Navigating cross-border secured financing presents a complex challenge, where choice of law and conflict of law rules create an intricate maze. Unlike straightforward domestic transactions under the Uniform Commercial Code, international financing demands careful scrutiny of diverse jurisdictions’ laws. David Morse of Otterbourg P.C. explores the practical steps lenders must take to secure rights over assets like inventory and receivables across multiple countries to ensure the lender has the benefit of such security. Part 2 of this article will appear in the November/December issue.

Choice of law rules and conflict of law rules in the realm of private international law are areas that lead into an intellectual maze of twist and turns, with results that are difficult to describe, difficult to analyze and difficult to understand. Yet, in a cross-border secured financing, the secured lender faces the very real, very practical dilemma of determining the correct steps to take to establish its rights to the accounts, inventory or other assets that are the security it may be relying on in making its loans. Those steps are dictated by the laws of the jurisdiction or jurisdictions that govern the secured lender’s rights. While these issues apply to all categories of both tangible and intangible assets constituting personal property (also referred to as moveable assets), the focus below will be on
inventory and trade receivables.

When structuring a secured financing of a business with assets and operations in a single jurisdiction, the matter is (relatively) straightforward. For a business with assets in the United States and customers in the United States, the Uniform Commercial Code (UCC), even with all 50-plus versions of it (one for each State, plus District of Columbia, Puerto Rico, U.S. Virgin Islands and others), provides a clear guide for the steps necessary to create a security interest as to most (albeit not all) categories of personal property, tangible and intangible, and then to establish the effectiveness of such security interest as to relevant third parties, including the priority of the security interest relative to the claims of other creditors and in an insolvency. But when structuring a secured financing of a business with assets and operations in multiple jurisdictions throughout the world, the secured lender will necessarily have to examine the laws of such jurisdictions to know what to do.

Taking Security: Security Rights in Tangible Moveable Assets
Let’s start on the relatively easier path—tangible assets, particularly since it will provide some useful guidance in the subsequent discussion on intangible assets.

The Basics: Perfection and the Effect of Perfection Under the UCC
What if a U.S. based business has valuable assets at a location in Mexico? Perhaps the borrower under a secured credit facility is a retailer importing goods that come in through the port in Long Beach, California, get picked up at the port and taken to the facility of a “3PL” (third-party logistics company) in Juarez, Mexico? Since it is a U.S. business, for this purpose meaning a corporation or limited liability company organized under the laws of a State in the United States, the secured lender will start with the UCC to determine how to take its security. After all, in the event of insolvency, the U.S. business would most likely be in a Chapter 11 or Chapter 7 under the U.S. Bankruptcy Code in the United States.

Suppose the U.S.-based business is organized in Delaware. Since the company is organized under the laws of a State in the United States, the company is a “registered organization” under the UCC. For a registered organization, under UCC Section 9-307(e), the location of the company is its jurisdiction of organization. Under Section 9-301(a) of the UCC, subject to some significant exceptions provided in such section (more on that below), the law of the location of the company governs perfection, the effect of perfection or nonperfection and priority of a security interest. So, if the company is organized under the laws of the State of Delaware, it is “located” in Delaware
and the secured party would comply with Delaware law. For the perfection of a security interest in assets like accounts and inventory, this means the filing of a UCC financing statement with the Delaware Department of State.

But, in the example, this Delaware company has valuable inventory located in Mexico. Already, UCC readers are turning back to Section 9-301, the core provision for these matters, given away by its title: “Law Governing Perfection and Priority of Security Interests”. Matters start to get a bit more complex because the UCC introduces an additional concept. In particular, just to focus on “nonpossessory security interests”, Section 9-301(c) sends the secured party to the local law of the jurisdiction in which the goods are actually located to determine “the effect of perfection or nonperfection and the priority of a nonpossessory security interest in the collateral.”

Under the UCC, the laws of two different countries are now quite relevant to the secured lender. For purposes of knowing the steps to take to perfect its security interest under the UCC, the secured lender will look to the requirements of Delaware law, but to establish the “effect of perfection or nonperfection and priority” as to the inventory in Mexico the secured lender will need to turn to the laws of Mexico. This distinction between “perfection” and its “effect” is the theoretical overlay of the UCC that at least as set out in the UCC is not found in the secured transactions laws of many countries.

As a secured party it may seem enough to have a “perfected” security interest. But isn’t what really matters the “effect” of being perfected and the priority of the security interest? And, in any event, what does the “effect” of perfection (or nonperfection) really mean?

The comments to UCC Section 9-301(c) give a clear, simple example. A corporation organized under the laws of Illinois has equipment located in Pennsylvania. The secured party is perfected by filing a financing statement in Illinois, since that is where the borrower as a “registered organization” is “located” according to the UCC. But, the example goes on--if the law of the location of the borrower were to govern priority, then, for example, the priority of a judgment lien on goods located in Pennsylvania would be governed by Illinois law. Instead, the UCC says that it is the law of Pennsylvania, where the equipment is located, that will determine the priority of the secured party’s rights to the equipment relative to the holder of a judgment lien. 

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