loan documentation 101 part 1: the basics...your state association presents loan documentation 101...

Your State Association Presents

Loan Documentation 101

Part 1: The Basics

Program Materials

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Wednesday, February 19, 2014 Presenter: Robin Russell

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HOU:3396608.111

Loan Documentation 101: Part One

The Basic Loan Document Package

February 19, 2014

Robin Russell [Your State Banker’s Association Webinar]Andrews Kurth LLPCopyrighted

HOU:3396608.12

How Do I Become A Secured Creditor?

Lien a/k/a Attachment + Perfection = Secured Status

Security Agreement + UCC-1

Deed of Trust + Recording in County

Ship Mortgage + Coast Guard Filing

Aircraft Security Agreement + FAA Filing

Investment Property + Account Control Agreement Security Agreement

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Attachment

• Bank gives value

• Debtor has rights in collateral

• Debtor has signed written agreement granting lien

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Methods Of Perfection

• File UCC-1

• Possession

• Control

• Notation on Title

• Non-UCC Filings

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So Why Do I Want To Be A Secured Creditor?

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The “Covered Dish Supper” Rules of Priority

EquityUnsecuredSecuredPMSI

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Bankruptcy 101

Assets fmv 500,000

Liabilities 2,000,000

Bank Debt 500,000

Trade Debt 750,000

Judgment 750,000

________________________________________

If Bank is secured and perfected - 100% recovery

If Bank unsecured or unperfected - 25% recovery

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• Wrong legal name of Debtor

• Bad collateral description

• UCC-1 filed in wrong state

• Debtor doesn’t own collateral

Ways to be Unsecured/Unperfected

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• Undiscovered prior liens

• Loans exceeds realizable value from collateral

Ways to be Undersecured

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Basic Secured Loan Documentation

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The Loan Application

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The Financial Statement

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Fraud on a Financial Institution

“This information and the information provided on all accompanying financial statements and schedules is provided for the purpose of obtaining credit for the Applicant(s) or for the purpose of Applicant(s) guaranteeing credit for others. Applicant(s) acknowledge that representations made in this statement will be relied on by Creditor in its decision to grant such credit. This Statement is true and correct in every detail and accurately represents the financial condition of the Applicant(s) on the date given below. Creditor is authorized to make all inquiries it deems necessary to verify the accuracy of the information contained herein and to determine the creditworthiness of the Applicant(s). Applicant(s) will promptly notify Creditor of any subsequent changes which would affect the accuracy of this Statement. Creditor is further authorized to answer any questions about Creditor’s credit experience with Applicant(s).

aware that any knowing or willful false statements regarding the value of the above property for purposes of influencing the actions of Creditor can be a violation of federal law. 18 U.S.C. & 1014, and may result in a fine or imprisonment or both.”

Applicant(s) are

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The Promissory Note

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• Principal Amount

• Single/Multiple Advance

• Interest Rate - fixed

- floating

• Accrual Method

• Default Rate

• Payment Schedule

• Maturity Date

• Security/Collateral

• Applicable Law

• Defaults

• Remedies

• Signature of Borrower

Basic Promissory Note

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The Lien Document

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Requirements Of A Lien Document

Mandatory

• Identify parties

• Identify what obligation is being secured

• Identify collateral

• Contain “words of grant” granting lien on collateral

• In writing

• Signed by owner of collateral

Optional

• Representations/Warranties

• Covenants

• Events of Default

• Remedies

• Applicable Law

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Representations and Warranties

• valid existence as entity

• authorization to execute and perform

• past, present and future name

• location/address of debtor

• ownership of collateral

• PMSI

• use of property (personal, business, agricultural)

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COVENANTSDuties Toward Property

• possession• good repair• payment of taxes• access to inspect collateral• notification of loss• access to books and records• nondisposition (unless ordinary course)• recordation of security interest on chattel paper• proper collection and settlement of accounts• no commingling of proceeds• direct payment of accounts receivable• insurance

Other Duties• authorization of secured party to file financing statement• authorization of secured party to protect collateral• advance notice of changes (name, location, form of organization)

HOU:3396608.130

Defaults

• failure to pay principal and/or interest

• breach of covenant

• rep or warranty untrue

• bankruptcy/insolvency

• deemed insecure

Remedies

• charge default interest

• turn over collateral

• enter and take possession of collateral

• foreclose

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The Authorization Documentation

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UCC Importance

• UCC-1 requires exact full legal name of debtor

• UCC-1 requires designation of type of organization

• UCC-1 requires designation of jurisdiction of organization (i.e., formation)

• UCC-1 requires organization I.D. number (where the state of formation issues such a number)

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Business Borrowers

• Sole Proprietorships

• General Partnerships

• Limited Partnerships (LP)

• Limited Liability Partnerships (LLP)

• C Corporations

• S Corporations

• Limited Liability Companies (LLC)

• Real Estate Investment Trusts

• Cooperative Associations

• Professional Corporations

• Professional Associations

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Sole Proprietorship

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Sole Proprietorship

d/b/a

• An individual doing business under an assumed name

John Lee Doe

d/b/aJohn’s Auto

d/b/aAutoworld

d/b/aJohn’s Flowers

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Sole Proprietorship

• A sole proprietorship is not a legal entity (even if it has its own Federal Tax I.D. Number).

• The borrowing entity is the individual who is operating the business as a sole proprietor.

• The person who is the sole proprietor is personally liable for all debts.

• The sole proprietor reports all profit or loss on his/her personal income tax (Form1040, Schedule C).

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Can a Husband and Wife operate a business as a sole proprietorship or do

they need to be a partnership?

• An unincorporated business jointly owned by a married couple is generally classified as a partnership by the IRS.

• The Small Business and Work Opportunity Tax Act of 2007 provides that a “qualified joint venture” whose only members are a husband and wife filing a joint return can elect not to be treated as a partnership for Federal tax purposes.

• In community property states such as Texas the husband and wife may elect to treat either as a disregarded entity or a partnership for tax purposes but must be consistent.

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What if my loan officer wants to put the d/b/a in the loan

documents?

Correct > John Lee Doe*

* individually and doing business under any assumed name including, without limitation, John’s Auto

Wrong > John Lee Doe d/b/a John’s Auto

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UCC Filing Location

State of Residence of Sole Proprietor (i.e., individual)

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Authorization Documents Requiredfor Sole Proprietorship

• Most states require Assumed Name Certificate

• Sole Proprietorship Resolution of Authority

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General Partnership

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General Partnership

• Two or more persons who manifest an intent to associate as co-owners in a business for a profit.

• Created by contract (oral or written) without the need for government filing (i.e., unregistered).

• Partnership agreements should be required for any partnership borrow, although a written agreement is not required by law.

• All partners are jointly and severally liable for debts of partnership.

• Partners taxed personally for partnership income (including phantom income). For example, even if the partnership reinvests its profits and distributes net income to partners, the partners are taxed on their portion.

• Because of liability issues that are not present with other entities, GPs are not as popular today as in past years.

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• If all partner’s surnames are not in partnership name (i.e., Doe & Brown Auto) then in some states the partnership name (i.e.,

John’s Auto) is considered an assumed name and an assumed name certificate should be filed.

personally liable for partnership

debts

John’s Auto

John Doe Robert Brown

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Rights of Partners

Management All partners have an equal right to participate in management of the partnership unless the partnership agreement provides otherwise.

Inspection A partner has a right to inspect and copy the partnership books and records.

Distributions Partners have whatever rights are granted in the partnership agreement as to distribution of profits. If the agreement is silent, partners are presumed to share equally.

Indemnification A partner has a right to be indemnified by fellow partners for expenses and personal liabilities incurred on behalf of the partnership.

Remuneration Partners have no general right to remuneration for their services to the partnership.

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Partnership Agreement Basics

• Initial capital contributions by partners

• Subsequent capital contributions

• Loans by partners to the partnership

• Duties and responsibilities of each partner

• Percentage share of profits and losses of each partner

• Distributions

• Admission of a new partner; limitations on transfer of partnership interests

• Withdrawal and expulsion of a partner

• Right of a partner to withdraw capital

• Payments to estate of a deceased partner

• Survival of partnership after an event that could result in dissolution (death of a partner)

• Method of resolving partnership disputes

• Method for amending partnership agreement

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Signature Style

John’s Auto

By: _________________________

John Lee Doe, General Partner

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UCC Filing Location

Filed in the state of the general partnership’s

principal place of business

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Authorization Documents Required forGeneral Partnership/Joint Venture

• Partnership Agreement

• Partnership Resolution of Authority

• Assumed Name Certificate required in most states

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Limited Partnership

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Limited Partnership

• Limited Partnerships are legal entities created under state law. An LP must have at least one general partner who retains personal liability.

• The limited partners have limited liability for partnership debts (i.e., only their investment).

• A written partnership agreement and state filing are required.

• Limited Partnerships generally receive the same tax treatment as general partnerships (i.e.,

partners are taxed for income of partnership).

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John’s Corporate Shell, Inc.General Partner

John’s Auto, LP

JohnDoe

JaneDoe

BobSmith

Limited Partners

Liable for debts of limited partnership

Not liable for debts of limited partnership

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Signature Style

John’s Auto, L.P.

Individual General Partner By: _____________________________John Lee Doe, General Partner

John’s Auto, L.P. by its general partner

John’s Corporate Shell, Inc.Corporate General Partner By: ___________________________

Title: John Doe, President___________

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UCC Filing Location

State of Formation of the Limited Partnership

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Authorization Documents Requiredfor Limited Partnership

• Limited Partnership Agreement

• Certificate of Limited Partnership or Certificate of Formation

• Partnership Resolution of Authority

• Tax Certificate

• Certificate of Authority to Transact Business if conducting business outside its state of incorporation

• Assumed Name Certificate, if appropriate

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Comparison between General Partnership and Limited Partnership

Requirements GP LP

Writing Required? NO YES

Registration? NO YES

Special Name Required? NO YES-Must include “limited partnership” or “L.P.”

Limited Liability? NO YES-for limited partnersNO-for general partner

Partners have management rights?

YES NOT as to limited partners

Partners share profits/losses?

YES (assigned)

YES (according to value of contributions)

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Limited Liability Partnership

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Limited Liability Partnership

• Developed to help professional firms, such as lawyers, CPAs, and doctors, by providing a liability shield to protect a partner’s vicarious liability, but does not protect a partner from contractual obligations (unless non-recourse) and tort-based liability in matters in which the individual partner was involved.

• All partners must be licensed by the state to practice.

• Limited Liability Limited Partnerships are possible in more than 50% of the states. In a LLLP the general partner is also shielded from liabilities.

• The partnership agreement must be obtained and read to determine who has authority to act or sign for the LLP and LLLP.

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The partnership’s name must contain the words “registered limited liability partnership” or the abbreviation “L.L.P.” In addition to obtaining the authorization documents for either a general partnership or limited partnership, the Bank should obtain a copy of the registration application, verify that the partnership is currently registered and obtain a copy of the liability insurance policy.

Registered Limited Liability Partnership

• A registered limited liability partnership is either a general partnership or a limited partnership which:

– has registered with the Secretary of State as a registered limited liability partnership (which registration must be renewed annually) and

– carries a statutorily prescribed minimum of liability

insurance.

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C Corporation

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Corporations

• Created under state law by formal incorporation and state requisite filing (Articles of Formation or Incorporation)

• Owned by shareholders (public or private)

• Double taxation—corporation itself pays corporate taxes and shareholders pay taxes on distributions

• No personal liability of shareholders/owners for debts of corporation

• Corporation can be involuntarily dissolved for failure to comply with state formalities

• Name changes must be effectuated by filed amendment to formation document

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ShareholderShareholderShareholder

John’s Auto, Inc.

Directors

Chief Executive Officer/President

OfficerOfficer Officer

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Typical Contents of Bylaws

• Location of corporate headquarters

• Date of the annual meeting

• How to call a special meeting of shareholders

• How to provide notice to stockholders of meetings

• Quorum and other factors in the conduct of the meeting

• Record date for the meeting which is the date on which stock ownership entitles a shareholder to vote

• Rules for proxy voting

• Vote required to elect directors and take other measures

• Number and term of directors

• Qualifications for serving as a director

• Rules for holding directors’ meeting; whether they must be held in person or whether the board can take unanimous, supermajority, or majority action in writing, by telephone or online

• Compensation of directors

• How to remove and replace directors

• Board duties and actions that can be delegated to a committee, such as an investment committee, or due diligence committee to examine possible mergers and acquisitions

• Indemnification of directors, officers and managers; advancement of litigation expenses

• Selection qualifications, duties, and liabilities of corporate officers

• Removal and replacement of officers

• Regulation of corporate stock, including issuance of certificates; transfer restrictions; record date for determining stock ownership before a meeting; how to replace lost, stolen, or destroyed certificates

• Maintenance of the corporate books and records, such as stock and stock transfer records, and minutes of meetings.

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Signature Style

John’s Auto, Inc.

By: ____________________

John Lee Doe, President

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UCC Filing Location

State of Formation of Corporation

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Corporate Resolutions

• A meeting was held on a certain date

• The corporation made a decision to request a loan from the lender

• The loan will benefit the corporation

• Certain officers designated by name and title are authorized to execute loan documents on behalf of the corporation

• Pledging of corporate assets as collateral is authorized

*Funding of any loan should not occur prior to receipt of a properly executed corporate borrowing resolution. Otherwise, the borrowing could be challenged as unauthorized.

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Authorization Documents Requiredfor Corporation

• Certificate of Formation or Articles or Certificate of Incorporation

• Bylaws

• Certificate of Corporate Status

• Certificate of State Tax Status

• Resolutions of the Board of Directors

• Certificate of Authority to Transaction Business in all states outside its state of formation in which it does business


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Best Practices Checklist

Has the Bank satisfied itself prior to funding that:

� The borrowing under consideration is permitted

� Officers who are signing have been properly authorized

� Corporation does not have a maximum indebtedness clause which will be violated (from another credit arrangement or board action)

� All conditions precedent to borrowing have been met

� Exact corporate name on loan documents matches with documents on file related to the corporation,

� Liens and security interests in collateral are proper and within the powers of the corporation as granted by its Board.

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HOU:3396608.17474

S Corporation

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Subchapter S Corporations

• The name “Subchapter S” is a chapter designation in the IRS Code

• Other than Tax Code differences the S Corp is legally exactly the same as a C Corp

• S Corps do not pay tax on their earnings—the shareholders report their pro-rata share of income, loss, etc. on their personal Form 1040

• There are restrictive criteria that must be met for a Subchapter S election

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Criteria for S Corp Election

To make an election to be taxed under Subchapter S, the corporation must:

• Be a U.S. entity

• Be eligible to make the election

• Not have more than 100 shareholders, but certain family members are counted as a single shareholder

• All shareholders must be individuals, decedents’ estates, bankruptcy estates, trusts permitted to own S Corp stock, 501(c)(3) tax-exempt organizations (private foundations, charities) or 401(a) qualified plan trusts

• Not have any non-resident alien shareholders

• Have only one class of stock

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Documents Required for Subchapter S Corporation

Same as for C Corporation plus complete listing of shareholders with ownership percentages

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Limited Liability Company

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Limited Liability Company

• Created by filing Articles of Organization at the state level

• LLCs provide each owner with a shield from personal liability for debts of the LLC

• LLCs are classified as partnerships for tax purposes. All income, expense, gain and loss of the LLC are reported by members of the LLC on their personal Form 1040 (Partnership K-1) in pro-rata relationship to their ownership interest in the LLC

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John’s Auto, L.L.C.

Member Member Member

Manager(s)

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Signature Style

John’s Auto, LLC

By: ___________________

John Lee Doe, Manager

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UCC Filing Location

State of Formation of Limited Liability Company

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Authorization Documents Required forLimited Liability Company

• Articles of Organization or Certificate of Formation

• Regulations or Company Agreement (content similar to Bylaws)

• Certificate of Formation Status

• Certificate of Franchise Tax Account Status

• Resolutions of the Members

• Certificate of Authority to Transact Business in all states outside its state of formation where it conducts business


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LLC S Corporation Limited Partnership

Name LLC or some variation must appear

Corporation, Company, Incorporated or abbreviation must appear

Limited Partnership, LP must appear

Personal Liability

None None Gen. Partner liable-Ltd. Partners protected

MgmtParticipation

Yes Yes No-in order to restrict personal liability

Ownership Restrictions

Single member allowed. No limit on # of members

100 max shrhldrsMany restrictions on type of members

Min 2 members—No restrictions on types of members

Types of Owners

No restrictions Single class of stock

No restrictions

Fed Entity Level Tax

No—if taxed as partnership

No No

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Cooperative Association

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Cooperative Association

cooperative n. an association of individual business, farmers, ranchers, or

manufacturers with similar interests, intending to cooperate in marketing, shipping

and related activities (sometimes under a single brand name) to sell their products

efficiently, and then share the profits based on the production, capital or effort of

each. “Sunkist” oranges is an example of a large cooperative. Cooperatives include

dairy milk producers, cotton gins, and thousands of other enterprises of all sizes.

There are also cooperatives in which consumers form retail outlets like grocery

stores and share the profits based on the amount of patronage of each member, but

they have found it difficult to compete with the giant supermarket chains.

• An association established for the purpose of providing services on a nonprofit basis to its shareholders or members who own and control it

• The nature and functions of cooperatives differ considerably—such as purchasing cooperatives, consumer cooperatives, and marketing cooperatives

• In the context of agriculture, a farmers’ cooperative refers to an organization of farmers residing in the same locale that is established for their mutual benefit in regard to the cultivation and harvest of their products, the purchase of farm equipment and supplies at the lowest possible cost, and the sale of their products at the maximum possible price.

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Authorization Documents Requiredfor Cooperative Association

• Certificate of Formation

• Bylaws


• Resolutions

• Assumed Name Certificate

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Real Estate Investment Trust

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Real Estate Investment Trust(REIT)

An unincorporated trust formed by one or more trust managers and managed under the state’s business organizations code.

HOU:3396608.190

Authorization DocumentsRequired for Real Estate Investment Trust

• Certificate of Formation or Declaration of Trust

• Bylaws


• Entity Authorization

• Assumed Name Certificate

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Professional Association

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Professional Association

A “professional association” is an association, as distinguished from either a partnership or a corporation, that is formed for the purpose of providing the professional service rendered by a doctor of medicine, doctor of osteopathy, doctor of podiatry, dentist, chiropractor, optometrist, therapeutic optometrist, veterinarian, or licensed mental health professional.

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Authorization Documents Requiredfor Professional Association

• Articles of Association or Certificate of Formation

• Bylaws


• Entity Authorization


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HOU:3396608.196

Professional Corporation

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Professional Corporation

A “Professional Corporation” is a corporation organized for the sole and specific purpose of rendering a professional service. A “professional service” is any type of personal service that requires the obtaining of a license, permit, certificate of registration, or other legal authorization. Professionals include accountants, acupuncturists, athletic trainers, attorneys, chiropractors, clinical social worker/ licensed master social worker, dentists, insurance agents, licensed insurance adjusters, licensed marriage and family therapists, licensed professional counselors, massage therapists, medical radiologic technologists, nurses, including advanced practice nurses, nurse anesthetists, and nurse practitioners, occupational therapists, optometrists, orthotists, paramedics, physical therapists, physician assistants, podiatrists, professional sanitarian, prosthetists, psychologists, respiratory care therapists, speech pathologists/audiologists, and veterinarians. Physicians, surgeons, and other doctors of medicine may form professional associations (see below) but not professional corporations. Engineers and architects may form business corporations but not professional corporations. Other professionals who form professional corporations include cosmetologists, dieticians, mortgage brokers, pharmacists, private security investigators, securities brokers/dealers, real estate agents/brokers, interior designers, court reporters, patent agents, educational diagnosticians, registered lobbyists, social workers and enrolled agents.

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Professional Corporations

• PCs were created to help professionals improve benefits and still enjoy limited liability offered by a corporate form of business organization

• All shareholders must be licensed to practice the profession and are not excused from personal liability for professional negligence of those they supervise

• PCs are taxed as corporations

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Documentation Required for Professional Corporation

• Same as for any C Corp

• Full list of shareholders with license number for each shareholder issued by their professional board

• From a credit standpoint, complete understanding of the retirement and other employee benefit programs operated and funded by the PC

HOU:3396608.1100

Signature Style

John Lee Doe, P.C.

By: ____________________

John Lee Doe, President

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UCC Filing

State of Formation of Professional Corporation

HOU:3396608.1102

Title Verification Document

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Examples of Title Verification Documentation

• Bill of Sale

• Invoice

• Title

• Stock Certificate

• Patent Registration

• Deed of Trust

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Lien Search

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Types of Lien Searches

• UCC – Secretary of State or other Central Filing Office

• County Real Estate Records

• Review of Certificate of Title

• Special Filing Office - FAA

- Coast Guard

HOU:3396608.1106

What if I find other liens?

Think about the Rules of Priority

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General Rules of Priority

• possession v. filing > possession wins

• first to file > wins

• pre-existing security interest > wins

• purchase money security > wins as to interest (PMSI) specific collateral

• secured v. unsecured > secured wins

• perfected v. unperfected > perfected wins

• future advance limitation

HOU:3396608.1108

First-to-File(Subordination)

John’s Auto, Inc. ← 9/8/03 UCC-1 filed by John Doe, Sr.

John’s Auto, Inc. ← 8/10/07 UCC-1 filed by Bank #1

Subordination

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Purchase Money Security Interest

John’s Auto, Inc. ← 9/8/03 UCC-1 John Doe, Sr.

John’s Auto, Inc. ← 8/10/07 UCC-1 filed by Bank #1on all assets

John’s Auto, Inc. ← 12/8/09 UCC-1 filed by Bank #2PMSI on specific office equipment

HOU:3396608.1110

Purchase Money Security Interest

Equipment and Fixtures• file UCC-1 within 20 days of possession

Inventory

• file UCC-1 before debtor takes possession (i.e.,pre-filing)

• notification to other lien holders within last five years

Farm Products

• pre-filing• notification to other lien holders within last six months

Consumer Goods

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Personal Property Lien Subordination

HOU:3396608.1112

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Business Purpose Affidavit or Statement

Consider when:

• Loan under $50,000

• Borrower is individual

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Truth-in-Lending Disclosure Statement and Amount Financed Itemization

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Evidence of Insurance

• All tangible collateral should be covered with Bank as co-loss payee

• General liability coverage

• Business interruption

• Key person

• Flood, if applicable

• Crop, if applicable

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State Specific Disclosures

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Arbitration Agreement

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Legal Opinion

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Uniform Commercial Code Overview

HOU:3396608.1128

What Types of Collateral AreCovered by the UCC-1?

The UCC covers five types of tangible personal property:

• Inventory

• Equipment

• Fixtures

• Farm Products

• Consumer Goods

Intangible personal property is divided into the following classifications under the UCC:

• Accounts

• Chattel Paper

• General Intangibles

• Instruments

• Deposit Accounts (Commercial)

• Letter of Credit Rights

If accounts represent amounts due from the U.S. government, they may be subject to special rules, see Government Contracts.

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What Types of Collateral are Not Covered by the UCC-1?

Tangible personal property includes the following types of collateral not exclusively covered by the UCC:

• Motor Vehicles

• Manufactured Homes

• Boats and Vessels

• Aircraft

• Rolling Stock

Intangible personal property also includes the following types of collateral not subject to the UCC:

• Life Insurance

• Deposit Accounts (Consumer)

• Tort Claims

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Collateral Descriptions

By item or type (i.e., UCC classification)

UCC TYPE: “All inventory now owned or hereafter acquired and all proceeds therefrom”

ITEM: “That certain film processor VIN 43298746”

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What are Proceeds?

• “Proceeds” include whatever is received upon the sale, exchange, collection or other disposition of collateral or proceeds of collateral.

• Insurance payable due to loss or damage to collateral is proceeds if the debtor is the beneficiary.

• Money, checks, deposit accounts and the like are “cash proceeds.”

• All other proceeds of collateral are “noncash proceeds.”

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Requirements for Continued Perfection of a Security Interest in Proceeds

• The Bank’s security interest continues in collateral, notwithstanding the sale, exchange or other disposition thereof by the borrower unless the disposition was authorized by the Bank in the security agreement or otherwise.

• Bank’s security interest continues described below, in any identifiable proceeds of the collateral, including collections received by the borrower.

• The Bank’s security interest in proceeds becomes unperfected on the 21st day after the borrower receives the proceeds unless:

– A UCC-1 covers the original collateral and the proceeds are collateral in which a security interest may be perfected by filing a UCC-1 in the same office in which the original UCC-1 was filed.

– The proceeds are identifiable cash proceeds; or

– A security interest in the proceeds is perfected before the expiration of the 20-day period.

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Illustration of Perfection Requirements For Proceeds

• If the Bank has a security interest in medical equipment which it has perfected by the filing of a financing statement describing medical equipment and the borrower exchanges some of the medical equipment for office equipment, the Bank will have a continuously perfected security interest in the office equipment.

• On the other hand, if the borrower sells the medical equipment and uses the cash to buy a car, the Bank’s perfected security interest in the car will lapse at the end of the 20 days, because there will be no notation on the certificate of title to indicate that the Bank has a security interest in the office equipment.

• The Bank has a lien on inventory, accounts and equipment.

• If the borrower sells an x-ray machine for cash and then uses the cash to buy vaccine, the Bank will have a continuously perfected security interest in the vaccine because it is inventory as described in the financing statement.

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