"Maybe we should call legal?" Answers to commonly recurring questions from lenders

April 20, 2023

Related PeopleJanet Wagner

Practice AreasFinancial Services

This article presents some recurring questions that come up from time to time from various lenders. They are the kind of questions that make one stop for a moment and (usually) say, let’s talk to legal about this.

Question: Can an individual use a power of attorney (POA) to have someone else (an agent) sign loan documents for the legal entities involved? The individual is the sole member of these entities.

Answer: Not really. A POA gives an agent power to act on behalf of the individual, not a company or other legal entity. Even though as a sole member there doesn’t seem to be much of a difference between the individual’s identity and the entity’s identity, it is still not the right move. In order to give an agent power to act on behalf of the entity, use resolutions or a consent to make the agent an authorized signatory. From the lender’s perspective, you want to be sure that you have the formalities in place to prevent a claim that the agent wasn’t authorized to sign and thereby making your documents invalid.

Question: Can I have a trust be my borrower on its own?

Answer: It depends. This is a situation that requires looking at the specifics at hand. Some trusts are set up by the grantor as a “living trust” which is often used as a vehicle for asset protection as well as providing for beneficiaries. The individual may have moved a significant proportion of their assets into the trust. It may be that the trust has beneficiaries who the assets are to be distributed to at a certain point. If so, you’ll need to do an analysis as to whether you are able to reach those assets if you need to enforce your documents. The better structure is to have both the trust as well as the individual grantor as parties to the loan documents.

There are times that the grantor of the trust is deceased or the borrower will ask to use the trust as a substitute guarantor. In that case and generally, the purpose of the trust is to distribute assets in accordance with its terms. If the loan was already in place, the trust should have provisions whereby any debts are required to be paid before assets are distributed. Otherwise, the viability of the trust as a party may be time-limited, i.e., it will have assets only until they are distributed.

One structure to consider is to have the trust as the borrower and the individual as a guarantor, especially where most of the individual’s assets have been moved to the trust. Either way, you’ll need to look at the trust agreement as well as determine what assets the trust holds and what may remain with the individual. Often you’ll want the trust as well as the “warm body” to be obligors on the loan.

Question: I need to release some but not all of the personal property collateral from my UCC-1.  How do I do this?

Answer: If this is a partial release of collateral, the UCC-3 form provides two options: amend or terminate. Depending on specifics, you might want to amend your collateral description to show just the personal property on which you will continue have a lien. Remember that a UCC-1 filing is to put other potential creditors on notice that you have a lien on certain collateral. In my view, amending the collateral description is a way to show affirmatively what remains subject to your lien. While you can use the termination option, that will requires the next party to look to both filings to determine what remains and what has been released.  

If you are interested in learning more about these topics, please reach out to one of Chuhak & Tecson’s many talented and experienced banking attorneys.

Client alert authored by Janet Wagner (312 855 4316), principal.

This Chuhak & Tecson, P.C. communication is intended only to provide information regarding developments in the law and information of general interest. It is not intended to constitute advice regarding legal problems and should not be relied upon as such.