It Is All In The Details!

Whether it is the devil or God who is in the details depends on who you are listening to. (Hyman George Rickover vs. Mies van der Rohe) But when it comes to documenting loan transactions, it seems pretty clear that it is the former!

As someone who represents lenders nearly all of the time, I have certainly seen a myriad of ways that a loan transaction can take a sudden turn for the worse when a lender didn’t understand the significance of what appeared to be a very small detail.

We’ve all been faced with a pledge of a certificate of deposit jointly titled in the name of a husband and wife. The husband is the guarantor, so, of course, he would sign the pledge. The lender, being aware of the requirements of Regulation B, didn’t ask the wife to guaranty the loan. As a result of not guarantying the loan, the lender also didn’t have her she sign the pledge. But what happens if husband dies? Well, in that case, the collateral did too—at least to the lender! The certificate of deposit has now moved to the wife by operation of law.

But what if the collateral in question is stock in a business and the stock indicates that it is subject to TOD? What does THAT mean? TOD stands for Transfer on Death, and it works pretty much the way the jointly held CD or, to pick an even more similar example, the way that a POD (payable on death) would work.

While there are ways that the loan can be structured to avoid these particular issues, the problem is in identifying them in the first place. If there are questions regarding a transaction, these should be reviewed before the loan is documented, if at all possible, to avoid unintended consequences like having the collateral “evaporate.”

Please feel free to contact us if you have any questions on your loan transactions.

Posted by: Kimberly K. Mauer

Categories: Bankruptcy & Banking Law