For those of you who have always wondered what a “commercial tort claim” is, and what to do when you have one, today’s the day you’ll get your answer.
A commercial tort claim might arise when a corporate borrower has a claim that it can make against someone else for harm it has suffered. For example, let’s say a fire starts in a neighboring property due to the negligence of the neighbor. The fire spreads and burns down the borrower’s warehouse, destroying the structure and all the inventory inside. Having suffered this loss, the borrower has a claim against the neighbor for causing the destruction. That claim is a commercial tort claim (“commercial” because the borrower is a business, and “tort” because it is a type of claim that “arises in tort” under state law).
The claim is an asset of the borrower because any judgment in the case would be owed to the borrower (not the other way around). So, the claim is something that could be treated as collateral for a loan — something a lender could take a security interest in.
There are special rules that apply when you want to take a security interest in a commercial tort claim.
First, you have to describe the claim with specificity in your security documents. So, you would need to say something like “all tort claims arising out of the destruction of Debtor’s warehouse” rather than just “all commercial tort claims”. This is different from most other types of assets, which you can describe in just general terms.
But what if the tort claim arises after the security agreement has been signed? At that point, it’s too late to be specific, right? To protect yourself in this situation, a “best practice” would be to require the borrower to periodically report on the existence of additional assets such as tort claims, and provide a process for amendment of the security agreement to include such updates.
If you don’t have a provision like that in your agreement – or if it’s too late to amend the agreement to include the claim – can you rely on the inclusion of the “proceeds” of collateral in the granting language in your security agreement? Well, yes and no. In a case from the First Circuit last year (In re American Cartage, Inc., 656 F.3d 82 (2011)), the court found that the right to pursue a commercial tort claim itself can’t qualify as “proceeds” of other collateral. However, distinct from the right to pursue the claim, the right to payments from the tort claim could qualify as proceeds of collateral (for example, proceeds of the inventory that was destroyed), and thus could be treated as included in the lender’s security interest. Other courts have made similar findings. So, you can get the right to the recovery, but not the right to the claim itself, unless you have used specific language to include the claim as part of your collateral. Good to know.