Loan documents used by institutional lenders always have a description of collateral in a secured loan transaction. But what happens when a lender tries to use an “old” security agreement, initially agreed upon and signed in connection with an earlier loan, to scoop up collateral not specifically covered in a later security agreement? That was the question put to a court in the case of Jipping v. First National Bank of Alaska.*
The old security agreement, entered into in 2009, specifically covered deposit accounts as collateral. It also had a future advances clause and a cross-collateralization provision. That is, the language in the 2009 security agreement said the collateral secured not only the advance made at loan closing but any future advances made by the lender as well. The borrower paid off this loan in 2011.
Two years later, in 2013, the borrower obtained another loan from the same lender, which was booked with a whole new set of loan documents, including a new security agreement that contained a different collateral description that did not mention any deposit accounts. The 2013 loan agreement contained a standard form integration provision stating that the 2013 loan agreement and other loan documents related to the loan contained the entire agreement between the parties with respect to the subject loan. The 2009 loan documents were never terminated although the loan had been paid off.
Later, when the borrower suffered financial trouble and filed a bankruptcy petition, the lender argued that the 2009 security agreement, which included the deposit accounts, was still effective and gave the lender a lien on the deposit accounts. In its ruling (after an appeal), the 9th Circuit Court of Appeals, the federal court with jurisdiction in California, leaned on the integration clause and a “common sense” interpretation. The court held that, notwithstanding the broad cross collateralization and future advance provisions of the 2009 security agreement, the lending bank did not hold a lien on the deposit accounts. The integration clause in the 2013 security agreement, the court ruled, meant what it said and the parties at that time did not contemplate relying on the 2009 security agreement. The court analyzed in detail several provisions of the 2013 security agreement and concluded it would, in the court’s words, “[give] ordinary words their ordinary meaning….” Given the integration clause, the Court was not inclined to include the old 2009 security agreement among the “related documents” that evidenced the loan. The court thus held that the 2009 security agreement had no effect and the broader language it contained did not apply.
The takeaway for lenders is that the more or less boilerplate integration clause in virtually every loan and security agreement actually means something! If you are relying on a earlier-signed documents and are concerned an integration clause may leave them out, having the borrower reaffirm the prior document(s) is one way (and generally an efficient way) of ensuring they have effect in a new transaction. In any event, always be careful and thoughtful if you are relying on documents executed earlier in time than the new loan or promissory note. And if you are viewing it from the borrower side, you may want to ensure that loan documents have express termination dates.
One additional comment: in a non-bankruptcy situation the lending bank would still be able to rely on its banker’s lien rights to obtain access to the borrower’s deposit accounts. However, the Jipping case involved a bankruptcy and the trustee’s strong arm powers enabled the trustee, in these circumstances, to take priority over the lender’s banker lien rights. This nuance is unique to deposit accounts held at the lender. The important point here is to recognize how an appeals court construed the language in serial loan documents and the integration clause, and not focus on the particular collateral discussed. The principle set forth in the Jipping case remains broadly valid whenever a lender is relying on the enforceability of earlier loan documents as applied to a new loan.
*Jipping v. First National Bank of Alaska (In re. Omni Enterprises, Inc.) 568 B.R. 321 (2017).
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