What is the Purpose of a Free Trader Agreement?
A NC Free Trader Agreement Form is a document used in North Carolina to allow an individual to trade, borrow and do business without the need for additional approvals from any partners, co-owners or investors that individual may have. As an example, if your new business is an LLC with multiple business owners and you’ve entered into a multi-year lease for commercial space, if you default on the lease, the landlord will want to know that they can sue you – not someone else that owns the other part of the company.
In North Carolina, a NC free trader agreement form is a legal document that will both grant and confirm your permission to act independently of others at times, like when shopping for new commercial space, or to protect you against certain liabilities, like when signing a commercial lease. Without one, you can still conduct most business as a single person in an LLC, corporation or other business structure without objection from partners (unless specified otherwise). Yet, if you’re renegotiating a lease, the landlord may decide to find out if any partners will be responsible should you leave without paying what you owe.
Because an anticipated real estate deal often requires more input or signs of approval from each party, this instrument tends to be used for short periods of time in conjunction with normal LLC or partnership purposes.
This legal document is often used for property, money and business situations, in general. It permits one person out of a joint venture , LLC or other business entity to act on behalf of other people. For example, you might have a multi-member LLC in North Carolina, and one of you will move to another state to manage a new branch. During that time, this member would like to open a credit card account or obtain a loan for business expenses. It makes it easier to use one person’s credit to fund the LLC rather than seeking out approvals from each member every time.
If you want to use one member’s or partner’s credit for a new startup, ongoing enterprise or other endeavor under corporate or partnership law, you might use a free trader agreement to confirm that all members have given their consent. Because there is continuity of ownership in LLCs and corporations that enables them to carry on even after a member leaves, any one business owner may be required by a lender to demonstrate that he or she has permission to do certain things that might otherwise be reserved to the LLC as a whole.
The legal status of free trader agreements isn’t entirely clear. Courts sometimes recognize them, although they aren’t required so long as the member, company or partner works within the confines of whatever authorities have already been granted at a higher level in the business.
As a practical matter, such documents are often used as simply a way for one person to act on behalf of another in an LLC or partnership. Sometimes, partners work without one altogether, simply establishing a working agreement and then executing documents for any business-related needs that arise.
Essential Terms of an NC Free Trader Agreement
The North Carolina Free Trader Agreement form contains the following components:
The "Free Trader" clause. This is a declaration that one of the spouses will be able to sell or convey property without the informing the other spouse.
The "Protection of Creditors" clause. This clause informs the world that a spouse may not be able to sell or convey property until the provisions of this document have been recorded by the Register of Deeds.
The "Spousal Property" clause. This sets out what the parties declare to be "spousal property" in their marital estate.
Clause "1" states that all property acquired from the date of marriage to the execution of this document will be "spousal property."
Clause "2" provides that all property acquired during the marriage will be "spousal property" unless it falls within any of the definitions set out in the remaining clauses.
Clause "3" defines property which is "gifted" to one of the spouses. This property is not considered spousal property.
Clause "4" is a "presumption" type clause. It says that the acquisition of property in one spouse’s name is presumed to be that spouse’s separate property unless the other spouse can provide evidence that the property should be treated as "spousal property."
Clause "5" defines a "bequest" as separate property and not spousal property.
Clause "6" says that any property acquired after the date of separation is separate property and not spousal property.
Clause "7" says that property acquired during the marriage by one party by way of "inheritance" is the same as separate property under North Carolina law.
Clause "8" says that property acquired during the marriage by inherited money is separate property.
Clause "9" defines insurance policy proceeds as separate property and not spousal property.
Clause "10" is a "presumption" type clause which defines a spouse’s interest in pension, IRA and retirement assets as separate property unless the other spouse is able to provide evidence that the asset should be treated as "spousal property."
Clause "11" defines income earned after the date of separation as separate income.
Clause "12" says that any payments received after the date of separation are separate property.
Clause "13" disallows any "wins" or "gambling" increases as being "marital property."
Clause "14" says that certain real estate property shall be deemed to be the separate property of the spouse holding title to said property.
Clause "15" sets out a signature clause for both spouses.
Parties That Require a Free Trader Agreement
If you are your own person, a sole proprietorship, a general partnership or a limited partnership you would benefit from a NC Free Trader Agreement. In these situations, the Free Trader Agreement (FTA) operates much like a fictitious name registration – if you start a business using premises or other property, under which name do you want to be known? The FTA is filed in the Register of Deeds office in the county where the business will be operated. In addition to the county filing, there is no requirement that the FTA be filed with the Secretary of State’s office.
The FTA will be required to prove the legal existence and authority of the entity, such as a sole proprietorship or partnership, when the businesses seeks legal protection of its name, such as when it wants to enforce an exclusive right to use a trade name in commerce. Additionally, if the entity were to borrow money, the lender would probably require evidence of the business’ existence and authority to sign the loan documents, and that the FTA is filed.
North Carolina corporations do not file an FTA, even if they wish to engage in business under some other name. Corporations are identified by their corporate names and by their status on the records of the Secretary of State (which is publicly available).
How to Obtain and Complete the NC Free Trader Form
Steps for Obtaining and Completing the NC Free Trader Agreement Form
While the process for obtaining and completing the NC Free Trader Agreement Form is fairly simple, there are a few details to keep an eye out for prior to filing. First and foremost, it is important to ensure that all of the information provided on the North Carolina Free Trader Agreement Form is accurate, up to date and properly formatted.
The free trader agreement must contain the following information regarding the corporation(s): the name of the corporation’s officer whom is designated to accept legal documents; the corporation’s address of record (feasibly made available via the North Carolina Secretary of State’s website); a description of the nature of business the corporation is involved in; and a description of the business purpose for which the free trader agreement is being requested.
If a single corporation is seeking a free trader agreement, the entity must file the form with the county register of deeds where the corporation’s principal place of business resides.
Alternatively, if two corporations of the same business are seeking to file a single free trader agreement (process is still the same), the agreement must be filed with the county register of deeds where the corporations’ principal place of business is located or is anticipated to be located.
In the case of corporations with multiple business locations across various counties in North Carolina, multiple free trader agreements should be filed with each register of deeds in the counties of operation.
While it is not a requirement to file free trader agreements with the North Carolina Secretary of State, it is recommended that businesses, and their attorneys, retain a copy of the filed document as part of the company’s corporate records. Disorganized records will make it difficult to follow through with other requirements.
Potential Legal Consequences of the NC Free Trader Agreement
Legal Implications of the NC Free Trader Agreement Form
Since the NC Free Trader Agreement is a first registration under the NC UCC laws, the new secured interest is perfected without the need to file a UCC-1 financing statement. However, perfection and continuation of perfection are effected by the nature of the collateral. For example, banks routinely perfect by filing a UCC-1 when there are accounts receivable or inventory. In fact, most banks require the filing of a UCC-1 before they will lend. The filing of a UCC-1 provides the bank with notice that there is financing secured by the accounts or inventory. If the acquisition of ALL assets was effected by a "going out of business sale" the secured party should consider filing a UCC-1 and taking possession of the assets so as to create a future lien on after acquired assets. For a single transaction, it may not matter whether more formal steps are followed . However, on multiple transactions involving collateral of the debtor, if the US trustee permits the filing of multiple NC Free Trader Agreements and the documents that effect the creation of the security interest provide for perfection by filing a UCC-1 on future after-acquired collateral, the secured creditor could suffer from having the future assets of the debtor swept by the US trustee. This is because the law imposes a duty on the debtor to provide a notice of lien satisfaction by sending a UCC-3 when they have satisfied a security agreement, and the failure to do so would create a preserve a security interest in future after-acquired assets. The US trustee has the standing to pursue preference actions against secured creditors who fail to secure their interest when one is possible due to the failure of the debtor to respond to its notice of lien satisfaction obligation. Because the US trustee represents all other creditors, as well as the public interest in diligent enforcement of the Bankruptcy Code, it is very likely that the US trustee will do everything possible to invoke section 547 of the Bankruptcy Code.
Common Myths Surrounding the Free Trader Agreement
Common misconceptions about the NC free trader agreement form include:
- Thinking that the Free Trader Agreement form is an actual deed or bill of sale. The North Carolina free trader agreement form is actually a contract that allows one spouse to retain control of his or her separate property after marriage. The free trader agreement is not a deed or bill of sale, but it rather helps to clarify how certain property is owned in a marriage, or after divorce. Once the free trader agreement is duly executed and notarized, however, it may be enforceable in the same manner as a typical deed or bill of sale, especially in the context involving real estate. The North Carolina free trader agreement has been recognized to even supersede the written requirement of the statute of frauds.
- Thinking that the free trader agreement form only needs to be signed and have one witness. The North Carolina free trader agreement form requires a signature from both spouses and at least two witnesses. It must also be notarized. Further, there are special requirements for the validity of a Free Trader Agreement in North Carolina. For example, pursuant to the statute, the free trader agreement form must be "for a valuable and sufficient consideration, and be acknowledged before an officer in the State having power to administer oaths, and registered as prescribed in respect to deeds of real property." In effect, this means that a free trader agreement is not valid unless it is signed and acknowledged (similar to a deed), and must then be deposited in the Office of the Register of Deeds before it is enforceable.
- Thinking that a free trader agreement form doesn’t effectively protect assets. A free trader agreement can serve to protect assets if properly drafted and executed. In addition, if a free trader agreement is not vigorously attacked when entered into, it may be presumed valid after several years of marriage and become difficult to attack. An example includes if a spouse attempts to sell a home purchased prior to the marriage, the spouse may be able to transfer the home to a third-party. Then, if the spouse later attempts to sell the home, the spouse may be able to transfer the home to a third-party. In such a situation, the free trader may have some legitimate argument that property acquired prior to marriage with separate funds (funds that were owned and titled separately) should remain separate property. However, the effectiveness of the forms largely depend on other factors in the situation as well.
- Thinking that all businesses must use the free trader agreement form. North Carolina does not require a business to use the free trader agreement form. The free trader agreement was created so that spouses may do anything that they want regarding their jointly-held property. For example, spouses may transfer the title of property to another person or entity, or they can voluntarily convey it to a spouse or other person.
Expert Tips on Free Trader Agreements
Although the NCFTA/NCTFTA form can be filled out by the taxpayer without professional oversight or assistance, there are many circumstances in which a taxpayer, lender, or purchaser are advised to have legal counsel involved in the preparation, execution, and/or filing of the NCFTA form, including:
- When there is any question about whether there have been any prior transmutations of ‘marital property’ – the NCFTA form must be signed, sworn, and notarized by both spouses.
- When the taxpayer has prior or existing federal Uniform Commercial Code ("UCC") secured transactions. The NCFTA form may be used to avoid the need to re-perfect these security interests. The NCFTA form must be signed, sworn, and notarized by the taxpayer and filed with the office of the Register of Deeds in the county in which the property subject to the UCC lien is located.
- When the taxpayer has an existing, written, enforceable lien granted by a court of competent jurisdiction (i.e. a judgment lien, mechanic’s lien, etc.). The NCFTA form may be used in such instances to mitigate the dispute over ownership or title and stop the alienation of property.
- When property is the subject of two conflicting liens with respect to or affecting the same rights and interests in property under the North Carolina Uniform Commercial Code Article 9, Section 9-301-309. The NCFTA form may be used to resolve the conflict.
- When the taxpayer is a corporate officer, director, partner, member , or other authorized person acting on behalf of the business entity. The NCFTA form must be prepared and signed, sworn, and notarized by the taxpayer and filed with the office of the Secretary of State in Raleigh rather than the Register of Deeds in the county where the corporation is located.
- When a taxpayer has new business loans, mortgages, or other financing which require that the NCFTA form be filed as a condition to the loan. In this instance, the lender may require the NCFTA form to be filed as a condition precedent to granting the loan; in such event, it is advisable that the taxpayer involve his/her attorney when preparing the form.
- When a taxpayer has property being sold, transferred, or bequeathed. In these circumstances, the seller, transferee, or beneficiary may request completion and filing of the NCFTA form to clear record title and ensure an uninhibited right to receive payment proceeds from the sale.
- When the taxpayer has recent divorce, separation, or cohabitation agreements and/or living arrangements which may involve the transmutation of property from separate to marital property or back to separate property; or
- When an attorney general opinion has been requested regarding the need for the NCFTA form. The familiar adage "an ounce of prevention is worth a pound of cure" certainly applies to situations involving the NCFTA form. It is much easier to execute and file the form in advance of a transaction, dispute, or complaint than after the fact.
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