Can I Sign Delaware Banking Promissory Note Template

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if you are going to lend money you need to know how to mitigate the catastrophic damages of your borrower filing for bankruptcy protection how do you do this by securing your promissory notes buckle up because we're going to cover all this and much more hi i'm william dolan and this is esquire advice where we explain complicated and lucrative real estate and business topics remember we are not forming a lawyer-client relationship by way of this channel always consult your local attorney before taking any action with that said grab a pencil and a piece of paper and get ready to learn [Music] welcome to our episode on securing promissory notes with a special emphasis on real estate transactions however before we dive in please kindly hit those like and subscribe buttons so we can keep bringing you valuable and profitable content we're going to tackle this subject key concept style the first key concept is promissory note fundamentals there are many minimum requirements to make a note enforceable and if you are the lender there are certain provisions you want to be sure are included to protect your interests there are some limitations to what you can do or charge as a lender and some situations that may require you to obtain a lending license and or adhere to consumer protection laws however we have an entire episode devoted to those topics so i will direct you to that episode to get all of the information you need there the second key concept is understanding what it means to secure a promissory note a promissory note by itself is just a financial obligation the lender wants to secure repayment of the note it first needs to identify the type of collateral the most common way to secure a promissory note is with real estate how do you do that and the associated benefits and procedures can vary from state to state for example some states are mortgage states where a lender must go through a judicial foreclosure process that means it must foreclose through the courts some states are deed of trust states where trustee is appointed in the deed of trust document a deed of trust conveys a power of sale to the trustee which grants the trustee the right to sell the property in a private sale by private i mean it is not going through the courts as you can imagine there is a lot of legal language that needs to be included in a mortgage or deed of trust sometimes a lender may also want a lien on other rights associated with the real estate like the right to collect rents upon a default that is affected with an assignment of rents document if the loan is a short-term loan like a fix-and-flip type of transaction the lender may want the right to step into the borrower's shoes and take over agreements with contractors that is typically affected through an assignment of agreements document a lender can also obtain a lien on stock or llc interests these kinds of liens are generally affected with a pledge agreement possession of the stock or llc certificate if the interest are certificated and the filing of a ucc one form with the applicable secretary of state or other appropriate state agency if the borrower defaults the lender can conduct a sale similar to a power of sale with the deed of trust on the stock or llc interests also the sale must be performed in a commercially reasonable manner using stock or llc interest says collateral can be very tricky to navigate so you definitely want to use an attorney to help you with the applicable due diligence and document drafting for instance if there are llc interest most likely the llc has to opt the llc interests into article 8 of the ucc which requires an amendment to the llc's governing instrument to amend the llc's governing instrument requires a legal analysis of the company's operating agreement or governing instrument to make sure that the proper people have authorized the amendment and that it gets properly executed the llc or corporation likely needs to consent to the pledge as well the entity should also be in good standing however please note that was not an exhaustive list of issues that can come up when you are securing your note with llc interest or stock a lender can also obtain a lien on motor vehicles and other personal property the third key concept is power and authority if the borrower is an entity you want to be sure that the party signing on behalf of the company has the power and authority and is authorized empowered and directed to execute and deliver the loan documents at closing this will require a legal analysis of the company's organizational documents i cannot tell you how many times i have reviewed llc agreements and discovered that there is a person listed in the llc agreement as the manager or member of the llc that is not involved at all in obtaining the loan with my lender client and that the lender knows nothing about usually in these situations these people are no longer involved with the llc but they have never been formally removed which could become a huge problem later if you have an attorney represent you as lender the attorney should handle identifying these issues and explain what needs to be done the fourth key concept is title insurance this is only applicable if you are securing your note with real estate but you should have the borrower provide a lender's title insurance policy i would also recommend having your attorney review the title commitment so that he or she can make sure that the exceptions that can be removed are removed which sometimes requires the attorney to request one or more riders be added to the policy this policy of insurance protects your lien position in the property subject to a very limited number of items the fifth key concept is bankruptcy and insolvency issues these are the primary reasons that a lender generally wants to have collateral to secure a note if there is no collateral the lender is an unsecured creditor unsecured creditors generally get little to nothing in bankruptcy and insolvency proceedings however for instance if the lender has a mortgage against a piece of real estate even if the borrower files for protection under the bankruptcy code the lender's loan is still secured to the extent of the value of the real estate and the lender will eventually be able to foreclose against the property to satisfy the note once the automatic stay is lifted or the case is discharged or dismissed before i move on i want to address one more point provisions that state a party is still on the hook for the debt even if the debt is discharged in bankruptcy are unenforceable because they are against public policy just think about it if it were that simple every lender would include this provision in its promissory note and no debt would ever be dischargeable in bankruptcy the sixth key concept is personal guarantees you affect a personal guarantee with a guarantee agreement or a guarantee and surety ship agreement as with other documents we have discussed here there are many important legal issues like consideration legal fees confession of judgment borrower bankruptcy and others that you need to navigate so please be sure to work with your attorney on your guarantee agreements when the borrower is an entity or if the borrower is an individual and has income asset or credit issues it's useful to get a party with a strong balance sheet to guarantee repayment of the note what do i mean by balance sheet lots of assets that have equity in them and particularly ones that a creditor could get to if it had to collect against the guarantor business assets equity and real estate cash assets and the like are generally good ones money in retirement accounts is very difficult to get to you should always want to do a thorough analysis of the assets of guarantors and discuss with an attorney how easy it may be or may not be to get to those assets otherwise you do not know how strong the guarantee really is having a guarantor is also helpful when the borrower becomes insolvent or has a debt discharged in bankruptcy because if the note and guarantee document are drafted properly the guarantor should still be on the hook and you have another collection avenue now i know what some of you are thinking but bill didn't you just say that you cannot make a party liable for a debt if it's discharged in bankruptcy what i said was that you cannot make the party who had the debt discharged in bankruptcy remain liable for that debt so if the borrower filed for bankruptcy protection but the guarantor did not you can still go after the guarantor now if the borrower and guarantor both have the debt discharged in bankruptcy you can only collect against the collateral if you had the loans secured by collateral again by collateral we're talking about the real estate stock or llc interest motor vehicles and the like the seventh key concept is that customarily borrowers pay for all of the lender's costs including document preparation attorneys fees recording fees and title expenses so don't be afraid to tell your borrowers that you are going to use an attorney the borrower will have to pay for that service and your other costs and that you're going to do this the right way finally there are many other issues with lending money like usury laws consumer protection laws licensing requirements and many others that you should discuss with your attorney when you lend money we've covered these issues in our episode on promissory notes so check that episode out i hope you found this episode on securing promissory notes helpful please kindly hit those like and subscribe buttons so we can keep bringing you valuable and profitable content thanks for watching and i'll see you next time [Music] you