Can I secure a promissory note using unvested restricted stock units? 4 Answers as of April 25, 2014

Party A borrows money from private Party B and they execute a promisory note. Party A, knowing that he may soon file for bankruptcy and out of moral obligation to Party B, attempts to securitize the loan against unvested restricted stock units that vest during the duration of the promissory note. Is this possible? What would the mechanism be? A lien against the stocks?

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Janet A. Lawson Bankruptcy Attorney
Janet A. Lawson Bankruptcy Attorney | Janet Lawson
You need to see local counsel. First of all, creating a security interest on the eve of bankruptcy is ineffective. It can be set aside by the trustee. Second it would probably require a UCC filing. This should not taken on by a novice.
Answer Applies to: California
Replied: 4/25/2014
Law Offices of David H. Relkin
Law Offices of David H. Relkin | David H. Relkin
However the procedure would work, whether as a lien or as an assignment of the unvested stock, the improvement of position of B by the transfer of greater security to support the note would likely result in an assertion by A's creditors as a "fraudulent transfer" under the NY Debtor and Creditor law. The same result would occur whether you filed for bankruptcy since the Trustee would have the benefit of the Debtor and Creditor Law and the strong arm powers in Section 548 of the Bankruptcy Code. That being said, you should contact me since I have litigated these types of matters dozens of times, and there is a way to securitize the note without creating an avoidable transfer. Problems: Unvested Stock, Restricted Stock, Nature of Promissory Note.
Answer Applies to: New York
Replied: 4/25/2014
Law Offices of Eric W. I. Anglin
Law Offices of Eric W. I. Anglin | Eric W. I. Anglin
If the promissory note is not secured by the stock then it cannot be secured later. You could rewrite the promissory note to add a security interest. If the creditor is an insider then the promissory note could be invalidated and the stocks could be subject to turnover for other creditors if the stocks are not exempt in your jurisdiction. Be careful and consult an attorney.
Answer Applies to: Indiana
Replied: 4/25/2014
While the procedure would, more than likely, be a pledge of the stock, the problem that would arise is that of a preferential transfer whereby Party B would be getting an improved position over other unsecured creditors. In such case, and depending on time and relationship between Party A and Party B, the trustee in bankruptcy could set aside the transfer [pledge] and sell the stock - if it has any market value.
Answer Applies to: Ohio
Replied: 4/25/2014
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