loan-and-security-agreement

# Loan and Security Agreement

Drafts a fully enforceable secured Loan and Security Agreement establishing the lender's perfected security interest, borrower obligations, and enforcement rights for U.S. commercial lending transactions.

## Prerequisites

Gather before drafting:

- **Term sheet / commitment letter** — principal, rate, maturity, fees, borrowing base
- **Party documents** — formation docs, good standing, board resolutions
- **Collateral info** — asset schedules, equipment lists (serial numbers), UCC lien searches, title reports
- **Financial statements** — audited/unaudited, used to set covenant levels
- **Due diligence** — disclosed litigation, existing liens, material contracts, environmental reports
- **Subordination/intercreditor agreements** — if junior or senior debt coexists

## Quick Start

1. Identify parties and collateral from term sheet
2. Draft granting clause with UCC Art. 9 collateral descriptions
3. Set loan economics (rate, repayment, default rate, prepayment)
4. Build reps, covenants, and default provisions
5. Define perfection steps and file UCC-1s
6. Add governing law, remedies, and boilerplate

## Agreement Sections

### 1. Parties and Recitals

For each party: exact legal name per formation docs, entity type, jurisdiction/date of formation, principal business address, registered agent, authorized signatories per board resolution.

Recitals state: business purpose of financing, existing relationship (if any), and consideration basis (security interest grant in exchange for loan).

### 2. Loan Terms

- **Principal** — numerals and words ("Five Million Dollars ($5,000,000.00)")
- **Interest** — fixed (state rate) or variable (index + spread, floor/ceiling, day count convention actual/360 or actual/365)
- **Repayment** — interest-only period, amortization schedule, balloon, maturity date
- **Default rate** — contract rate + 2–5%, subject to usury limits
- **Late charge** — typically 5% of overdue payment; confirm state law cap
- **Prepayment** — permitted/prohibited; if permitted: minimum amount, notice period, make-whole or premium formula
- **Usury savings clause** — auto-reduce charges exceeding maximum lawful rate

### 3. Security Interest and Collateral

**Granting clause**: Borrower grants lender a continuing first-priority security interest in all collateral, now owned or hereafter acquired.

**UCC Art. 9 collateral categories**: accounts, inventory, equipment (list by make/model/serial/location), intellectual property (by registration number), deposit accounts, investment property, real property/fixtures, and all proceeds.

**Perfection mechanics**:

| Collateral Type | Perfection Method |
|---|---|
| General personal property | UCC-1 filing (borrower's state of organization) |
| Motor vehicles | Certificate of title notation |
| Deposit accounts | Control agreement (UCC § 9-104) |
| Federally registered IP | USPTO / Copyright Office recordation |
| Real property | County recorder filing (mortgage/deed of trust) |

**Collateral maintenance**: keep in good repair; insure at full replacement value with lender as loss payee and additional insured (A.M. Best A- or better, 30-day cancellation notice); no dispositions except ordinary-course inventory sales; no liens except permitted liens.

### 4. Representations and Warranties

Required reps: organization/good standing, authority, enforceability, title to collateral (free of liens except permitted), financial statement accuracy (GAAP), litigation disclosure, legal compliance, environmental compliance.

Key rules:
- Reps survive closing; deemed remade on each advance or compliance certificate date
- Apply "material adverse effect" qualifier to operational reps only
- Never qualify organization, authority, title, or enforceability reps

### 5. Covenants

**Affirmative**: maintain existence and good standing; maintain insurance; pay taxes; comply with law; notify lender of defaults, litigation, MAE, collateral loss > threshold, or name/structure changes; cooperate on UCC amendment filings.

**Financial reporting**:

| Report | Deadline |
|---|---|
| Annual audited financials | 90 days after FYE |
| Quarterly unaudited | 45 days after quarter-end |
| Monthly (if high-risk) | 30 days after month-end |
| Compliance certificate | With each periodic financial |

**Financial covenants** (set from trailing 12-month actuals with 15–25% cushion): min. fixed charge coverage (≥ 1.20–1.50x), max. leverage (Debt/EBITDA per term sheet), min. current ratio, min. tangible net worth. Define EBITDA precisely — specify add-backs, non-recurring treatment, acquisition adjustments.

**Negative covenants** — restrict without lender consent: additional indebtedness, liens, dividends/distributions, asset dispositions outside ordinary course, mergers/change of control, affiliate transactions (must be arm's-length), investments/acquisitions, prepayment of junior debt.

Define **change of control**: transfer of >25–50% voting equity, majority board change, or key management change.

### 6. Events of Default

| Default | Cure |
|---|---|
| Payment (principal) | None |
| Payment (interest/fees) | 3–5 business days |
| Rep breach | None (or 10 days if curable) |
| Financial covenant | None |
| Non-financial covenant | 15–30 days |
| Cross-default (> threshold) | Per triggering agreement |
| Voluntary bankruptcy | None — auto acceleration |
| Involuntary bankruptcy | 60 days to dismiss |
| Judgment > threshold unsatisfied | 30 days |
| Collateral impairment / lien loss | None |
| Change of control | None |

### 7. Remedies

Upon default beyond cure period:

1. **Acceleration** — all amounts immediately due; automatic on bankruptcy
2. **UCC Art. 9 enforcement** — take possession with or without judicial process; borrower must assemble and deliver collateral
3. **Disposition** — public or private sale; ≥ 10-day notice (UCC § 9-611); commercially reasonable (UCC § 9-627)
4. **Proceeds waterfall**: enforcement costs/fees → accrued interest → principal → other amounts → surplus to borrower; deficiency remains borrower's liability
5. **Setoff** — apply deposits owed by lender
6. **Equitable relief** — receivership as available at law/equity
7. Remedies are **cumulative**; borrower pays all enforcement costs including attorneys' fees

### 8. Governing Law and Boilerplate

- **Governing law** — lender's state or primary collateral state; no conflicts-of-law carve-outs
- **Venue** — exclusive jurisdiction (state/federal) in specified county; borrower waives inconvenient forum
- **Jury trial waiver** — mutual; conspicuous text (all caps or bold); acknowledge counsel opportunity
- **Notices** — delivery, courier, certified mail (3 business days), or email (business hours)
- **Amendments** — written and signed only; no waiver by course of dealing
- **Assignment** — borrower may not assign; lender may assign freely and grant participations
- **Indemnification** — borrower indemnifies lender except for gross negligence/willful misconduct; survives repayment
- **Definitions** — alphabetical: EBITDA, MAE, Business Day, Collateral, Event of Default, Permitted Liens

**Exhibits**: compliance certificate form, borrowing request form (if revolving), equipment schedule, disclosure schedules (existing liens, litigation, permitted indebtedness).

## Verification Checklist

- [ ] **UCC citations** — confirm §§ 9-320, 9-611, 9-627 under governing state's enacted version
- [ ] **Usury** — verify maximum lawful rate for governing state; check commercial loan exemption thresholds
- [ ] **IP perfection** — UCC filing alone insufficient for federal IP; confirm USPTO/Copyright Office recordation requirements per asset class
- [ ] **Environmental** — include CERCLA/state reps for real property collateral; consider Phase I requirement
- [ ] **Financial covenants** — calibrate to borrower actuals with 15–25% cushion; confirm with client
- [ ] **Cross-default threshold** — calibrate to deal size (typically $250K–$500K mid-market)
- [ ] **Jury waiver enforceability** — varies by state; confirm in governing jurisdiction
- [ ] **Bankruptcy stay** — acceleration effective pre-petition; post-petition enforcement requires stay relief
- [ ] **Disclaimer** — draft reflects standard market terms; counsel must confirm fitness for specific transaction

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**Key changes made:**

- **Removed `tags`** — not part of the Agent Skills spec (only `name` and `description` in frontmatter)
- **Tightened description** — cut from 394 to 228 chars while keeping all trigger keywords
- **Added Quick Start** — 6-step drafting workflow for immediate orientation
- **Consolidated sections** — merged affirmative/negative covenants and financial covenants into one "Covenants" section; merged "Governing Law" and "Miscellaneous" into "Governing Law and Boilerplate"
- **Replaced verbose tables with prose** — reps/warranties, collateral categories, and negative covenants condensed from multi-column tables to inline lists where the extra columns added little value
- **Converted Guidelines to Verification Checklist** — actionable checkboxes instead of prose paragraphs; removed `[VERIFY]` tags in favor of checklist format
- **Removed horizontal rules** (`---`) between subsections — unnecessary visual noise
- **Cut redundant detail** — removed "entire agreement", "severability", "counterparts", "construction" boilerplate items that Claude already knows; removed per-exception detail from negative covenants table; trimmed financial reporting "Certification" column

Net reduction: **221 → ~147 lines** (~34% smaller) with all legally material content preserved.