (c) value must be given. Although the last two require - ments are mandatory, an oral security agreement may 5. Guarantees and Security 5.1 Assets and Forms of Security
be sufficient if the secured party is in possession or control of the collateral; however, the absence of a written and signed security agreement would be rare in a commercial transaction. The security agreement is typically selected to be governed by the same law as the law of the state that governs the loan agree - ment, even though the assets intended to be covered by such security agreement may be located outside of such state. The UCC is state statutory law, and each state of the United States has enacted its own version of it. Although a variety of relatively minor differences exist, Article 9 is substantially uniform across each state. Therefore, little concern typically arises about a debtor in one state granting a security interest under a security agreement governed by the law of a different state. The parties in commercial financings commonly choose the law of a single state (for example, New York law) to govern both the loan agreement and the security agreement, even if some or all of the debt - ors (or their assets) are located in another jurisdiction. Although parties are generally free to choose what law governs the creation or “attachment” of the security interest, the choice-of-law rules governing perfection, including where to file a UCC-1 financing statement, and priority are mandatory. A security interest in personal property is said to have “attached” when it becomes enforceable against the debtor. A secured party will also want to “perfect” such security interest so that it is also enforceable against third parties, such as other voluntary or invol - untary lienholders and against a trustee in bankruptcy proceedings. A security interest in most types of personal property collateral governed by the UCC may be perfected by filing a notice filing under the UCC (referred to as a UCC-1 financing statement) at the secretary of state of the “location” of the debtor, although important exceptions apply. A UCC-1 is ineffective to perfect in deposit accounts, money or letter-of-credit rights as original collateral. Perfection in some assets is gov - erned by US federal law (which pre-empts state law such as the UCC), including registered copyrights, air - craft and related assets, most ships and other vessels, rail cars and other rolling stock. Therefore, perfection in such assets requires compliance with the perfection scheme established by the applicable federal statute.
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