Pub. 2 2014 Issue 2

spring 2014 19 water shares to be transferred pursuant to Article 8 but that the 1996 amendments did not overturn Cahoon and did “not transform water shares from real property to personal property, nor do they require the result that inclusion in a trust deed is no longer a valid method to perfect a security interest in water shares.” 9 In other words, the Bankruptcy Court held that (i) Cahoon is still good law; (ii) water shares are not certificated securities as defined under Article 9; (iii) water shares are real property rights; (iv) the 1996 amendments apply to the transfer of water shares but not perfection of security interests in water shares; and, accordingly, (v) the Utah Su- preme Court would rule that 70A-9a-313 does not require possession to perfect a security interest in water shares. 10 Accord- ingly, the Bankruptcy Court determined that a security interest in water shares may be perfected by including the shares in a recorded deed of trust.” While not binding precedent for Utah Courts, banks should seriously consider the Bankruptcy Court’s decision. Im- portantly, the Bankruptcy Court did not predict that the Utah Supreme Court would rule that possession of water shares is not perfection of a security interest, but its reasoning calls this method into serious question. The court predicted that the Utah Supreme Court would hold that perfection of a security interest in water shares can be accomplished by including the shares in a recorded deed of trust. 11 The Bankruptcy Court’s decision poses several challenges for banks. For example, if a borrower owned several parcels of real property within the service area of a water company, how would a potential lender be able to determine whether another lender already had a properly perfected security interest in water shares that are still in the possession of the borrower? The poten- tial lender would essentially have to run a title report on all of the parcels owned by the borrower within the service area of the water company to determine whether another lender already had recorded a deed of trust against one of the borrower’s parcels and whether that deed of trust de- scribed the water stock still in the posses- sion of the borrower. This process would be burdensome, expensive, inefficient, and is ripe for errors. Possession, on the other hand, provides the lender with some assurance that the water shares have not been pledged to another lender. And per- fection by possession (not just transfer by possession) appears to be what the Utah Legislature had in mind in 1996. In light of the recent Bankruptcy Court decision, it would be wise for lenders to review their loan files for loans secured by water shares and to review their protocols for originating loans secured by water shares. In an abundance of caution, if a lender has taken water shares as collateral, the lender should possess both the water stock certificates and a recorded deed of trust properly identifying the water shares. If the lender does not have possession of the stock certificates, it should take immediate steps to obtain possession. If the lender does not hold a recorded deed of trust identifying the shares, the lender should consider approaching the borrower about recording a modified deed of trust while the borrower is willing to work with the lender (i.e., before a default). If a lend- er accepts water shares as collateral for new loans, it should do the following: (i) conduct a title search on all lands served by the water company for recorded deeds of trust that include the borrower’s water shares; (ii) properly describe the water stock certificates in a deed of trust re- corded against real property served by the water shares (note that the land may not be collateral for the loan in some instanc- es); (iii) take possession of the water stock certificates; and (iv) provide written notice to the water company that the lender has possession of and a security interest in the borrower’s water stock certificates. While there is room for clarity in the law, wise lenders should take steps to review their loan portfolios and change their origination protocols to ensure that they properly perfect valuable security inter- ests in water shares. Lenders also should consider consolidating resources to lobby the Utah Legislature to clarify that security interests in water shares are perfected by possession, just as certificated securities under Article 9. n Brad Cahoon is an environmental lawyer at Snell & Wilmer L.L.P. who represents a variety of clients throughout the country. He focuses on achieving his clients’ business objectives by applying his extensive experience in environmental, natural resources, water and zoning law. Brad has a record of using his litigation, administrative, regulatory and government relations skills to protect his clients from arbitrary, capricious and abusive action by federal, state and local governments. His clients include financial institutions, manufacturers, oil, gas and mining companies, ski resorts, ranchers, wireless telecommunications carriers, developers, chemical companies, drycleaners, landowners, water companies, government entities and public interest groups. Brad received his Juris Doctor from the University of Utah, and earned a B.A. from Brigham Young University. He is listed in The Best Lawyers in America® and Chambers USA: Ameri- ca’s Leading Lawyers for Business® Doug Farr is a commercial litigator with a background in bankruptcy at Snell & Wilmer L.L.P. He represents clients from a broad range of indus- tries, including financial services, real estate, and insurance. His experience spans from representing creditors through the complexities of bankruptcy cases to litigating zoning and water law disputes. Doug received his Juris Doctor from Brigham Young University, where he graduated cum laude . He also earned a B.A. in anthropology from Brigham Young University. ater Shares 9 Id. at *9 10 Id. at *9. 11 Id. at *10.