July 2005 Legal Briefs

• “Four-Wheelers” Require Certificates of Title and Lien Entries
• Continuing Liens for Repair of Farm Equipment
• Mechanic’s Lien Provisions Changed for Motor Vehicles
• Changes in Items of Property Exempt in Bankruptcy
• Amendments to Family Wealth Preservation Act

“Four-Wheelers” Require Certificates of Title and Lien Entries

House Bill 1297, effective July 1, changes how lenders must perfect a security interest in “all-terrain vehicles” (ATV’s) in Oklahoma (also called “four-wheelers”).

In most cases, if an ATV (new or used) is purchased or transferred after June 30 it will need a certificate of title, and the lender must perfect a security interest by recording a lien on the title.  Persons who already own an ATV before July 1 are not required to get a certificate of title, but the next owner will need one.  Farmers do not need certificates of title.  If an ATV owner is not required to obtain a certificate of title, the lender’s security interest will remain perfected by a UCC filing.  Of course, ATV’s that are “inventory” can be perfected only by UCC filing—the same as for cars.

On or after July 1, anyone taking ownership of an off-road ATV (four-wheeler), new or used, must apply to the Oklahoma Tax Commission for a title.  (Lenders taking ATV’s as collateral should insist on compliance for all vehicles acquired after June 30—except for farmers with agricultural exemption permits.)

ATV’s will have Tax Commission decals (similar to boats), not license tags.

A person who already owns an ATV before July 1 is permitted but not required to obtain a certificate of title after June 30.  This may create a trap for lenders. Suppose a person already owns an ATV before June 30, and already has a secured loan, perfected by a UCC filing.  If that owner voluntarily applies for a certificate of title after June 30, the lender will become unperfected unless a lien is recorded on the title.  If no title is applied for, the lender will remain perfected by the existing UCC filing. (UCC filings generally cannot perfect a security interest if the collateral is covered by a certificate of title.)
 
The safest way for banks to protect themselves might be to require all ATV owners (new and existing customers) to obtain a certificate of title on their ATV’s, so that the bank can record a lien on the title.  (Banks should consider whether to go this far or not, because farmers and existing ATV owners are not legally required to obtain a title.)

Continuing Liens for Repair of Farm Equipment

Senate Bill 419 changes the mechanic’s lien provisions for farm equipment, effective November 1.  

Under previously existing law (42 O.S. Section 91), someone who performs repairs or improvements with respect to any kind of personal property (including farm equipment), or provides storage or other services, has a lien on the property for the amount owed—and can retain possession of the property until the owner pays.  After certain additional steps, the service provider can sell the property to recover the amount owed.  

However, if the repairman releases the property before receiving payment, the mechanic’s lien goes away, as does that person’s right to sell the property to satisfy what’s owed.  For this reason, a repairman (such as an auto repair shop) typically will not give up possession of repaired property unless payment is received.

This year, this bill’s author argued that a farmer is a special case:  His crop has to be planted or harvested at a certain time, and he needs his equipment to do this.  If the farmer can’t pay for equipment repairs until his crop is harvested, but can’t harvest his crop until his equipment is repaired and available to him, he has a problem.  Senate Bill 419 deals with this issue.
 
Effective November 1, Senate Bill 419 deletes “farm equipment” from coverage under the general mechanic’s lien provisions in 42 O.S. Section 91, which were summarized above.  Instead, it creates a new, separate, mechanic’s lien provision (42 O.S. Section 91.2) with respect to farm equipment.

Under Section 91.2(A), a person who performs work, or makes repairs or improvements on any farm equipment will have a first and prior lien on such equipment for the total value of the services performed, material used, and equipment replaced, added or installed.  The lien will have first priority (ahead of a lender’s perfected security interest) only while the repairman retains possession of the farm equipment.  (This much is the same as previous treatment under Section 91.)

What’s new under Section 91.2(B) is that a repairman will have a method of maintaining a lien even after releasing the farm equipment.  Within 90 days after releasing the equipment to the owner, the lien claimant can file a sworn statement with the County Clerk’s office in the county where the equipment’s owner resides.  (If the equipment’s owner lives out of state, the filing is made with the County Clerk in the county where the equipment is located.)

This lien statement must indicate the legal name (not a nickname) of the owner of the equipment, the items of the account, and a description of the equipment on which the lien is claimed. This lien which is perfected by filing (after the repairman has surrendered possession of the equipment) will be subordinate to any perfected security interest; but of course it stands ahead of unsecured creditors with respect to any “equity” in the equipment.

New Section 91.2(C) includes another provision, allowing the same mechanic’s lien protection for someone who never takes possession of the farm equipment, but provides services, repairs, improvements or towing.  (Under the old provisions of Section 91, this person had no way to acquire a lien, except by possession.)  Within 90 days after work was last performed, materials were last provided, equipment was last replaced, added or installed, or the farm equipment was last towed or stored, the lien claimant will be able to file a lien statement with the County Clerk, the same as described above.  Because the provider never had possession of the equipment, this lien will be subordinate to any perfected security interest.

After a lien is filed (under either Section 91.2(B) or 91.2(C)), the lien claimant will have one year to take legal action to enforce or foreclose the lien.

One disadvantage for lenders under the new lien provisions covering farm equipment is the 90-day window after a repairman releases possession of the equipment, before a lien statement is required to be filed with the County Clerk. During this time period, a lender has no way of knowing that a lien is pending, unless the farm equipment’s owner says so.

Under prior law, if a lender saw farm equipment located at the owner’s farm, it was a safe conclusion that there was no mechanic’s lien. The new provisions aren’t that simple.  For a lender that already has a perfected security interest, the equipment that goes to the shop and comes back may have a lien pending, but it will be subordinate to the lender.

On the other hand, when a lender is making a new loan on the owner’s existing farm equipment, it will no longer be possible to know that there is no mechanic’s lien, just by seeing the equipment in the farmer’s possession.  Beginning November 1, a lender may want to check for mechanic’s liens on file in the county, before lending on existing farm equipment.  

In addition, lenders should be aware that, because of the new 90-day period to file a lien, it’s possible that a mechanic’s lien is already eligible for filing, although not yet on file.  (A mechanic’s lien will be back-dated to when the services were provided, and apparently can take priority over a lender’s security interest that is perfected after the repair services were performed but before the lien is filed.)  

For real estate loans, it’s already a standard practice to get a lien statement from the borrower, stating that no repairs or improvements have been made to the property in the previous 90 days that could result in a mechanic’s or materialman’s lien being filed against the real estate.  Similarly, in light of the new “farm equipment” lien procedure, a lender may want to obtain a lien statement from the borrower that no work has been performed or services provided with respect to the farm equipment in the previous 90 days that could give rise to a mechanic’s lien.

 The definition of “farm equipment” covered by these new provisions appears in Section 91.2(D).  It means “equipment” (defined in UCC Revised Article 9) that is primarily used in connection with a “farming operation” (also defined in Revised Article 9). 

Mechanic’s Lien Provisions Changed for Motor Vehicles

Effective November 1, 2005, Senate Bill 835 makes changes to the mechanic’s lien provisions for vehicles registered with the Oklahoma Tax Commission or a federally recognized Indian tribe.

Previously, vehicles have been treated no differently from other personal property, under the general mechanic’s lien provisions of 42 O.S. Section 91, discussed earlier.  A mechanic’s lien on personal property (including vehicles) simply took priority over a perfected security interest in the same property, as long as the person performing the work retained possession of the property.  

Amendments to Section 91 impose some new requirements on repairmen or other service providers who retain possession of a registered motor vehicle because of non-payment of their bill.  First, storage fees will not start accruing until the lien claimant has given an appropriate “notice of lien” to “interested parties.”  (For ordinary vehicles, outdoor storage cannot exceed $15.00 per day, and indoor storage cannot exceed $25.00 per day.)  

A lien claimant (such as an auto repair shop) will have an incentive to notify the secured party promptly, so that storage fees can be charged.  A repair shop will not be able to earn greater storage fees by delaying before notifying interested parties about its lien and possession of the vehicle–because storage fees can’t accrue prior to notice.

(There is a required deadline for mailing a “notice of lien”–thirty (30) days after the first services are performed on the vehicle.  Faster notice is permitted, and will benefit not only the lender and any joint owner, but also the repairman, who can start charging for storage after sending notice.  Even so, the average repairman will probably wait a while to see whether the vehicle’s owner can come up with the money, so as to avoid the time and expense required to prepare and mail proper lien notices.)

(When a lien notice is mailed, the repairman must send it by two methods:  (1) by regular, first-class mail (for faster delivery, without the requirement that the addressee be present to sign), AND ALSO (b) by certified mail (for proof that the notice was received).  The notice must be sent to all “interested parties” (explained below) who reside at separate addresses.  Typically, this would involve two or three notices by regular mail, as well as two or three notices by certified mail.)

Second, failure to give “interested parties” a sufficiently detailed lien notice, not later than the statutory deadline, will cause the repairman’s lien to become subordinate to a perfected security interest in the same vehicle.  (The repairman, not the lender, will be the one more disadvantaged by failure to give prompt and adequate notice.)     

“Interested parties” are all persons of whom the claimant has actual notice, who have an ownership interest in the vehicle, have a perfected security interest, hold a lien, or have some other property interest–as shown by the records of the county clerk, a certificate of title, etc.  For vehicles with registered titles, the lien claimant can easily learn of the existence of a joint owner or a secured lender, by contacting the local tag agent (in advance of any proposed sale of the vehicle).  Awareness of “interested parties” will then create a duty to give notice.  Bottom line:  Under the new provisions a lender with a recorded lien on a vehicle’s title should receive faster notice than previously, when a mechanic’s lien exists.  

The required lien notice to “interested parties,” as outlined in revised Section 91(A)(3), must include the following: (1) an indication that the statement is a notice of possessory lien; (2) the complete legal name, physical and mailing address, and telephone number, of the person claiming the lien; (3) the complete legal name, physical and mailing address of the person who requested that the claimant render services to the owner; (4) a description of the vehicle and the complete physical and mailing address of the place where it is located; (5) an itemized statement giving the date(s) when work was performed, listing the services and materials provided, and explaining the amount that is claimed; (6) a statement that the work was authorized by the owner and has been performed; and (7) the notarized signature of the claimant, as well as (if applicable) the signature of the claimant’s attorney.

It may not be very easy to fill out these forms correctly.  A business will probably need to obtain more extensive information from its customers before beginning repair work, compared to past practices.  For example, very few businesses regularly obtain in advance not only (1) the “complete legal name” but also (2) both the “physical and mailing address,” of a person for whom work will be done.  But if the business waits until the work has been completed and the owner fails to pay, that will be a more difficult time to obtain additional information from the owner for use in preparing a lien notice.  

No state agency regulates repair shops, and many of these shops will have no warning of the new “lien notice” provisions.  A bank that has repair shops as loan customers may want to inform them of Senate Bill 835, to help them comply.  Although the bill shifts greater responsibility to repair shops, lenders still won’t receive faster notice of liens unless repair shops are aware of the new provisions.   

The bill somewhat changes the previous “notice of sale” procedure that has applied to mechanic’s liens on motor vehicles. To foreclose a lien, the repairman’s “notice of sale” must include the following: (1) a statement that is it a “Notice of Sale,” (2) the names and addresses of all “interested parties” known to the claimant, (3) a description of the vehicle being sold, (4) a notarized statement of the work done, and who authorized it (or a statement that the vehicle was abandoned, if no work was done), (5) the date, time and physical location of sale, and (6) the name, complete physical address, and telephone number of the person foreclosing the lien (the repairman, agent, attorney, etc.).

The procedures for giving the notice of sale are also changed a bit.  Previously, the statute required the notice of sale to be published (posted) in three public places, at least ten days in advance of the sale.  (This much is still true).  Prior language also required mailing the notice of sale to the owner and any other party claiming an interest, if known.  New language requires mailing the notice of sale to all “interested parties,” and mailing must be made to each of them by two methods simultaneously:  (1) by regular, first-class mail, AND ALSO (2) by certified mail.  The mailing must be on the same day as the public posting of notice.

After a notice of sale is given, the lien claimant must allow all “interested parties” to inspect the vehicle during normal business hours to verify that the services were actually rendered by the claimant.  (For example, if non-payment was the result of a dispute about the type or value of services actually performed, presumably either the owner or the lender could bring along a mechanic to inspect what has been done to the vehicle.)

A foreclosure proceeding must be started by the lien claimant within 30 additional days after expiration of the “notice of lien” period (which extends for 30 days after the date of first work performed).  A sale must be completed within 60 days from the Notice of Sale.  (These provisions should at least limit the time that storage charges are accruing.  The repairman controls the sale, but these provisions may help the lender to receive sales proceeds sooner, or to recover faster on VSI coverage if there is a loss.)

The bill allows any “interested party” to sue the lien claimant for damages arising from the claimant’s noncompliance with the provisions outlined above.  If the vehicle has been sold improperly, any “interested party” can sue for conversion (for wrongfully “taking” the owner’s or lender’s interest in the vehicle).  If any “notice of lien” or “notice of sale” is knowingly false or fraudulent (for example, if the lien claimant deliberately failed to notify a known “interested party” or falsely claimed any amount of charges), the “interested party” can sue for triple damages.  A prevailing party in a lawsuit is entitled to costs and reasonable attorney’s fees.

The following situations or persons are exempted from the modified mechanic’s lien provisions described above.  Instead, in the following cases, the prior existing mechanic’s lien provisions will continue in effect unchanged:  (1) vehicles registered under the certificate of title laws of another state, (2) vehicles not required to have a certificate of title, (3) salvage pools (persons or businesses regularly conducting salvage disposal sales), and (4) class AA licensed wrecker operators acting in their capacity as wrecker operators.

Although wrecker operators are exempted from the new provisions, they apparently have not been much of a problem for lenders.  Rather, complaints about large accumulated storage fees and delays in receiving notice have typically involved repair shops.

Changes in Items of Property Exempt in Bankruptcy

Senate Bill 758 makes some changes to Oklahoma’s list of property that is exempt from execution and in bankruptcy, effective August 25.

Most of the dollar amounts in Oklahoma’s statutory list of bankruptcy exemptions (Title 31 O.S., Section 1) have not changed since 1970.  Several bills were introduced in the Legislature this year to expand the categories of exempt property and/or to increase the dollar amounts of specific items. The version that passed was narrower than all of the original proposals.

The exemption for “all household and kitchen furniture held primarily for personal, family or household use” was expanded to add furniture that is held primarily for “educational” use, and now will also specifically include “a personal computer and related equipment” for either personal, family, educational or household use.

The previous exemption for “implements of husbandry necessary to farm the homestead” was limited to $5,000.  Similarly, there has been an exemption for “tools, apparatus and books used in any trade or profession of such person or a dependent of such person,” limited to $5,000.  

As originally introduced, Senate Bill 758 would have increased “implements of husbandry” to $10,000, as well as increasing “tools of the trade” to $10,000.  (This would have allowed a person to exempt up to $20,000 of assets by maximizing each of these two categories.)  The bill’s author strongly felt that $10,000 was needed for “tools of the trade.”  As a compromise, the two categories were combined (“tools of the trade” and “implements of husbandry” now have become a single, combined category), with a maximum exempt amount of $10,000 applied as the total of the two. Compared to the original proposal, the compromise will help to limit the impact on rural lenders that have borrowers involved in both farming and some other income-producing activity.

The bill adds as an additional exempt category “wedding and anniversary rings,” not to exceed $3,000 in aggregate value.

A person has previously been able to exempt his/her equity interest in one motor vehicle, not to exceed $3,000 in value.  This amount will be increased to $7,500.

In addition, a person has been able to exempt “one gun” (regardless of value), that is “held primarily for personal, family or household use.”  It was proposed to change this language to “guns” (unlimited in number or value), but the final version says “guns, not to exceed $2,000 in aggregate value.”  An additional phrase was added as clarification, to prevent abuse: “Nothing in this subsection shall be construed to allow a person to exempt guns which are used mainly as an investment or nonpersonal, family or household use.” 

Amendments to Family Wealth Preservation Act

Senate Bill 573 amends Oklahoma’s Family Wealth Preservation Trust Act, effective June 8, 2005.  Estate planners and professional trustees thought several provisions of last year’s asset-protection act were unclear.  (Most of their concerns are addressed by this year’s changes.)

Many accountants and lawyers advised their clients not to set up “preservation trusts” until the Legislature could adopt clarifying amendments.  Because of this delay, very few of these trusts have been formed so far, and the act’s purpose to encourage greater investment in Oklahoma assets has not yet been accomplished.  Because of this year’s amendments, preservation trusts should become a lot more common.  

There should be quite a large “market” for setting up these trusts in Oklahoma, over time.  (Although $1,000,000 in contributed assets can be shielded by a preservation trust, an individual doesn’t need to have a lot of money to take advantage of the provisions. A preservation trust can be funded gradually over a lifetime, or all at once.)

This year’s fine-tuning of the provisions for preservation trusts should result in a greatly increased number of bank-managed trusts.  Indirectly, Oklahoma’s overall economy will also benefit if wealthy investors bring their investments back to Oklahoma to satisfy the requirement that a majority of the value of assets in a preservation trust must be “Oklahoma assets.”  

The bill amends Sections 11 through 18 of Title 31, Oklahoma Statutes, providing greater clarity and predictability for investors, trustees and lenders.  Following is a summary of amendments that make preservation trusts more flexible and advantageous, increasing the desirability of such trusts as vehicles for investment and protection of wealth:  

1.  “Net” Valuation of Contributed Assets. The act allows a wealthy individual to put as much as $1 million of assets into a “preservation trust,” shielded from future lawsuits that may be brought against the individual (but not shielded from existing secured creditors or other persons who may be defrauded by a transfer of that individual’s assets to the trust).  The amendments clarify that the permitted $1 million valuation means “net” assets contributed.

For example, if a property worth $1.8 million is subject to an $800,000 mortgage debt for which the trust will assume liability, the “net” asset contributed to the trust is worth $1 million.  Related indebtedness is one method of putting assets with a gross valuation higher than $1 million into a preservation trust.

2.  Appreciation in Value. The original act allowed a preservation trust to shield from an individual’s future creditors up to $1,000,000 of assets contributed by that individual to the trust, as well as an additional amount representing income earned and retained by the trust.  (If $1 million is placed in trust, and $300,000 of income accumulates over time, then $1,300,000 could be exempt from creditors.)  

However, where a preservation trust’s assets (such as real estate) are appreciating in value (without resulting in “income” yet), the original act did not make clear whether that “increase in value” is part of the total asset valuation that can be shielded by a preservation trust.  (If real estate worth $1,000,000 is placed in a preservation trust, and later is worth $1,500,000, will there be $1,000,000 or $1,500,000 of value that is shielded by the preservation trust?) This year’s amendments clarify that any incremental growth in value of exempted trust assets, whether derived from income or from appreciation in value, is protected by the preservation trust.   

3.  Substituted Assets.  A preservation trust can be either revocable or irrevocable.  If a person decides to partially revoke a preservation trust (removing some but not all of the assets), the original act’s provisions did not state on what basis substitute assets could be contributed to the trust.

Assume that a person contributes two real estate properties to a preservation trust, with a total value of $1,000,000.  One property is worth $700,000 when transferred to the trust, and later increases in value to $1,000,000.  The second property is worth $300,000 when placed in the trust, and later is worth $500,000.  The individual decides to partially revoke the trust by withdrawing the second property.  The trust still owns the first property, now valued at $1,000,000.  Can the individual contribute other property to replace what was removed?  Where the trust’s remaining property is still worth at least $1,000,000, it is unclear under the original statute whether substitute property can be contributed to the trust and protected from creditors.  

This year’s amendments take a different approach.  If a property owned by the trust has increased in value to $500,000 and is withdrawn from the trust by the individual who established the trust, that individual will be allowed to make future contributions to the trust, equal to the $500,000 fair market value of what was removed from the trust.  (What ends up in the trust will still be worth no more than what the trust would have been worth if nothing was removed.)  

The amendments allow an individual to immediately contribute substitute property with fair market value equivalent to what was removed.  Alternatively, the person can take unlimited time to make new contributions of assets with a fair value equivalent to the removed assets.  This permits flexibility to deal with situations arising after a trust is established, and makes preservation trusts more attractive.

4.  Eligible Trustees.  The original act required a preservation trust to have as its trustee either an Oklahoma-based bank or an Oklahoma-based trust company.  As originally enacted, the provisions did not allow any individual to serve as a co-trustee along with the professional trustee.  Many estate planners felt this requirement was too rigid. Most revocable trusts have an individual as trustee or co-trustee, and the same is true for many irrevocable trusts.

The amended language still requires at least one trustee of the preservation trust to be an Oklahoma-based bank or Oklahoma-based trust company, but the trust can have one of more individuals as co-trustees.  (This year a separate bill would have amended the trustee provision to allow individuals to serve alone as trustee(s) of a preservation trust, with no professional trustee involved, but this proposal was defeated.)

The Legislature amended the definition of “Oklahoma-based bank,” so that any bank, savings association or credit union that has trust powers and has an office in Oklahoma, or any Oklahoma-based trust company, can serve as trustee of a preservation trust.

5.  Required Percentage of “Oklahoma Assets.”  The original act required a preservation trust to be 100% invested in Oklahoma assets (as defined).  One of the arguments later raised against this approach was that even one dollar of non-qualifying assets might cause the 100% investment test not to be met, with the result that the whole trust could fail be treated as a preservation trust, making none of it exempt from execution.

One of this year’s amendments creates a “cure” provision:  If an asset intended to qualify as an “Oklahoma asset” fails or ceases to meet the definition, the trustee has a reasonable time to convert that asset to an “Oklahoma asset,” and the mistake or change in circumstances does not mess up the “percentage of assets” test.  (An in-state company merging into an out-of-state company is one example where assets that previously qualified may need to be readjusted.)

Another significant change this year decreases the required “Oklahoma assets” test, so that only a majority of a trust’s assets, not 100%, must be “Oklahoma assets,” in order to qualify the trust as a preservation trust.

The act’s original intent (100% “Oklahoma assets”) was commendable, as an attempt to stimulate greater investment in Oklahoma.  However, hardly any of these trusts were being established, so very little investment in Oklahoma actually occurred because of the original 100% requirement.  If many more trusts are now established as a result of the amendments, the “majority” investment requirement will produce a lot more investment in Oklahoma than the previous provision did.

A second serious issue expressed by trust bankers in Oklahoma is that a “100% Oklahoma assets” requirement does not really allow a bank’s trust department to achieve adequate diversification of trust investments.   With a change to the “majority of assets” test, plus a broadening of the definition of “Oklahoma assets” (explained below), trust bankers should be much more comfortable that they can achieve adequate diversification of investments in a preservation trust.

6.  Definition of “Oklahoma Assets.”  The original act’s definition of “Oklahoma assets” (permissible investments for a preservation trust) was appropriate so far as it went—including stocks, bonds, and any other equity or debt interest in Oklahoma-based companies; Oklahoma agency or municipal bonds; real property in Oklahoma; and deposits in Oklahoma-based banks.  

However, after giving more thought to activities that could benefit Oklahoma’s economy, it seemed desirable to broaden the range of investments permitted for one of these trusts. As a result, this year’s amendments added several new categories to the definition of “Oklahoma assets.”

For example, the original list did not specifically allow investment in bonds issued by Oklahoma school districts or by Oklahoma-based public trusts, so these are now included.  

The list allowed investment in Oklahoma real estate, but has now been expanded to include tangible personal property located in Oklahoma, or any interest in Oklahoma real estate or tangible personal property.  For example, any vehicles, miscellaneous personal property, jewelry, art, collectibles, furniture, fixtures, inventory, materials and equipment located in Oklahoma (either directly owned and utilized, held for sale or manufacture, or leased to others) would now qualify.  Mineral interests in Oklahoma (considered an interest in real estate) are also specifically added.  Promissory notes secured by a mortgage or security interest in real or tangible personal property located in Oklahoma, or both, will also qualify.

Going further, a securitization of qualifying secured promissory notes is also a qualified investment.  Thus, mortgage-backed securities would be a permissible “Oklahoma asset” if each mortgage in the securitized pool would separately qualify as an “Oklahoma asset.”

 In addition, any investment in a mutual fund or common trust fund will count as an “Oklahoma asset” to the extent that the underlying assets in the fund will separately qualify as “Oklahoma assets.”  For example, someone might start a mutual fund that invests only in Oklahoma-based tax-exempt bonds.  A more likely example would be a common trust fund established by a bank’s trust department, pooling together various “Oklahoma assets” that are permissible investments for preservation trusts.  For convenience of administration and easier diversification of assets, each preservation trust managed by the bank could then be invested in this common trust fund, along with other investments.  

The provision allowing investment in mutual funds or common trust funds does not require that all assets in the fund be “Oklahoma assets”; rather, any fund of this type can be counted as an “Oklahoma asset” in the same percentage that it is invested in Oklahoma assets.  If, for example, a particular mutual fund happens to have 3% of its assets invested in “Oklahoma assets,” then 3% of a preservation trust’s total dollar investment in this mutual fund will qualify as an Oklahoma asset.

Of course, because only a “majority of the value of assets” in any preservation trust must be “Oklahoma assets,” a trust still can invest just under 50% of its asset value in general investments of any kind not meeting the “Oklahoma assets” definition (other publicly traded stock, U.S. obligations, non-Oklahoma real estate, other mutual funds, etc.).

7.  Definition of “Oklahoma-Based Company.”  Any interest in an “Oklahoma-based company” (equity or debt) is an Oklahoma asset.  This definition has been broadened to include any legal entity (adding business trusts, real estate investment trusts, and joint ventures, to the previous list of corporations, partnerships, and LLC’s).  The amended definition of “Oklahoma-based company” includes any entity (1) formed or qualified to do business in Oklahoma, that also (2) has its principal place of business (a physical location) in Oklahoma.  

The prior language required an “Oklahoma-based company” to be formed (for example, incorporated) in Oklahoma; but this excluded, for example, some publicly traded companies that have their principal office in Oklahoma but technically are formed in Delaware for legal reasons.  With the amendments, it will make no difference where a business is formed, or whether it has a majority of its assets or total business activities in Oklahoma, if it at least has its principal place of business in Oklahoma.  By this definition, a preservation trust will be permitted to invest in stock, debentures or commercial paper of some fairly large oil-related companies, manufacturing companies, bank holding companies, etc., that have operations extending to more than one state, or even around the world, but technically have their principal place of business in Oklahoma.

8.  Permitted Beneficiaries.  The original act rather narrowly restricted the permitted beneficiaries of a preservation trust. It did not allow the grantor’s parents to be named as beneficiaries, nor any of the spouse’s descendants (if they were not descendants of the grantor), nor any adopted children that were over the age of 18 when the trust was created.  It didn’t allow adopted grandchildren to be named, nor most great-grandchildren.  

As amended, beneficiaries can include a spouse, or any lineal ancestors and lineal descendants of either the grantor or the spouse.  Any person’s adopted child will count the same as a natural child if under 18 at the time of adoption.  Any charitable organization can be a beneficiary (same as before).  In addition (new provision), any trust can be a beneficiary if it is created solely for the benefit of person(s) or charities that separately qualify as beneficiaries.

9. Debt Secured by Transferred Property.  When the act was first enacted a year ago, some bankers asked whether the following language in 31 O.S. Section 12 would prevent a lender from foreclosing on a mortgaged property transferred to a trust, if the grantor was the one who incurred that debt: “[T]he corpus and income of a preservation trust shall be exempt from attachment or execution and every other species of forced sale and no judgment, decree, or execution can be a lien on the trust for the payment of debts of a grantor.”  

Real property lawyers advised me that there shouldn’t be any problem foreclosing a mortgage on property held by a preservation trust, even though the grantor of the trust originally incurred the debt.  It’s not really possible for a person to transfer a higher title to real estate than what he, himself holds.  If a person owns real estate encumbered by a mortgage, any person or entity receiving the property will take it subject to the mortgage—unless the mortgage is satisfied first.

However, to make the result clear beyond any doubt, this year’s amendments add the following language:  “Transfer of an asset to a preservation trust does not affect any mortgage, security interest or lien to which that asset is subject.”

10. When Trust Assets Not Exempt.  There are certain situations in which the assets of a preservation trust are not exempt from execution.  First, although the act protects a trust from suit for debts of the grantor, it will always be true that a trust can be sued successfully for its own debts.  

Second, this year’s amendments provide that a preservation trust is not exempt from execution to satisfy a child support judgment against the grantor.  (It would be against “public policy” to allow a person to avoid paying child support by putting his assets in a preservation trust.)

Third, a preservation trust remains subject to the Uniform Fraudulent Transfer Act.  Any transfer of assets to a trust can be reversed by court order if the circumstances satisfy one of Oklahoma’s definitions of a “fraudulent transfer.”