Canadian lenders engaged in cross-border financing frequently require their borrowers’ US affiliates to grant security interests in their assets. The standard practice involves using U.S.-law-governed security agreements for these US entities. However, sometimes Canadian lenders or their Canadian counsel will request that a Canadian General Security Agreement (GSA) be “converted” to a US security agreement. While the desire for contractual uniformity across all cross-border obligors is understandable, relying on a poorly converted GSA can lead to serious negative outcomes and often overlooked legal risks.
One Critical Difference: Collateral Descriptions
In Canada, GSAs commonly use a broad "catchall" phrase like "...all of debtor's present and after-acquired personal property, including, without limitation, (list of specific categories of collateral)...". This order typically works under the Personal Property Security Act of the applicable Province.
However, under UCC Article 9, a supergeneric description such as "all the debtor's assets" or "all the debtor's personal property" is not considered a reasonable description for collateral in a US security agreement. The Canadian practitioner’s immediate thought might be: “But I see ‘All Asset’ language in financing statements all the time in the US?” It's an understandable point of confusion. The critical difference lies in that the UCC distinguishes between the Security Agreement, which grants the security interest, and the UCC-1 Financing Statement, which serves as public notice of that interest:
- For a Security Agreement. The UCC requires a description that "reasonably identifies" the collateral. A "supergeneric" description like "all assets" or "all personal property" is explicitly insufficient and will render the security agreement defective.
- For a UCC-1 Financing Statement. The UCC is more permissive. It allows a supergeneric description, such as "all assets" or "all personal property," to provide public notice, as long as the underlying Security Agreement contains a specific enough description to authorize it.
What This Means for Your US Security Agreement
- Specificity is Key. US security agreements should start with specific categories of collateral (often using UCC-defined terms) before any catchall phrase. The reverse order, described above and common in Canadian GSAs, adds the valid collateral description by category to an invalid supergeneric grant.
- No "Catchall" Correction. Crucially, if a specific category of collateral – like "investment property" – is omitted from a US security agreement's granting clause, the generic "any other of Debtor's present and after-acquired personal property" will not automatically cover the missing investment property, and the lender should not rely on that language as a safety net.
- Required Precision. Certain valuable assets, like "commercial tort claims" (for example, claims for contractual interference), cannot be described by category under the UCC. These must be described specifically and individually within the security agreement to be covered.
Don't Let the Pursuit of Uniformity Undermine Your Security
While the appeal of standardized documentation in cross-border transactions is understandable, prioritizing uniformity over the effectiveness of a security interest can lead to significant risks. To properly grant a security interest under US law, Canadian lenders have two primary options:
- Utilize a US Security Agreement. This ensures that the document is drafted specifically to meet the UCC's requirements.
- Carefully Convert a Canadian GSA to a US Security Agreement. This conversion requires legal advice and meticulous attention to detail to align with US legal standards for granting security interests.
Protect Your Interests – Get a Comprehensive Review
There are many other nuances and critical considerations beyond collateral description when structuring cross-border financings and preparing US security agreements. Don't leave valuable collateral vulnerable due to an ill-considered conversion or other oversight.
Ensure your cross-border security agreements truly protect your interests. Contact our experienced Cross-Border Finance team at Hodgson Russ LLP for a review of your loan and security structuring and other US law requirements.
About the Authors
Christofer Fattey and Danijel Augustinovic are partners at Hodgson Russ LLP. They concentrate their practices on representing borrowers and lenders in secured lending and other transactions, with an emphasis on cross-border financings.
Disclaimer:
This blog is a form of attorney advertising. Hodgson Russ LLP provides this information as a service to its clients and other readers for educational purposes only. Nothing in this blog should be construed as, or relied upon, as legal advice or as creating a lawyer-client relationship.
This article was originally published by Law360 Canada (www.law360.ca) a division of LexisNexis.
