FIRST AMERICAN TITLE INSURANCE COMPANY
FORECLOSURE ON EQUITY INTERESTS IN REAL ESTATE MEZZANINE LENDING TRANSACTIONS
Our Mission Cover foreclosure of Article 9 security interests on equity collateral in real estate mezzanine lending.
<ul><li>The potential liability exposure associated with becoming the proud owner of the borrower’s distressed business fo...
Other Sources <ul><li>Lynn L. Soukup,  Securities Law and the UCC: When Godzilla Meets Bambi , Uniform Commercial Code Law...
Other Sources <ul><li>John C. Murray,  Carveouts to Nonrecourse Loans: Are They Enforceable? </li></ul><ul><li>Donald W. G...
<ul><li>But Now: </li></ul><ul><li>What is mezzanine lending? </li></ul>
What is Mezzanine Lending? <ul><li>“ Mezzanine lending. . .means lending to a borrowing entity or group of entities that d...
What is Mezzanine Lending? <ul><li>“ Financing secured by pledges of  ownership interests  in the real property owning  en...
What is Mezzanine Lending? <ul><li>THEREFORE A PERSONAL PROPERTY SECURED TRANSACTION! </li></ul>
<ul><li>Finances difference between senior mortgage and amount investor wants to invest </li></ul><ul><ul><li>Senior Mortg...
RE TURN RISK DEBT EQUITY Mezzanine Financing What is Mezzanine Lending?
<ul><li>Generally:   a non-mortgage form of subordinate financing (replaces traditional 2 nd  mortgage) </li></ul><ul><ul>...
<ul><li>Developed after real estate foreclosure debacles in early 1990’s cause by junior lenders: </li></ul><ul><ul><li>Pr...
Intercreditor Agreement <ul><li>In 2002,  CMBS World published a “suggested standard form” of Intercreditor Agreement – th...
Real Property Lender Owner of Real Property Mezzanine Lender A B Mortgage Loan Equity Secured Loans Equity Owners Mezzanin...
Property Lender Owner of Property Mezzanine Lender #1 A B Mortgage Loan Equity Owners Co-Borrowers D C E Mezzanine Lender ...
Lender Borrower A B Asset Based Loan Equity Secured Guarantees Equity Owners PLEDGED EQUITY LENDING Law is the Same
A GUIDE TO THINKING ABOUT PERFECTION <ul><li>Step 1: Does Article 9 Apply? </li></ul><ul><li>Step 2: Attachment </li></ul>...
Perfection of liens (security interests) in equity interest collateral. Lien Perfection
US CMBS and CRE CDO: Moody’s Approach to Rating Commercial Real Estate Mezzanine Loans <ul><li>“ Moody’s expects that  100...
“ Therefore, Moody’s expects that mortgage loan borrowers will irrevocably “ opt-in ” to Article 8 of the UCC and will  ce...
“ UCC-1  financing statements  should additionally be filed, as “fail-safe” protection.”   Moody’s Report
<ul><li>The mortgage borrower’s organizational documents should have provisions  prohibiting  both the issuance of additio...
<ul><li>“ Therefore, Moody’s generally expects that mezzanine loans presented for rating will have the benefit of … in all...
US CMBS and CRE CDO: Moody’s Approach to Rating Commercial Real Estate Mezzanine Loans <ul><li>Pledge of 100% of the equit...
<ul><li>NEED TO CONSIDER NOT ONLY </li></ul><ul><li>SECURED CREDITOR  STATUS UNDER ARTICLE 9 OF THE UCC; </li></ul><ul><li...
Protected Purchaser Status and Equity Ownership Coverage LENDER’S POLICY Mezzanine Endorsement – Primary Obligor Pledged E...
<ul><li>NEMO DAT  </li></ul><ul><li>QUOD NON  </li></ul><ul><li>HABET* </li></ul><ul><li>*“No man can give what he does no...
<ul><li>EXCEPTIONS TO NEMO DAT: </li></ul><ul><li>◦  Negotiable Promissory Notes </li></ul><ul><li>◦  Negotiable Bills of ...
<ul><li>“ In addition to acquiring  </li></ul><ul><li>the rights of a purchaser,  </li></ul><ul><li>a Protected Purchaser ...
<ul><li>FIRST STEP IS TO BE A SECURED CREDITOR BY CONTROL OF A SECURITY UNDER ARTICLE 8  and  INVESTMENT PROPERTY UNDER AR...
NOTE: If entity  subsequently  opts-in to be a security under Article 8 (no way to prevent), then Protected Purchaser has ...
<ul><li>THEN BE A PROTECTED PURCHASER UNDER ARTICLE 8 </li></ul>
Mezz/Pledged Equity Endorsement <ul><li>Section 8303 of the U.C.C. defines a “Protected Purchaser” as a purchaser of a sec...
I WIN!!!!!! ARTICLE 8 and ARTICLE 9  - INTERRELATIONSHIP Perfection by Control Protected Purchaser Investment Property Opt...
Equity Owner – California LLC Property Owner – Delaware LLC Ultimate Parent The Property First Mezzanine Lender Loan Secur...
Old Equity  Owner – California LLC Property Owner  –  Delaware LLC Ultimate Parent The Property First  Mezzanine Lender Ne...
First Mezzanine Lender Sues Old Equity Owner for Conversion Based On Fraudulent Conveyance Alleging  Property Worth $400,0...
<ul><li>FORECLOSURE </li></ul>
Initial Steps –Evaluate Facts <ul><li>Evaluate Facts </li></ul><ul><li>Review Loan Documentation and Deal Structure </li><...
Evaluate Facts <ul><li>• Monetary default: interest, principal, other payments </li></ul><ul><li>• Non-monetary default: c...
Evaluate Facts Review senior loan documents – if mezzanine lender acquires the mezzanine collateral it will become the dir...
Intercreditor Issues <ul><li>The intercreditor agreement governs the relationship between the senior and junior lenders </...
Confirm Perfection of Security Interest <ul><li>Review organizational documents of the entity owned by the mezzanine   to ...
Other Parties <ul><li>Are there any other interested parties? </li></ul><ul><ul><li>Guarantors </li></ul></ul><ul><ul><li>...
<ul><li>Foreclosure by Public Sale </li></ul><ul><li>Foreclosure by Private Sale </li></ul><ul><li>Retention of Collateral...
<ul><li>1. Analogies to real property law don’t work – as is generally true: </li></ul><ul><li>foreclosure cuts off right ...
Sale Procedures Compared Purpose Judgment for deficiency? When final? Legal standard? By whom? Article 9 sale Judicial sale
Sale Procedures Compared Enforce mortgage Protect “equity” Maybe fix deficiency Purpose Judgment for deficiency? When fina...
Sale Procedures Compared Enforce SI Protect “surplus” Maybe fix deficiency Enforce mortgage Protect “equity” Maybe fix def...
Sale Procedures Compared Enforce SI Protect “surplus” Maybe fix deficiency Enforce mortgage Protect “equity” Maybe fix def...
Sale Procedures Compared Enforce SI Protect “surplus” Maybe fix deficiency Enforce mortgage Protect “equity” Maybe fix def...
Sale Procedures Compared Enforce SI Protect “surplus” Maybe fix deficiency Enforce mortgage Protect “equity” Maybe fix def...
Sale Procedures Compared Enforce SI Protect “surplus” Maybe fix deficiency Enforce mortgage Protect “equity” Maybe fix def...
Sale Procedures Compared Enforce SI Protect “surplus” Maybe fix deficiency Enforce mortgage Protect “equity” Maybe fix def...
Sale Procedures Compared Enforce SI Protect “surplus” Maybe fix deficiency Enforce mortgage Protect “equity” Maybe fix def...
Sale Procedures Compared Enforce SI Protect “surplus” Maybe fix deficiency Enforce mortgage Protect “equity” Maybe fix def...
Sale Procedures Compared Enforce SI Protect “surplus” Maybe fix deficiency Enforce mortgage Protect “equity” Maybe fix def...
Sale Procedures Compared Enforce SI Protect “surplus” Maybe fix deficiency Enforce mortgage Protect “equity” Maybe fix def...
Public vs. Private UCC Foreclosure Sales <ul><li>Public Sale –  </li></ul><ul><li>  •  Not defined </li></ul><ul><li> •  M...
Public vs. Private UCC Foreclosure Sales <ul><li>Limits on the right of the secured creditor to purchase collateral at a p...
<ul><ul><li>Notice: </li></ul></ul><ul><ul><li>Notification provisions of §§9-611-613. </li></ul></ul><ul><ul><li>Who rece...
<ul><ul><li>Notice: </li></ul></ul><ul><ul><li>Contents of notice of sale: “time and place of a public disposition” vs. “t...
Content of Notice <ul><li>§ 9-613 provides that notice is sufficient if it: </li></ul><ul><ul><li>Describes the debtor and...
Where to Advertise <ul><li>Depends on the type of collateral </li></ul><ul><li>Newspapers of general circulation  </li></u...
<ul><ul><ul><li>Private Sale Significantly Cheaper </li></ul></ul></ul><ul><ul><ul><li>Commercially Reasonable Notice  AND...
<ul><li>§9-610(b): </li></ul><ul><li>Every aspect of a disposition of collateral, including the method, manner, time, plac...
<ul><li>§9-627(b)(3): </li></ul><ul><li>Otherwise in conformity with reasonable commercially practices among dealers in th...
<ul><li>§9-627(a): </li></ul><ul><li>The fact that a greater price could have been obtained ...is not itself sufficient to...
Commercial Reasonableness <ul><li>A commercially reasonable sale may include the following: </li></ul><ul><ul><li>Marketin...
Commercial Reasonableness <ul><li>Due Diligence Materials (to the extent available and not confidential), such as: </li></...
<ul><li>§9-627(c)(1): </li></ul><ul><li>A collection, enforcement, disposition, or acceptance is commercially reasonable i...
<ul><li>MORAL: A foreclosing mezzanine lender should make sure that at each point in the foreclosure process its actions a...
<ul><ul><li>•   Partial vs. Full Satisfaction –    affirmative consent vs. passive    acceptance  (§9-620) </li></ul></ul>...
<ul><li>Donald J. Rapson commented that strict foreclosure “provides a method of enforcement that is nonadversarial, requi...
<ul><ul><li>Notification of Proposal  (§9-621) *  -  </li></ul></ul><ul><ul><ul><li>any person with an interest in the col...
<ul><ul><li>Who must consent: </li></ul></ul><ul><ul><ul><li>Debtor under  §9-620 </li></ul></ul></ul><ul><ul><ul><li>Pers...
<ul><ul><li>•   Strategic Advantages to    Secured Party </li></ul></ul><ul><ul><li>•   Debtor’s Strategic    Assertion of...
Settlement Procedures Compared System Purpose Consumer exceptions Formal requirements Acceptance of Collateral,  §  9-620 ...
Settlement Procedures Compared Real estate System Purpose Consumer exceptions Formal requirements Acceptance of Collateral...
Settlement Procedures Compared Personal property Real estate System Purpose Consumer exceptions Formal requirements Accept...
Settlement Procedures Compared Personal property Real estate System Settlement that avoids foreclosure Purpose Consumer ex...
Settlement Procedures Compared Personal property Real estate System Settlement that avoids foreclosure Settlement that avo...
Settlement Procedures Compared Personal property Real estate System Settlement that avoids foreclosure Settlement that avo...
Settlement Procedures Compared Personal property Real estate System Settlement that avoids foreclosure Settlement that avo...
Settlement Procedures Compared Personal property Real estate System Settlement that avoids foreclosure Settlement that avo...
Settlement Procedures Compared Personal property Real estate System Settlement that avoids foreclosure Settlement that avo...
Settlement Procedures Compared Personal property Real estate System Settlement that avoids foreclosure Settlement that avo...
Procedures for Acceptance (Consent) Actual Agreement (for partial or full satisfaction) Lack of Objection (only for full s...
Procedures for Acceptance (Consent) Secured party consent:  Secured party sends unconditional  proposal  to accept in full...
Procedures for Acceptance (Consent) Secured party consent:  Secured party sends unconditional proposal to accept in full s...
Procedures for Acceptance (Consent) Secured party consent:  Secured party consents in an  authenticated   record   § 9-620...
Procedures for Acceptance (Consent) Secured party consent:  Secured party consents in an authenticated record  § 9-620(b)(...
Procedures for Acceptance (Consent) Secured party consent:  Secured party consents in an authenticated record  § 9-620(b)(...
<ul><ul><li>•   Discharges the security interest under which the disposition is made; </li></ul></ul><ul><ul><li>•   Trans...
<ul><li>In the good old days:  </li></ul><ul><ul><li>Madrid to BFP vs. RTC,  511 US 531 (1994)(regularly conducted, non co...
<ul><ul><li>Read Lynn Soukup’s article. </li></ul></ul><ul><ul><li>Ability of lender to acquire equity interests at public...
Foreclosure On Equity: <ul><li>NOTE #1: If 100% of the equity is not in play, without the necessary consents from other pa...
Foreclosure On Equity: <ul><li>NOTE #2: Complexities may arise due toi the “carving up” of the capital structure, includin...
Foreclosure On Equity: AND THEN THE MEZZANINE BORROWER FILES BANKRUPTCY ! FINAL THOUGHTS IF WE HAVE TIME
Foreclosure On Equity: BUT REMEMBER “BAD BOY” CARVEOUTS TO NONRECOURSE LIABILITY!
Foreclosure Through Bankruptcy & Receiverships <ul><li>Stay of foreclosure in a bankruptcy case. </li></ul><ul><ul><li>Doe...
<ul><li>Debt play </li></ul><ul><li>Equity play </li></ul>Recovery Approaches in General
<ul><li>“ Going Concern” Recoveries (Debt Play) </li></ul><ul><li>may exceed breakup liquidation value. </li></ul><ul><li>...
Section 363 Sales Increased Scrutiny for Sales to Insiders
In re Medical Software Solutions, 286 B.R. 431 (2002) <ul><li>Owner/Lender case (VC) </li></ul><ul><li>Sought approval of ...
In re Medical Software Solutions, 286 B.R. 431 (2002) <ul><li>Equitable subordination rejected </li></ul><ul><li>Recharact...
L ENDER as  O WNER: When Lender acquires 100% of the equity of Debtor as a recovery strategy. Equity Play:
Why Acquire Equity of the Debtor? <ul><li>Cut off owners, set up other remedies </li></ul><ul><li>Complex assets re: trans...
“ Going Concern” Recoveries (Equity) <ul><li>Foreclose on equity </li></ul><ul><li>Convert debt </li></ul>Equity Play:
Risks of Lender/Owner Piercing the Veil Equitable Subordination Management Risks Equity Play:
Equitable Subordination  § 510(c) <ul><li>...the court may…under principles of equitable subordination, subordinate for pu...
Mobile Steel <ul><li>Inequitable conduct </li></ul><ul><li>Injury to other creditors </li></ul><ul><li>Not inconsistent wi...
<ul><li>Defined BK §101(31) </li></ul><ul><li>More scrutiny of insiders v. non-insiders </li></ul><ul><li>“ Material evide...
Inequitable Conduct <ul><li>fraud, illegality or  breach of fiduciary  duties by the creditor, </li></ul><ul><li>(ii) use ...
Remedies Under Equitable Subordination <ul><li>Scope of subordination </li></ul><ul><li>Amount of subordination </li></ul>...
Lender/Owner Management Risk Fiduciary D uties  of Directors
<ul><li>Fiduciary (competence and loyalty) </li></ul><ul><li>Business Judgment Rule </li></ul><ul><li>Presumption of Regul...
<ul><li>Duty to creditors </li></ul><ul><li>Loyalty emphasis </li></ul><ul><li>Some courts extend  to duty of  competence,...
Potential Appointment of Trustee for “Cause” <ul><li>Includes  without limitation  fraud, dishonesty, incompetency or gros...
Cause Also Includes: <ul><li>Materiality of misconduct  </li></ul><ul><li>Evenhandedness in dealings with insiders or affi...
UCC  EAGLE 9 ® NEW PROGRAMS, NEW SOLUTIONS!
<ul><li>Domain Name (URL):  www.eagle9.com </li></ul><ul><li>E-mail Address:  [email_address] </li></ul><ul><li>Toll Free ...
<ul><li>QUESTIONS </li></ul>?
THANK YOU
CONTACT COLORADO NCS <ul><li>Curtsey of  </li></ul><ul><li>Colorado NCS Office  </li></ul><ul><li>8310 S. Valley Hwy, Suit...
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Foreclosure On Equity120308

  1. 1. FIRST AMERICAN TITLE INSURANCE COMPANY
  2. 2. FORECLOSURE ON EQUITY INTERESTS IN REAL ESTATE MEZZANINE LENDING TRANSACTIONS
  3. 3. Our Mission Cover foreclosure of Article 9 security interests on equity collateral in real estate mezzanine lending.
  4. 4. <ul><li>The potential liability exposure associated with becoming the proud owner of the borrower’s distressed business following the foreclosure of a lien on an equity interest (an equity play). </li></ul><ul><ul><li>Piercing the Veil </li></ul></ul><ul><ul><li>Equitable Subordination </li></ul></ul><ul><ul><li>Management Risks </li></ul></ul><ul><ul><li>Fiduciary (Competence and loyalty) </li></ul></ul><ul><ul><li>Duty to Creditors </li></ul></ul>What We Are Not Exploring in Depth
  5. 5. Other Sources <ul><li>Lynn L. Soukup, Securities Law and the UCC: When Godzilla Meets Bambi , Uniform Commercial Code Law Journal [Vol. 38, #1]. </li></ul><ul><li>Dennis B. Arnold, Enforcing Security Interests in Membership Interests and Partnership Interests Under Revised Article 9 of the Uniform Commercial Code , Commercial Real Estate Finance 2007. </li></ul>
  6. 6. Other Sources <ul><li>John C. Murray, Carveouts to Nonrecourse Loans: Are They Enforceable? </li></ul><ul><li>Donald W. Glazer and Jonathan C. Lipson, Courting the Suicide King, Closing Opinions and Lawyer Liability, Business law Today, Volume 17, No. 4,March/April 2008. </li></ul>
  7. 7. <ul><li>But Now: </li></ul><ul><li>What is mezzanine lending? </li></ul>
  8. 8. What is Mezzanine Lending? <ul><li>“ Mezzanine lending. . .means lending to a borrowing entity or group of entities that directly or indirectly owns a real property-owning entity, which debt is secured by a perfected first security interest in the mezzanine borrower’s pledged ownership interests in the property owner” </li></ul><ul><li>(Report by Moody’s Investors Service titled “US CMBS and CRE CDO: Moody’s Approach to Rating Commercial Real Estate Mezzanine Loans,” the “Moody’s Report,” page 3) </li></ul>
  9. 9. What is Mezzanine Lending? <ul><li>“ Financing secured by pledges of ownership interests in the real property owning entity rather than by security in the real property itself…” (Moody’s Report page 2) (emphasis in original) </li></ul>
  10. 10. What is Mezzanine Lending? <ul><li>THEREFORE A PERSONAL PROPERTY SECURED TRANSACTION! </li></ul>
  11. 11. <ul><li>Finances difference between senior mortgage and amount investor wants to invest </li></ul><ul><ul><li>Senior Mortgage: 40 - 70% LTV </li></ul></ul><ul><ul><li>Mezzanine Financing: up to 90% LTV </li></ul></ul>What is Mezzanine Lending?
  12. 12. RE TURN RISK DEBT EQUITY Mezzanine Financing What is Mezzanine Lending?
  13. 13. <ul><li>Generally: a non-mortgage form of subordinate financing (replaces traditional 2 nd mortgage) </li></ul><ul><ul><li>No lien against real estate </li></ul></ul><ul><ul><li>Lien/ownership is in equity interests in entity which owns the real estate </li></ul></ul><ul><ul><li>Upon foreclosure mezzanine lender owns the entity and takes over mortgage borrower </li></ul></ul>What is Mezzanine Lending?
  14. 14. <ul><li>Developed after real estate foreclosure debacles in early 1990’s cause by junior lenders: </li></ul><ul><ul><li>Prevents delays on foreclosure, maybe </li></ul></ul><ul><ul><li>Eliminates forced bankruptcy of mortgage borrower </li></ul></ul><ul><ul><li>Requirements are set by rating agencies for first mortgage to qualify for securitization pools </li></ul></ul>What is Mezzanine Lending?
  15. 15. Intercreditor Agreement <ul><li>In 2002, CMBS World published a “suggested standard form” of Intercreditor Agreement – the “CMSA form” (also the “Dechert form”). The form is “credit neutral” platform against which Moody’s weighs modifications. (Moody’s Report page 6) </li></ul>
  16. 16. Real Property Lender Owner of Real Property Mezzanine Lender A B Mortgage Loan Equity Secured Loans Equity Owners Mezzanine Lending
  17. 17. Property Lender Owner of Property Mezzanine Lender #1 A B Mortgage Loan Equity Owners Co-Borrowers D C E Mezzanine Lender #2 F G H Mezzanine Lender #3 I Mezzanine Lender #4 Mezzanine Loans Mezzanine Lending
  18. 18. Lender Borrower A B Asset Based Loan Equity Secured Guarantees Equity Owners PLEDGED EQUITY LENDING Law is the Same
  19. 19. A GUIDE TO THINKING ABOUT PERFECTION <ul><li>Step 1: Does Article 9 Apply? </li></ul><ul><li>Step 2: Attachment </li></ul><ul><li>Step 3: Categorize the Collateral </li></ul><ul><li>Step 4: Perfection Step </li></ul><ul><ul><ul><li>Filing ( §9-310) </li></ul></ul></ul><ul><ul><ul><li>Perfection under non-Article 9 law ( §9-311(a)) </li></ul></ul></ul><ul><ul><ul><li>Possession ( §9-313) </li></ul></ul></ul><ul><ul><ul><li>Control ( §§9-314, 9-104, 9-106, 8-106) </li></ul></ul></ul><ul><li>Step 5: Priority Consequences </li></ul>
  20. 20. Perfection of liens (security interests) in equity interest collateral. Lien Perfection
  21. 21. US CMBS and CRE CDO: Moody’s Approach to Rating Commercial Real Estate Mezzanine Loans <ul><li>“ Moody’s expects that 100% of the beneficial ownership interests in the property owning entity will be pledged as collateral, so that any foreclosure of the mezzanine loan will produce a transfer of all of the equity interests in the property owner, leaving behind no minority interests.” </li></ul>
  22. 22. “ Therefore, Moody’s expects that mortgage loan borrowers will irrevocably “ opt-in ” to Article 8 of the UCC and will certificate the partnership or LLC membership interest that will be pledged to the mezzanine lender.” Moody’s Report
  23. 23. “ UCC-1 financing statements should additionally be filed, as “fail-safe” protection.” Moody’s Report
  24. 24. <ul><li>The mortgage borrower’s organizational documents should have provisions prohibiting both the issuance of additional interests and opting-out of Article 8 without the lender’s written consent. </li></ul>Moody’s Report
  25. 25. <ul><li>“ Therefore, Moody’s generally expects that mezzanine loans presented for rating will have the benefit of … in all cases … of a ‘ UCC insurance policy ’ where available.” </li></ul>Moody’s Report
  26. 26. US CMBS and CRE CDO: Moody’s Approach to Rating Commercial Real Estate Mezzanine Loans <ul><li>Pledge of 100% of the equity </li></ul><ul><li>Opt In to Article 8 </li></ul><ul><li>Certificate the Equity </li></ul><ul><li>File a Financing Statement </li></ul><ul><li>Control the ability to Opt Out </li></ul><ul><li>– hardwire or proxy </li></ul><ul><li>UCC Insurance </li></ul>
  27. 27. <ul><li>NEED TO CONSIDER NOT ONLY </li></ul><ul><li>SECURED CREDITOR STATUS UNDER ARTICLE 9 OF THE UCC; </li></ul><ul><li>BUT ALSO </li></ul><ul><li>PROTECTED PURCHASER STATUS UNDER ARTICLE 8 OF THE UCC </li></ul>
  28. 28. Protected Purchaser Status and Equity Ownership Coverage LENDER’S POLICY Mezzanine Endorsement – Primary Obligor Pledged Equity Endorsement – Secondary Obligor BUYER’S POLICY Equity Ownership Endorsement
  29. 29. <ul><li>NEMO DAT </li></ul><ul><li>QUOD NON </li></ul><ul><li>HABET* </li></ul><ul><li>*“No man can give what he does not have” </li></ul>
  30. 30. <ul><li>EXCEPTIONS TO NEMO DAT: </li></ul><ul><li>◦ Negotiable Promissory Notes </li></ul><ul><li>◦ Negotiable Bills of Lading </li></ul><ul><li>◦ Securities under Article 8 – if a Protected Purchaser </li></ul>
  31. 31. <ul><li>“ In addition to acquiring </li></ul><ul><li>the rights of a purchaser, </li></ul><ul><li>a Protected Purchaser </li></ul><ul><li>also acquires its interest </li></ul><ul><li>in the security </li></ul><ul><li>free of any adverse claim .” </li></ul><ul><li>§8-303(b) </li></ul>
  32. 32. <ul><li>FIRST STEP IS TO BE A SECURED CREDITOR BY CONTROL OF A SECURITY UNDER ARTICLE 8 and INVESTMENT PROPERTY UNDER ARTICLE 9 </li></ul>
  33. 33. NOTE: If entity subsequently opts-in to be a security under Article 8 (no way to prevent), then Protected Purchaser has priority in security over first lien-holder who perfected by filing! Entity Ownership Interests Is it a security under Art. 8? Perfection by Filing Financing Statement Perfection by Control Agreement Is it certificated or uncertificated ? NO YES Certificated Uncertificated WINS over filing! Perfection by Possession + Endorsement Control
  34. 34. <ul><li>THEN BE A PROTECTED PURCHASER UNDER ARTICLE 8 </li></ul>
  35. 35. Mezz/Pledged Equity Endorsement <ul><li>Section 8303 of the U.C.C. defines a “Protected Purchaser” as a purchaser of a security or an interest who: </li></ul><ul><ul><li>Gives value. </li></ul></ul><ul><ul><li>Does not have notice of any adverse claim to the security. </li></ul></ul><ul><ul><li>Obtains control of the security. </li></ul></ul>
  36. 36. I WIN!!!!!! ARTICLE 8 and ARTICLE 9 - INTERRELATIONSHIP Perfection by Control Protected Purchaser Investment Property Opt-In to Article 8 – LLC or Partnership Interest a Security ARTICLE 9 ARTICLE 8
  37. 37. Equity Owner – California LLC Property Owner – Delaware LLC Ultimate Parent The Property First Mezzanine Lender Loan Secured by Pledge of Equity In Delaware Sub Lender Perfects Security Interest in Pledged Equity by Filing UCC-1 with CA SOS Step #1 A Case Study
  38. 38. Old Equity Owner – California LLC Property Owner – Delaware LLC Ultimate Parent The Property First Mezzanine Lender New Equity Owner- Delaware LLC 1. 3. 1. Sells Equity Ownership in Sub to Sister Sub for $100,000,000 Second Mezzanine Lender 2. 2. Provides New Mezzanine Loan Secured by Equity Ownership in Del. Sub – Perfects by Control and Protected Purchaser 3. Pays Off First Mezzanine Lender with Proceeds of Mezz Loan from Second Mezzanine Lender Step #2 A Case Study
  39. 39. First Mezzanine Lender Sues Old Equity Owner for Conversion Based On Fraudulent Conveyance Alleging Property Worth $400,000,000 and Wants $2,000,000 kicker Old Equity Owner – California LLC Property Owner – Delaware LLC Ultimate Parent The Property First Mezzanine Lender New Equity Owner- Delaware LLC Second Mezzanine Lender Step #3 A Case Study
  40. 40. <ul><li>FORECLOSURE </li></ul>
  41. 41. Initial Steps –Evaluate Facts <ul><li>Evaluate Facts </li></ul><ul><li>Review Loan Documentation and Deal Structure </li></ul>> Confirm perfection of security interest > Confirm that you have a pledge of 100% of the equity > Check any requirements imposed by lender > Review guaranties; have other collateral? > Is there a lockbox or blocked account? > Determine which state’s UCC governs the exercise of the mezzanine lender’s remedies > Understand status of senior loan
  42. 42. Evaluate Facts <ul><li>• Monetary default: interest, principal, other payments </li></ul><ul><li>• Non-monetary default: covenants, other </li></ul><ul><li>• Cure periods </li></ul><ul><li>• Always good practice to provide mezzanine borrower with written notice of default </li></ul><ul><li>• Written notice may be required to commence cure periods </li></ul>Consult with local counsel re state specific issues/concerns (transfer taxes etc.) Obtain updated UCC searches Confirm that an event of default has occurred
  43. 43. Evaluate Facts Review senior loan documents – if mezzanine lender acquires the mezzanine collateral it will become the direct or indirect owner of the property/owner mortgage borrower and will be subject to the terms of the senior loan documents Review other material contracts and agreements such as ground leases and material contracts pertaining to the underlying property.
  44. 44. Intercreditor Issues <ul><li>The intercreditor agreement governs the relationship between the senior and junior lenders </li></ul><ul><ul><li>Cross default provisions </li></ul></ul><ul><ul><li>Junior lender’s right to cure senior loan defaults </li></ul></ul><ul><ul><li>Junior lender’s right to purchase senior loans – mortgage and other tranches of mez </li></ul></ul><ul><ul><li>Can mezzanine lender foreclose on mezzanine loan collateral </li></ul></ul><ul><ul><ul><li>Qualified Transferee </li></ul></ul></ul><ul><ul><ul><li>Replacement guaranties </li></ul></ul></ul><ul><ul><ul><li>Replacement of property managers </li></ul></ul></ul><ul><ul><ul><li>Delivery of opinions </li></ul></ul></ul><ul><ul><ul><li>Cure of senior loan defaults ( strategy to stave off foreclosure ) </li></ul></ul></ul>
  45. 45. Confirm Perfection of Security Interest <ul><li>Review organizational documents of the entity owned by the mezzanine to see if election to “opt-in” to Article 8 has been correctly made and whether or not the equity inertest has been certificated. </li></ul><ul><li>Depending on the scope of collateral and whether Article 8 applies, confirm that UCC financing statements have been filed in the appropriate jurisdictions. The appropriate jurisdiction is usually the jurisdiction of organization. </li></ul><ul><li>If the entity owned by the mezzanine has opted in to Article 8, determine if “control” has been obtained. </li></ul>
  46. 46. Other Parties <ul><li>Are there any other interested parties? </li></ul><ul><ul><li>Guarantors </li></ul></ul><ul><ul><li>Pledgors </li></ul></ul><ul><ul><li>Other creditors – UCC searches </li></ul></ul><ul><ul><li>Any other parties that have requested notice of foreclosure sale </li></ul></ul>
  47. 47. <ul><li>Foreclosure by Public Sale </li></ul><ul><li>Foreclosure by Private Sale </li></ul><ul><li>Retention of Collateral in Satisfaction </li></ul><ul><li>of the Debt </li></ul><ul><li>Judicial Enforcement </li></ul><ul><li>Collection Rights under UCC </li></ul><ul><li>Section 9-607 </li></ul>Methods of Foreclosure
  48. 48. <ul><li>1. Analogies to real property law don’t work – as is generally true: </li></ul><ul><li>foreclosure cuts off right of redemption ( §9-623(c)) </li></ul><ul><li>rights of good faith transferee ( §9-617(b)) </li></ul><ul><li>2. Secured creditor rights upon default (including foreclosure) are covered in Part 6 of Article 9. </li></ul>Foreclosure 101:
  49. 49. Sale Procedures Compared Purpose Judgment for deficiency? When final? Legal standard? By whom? Article 9 sale Judicial sale
  50. 50. Sale Procedures Compared Enforce mortgage Protect “equity” Maybe fix deficiency Purpose Judgment for deficiency? When final? Legal standard? By whom? Article 9 sale Judicial sale
  51. 51. Sale Procedures Compared Enforce SI Protect “surplus” Maybe fix deficiency Enforce mortgage Protect “equity” Maybe fix deficiency Purpose Judgment for deficiency? When final? Legal standard? By whom? Article 9 sale Judicial sale
  52. 52. Sale Procedures Compared Enforce SI Protect “surplus” Maybe fix deficiency Enforce mortgage Protect “equity” Maybe fix deficiency Purpose Judgment for deficiency? When final? Legal standard? Sheriff, clerk By whom? Article 9 sale Judicial sale
  53. 53. Sale Procedures Compared Enforce SI Protect “surplus” Maybe fix deficiency Enforce mortgage Protect “equity” Maybe fix deficiency Purpose Judgment for deficiency? When final? Legal standard? Secured party Sheriff, clerk By whom? Article 9 sale Judicial sale
  54. 54. Sale Procedures Compared Enforce SI Protect “surplus” Maybe fix deficiency Enforce mortgage Protect “equity” Maybe fix deficiency Purpose Judgment for deficiency? When final? Fixed procedural requirements Legal standard? Secured party Sheriff, clerk By whom? Article 9 sale Judicial sale
  55. 55. Sale Procedures Compared Enforce SI Protect “surplus” Maybe fix deficiency Enforce mortgage Protect “equity” Maybe fix deficiency Purpose Judgment for deficiency? When final? Commercially reasonable Fixed procedural requirements Legal standard? Secured party Sheriff, clerk By whom? Article 9 sale Judicial sale
  56. 56. Sale Procedures Compared Enforce SI Protect “surplus” Maybe fix deficiency Enforce mortgage Protect “equity” Maybe fix deficiency Purpose Judgment for deficiency? On confirmation When final? Commercially reasonable Fixed procedural requirements Legal standard? Secured party Sheriff, clerk By whom? Article 9 sale Judicial sale
  57. 57. Sale Procedures Compared Enforce SI Protect “surplus” Maybe fix deficiency Enforce mortgage Protect “equity” Maybe fix deficiency Purpose Judgment for deficiency? Upon sale On confirmation When final? Commercially reasonable Fixed procedural requirements Legal standard? Secured party Sheriff, clerk By whom? Article 9 sale Judicial sale
  58. 58. Sale Procedures Compared Enforce SI Protect “surplus” Maybe fix deficiency Enforce mortgage Protect “equity” Maybe fix deficiency Purpose Varied rules Judgment for deficiency? Upon sale On confirmation When final? Commercially reasonable Fixed procedural requirements Legal standard? Secured party Sheriff, clerk By whom? Article 9 sale Judicial sale
  59. 59. Sale Procedures Compared Enforce SI Protect “surplus” Maybe fix deficiency Enforce mortgage Protect “equity” Maybe fix deficiency Purpose If procedure OK, and secured is not buyer Varied rules Judgment for deficiency? Upon sale On confirmation When final? Commercially reasonable Fixed procedural requirements Legal standard? Secured party Sheriff, clerk By whom? Article 9 sale Judicial sale
  60. 60. Sale Procedures Compared Enforce SI Protect “surplus” Maybe fix deficiency Enforce mortgage Protect “equity” Maybe fix deficiency Purpose If procedure OK, and secured is not buyer Varied rules Judgment for deficiency? Upon sale On confirmation When final? Commercially reasonable Fixed procedural requirements Legal standard? Secured party Sheriff, clerk By whom? Article 9 sale Judicial sale
  61. 61. Public vs. Private UCC Foreclosure Sales <ul><li>Public Sale – </li></ul><ul><li> • Not defined </li></ul><ul><li> • Meaningful opportunity for competitive bidding </li></ul><ul><li> • Some form of advertising and notice to maximize public participation </li></ul><ul><li> • Commercially Reasonable </li></ul>
  62. 62. Public vs. Private UCC Foreclosure Sales <ul><li>Limits on the right of the secured creditor to purchase collateral at a private sale (§9-610(c)). </li></ul><ul><ul><li>No limits in a public sale. </li></ul></ul><ul><ul><li>Only collateral sold on a recognized market/subject to widely distributed standard price quotes (publicly traded stock) can be purchased at a private sale by the secured creditor. </li></ul></ul>
  63. 63. <ul><ul><li>Notice: </li></ul></ul><ul><ul><li>Notification provisions of §§9-611-613. </li></ul></ul><ul><ul><li>Who receives notice of the sale. (§9-611) </li></ul></ul><ul><ul><ul><li>The Debtor, any secondary obligor, other secured creditors, and others requesting notice. </li></ul></ul></ul><ul><ul><ul><li>While not technically required, notice to parties that have expressed an interest in acquiring the collateral may bear on whether the sale was commercially reasonable. </li></ul></ul></ul>Public/Private Sale:
  64. 64. <ul><ul><li>Notice: </li></ul></ul><ul><ul><li>Contents of notice of sale: “time and place of a public disposition” vs. “time after which” (§9-613). </li></ul></ul><ul><ul><li>Timeliness of notice:10 day safe harbor (§9-612). </li></ul></ul><ul><ul><li>UCC Foreclosure Notice Insurance Policy ™ (pending). </li></ul></ul>Public/Private Sale:
  65. 65. Content of Notice <ul><li>§ 9-613 provides that notice is sufficient if it: </li></ul><ul><ul><li>Describes the debtor and the secured party </li></ul></ul><ul><ul><li>Describes the collateral being sold </li></ul></ul><ul><ul><li>States the method of intended disposition </li></ul></ul><ul><ul><li>States that the debtor is entitled to an accounting of the unpaid indebtedness and states the charge, if any, for the accounting </li></ul></ul><ul><ul><li>States the time and place of public disposition or the time after which any other disposition will be made </li></ul></ul>
  66. 66. Where to Advertise <ul><li>Depends on the type of collateral </li></ul><ul><li>Newspapers of general circulation </li></ul><ul><li>Trade journals </li></ul><ul><li>Location of likely bidders </li></ul><ul><li>Specialized markets </li></ul>
  67. 67. <ul><ul><ul><li>Private Sale Significantly Cheaper </li></ul></ul></ul><ul><ul><ul><li>Commercially Reasonable Notice AND Commercially Reasonable Sale </li></ul></ul></ul><ul><ul><ul><li>“ Qualified Transferee” </li></ul></ul></ul><ul><ul><ul><li>Rights of Good Faith Transferee (§9-617) </li></ul></ul></ul>Public/Private Sale:
  68. 68. <ul><li>§9-610(b): </li></ul><ul><li>Every aspect of a disposition of collateral, including the method, manner, time, place, and other terms, must be commercially reasonable </li></ul>Commercially Reasonable Sale
  69. 69. <ul><li>§9-627(b)(3): </li></ul><ul><li>Otherwise in conformity with reasonable commercially practices among dealers in the type of property that was the subject of the disposition. </li></ul>Commercially Reasonable Sale
  70. 70. <ul><li>§9-627(a): </li></ul><ul><li>The fact that a greater price could have been obtained ...is not itself sufficient to preclude the secured party from establishing that the ...[foreclosure] was made in a commercially reasonable manner </li></ul>Commercially Reasonable Sale
  71. 71. Commercial Reasonableness <ul><li>A commercially reasonable sale may include the following: </li></ul><ul><ul><li>Marketing method </li></ul></ul><ul><ul><li>Advertising in trade publications and newspapers </li></ul></ul><ul><ul><li>Retention of brokers </li></ul></ul><ul><ul><li>Electronic forum </li></ul></ul><ul><ul><li>Providing property profiles to prospective purchasers and access to subject property </li></ul></ul><ul><ul><li>“ war room” – provide sufficient due diligence materials and time to allow potential buyers to review </li></ul></ul><ul><ul><li>Disclaimer of warranties ( §9-610(e)) </li></ul></ul><ul><ul><li>Appropriate UCC insurance </li></ul></ul>
  72. 72. Commercial Reasonableness <ul><li>Due Diligence Materials (to the extent available and not confidential), such as: </li></ul><ul><li> • information pertaining to the mortgage and other senior loans </li></ul><ul><li> • rent roll </li></ul><ul><li> • title report </li></ul><ul><li> • survey and structural and environmental assessments </li></ul><ul><li> </li></ul>
  73. 73. <ul><li>§9-627(c)(1): </li></ul><ul><li>A collection, enforcement, disposition, or acceptance is commercially reasonable if it has been approved in a judicial proceeding. </li></ul>Commercially Reasonable Sale
  74. 74. <ul><li>MORAL: A foreclosing mezzanine lender should make sure that at each point in the foreclosure process its actions are carefully considered to minimize the chances of a challenge for lack of commercial reasonableness. </li></ul>Commercially Reasonable Sale
  75. 75. <ul><ul><li>• Partial vs. Full Satisfaction – affirmative consent vs. passive acceptance (§9-620) </li></ul></ul><ul><ul><li>• Notice (§9-621) </li></ul></ul><ul><ul><ul><li>• Acceptance – debtor and others (§9-620) </li></ul></ul></ul><ul><ul><ul><li>Best way to go if Debtor consents </li></ul></ul></ul>Strict Foreclosure:
  76. 76. <ul><li>Donald J. Rapson commented that strict foreclosure “provides a method of enforcement that is nonadversarial, requires lower transaction costs, and is </li></ul><ul><li>not likely to result in litigation.”* </li></ul><ul><li>* Default and Enforcement of Security Interests Under Revised Article 9, 74 Chi.-Kent L. Rev. 893. 923 (1999). </li></ul>
  77. 77. <ul><ul><li>Notification of Proposal (§9-621) * - </li></ul></ul><ul><ul><ul><li>any person with an interest in the collateral who has notified the Secured Party; </li></ul></ul></ul><ul><ul><ul><li>any other lienholder that, 10 days before the Debtor consented to the acceptance, held a lien on the collateral perfected by the filing of a Financing Statement; and </li></ul></ul></ul><ul><ul><ul><li>any other secured party that, 10 days before the Debtor consented to the acceptance, held a security interest in the collateral perfected by compliance with a statute, regulation, or treaty described in §9-311(a) . </li></ul></ul></ul><ul><ul><ul><li>In addition, if in partial satisfaction, to any secondary obligor. * UCC Foreclosure Notice Insurance Policy ™ (pending) </li></ul></ul></ul>Strict Foreclosure:
  78. 78. <ul><ul><li>Who must consent: </li></ul></ul><ul><ul><ul><li>Debtor under §9-620 </li></ul></ul></ul><ul><ul><ul><li>Person to whom notice is required under §9-621 </li></ul></ul></ul><ul><ul><ul><li>Any other person holding a subordinate interest in the collateral </li></ul></ul></ul>Strict Foreclosure:
  79. 79. <ul><ul><li>• Strategic Advantages to Secured Party </li></ul></ul><ul><ul><li>• Debtor’s Strategic Assertion of Objection to Acceptance </li></ul></ul>Strict Foreclosure:
  80. 80. Settlement Procedures Compared System Purpose Consumer exceptions Formal requirements Acceptance of Collateral, § 9-620 Deed in lieu
  81. 81. Settlement Procedures Compared Real estate System Purpose Consumer exceptions Formal requirements Acceptance of Collateral, § 9-620 Deed in lieu
  82. 82. Settlement Procedures Compared Personal property Real estate System Purpose Consumer exceptions Formal requirements Acceptance of Collateral, § 9-620 Deed in lieu
  83. 83. Settlement Procedures Compared Personal property Real estate System Settlement that avoids foreclosure Purpose Consumer exceptions Formal requirements Acceptance of Collateral, § 9-620 Deed in lieu
  84. 84. Settlement Procedures Compared Personal property Real estate System Settlement that avoids foreclosure Settlement that avoids foreclosure Purpose Consumer exceptions Formal requirements Acceptance of Collateral, § 9-620 Deed in lieu
  85. 85. Settlement Procedures Compared Personal property Real estate System Settlement that avoids foreclosure Settlement that avoids foreclosure Purpose Consumer exceptions Deed Formal requirements Acceptance of Collateral, § 9-620 Deed in lieu
  86. 86. Settlement Procedures Compared Personal property Real estate System Settlement that avoids foreclosure Settlement that avoids foreclosure Purpose Consumer exceptions 1. Authenticated agree-ment partial satisfaction 2. Lack of objection if in full satisfaction Deed Formal requirements Acceptance of Collateral, § 9-620 Deed in lieu
  87. 87. Settlement Procedures Compared Personal property Real estate System Settlement that avoids foreclosure Settlement that avoids foreclosure Purpose No Consumer exceptions 1. Authenticated agree-ment partial satisfaction 2. Lack of objection if in full satisfaction Deed Formal requirements Acceptance of Collateral, § 9-620 Deed in lieu
  88. 88. Settlement Procedures Compared Personal property Real estate System Settlement that avoids foreclosure Settlement that avoids foreclosure Purpose 1. Waiver needed if debtor has paid 60% 2. No partial satisfaction 3. Not while debtor has the collateral No Consumer exceptions 1. Authenticated agree-ment partial satisfaction 2. Lack of objection if in full satisfaction Deed Formal requirements Acceptance of Collateral, § 9-620 Deed in lieu
  89. 89. Settlement Procedures Compared Personal property Real estate System Settlement that avoids foreclosure Settlement that avoids foreclosure Purpose 1. Waiver needed if debtor has paid 60% 2. No partial satisfaction 3. Not while debtor has the collateral No Consumer exceptions 1. Authenticated agree-ment partial satisfaction 2. Lack of objection if in full satisfaction Deed Formal requirements Acceptance of Collateral, § 9-620 Deed in lieu
  90. 90. Procedures for Acceptance (Consent) Actual Agreement (for partial or full satisfaction) Lack of Objection (only for full satisfaction)
  91. 91. Procedures for Acceptance (Consent) Secured party consent: Secured party sends unconditional proposal to accept in full satisfaction § 9-620(b)(1). Actual Agreement (for partial or full satisfaction) Lack of Objection (only for full satisfaction)
  92. 92. Procedures for Acceptance (Consent) Secured party consent: Secured party sends unconditional proposal to accept in full satisfaction § 9-620(b)(1). Debtor consent: Secured party receives no objection to proposal within 20 days, § 9-620(c)(2)(C). Actual Agreement (for partial or full satisfaction) Lack of Objection (only for full satisfaction)
  93. 93. Procedures for Acceptance (Consent) Secured party consent: Secured party consents in an authenticated record § 9-620(b)(1). Secured party consent: Secured party sends unconditional proposal to accept in full satisfaction § 9-620(b)(1). Debtor consent: Secured party receives no objection to proposal within 20 days, § 9-620(c)(2)(C). Actual Agreement (for partial or full satisfaction) Lack of Objection (only for full satisfaction)
  94. 94. Procedures for Acceptance (Consent) Secured party consent: Secured party consents in an authenticated record § 9-620(b)(1). Secured party consent: Secured party sends unconditional proposal to accept in full satisfaction § 9-620(b)(1). Debtor consent: Debtor agrees to terms in a record authenticated after default, § 9-620(c)(1). Debtor consent: Secured party receives no objection to proposal within 20 days, § 9-620(c)(2)(C). Actual Agreement (for partial or full satisfaction) Lack of Objection (only for full satisfaction)
  95. 95. Procedures for Acceptance (Consent) Secured party consent: Secured party consents in an authenticated record § 9-620(b)(1). Secured party consent: Secured party sends unconditional proposal to accept in full satisfaction § 9-620(b)(1). Debtor consent: Debtor agrees to terms in a record authenticated after default, § 9-620(c)(1). Debtor consent: Secured party receives no objection to proposal within 20 days, § 9-620(c)(2)(C). Actual Agreement (for partial or full satisfaction) Lack of Objection (only for full satisfaction)
  96. 96. <ul><ul><li>• Discharges the security interest under which the disposition is made; </li></ul></ul><ul><ul><li>• Transfers to a transferee for value all of the debtor’s rights in the collateral; and </li></ul></ul><ul><ul><li>• Discharges any subordinate security interest or other subordinate lien. </li></ul></ul>Results of Foreclosure:
  97. 97. <ul><li>In the good old days: </li></ul><ul><ul><li>Madrid to BFP vs. RTC, 511 US 531 (1994)(regularly conducted, non collusive sale conforming to state law is not avoidable). </li></ul></ul><ul><li>Today: </li></ul><ul><ul><li>Krohn v. Sweeheart Properties , 203 Ariz. 205, 52 P3d 774 (2002)(sale price is grossly inadequate). </li></ul></ul><ul><ul><li>§9-615(f) calculation of surplus or deficiency when the secured party or a person related to the secured party acquires the collateral through foreclosure. </li></ul></ul><ul><li>Be commercially reasonable (§9-610(b). </li></ul>Setting Aside Foreclosures
  98. 98. <ul><ul><li>Read Lynn Soukup’s article. </li></ul></ul><ul><ul><li>Ability of lender to acquire equity interests at public or private sale ( §9-610(c)) . </li></ul></ul><ul><ul><li>No action letters and other securities law challenges to a secured lender that is attempting to foreclose on stock of a public company pledged to secure a loan. </li></ul></ul><ul><ul><li>UCC Article 8 implications for the lien interest itself (protected purchaser status, etc.). </li></ul></ul>Foreclosure On Equity:
  99. 99. Foreclosure On Equity: <ul><li>NOTE #1: If 100% of the equity is not in play, without the necessary consents from other partners or members, the successful purchaser at a foreclosure sale may not be able to succeed to the right or powers of a partner or member and is only entitled to receive proceeds and distributions. </li></ul>
  100. 100. Foreclosure On Equity: <ul><li>NOTE #2: Complexities may arise due toi the “carving up” of the capital structure, including conflicts of interest between a servicer/collateral agent that also holds an interest in a mortgage or mezzanine tranche and another holder of an interest in a mezzanine tranche. </li></ul>
  101. 101. Foreclosure On Equity: AND THEN THE MEZZANINE BORROWER FILES BANKRUPTCY ! FINAL THOUGHTS IF WE HAVE TIME
  102. 102. Foreclosure On Equity: BUT REMEMBER “BAD BOY” CARVEOUTS TO NONRECOURSE LIABILITY!
  103. 103. Foreclosure Through Bankruptcy & Receiverships <ul><li>Stay of foreclosure in a bankruptcy case. </li></ul><ul><ul><li>Does stay apply to foreclosure of equity interests? </li></ul></ul><ul><li>Foreclosure through a §363 sale or plan of reorganization in a bankruptcy case. </li></ul><ul><li>Power of receiver to sell assets (in lieu of a foreclosure) </li></ul><ul><li>Retention of foreclosure rights by a secured creditor who moves for the appointment of a receiver. </li></ul><ul><li>Use of professionals to assist with the disposition of collateral. </li></ul>
  104. 104. <ul><li>Debt play </li></ul><ul><li>Equity play </li></ul>Recovery Approaches in General
  105. 105. <ul><li>“ Going Concern” Recoveries (Debt Play) </li></ul><ul><li>may exceed breakup liquidation value. </li></ul><ul><li>Cooperative Chapter 11 / plan </li></ul><ul><li>Cooperative Chapter 11 / 363 sale </li></ul><ul><li>Foreclosure to third party </li></ul>Debt Play:
  106. 106. Section 363 Sales Increased Scrutiny for Sales to Insiders
  107. 107. In re Medical Software Solutions, 286 B.R. 431 (2002) <ul><li>Owner/Lender case (VC) </li></ul><ul><li>Sought approval of § 363 sale to the VC </li></ul><ul><li>Debtor requested examiner </li></ul><ul><li>Examiner reported no inequitable conduct, loans made in good faith </li></ul>Section 363 Sales
  108. 108. In re Medical Software Solutions, 286 B.R. 431 (2002) <ul><li>Equitable subordination rejected </li></ul><ul><li>Recharacterization rejected </li></ul><ul><li>§ 363 sale approved as having sound business reason and being undertaken in good faith </li></ul>Section 363 Sales
  109. 109. L ENDER as O WNER: When Lender acquires 100% of the equity of Debtor as a recovery strategy. Equity Play:
  110. 110. Why Acquire Equity of the Debtor? <ul><li>Cut off owners, set up other remedies </li></ul><ul><li>Complex assets re: transfer </li></ul><ul><li>Non-assignable assets </li></ul><ul><li>Unencumbered assets </li></ul><ul><li>Control for rehabilitation – Mortgage Borrower </li></ul><ul><li>Absence of other collateral </li></ul><ul><li>Absence of other permitted remedies </li></ul>Equity Play:
  111. 111. “ Going Concern” Recoveries (Equity) <ul><li>Foreclose on equity </li></ul><ul><li>Convert debt </li></ul>Equity Play:
  112. 112. Risks of Lender/Owner Piercing the Veil Equitable Subordination Management Risks Equity Play:
  113. 113. Equitable Subordination § 510(c) <ul><li>...the court may…under principles of equitable subordination, subordinate for purposes of distribution all or part of an allowed claim to all or part of another allowed claim… </li></ul>
  114. 114. Mobile Steel <ul><li>Inequitable conduct </li></ul><ul><li>Injury to other creditors </li></ul><ul><li>Not inconsistent with other Bankruptcy Code provisions </li></ul>Equitable Subordination
  115. 115. <ul><li>Defined BK §101(31) </li></ul><ul><li>More scrutiny of insiders v. non-insiders </li></ul><ul><li>“ Material evidence” shifts the burden to the insider </li></ul><ul><li>The insider has burden of showing its good faith and the fairness of its conduct </li></ul>Equitable Subordination
  116. 116. Inequitable Conduct <ul><li>fraud, illegality or breach of fiduciary duties by the creditor, </li></ul><ul><li>(ii) use of the debtor as a mere instrumentality or alter ego </li></ul>Equitable Subordination
  117. 117. Remedies Under Equitable Subordination <ul><li>Scope of subordination </li></ul><ul><li>Amount of subordination </li></ul><ul><li>Burden of proof to limit subordination </li></ul>Equitable Subordination
  118. 118. Lender/Owner Management Risk Fiduciary D uties of Directors
  119. 119. <ul><li>Fiduciary (competence and loyalty) </li></ul><ul><li>Business Judgment Rule </li></ul><ul><li>Presumption of Regularity </li></ul>Fiduciary Duties of Directors
  120. 120. <ul><li>Duty to creditors </li></ul><ul><li>Loyalty emphasis </li></ul><ul><li>Some courts extend to duty of competence, subject to business judgment rule </li></ul>Fiduciary Duties of Directors
  121. 121. Potential Appointment of Trustee for “Cause” <ul><li>Includes without limitation fraud, dishonesty, incompetency or gross mismanagement </li></ul>HOSTILE BORROWER
  122. 122. Cause Also Includes: <ul><li>Materiality of misconduct </li></ul><ul><li>Evenhandedness in dealings with insiders or affiliated entities vis-a-vis others </li></ul><ul><li>Pre-petition voidable preferences or fraudulent transfers </li></ul><ul><li>Unwillingness or inability of management to pursue estate causes of action </li></ul><ul><li>Conflicts of interest interfering with management’s ability to fulfill fiduciary duties to the debtor </li></ul>
  123. 123. UCC EAGLE 9 ® NEW PROGRAMS, NEW SOLUTIONS!
  124. 124. <ul><li>Domain Name (URL): www.eagle9.com </li></ul><ul><li>E-mail Address: [email_address] </li></ul><ul><li>Toll Free Number: (800) 700-1191 </li></ul><ul><li>UCC Division Legal Team: </li></ul><ul><ul><li>Randy Scott, President & Counsel </li></ul></ul><ul><ul><li>Jim Prendergast, Senior Vice President and General Counsel </li></ul></ul><ul><ul><li>Brad Gibson, Associate General Counsel </li></ul></ul>RESOURCES
  125. 125. <ul><li>QUESTIONS </li></ul>?
  126. 126. THANK YOU
  127. 127. CONTACT COLORADO NCS <ul><li>Curtsey of </li></ul><ul><li>Colorado NCS Office </li></ul><ul><li>8310 S. Valley Hwy, Suite 135 </li></ul><ul><li>Englewood, CO 80112 </li></ul><ul><li>303-704-1878 </li></ul><ul><li>[email_address] </li></ul>
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