Financing In-Transit Inventory: Legal Risks to Lenders Legal Risks - - PowerPoint PPT Presentation

presents

Financing In-Transit Inventory: Legal Risks to Lenders

presents

Legal Risks to Lenders

Structuring In-Transit Financing to Protect Lenders From the Risk of Borrower Insolvency

A Live 90-Minute Teleconference/Webinar with Interactive Q&A

Today's panel features: James C. Chadwick, Partner, Patton Boggs, Dallas

• C. Edward Dobbs, Partner, Parker Hudson Rainer & Dobbs, Atlanta

Th H di Of C l B R C i S i & M Alli t P id RI

A Live 90-Minute Teleconference/Webinar with Interactive Q&A

Thomas Hemmendinger, Of Counsel, Brennan Recupero Cascione Scungio & McAllister, Providence, RI

Wednesday, March 31, 2010 The conference begins at: The conference begins at: 1 pm Eastern 12 pm Central 11 am Mountain 10 P ifi 10 am Pacific

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Financing I n Financing I n-

• Transit I nventory: Legal Risks to

Transit I nventory: Legal Risks to g y g y g Lenders Lenders

Structuring I n Structuring I n-

• Transit Financing to Protect Lenders From the

Transit Financing to Protect Lenders From the Risk of Borrower I nsolvency Risk of Borrower I nsolvency

James C. Chadwick James C. Chadwick -

• Partner

Partner Patton Boggs LLP Patton Boggs LLP -

• Dallas, TX

Dallas, TX

• C. Edward Dobbs
• C. Edward Dobbs –

– Partner Partner Parker, Hudson, Rainer & Dobbs LLP Parker, Hudson, Rainer & Dobbs LLP -

• Atlanta, GA

Atlanta, GA , , , , , Thomas Hemmendinger Thomas Hemmendinger -

• Of Counsel

Of Counsel Brennan, Recupero, Cascione, Scungio & McAllister, LLP Brennan, Recupero, Cascione, Scungio & McAllister, LLP -

• Providence, RI

Providence, RI , p , , g , , p , , g , , Presented via webinar for Strafford Publications Presented via webinar for Strafford Publications March 31, 2010 March 31, 2010 ,

Financing Goods in Transit Financing Goods in Transit Financing Goods in Transit Financing Goods in Transit

• Competitive Advantages for your Lender

Competitive Advantages for your Lender p g y p g y clients clients

– Provides additional liquidity for borrowers Provides additional liquidity for borrowers q y q y – If done properly, risk profile is comparable to If done properly, risk profile is comparable to a letter of credit structure a letter of credit structure – Enhanced collateral position for the Lender Enhanced collateral position for the Lender – Reduces credit risk resulting from Reduces credit risk resulting from g interruptions in borrower’s supply chain interruptions in borrower’s supply chain

March 31, 2010 March 31, 2010 4

Practical Example Practical Example Practical Example Practical Example

• Damascus Steel Transaction

Damascus Steel Transaction

– $135,000,000 credit facility $135,000,000 credit facility – Steel being transported from China and other Steel being transported from China and other countries to the United States was the primary source countries to the United States was the primary source countries to the United States was the primary source countries to the United States was the primary source

• f raw materials for the borrower
• f raw materials for the borrower

– The lender was able to perfect its interest in the in The lender was able to perfect its interest in the in-

• t ansit steel and p o ide

p to $40 000 000 additional t ansit steel and p o ide p to $40 000 000 additional transit steel and provide up to $40,000,000 additional transit steel and provide up to $40,000,000 additional availability availability – The ability to do the deal allowed the lender to The ability to do the deal allowed the lender to establish a business relationship that can now be establish a business relationship that can now be extended into other banking products extended into other banking products

March 31, 2010 March 31, 2010 5

BUYER P O V E C U W A SELLER GOODS TO BE O R T E S S E U S T O A R E H TO BE SHI PPED E L O M S H O U

• To take advantage of the benefits of financing

To take advantage of the benefits of financing goods in transit, you need to be perfected at every goods in transit, you need to be perfected at every

S E

point in this chain point in this chain

– Not every financial institution has this capability, but by mastering this material, Not every financial institution has this capability, but by mastering this material, you can be prepared to assist your clients with their opportunities to finance you can be prepared to assist your clients with their opportunities to finance d i t it d i t it goods in transit goods in transit – Note that goods in transit can also be financed through a letter of credit Note that goods in transit can also be financed through a letter of credit structure, which does not present the same issues as the types of transactions structure, which does not present the same issues as the types of transactions we will discuss today we will discuss today

March 31, 2010 March 31, 2010 6

we will discuss today we will discuss today

Basics of Goods in Transit Basics of Goods in Transit

• Common Modes of Transportation

Common Modes of Transportation

• Common Modes of Transportation

Common Modes of Transportation

– Ocean Vessel, Aircraft, Rail and Motor Truck Ocean Vessel, Aircraft, Rail and Motor Truck

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T i l T i l Basics of Goods in Transit Basics of Goods in Transit

• Terminology

Terminology

– Seller and Buyer Seller and Buyer – Shipper, Consignor, Consignee Shipper, Consignor, Consignee – Vessel Owner, Carrier, NVOCC, Charter Party Vessel Owner, Carrier, NVOCC, Charter Party – Customs Broker Customs Broker – Customs Bonded Warehouse and Free Customs Bonded Warehouse and Free-

• Trade

Trade Zone Zone

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• Documentation

Documentation

Basics of Goods in Transit Basics of Goods in Transit

• Documentation

Documentation

– Bill of Lading (Clean On Board) Bill of Lading (Clean On Board)

• Sets forth the contractual terms of carriage

Sets forth the contractual terms of carriage Sets forth the contractual terms of carriage Sets forth the contractual terms of carriage

• Possibly evidences title to the goods

Possibly evidences title to the goods

– Straight Bill of Lading Straight Bill of Lading – – Not Negotiable Not Negotiable – Order Bill of Lading Order Bill of Lading – – Negotiable and Title is “Locked Up” Negotiable and Title is “Locked Up” in the Bill in the Bill

• Carrier obligation to deliver

Carrier obligation to deliver g

• Master bills vs. house bills

Master bills vs. house bills

March 31, 2010 March 31, 2010 9

• Documentation

Documentation

Basics of Goods in Transit Basics of Goods in Transit

Documentation Documentation

– Certificate of Origin of the Goods Certificate of Origin of the Goods – Commercial Invoice Commercial Invoice – Certificate of Inspection Certificate of Inspection – Evidence of Insurance Evidence of Insurance – Arrangements with Other Parties Expected to Receive Arrangements with Other Parties Expected to Receive Possession of the Goods Possession of the Goods

• Freight Forwarders

Freight Forwarders

• Freight Forwarders

Freight Forwarders

• Customs Brokers

Customs Brokers

• Storage Companies

Storage Companies

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Potentially Applicable Laws Potentially Applicable Laws

• Many laws can govern the rights of the

Many laws can govern the rights of the

• Many laws can govern the rights of the

Many laws can govern the rights of the parties in the goods parties in the goods

• Here’s what we need to know:

Here’s what we need to know:

• Here s what we need to know:

Here s what we need to know:

– Where are the goods coming from? Where are the goods coming from? Where are they going? Where are they going? – Where are they going? Where are they going? – How are they getting there? How are they getting there? – How do the parties plan to document their How do the parties plan to document their – How do the parties plan to document their How do the parties plan to document their arrangement? arrangement? – Where will the documents be located? Where will the documents be located?

March 31, 2010 March 31, 2010 11 11

do u s b

• a

d do u s b

• a

d

Potentially Applicable Laws Potentially Applicable Laws

• UCC Articles 2, 7 or 9

UCC Articles 2, 7 or 9

– We are seeing more discussion of electronic bills of We are seeing more discussion of electronic bills of lading as Revised Article 7 has been adopted by more lading as Revised Article 7 has been adopted by more lading as Revised Article 7 has been adopted by more lading as Revised Article 7 has been adopted by more states states

• U.N. Convention on Contracts for the

U.N. Convention on Contracts for the i l S l f G d (“C SG”) i l S l f G d (“C SG”) International Sale of Goods (“CISG”) International Sale of Goods (“CISG”)

– Addresses contract formation, risk of loss, delivery Addresses contract formation, risk of loss, delivery and payment obligations and rights of parties upon and payment obligations and rights of parties upon and payment obligations and rights of parties upon and payment obligations and rights of parties upon breach breach

• U.N. Convention on the High Seas

U.N. Convention on the High Seas

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Potentially Applicable Laws Potentially Applicable Laws

• Law of the Sea

Law of the Sea

– Though not ratified, the United States generally Though not ratified, the United States generally complies with this body of law complies with this body of law complies with this body of law complies with this body of law

• U.S. Carriage of Goods by Sea Act

U.S. Carriage of Goods by Sea Act

• International Commercial Terms (“Incoterms”)

International Commercial Terms (“Incoterms”) International Commercial Terms ( Incoterms ) International Commercial Terms ( Incoterms ) adopted by the International Chamber of adopted by the International Chamber of Commerce Commerce

B h d fi d i i i l B h d fi d i i i l – Be aware that defined terms in international Be aware that defined terms in international commerce are very different than those used in commerce are very different than those used in domestic commerce. domestic commerce.

March 31, 2010 March 31, 2010 13 13

Perfecting a Security Interest in Goods Perfecting a Security Interest in Goods g y g y in Transit in Transit

• Attachment with respect to the goods

Attachment with respect to the goods

– The choice of law, extraterritorial reach of applicable The choice of law, extraterritorial reach of applicable l d i l t d d ill d t i h l d i l t d d ill d t i h law and commercial standards will determine when law and commercial standards will determine when the Borrower obtains “rights” in the goods the Borrower obtains “rights” in the goods

• Perfection of a security interest in the goods

Perfection of a security interest in the goods

• Perfection of a security interest in the goods

Perfection of a security interest in the goods

– Perfection by filing under the UCC Perfection by filing under the UCC – Perfection by possession of the goods Perfection by possession of the goods y p g y p g – These may be affected by the applicability of 11 These may be affected by the applicability of 11 U.S.C. U.S.C. § §544 544

March 31, 2010 March 31, 2010 14 14

Perfecting a Security Interest in Goods Perfecting a Security Interest in Goods g y g y in Transit in Transit

• Generally, the laws of most countries will

Generally, the laws of most countries will recognize the rights of a secured lender that is: recognize the rights of a secured lender that is:

Th h ld f d bill f l di Th h ld f d bill f l di – The holder of an order bill of lading The holder of an order bill of lading – The consignee of a straight bill of lading The consignee of a straight bill of lading – A party to an attornment letter where the buyer is a A party to an attornment letter where the buyer is a – A party to an attornment letter where the buyer is a A party to an attornment letter where the buyer is a consignee of a straight bill of lading consignee of a straight bill of lading

• Controlling the package of documents is

Controlling the package of documents is g p g g p g important in protecting the secured lender’s important in protecting the secured lender’s interest in the goods interest in the goods

March 31, 2010 March 31, 2010 15 15

Competing Claimants to Goods in Competing Claimants to Goods in p g p g Transit Transit

• In any transaction, expect that there will be

In any transaction, expect that there will be competing interests for the goods competing interests for the goods competing interests for the goods competing interests for the goods

• Manufacturer/Seller

Manufacturer/Seller

• Carrier

Carrier

• NVOCC

NVOCC

• Lien Creditors and Title

Lien Creditors and Title Ca e Ca e

• Customs Broker

Customs Broker

• Other Secured Creditors

Other Secured Creditors e C ed to s a d t e e C ed to s a d t e Retention Creditors Retention Creditors

• Borrower (sometimes

Borrower (sometimes known as the “trustee in known as the “trustee in known as the trustee in known as the trustee in bankruptcy”) bankruptcy”)

March 31, 2010 March 31, 2010 16 16

Common Complications Common Complications Common Complications Common Complications

• Claims of sellers and the creditors of sellers

Claims of sellers and the creditors of sellers

– Stoppage in transit Stoppage in transit – Reclamation Reclamation – Possible impact of Possible impact of § §2 2-

• 505 of the UCC

505 of the UCC – Title retention laws and conditional sales contracts Title retention laws and conditional sales contracts – Possible implications of CISG and Incoterms Possible implications of CISG and Incoterms p

• Dealing with logistics providers

Dealing with logistics providers

– Letters of indemnity may help smooth this process Letters of indemnity may help smooth this process

• Double

Double pledging of goods or documents pledging of goods or documents

• Double

Double-pledging of goods or documents pledging of goods or documents

• Customs problems

Customs problems

• Political risk

Political risk

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Bankruptcy Concerns Bankruptcy Concerns Bankruptcy Concerns Bankruptcy Concerns

Li A id I Li A id I

• Lien Avoidance Issues

Lien Avoidance Issues

– If you have considered the applicable law and taken the appropriate If you have considered the applicable law and taken the appropriate perfection actions, the Trustee in Bankruptcy will not be able to avoid perfection actions, the Trustee in Bankruptcy will not be able to avoid your lien your lien your lien your lien

• Motion for Adequate Protection

Motion for Adequate Protection

• DIP Financing and Third

DIP Financing and Third-

• Party Priming Liens

Party Priming Liens

• These issues will typically arise in the bankruptcy of a seller or

These issues will typically arise in the bankruptcy of a seller or buyer, but the bankruptcy of a carrier, broker or other logistics buyer, but the bankruptcy of a carrier, broker or other logistics provider can also be a problem provider can also be a problem

March 31, 2010 March 31, 2010 18 18

Strategies for Goods in Transit Strategies for Goods in Transit g Transactions Transactions

• Recognize that it may be impossible to maintain

Recognize that it may be impossible to maintain

• Recognize that it may be impossible to maintain

Recognize that it may be impossible to maintain a pristine first priority lien at all times and in all a pristine first priority lien at all times and in all places places

• Control the shipping documents and all duplicate

Control the shipping documents and all duplicate i i l if ibl i i l if ibl

• riginals, if possible
• riginals, if possible
• Utilize insurance to the extent practical

Utilize insurance to the extent practical

• Utilize insurance to the extent practical

Utilize insurance to the extent practical

March 31, 2010 March 31, 2010 19 19

Strategies for Goods in Transit Strategies for Goods in Transit g Transactions Transactions

• Utilize intercreditor agreements to the extent

Utilize intercreditor agreements to the extent

• Utilize intercreditor agreements to the extent

Utilize intercreditor agreements to the extent practical to neutralize claims of third parties practical to neutralize claims of third parties

– Lien priorities Lien priorities Lien priorities Lien priorities – Indemnification issues Indemnification issues – Bailee issues Bailee issues – Extent of obligations secured by custom Extent of obligations secured by custom broker's/NVOCC's/carrier’s liens broker's/NVOCC's/carrier’s liens C t f B C t f B – Consent of Borrower Consent of Borrower

March 31, 2010 March 31, 2010 20 20

Strategies for Goods in Transit Strategies for Goods in Transit g Transactions Transactions – – Due Diligence Due Diligence

• Understand the involvement of third parties

Understand the involvement of third parties

• Understand the involvement of third parties

Understand the involvement of third parties

• Understand the sale terms and governing law

Understand the sale terms and governing law

– If the transaction is significant, retain local counsel to If the transaction is significant, retain local counsel to g , g , provide analysis of governing law provide analysis of governing law

• Understand the shipping terms

Understand the shipping terms R i h d d f f h hi i R i h d d f f h hi i

• Review the standard forms of the shipping

Review the standard forms of the shipping documents documents

– Bills of Lading Bills of Lading Bills of Lading Bills of Lading – Invoices and sales documents Invoices and sales documents – Evidence of insurance Evidence of insurance

March 31, 2010 March 31, 2010 21 21

Strategies for Goods in Transit Strategies for Goods in Transit g Transactions Transactions – – Loan Documentation Loan Documentation

• Carefully define each of the following:

Carefully define each of the following:

• Carefully define each of the following:

Carefully define each of the following:

– Eligible foreign vendors Eligible foreign vendors

• Attempt to obtain a vendor agreement

Attempt to obtain a vendor agreement

• Attempt to obtain a vendor agreement

Attempt to obtain a vendor agreement

– Eligible in Eligible in-

• transit goods

transit goods – Eligible NVOCC Eligible NVOCC – Eligible NVOCC Eligible NVOCC

• Attempt to obtain an imported goods agreement

Attempt to obtain an imported goods agreement

– Acceptable Bill of Lading Acceptable Bill of Lading Acceptable Bill of Lading Acceptable Bill of Lading

March 31, 2010 March 31, 2010 22 22

Parting Thoughts Parting Thoughts Parting Thoughts Parting Thoughts

• Obtaining a perfected security interest in goods

Obtaining a perfected security interest in goods in transit can provide a significant benefit to in transit can provide a significant benefit to your lender clients your lender clients

• Always identify where the goods and documents

Always identify where the goods and documents will be at all stages of the transaction will be at all stages of the transaction h l b d h l b d

• By mastering this material, you can be prepared

By mastering this material, you can be prepared to assist your clients with their opportunities to to assist your clients with their opportunities to finance goods in transit finance goods in transit finance goods in transit finance goods in transit

March 31, 2010 March 31, 2010 23 23

All Questions Answered . . . All Questions Answered . . . All Knowledge Shared All Knowledge Shared All Knowledge Shared All Knowledge Shared

March 31, 2010 March 31, 2010 24 24

Thank You For Your Time and I nterest! Thank You For Your Time and I nterest!

For More Information Call Or E For More Information Call Or E-

• mail:

mail:

• C. Edward Dobbs

P k H d R i &

James C. Chadwick

P tt B LLP Parker, Hudson, Rainer & Dobbs LLP

285 Peachtree Center Avenue, NE 1500 Marquis Two

Patton Boggs LLP

2000 McKinney Avenue, Suite 1700 Dallas, Texas 75201 Telephone: (214) 758-1575 i il ( ) Atlanta, GA 30303 Telephone: (404) 420-5529 Facsimile: (404) 522-8409 e-mail: ced@phrd.com Facsimile: (214) 758-1550 Cell: (214) 704-5457 e-mail: jchadwick@pattonboggs.com website: www.pattonboggs.com website: www.phrd.com

Thomas S. Hemmendinger

Brennan, Recupero, Cascione, Scungio & McAllister, LLP g ,

362 Broadway Providence, Rhode Island 02909 Telephone: (401) 453-2300 Facsimile: (401) 453-2345

March 31, 2010 March 31, 2010 25 25

( ) e-mail: themmendinger@brcsm.com