This Legal Update explores why, in order for an underlying loan to be included in a warehouse facility’s borrowing base, its original promissory note (if any) must be delivered to the collateral agent or custodian.
Example of Eligibility Criteria:
- The original promissory note evidencing such loan has been delivered to the collateral agent (or its custodian).
What does it Mean for a Promissory Note to be “Delivered”?
In the context of a credit facility, the term “delivery” generally refers to the appropriate and most effective method of perfecting a security interest in an asset under the Uniform Commercial Code (UCC). An asset is typically not credited as eligible collateral under a warehouse loan facility until it has been “delivered” in accordance with applicable perfection requirements.
With respect to an original promissory note (typically executed in wet ink), Article 9 of the UCC governs the creation and perfection of a security interest in the promissory note. If the promissory note qualifies as a “negotiable instrument” under the UCC, the preferred method of perfection is possession. A secured party perfects its security interest in such a note by taking physical possession of the original instrument, which may also be endorsed in favor of the secured party or in blank.
Accordingly, “delivery” of a promissory note under a warehouse facility typically requires physical transfer of the original promissory note to the secured party, along with any necessary endorsements, to effectuate perfection and render the asset eligible to be included in the warehouse facility’s borrowing base. In warehouse facilities, a warehouse borrower typically complies with this criterion by delivering the original promissory note to the custodian who is acting as “bailee” of the secured party, which is usually the collateral agent, acting on behalf of the lenders.