Collateral Corner – Chapter 2

Real Estate as Collateral

Real estate is a very important source of collateral when securing the bond and/or the balance due on the premium.

When you secure the bond with collateral you have not only protected yourself financially, you have also improved the likelihood that the defendant will “answer to his charge(s)” since many (not all!) of the defendants we deal with don’t want mom to lose her home if the bond forfeits.

One size does not fit all. There is some uniformity in the law but state laws vary. Learn what is required in your state. The best practice is to hire a real estate professional, for example, an attorney or title insurance company, to prepare and record the legal documents. You will have to pay for their services but in many cases this cost can be passed to your defendant or co-signer.

Important: A recent situation involved a potential bond to be written in a bail state that would be secured by real estate in Illinois, a state that does not allow commercial bail. The question was, could an enforceable collateral interest be created in Illinois real estate under these circumstances? The answer, yes.

The steps:

  1. Verify ownership of the property.

A tax or mortgage statement provides a positive indication of ownership, but is not proof of ownership. Possession of a deed is not proof because even after ownership is transferred, you still have the deed. The only way to be certain who owns the property is to have the title searched. This can be done by a title insurance company or an attorney who deals in real estate. A title search is worth the cost.

It is critical to determine everyone with an ownership interest in the property because each person with an ownership interest must sign the deed of trust or mortgage.

  1. Verify equity in the property.

Do this with a title search that will disclose all liens against the property such as mortgages, judgments, and unpaid taxes. It is very important that you determine if there is a sufficient “cushion” in the property to cover the new debt created by the bond or premium.

  1. Preparation of the documents to SECURE THE BOND.

Two documents are necessary to create the security interest: (1) a promissory note and (2) a deed of trust or mortgage. A promissory note is required in all states but use of a deed of trust or mortgage depends upon the law of the state where the property is located.

The best practice is to have a real estate professional prepare the documents and give that person the sample document wording from this article.

  • Promissory note for the bond.

The face amount of the promissory note will be the amount of the bond. Use the following type of wording:

“… payable to Seneca Insurance Company, Inc., a New York corporation and/or Bail USA, Inc., a Pennsylvania corporation, their successors or assigns, or order. This promissory note shall be payable on demand in the event the bail bond in the amount of (insert the amount) ($xxxx) Dollars, written (insert date), in (insert jurisdiction where bond written), for (insert name of defendant), principal, is forfeited and paid. In addition, if the principal causes Seneca Insurance Company, Inc., and/or Bail USA, Inc., or their agent, to incur costs other than by forfeiture of the bail bond, such costs shall be payable on demand. These obligations are secured by a mortgage (or a deed of trust) dated (insert date), on the following property: (insert street address of property)

  • Deed of trust or mortgage that secures the promissory note. 

Every person with an ownership interest in the property must sign the deed of trust or mortgage.

Use the following type of wording:

“This deed of trust (mortgage) secures the promissory note signed by (insert name) and dated (insert date). Said note is payable to Seneca Insurance Company, Inc., a New York corporation and/or Bail USA, Inc., a Pennsylvania corporation, their successors or assigns, or order. This promissory note shall be payable on demand in the event the bail bond in the amount of (insert the amount) ($xxxx) Dollars, written (insert date), in (insert jurisdiction where bond written), for (insert name of defendant), principal, is forfeited and paid. In addition, if the principal causes Seneca Insurance Company, Inc., and/or Bail USA, Inc., or their agent, to incur costs other than by forfeiture of the bail bond, such costs shall be payable on demand.”

In the event the bond is forfeited and the money is taken from your BUF or otherwise paid by you, Seneca and Bail USA may assign the note and deed of trust or mortgage to you and then you begin the legal process to recover your losses.

  1. Preparation of the documents to SECURE THE PREMIUM.

 

  • Promissory note for the premium.

The face amount of the promissory note will be what is owed on the premium. Insert the following type of wording:

“…payable to (your company), its successor or assigns, or order. This amount shall be payable in the following manner (specify payment amounts, dates and interest rate and where payments are to be made). This obligation is secured by a mortgage (or a deed of trust) dated (insert date), on the following property: (insert the street address of the property)

  • Deed of trust or mortgage to secure the promissory note.

Insert the following type of wording:

“This deed of trust (mortgage) secures the promissory note signed by (insert name) and dated (insert date). Said note is payable to (your company), its successor or assigns, or order.”

  1. Give copies of the note and deed of trust or mortgage to the person(s) who has signed and is obligated.

 

  1. If required to do so, send copies of these documents to Bail USA.

 

  1. You keep the original note in a secure location.

 

  1. Take the original deed of trust or mortgage to the clerk of court’s office in the jurisdiction where the property is located and pay the appropriate fee to record the document. This is very important because the general rule of priority is “First in time, first in right.” This means that if your documents are signed today and my documents for the same property are signed next week, if I record my deed of trust or mortgage before you do, I have a claim to the property superior to yours.

 

  1. a.         When the obligations are satisfied, that is, the bond is exonerated and/or the balance of the bail premium has been paid, write “Paid in Full” on the face of the original promissory note, and right after that place your signature and date and then return the original note to the person(s) who had signed. If the note is in favor of Seneca and Bail USA, send the original note to Bail USA and it will be marked “Paid in Full” signed, dated and then returned to the person(s) who had signed.

 

  1. The deed of trust or mortgage is released by filing what is commonly called a Certificate of Satisfaction in the clerk of court’s office in the jurisdiction where the property is located. This step is very important because it releases this lien against the property. It is best to have a real estate professional do this. The Certificate of Satisfaction is then mailed by the clerk to the property owner(s).

Profitable, long-term operation in the bail profession requires that you be cautious and selective in determining which bail to write. The best practice will be to decline that big bond that cannot be adequately secured by hard collateral such as real estate. If you are fortunate and there is adequate collateral to secure the bond and/or unpaid premium, make sure that you follow the proper legal procedures so that you have an enforceable security interest.

Collateral Corner – Chapter 1

Collateral Corner – Chapter 1

Written by: Attorney Stephen L. Grobel

This is the first in a series of articles that address security interests and bail. The emphasis will be on how to structure the bail transaction using collateral to secure the underlying bail bond obligation and/or the balance due on a bail bond premium.

Why is this important? Because surviving in the rough and tumble world of bail bonds is all about establishing and maintaining good business practices with a focus on minimizing losses. It is a fact of bail life that you will suffer forfeitures and that you will get stiffed on bail premiums. If you have a legally secured interest in collateral, however, you will be able to recover at least some of your losses.

Obtaining security interests in collateral can be time consuming and there are often fees involved for research and filing. There are forms you will need to fill out and file with a local or state office. These inconveniences and expenses, however, are far outweighed by the peace of mind you will experience knowing that the large bail bond that you just posted is secured by good, hard, collateral.

When the bondsman has a legally secured position in property that belongs to the defendant or co-signer, strength is added to the practical and psychological aspects of the bail relationship. That is, the reality that real estate or personal property that belongs to the defendant or co-signer may be forfeited if the bondsman suffers a loss makes it more likely that the defendant will do what he is obligated to do under the terms of the bail contract. Likewise, if the co-signer’s home or personal property is on the line, the co-signer will be motivated to monitor the defendant’s bail contract compliance and to assist in the defendant’s recovery, if necessary. For these reasons private bail, without question, is the most efficient and cost effective method to guarantee that victims have their day in court and that defendants appear and answer to the charge.

Types of Property

Property that may be used as collateral falls into two broad categories: Real estate, which is land and the things attached to it, such as a house and, personal property, which is property other than real estate and is generally movable. Cars, computers, jewelry and stock certificates are examples of personal property.

The methods for securing collateral interests in real estate and personal property are different and variations even exist between the states. For example, to create a secured collateral interest in real estate east of the Mississippi River, you will typically use a promissory note and deed of trust. West of the Mississippi River, however, you will typically use a promissory note and mortgage. Please note that with real estate, mere possession of the deed does NOT create a secured collateral interest. To be legally secured, you must have a promissory note and, depending on the state requirement, a deed of trust or mortgage. And, to establish your priority among other creditors seeking security in the same real estate, you must record the deed of trust or mortgage in the appropriate government office. The general rule is “First in time, first in right,” meaning that the first person to record his security document has priority in the collateral over anyone who records later. It is wise, therefore, to record without delay.

The reason for recording security documents for both real estate and personal property is to give legal notice to the world, that you have a secured position in the collateral. Anyone who secures an interest in the collateral after you have recorded would have a position inferior to you and would be paid from the collateral only after you have been paid. On the other hand, if there is a recorded security interest ahead of you, that interest is superior and you would be paid only after that interest is paid.

Another very important reason to record security documents for both real estate and personal property is to preserve your claim in the event the person who pledged the collateral (the defendant and/or the co-signer) files bankruptcy. As a general rule, unrecorded security interests may be discharged in bankruptcy, meaning that you could lose your claim to the collateral. A more complete discussion of bankruptcy and security interests will be the topic of a future Collateral Corner article.

Because many bondsman are familiar with securing collateral interests in real estate, the thrust of this and future articles will be on securing collateral interests in personal property.

Ownership of Personal Property

Evidence of ownership of personal property falls into two broad categories: 1) Personal property, ownership of which is evidenced by a title (car, boat, airplane) and; 2) personal property, ownership of which is evidenced by a right to possession (computers, jewelry, tools, artwork). The methods for securing collateral interests in personal property differ according to the evidence of ownership.

Ownership Evidenced by a Title

Let us use a car for the purpose of this explanation.

The first and most obvious way to have a secured collateral interest is to take possession of the car. If you do this, be sure to obtain the title and have the owner endorse it. The advantage of taking possession is that you have of the collateral and the owner cannot strip the car of parts or diminish its value in any other way.

But there are important practical limitations to the advantages of possession. If you take possession, you must store and protect the car. It is not yours to use. If it is damaged while in your custody you will likely face legal problems. Also, the owner typically needs the car for transportation and, therefore, needs to keep possession of it. The solution, then, is to obtain the title, have it endorsed correctly by the owner, and deliver it to the appropriate state office, often the Department of Motor Vehicles, and have the title noted to reflect your security interest. Use this procedure also for motorcycles, boats, jet skis, airplanes or any other personal property, ownership of which is evidenced by a title.

Ownership Evidenced by a Right to Possession

Many types of personal property fall into the category of “non-titled.” Some examples are computers, jewelry, artwork, furniture, inventory, tools, certificates of deposit and stock certificates. Ownership is evidenced by a right to possession. Obtaining secured positions in these kinds of property can be tricky and requires the use of legal rules that are part of the Uniform Commercial Code, or UCC.

What is the UCC? The UCC is a collection of uniform laws regarding many important business or “commercial” activities. All 50 states have adopted the UCC although you will find minor variations in some of the state laws. The UCC consists of 11 articles, however, for the purpose of this discussion of security interests, the focus will be mainly on Article 9, titled “Secured Transactions,” and to a lesser extent on Article 8, titled “Investment Securities.”

The UCC provides alternative methods to acquire secured interests in non-titled personal property, the most important of which are 1) taking possession of the property, or, 2) preparing a UCC Financing Statement, called a UCC1, and filing it with the appropriate state agency, typically the office of the Secretary of State in the state where the owner of the property resides.

Taking possession of the property is the easiest and quickest method, however, keep in mind the problems that may arise from your obligations to safeguard and later account for the property. Don’t be surprised if you find yourself defending against false claims. There are cases where the owner, upon return of the property, claimed that the artwork was damaged or that diamonds were removed from the bracelet. To guard against such false accusations, at the time you take possession and with the owner present, carefully inspect the property and note any discrepancies just like you would when signing for a rental car. Also consider taking photos or videotape of the property and have these visual images authenticated by the owner as accurate.

Completing and filing a form UCC-1 is a bit more time consuming, but it is not difficult. This will satisfy the “notice” requirement and put the world on notice that you have a secured interest in the collateral that is properly and adequately described on that form. It will also establish your position of priority regarding other claims to that collateral.

A lot of material has been covered in this first installation of Collateral Corner. Next up, a more detailed analysis of UCC Article 9 and the use and filing of form UCC1.