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EAGLE 9® UCC Division
FIRST AMERICANTITLE INSURANCE COMPANY
EAGLE 9® UCC Division
FORECLOSURE ON EQUITY INTERESTS
INREAL ESTATE MEZZANINELENDING TRANSACTIONS
EAGLE 9® UCC Division Our Mission
Cover foreclosure of Article 9 security interests on equity collateral in real estate mezzanine lending.
EAGLE 9® UCC Division
• 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).– Piercing the Veil– Equitable Subordination– Management Risks– Fiduciary (Competence and
loyalty)– Duty to Creditors
What We Are Not Exploring in Depth
EAGLE 9® UCC Division Other Sources
• Lynn L. Soukup, Securities Law and the UCC: When Godzilla Meets Bambi, Uniform Commercial Code Law Journal [Vol. 38, #1].
• 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.
EAGLE 9® UCC Division Other Sources
• John C. Murray, Carveouts to Nonrecourse Loans: Are They Enforceable?
• 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.
EAGLE 9® UCC Division
But Now:
What is mezzanine lending?
EAGLE 9® UCC Division
What is Mezzanine Lending?“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”
(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)
EAGLE 9® UCC Division What is Mezzanine Lending?
“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)
EAGLE 9® UCC Division What is Mezzanine Lending?
THEREFORE A PERSONAL PROPERTY SECURED
TRANSACTION!
EAGLE 9® UCC Division
• Finances difference between senior mortgage and amount investor wants to invest–Senior Mortgage: 40 - 70% LTV–Mezzanine Financing: up to 90%
LTV
What is Mezzanine Lending?
EAGLE 9® UCC Division
RRE E TTUURRNN
RISKRISK
DEBTDEBT
EQUITYEQUITY
Mezzanine Mezzanine FinancingFinancing
What is Mezzanine Lending?
EAGLE 9® UCC Division
Generally: a non-mortgage form of subordinate financing (replaces traditional 2nd mortgage)
– No lien against real estate
– Lien/ownership is in equity interests in entity which owns the real estate
– Upon foreclosure mezzanine lender owns the entity and takes over mortgage borrower
What is Mezzanine Lending?
EAGLE 9® UCC Division
Developed after real estate foreclosure debacles in early 1990’s cause by junior lenders:
– Prevents delays on foreclosure, maybe
– Eliminates forced bankruptcy of mortgage borrower
– Requirements are set by rating agencies for first mortgage to qualify for securitization pools
What is Mezzanine Lending?
EAGLE 9® UCC Division
Intercreditor Agreement
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)
EAGLE 9® UCC Division
Real PropertyLender
Owner ofReal Property
MezzanineLender
AB
Mortgage Loan
Equity Secured Loans
Equity Owners
Mezzanine Lending
EAGLE 9® UCC Division
PropertyLender
Owner ofProperty
MezzanineLender #1
A B
Mortgage Loan
Equity Owners
Co-Borrowers
DC EMezzanineLender #2
F G HMezzanineLender #3
IMezzanineLender #4
Mezzanine Loans
Mezzanine Lending
EAGLE 9® UCC Division
Lender Borrower
A B
Asset Based Loan
Equity Secured Guarantees
Equity Owners
PLEDGED EQUITY LENDING
Law is the Same
EAGLE 9® UCC Division A GUIDE TO THINKING ABOUT PERFECTION
• Step 1: Does Article 9 Apply?• Step 2: Attachment• Step 3: Categorize the Collateral• Step 4: Perfection Step
• Filing (§9-310)• Perfection under non-Article 9 law (§9-311(a))• Possession (§9-313)• Control (§§9-314, 9-104, 9-106, 8-106)
• Step 5: Priority Consequences
EAGLE 9® UCC Division
Perfection of liens (security interests) in equity interest collateral.
Lien Perfection
EAGLE 9® UCC Division
US CMBS and CRE CDO: Moody’s Approach to Rating Commercial Real Estate
Mezzanine Loans
“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.”
EAGLE 9® UCC Division
“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
EAGLE 9® UCC Division
“UCC-1 financing statements should additionally be filed, as “fail-safe” protection.”
Moody’s Report
EAGLE 9® UCC Division
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.
Moody’s Report
EAGLE 9® UCC Division
“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.”
Moody’s Report
EAGLE 9® UCC Division
US CMBS and CRE CDO: Moody’s Approach to Rating Commercial Real Estate
Mezzanine Loans
Pledge of 100% of the equityOpt In to Article 8Certificate the EquityFile a Financing StatementControl the ability to Opt Out
– hardwire or proxyUCC Insurance
EAGLE 9® UCC Division
NEED TO CONSIDER NOT ONLY
• SECURED CREDITOR STATUS UNDER ARTICLE 9 OF THE UCC;
BUT ALSO
• PROTECTED PURCHASER STATUS UNDER ARTICLE 8 OF THE UCC
EAGLE 9® UCC Division
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
EAGLE 9® UCC Division
NEMO DAT QUOD NON HABET*
*“No man can give what he does not have”
EAGLE 9® UCC Division
EXCEPTIONS TO NEMO DAT:◦ Negotiable Promissory Notes◦ Negotiable Bills of Lading◦ Securities under Article 8 – if a Protected
Purchaser
EAGLE 9® UCC Division
“In addition to acquiring
the rights of a purchaser,
a Protected Purchaser
also acquires its interest
in the security
free of any adverse claim.”
§8-303(b)
EAGLE 9® UCC Division
FIRST STEP IS TO BE A SECURED CREDITOR BY CONTROL OF A SECURITY UNDER ARTICLE 8 and INVESTMENT PROPERTY UNDER ARTICLE 9
EAGLE 9® UCC DivisionNOTE: 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!
EntityEntity Ownership Ownership
InterestsInterests
Is it a security under Art. 8?
Perfection by Filing Perfection by Filing Financing StatementFinancing Statement
Perfection by Perfection by Control Control
AgreementAgreement
Is it certificated or uncertificated ?
NO
YESCertificated
Uncertificated
WINS over
filing!
Perfection by Perfection by Possession + Possession + Endorsement Endorsement
ControlControl
EAGLE 9® UCC Division
THEN BE A PROTECTED PURCHASER UNDER
ARTICLE 8
EAGLE 9® UCC Division
Mezz/Pledged EquityEndorsement
Section 8303 of the U.C.C. defines a “Protected Purchaser” as a purchaser of a security or an interest who:
i. Gives value.
ii. Does not have notice of any adverse claim to the security.
iii. Obtains control of the security.
EAGLE 9® UCC Division
ARTICLE 8 ARTICLE 9
Opt-In to Article 8 – LLC or Partnership Interest
a Security
Investment Property
Protected Purchaser Perfection by Control
I WIN!!!!!!
ARTICLE 8 and ARTICLE 9 - INTERRELATIONSHIP
EAGLE 9® UCC Division
Equity Owner –California LLC
Property Owner –Delaware LLC
Ultimate Parent
The Property
First MezzanineLender Loan Secured by
Pledge of EquityIn Delaware Sub
Lender Perfects SecurityInterest in Pledged Equity by Filing UCC-1 with CASOS
Step #1
A Case Study
EAGLE 9® UCC Division
Old Equity Owner –
California LLC
Property Owner – Delaware LLC
Ultimate Parent
The Property
First Mezzanine
Lender
NewEquity Owner-Delaware LLC1.3.
1. Sells Equity Ownership in Sub to Sister Sub for $100,000,000
SecondMezzanine
Lender2.
2. Provides New Mezzanine LoanSecured by EquityOwnership 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
EAGLE 9® UCC Division
First Mezzanine Lender Sues OldEquity Owner for Conversion BasedOn 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
NewEquity Owner-Delaware LLC
SecondMezzanine
Lender
Step #3
A Case Study
EAGLE 9® UCC Division
FORECLOSURE
EAGLE 9® UCC Division Initial Steps –Evaluate Facts
• Evaluate Facts
• Review Loan Documentation and Deal Structure
> 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
EAGLE 9® UCC Division Evaluate Facts
•Monetary default: interest, principal, other payments•Non-monetary default: covenants, other•Cure periods•Always good practice to provide mezzanine borrower
with written notice of default•Written notice may be required to commence
cure periods
Consult with local counsel re state specific issues/concerns (transfer taxes etc.)
Obtain updated UCC searches
Confirm that an event of default has occurred
EAGLE 9® UCC Division 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.
EAGLE 9® UCC Division Intercreditor Issues
The intercreditor agreement governs the relationship between the senior and junior lenders– Cross default provisions– Junior lender’s right to cure senior loan defaults– Junior lender’s right to purchase senior loans –
mortgage and other tranches of mez– Can mezzanine lender foreclose on mezzanine loan
collateral• Qualified Transferee• Replacement guaranties• Replacement of property managers• Delivery of opinions• Cure of senior loan defaults (strategy to stave off
foreclosure)
EAGLE 9® UCC Division Confirm Perfection of Security Interest
• 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.
• 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.
• If the entity owned by the mezzanine has opted in to Article 8, determine if “control” has been obtained.
EAGLE 9® UCC Division Other Parties
• Are there any other interested parties?– Guarantors– Pledgors– Other creditors – UCC searches– Any other parties that have requested notice
of foreclosure sale
EAGLE 9® UCC Division
• Foreclosure by Public Sale
• Foreclosure by Private Sale
• Retention of Collateral in Satisfaction of the Debt
• Judicial Enforcement
• Collection Rights under UCC Section 9-607
Methods of Foreclosure
EAGLE 9® UCC Division
1. Analogies to real property law don’t work – as is generally true:
• foreclosure cuts off right of redemption (§9-623(c))
• rights of good faith transferee (§9-617(b))
2. Secured creditor rights upon default (including foreclosure) are covered in Part 6 of Article 9.
Foreclosure 101:
EAGLE 9® UCC Division
Judicial sale Article 9 sale
Purpose
By whom?
Legal standard?
When final?
Judgment for deficiency?
Sale Procedures Compared
EAGLE 9® UCC Division
Judicial sale Article 9 sale
Purpose Enforce mortgage
Protect “equity”
Maybe fix deficiency
By whom?
Legal standard?
When final?
Judgment for deficiency?
Sale Procedures Compared
EAGLE 9® UCC Division
Judicial sale Article 9 sale
Purpose Enforce mortgage
Protect “equity”
Maybe fix deficiency
Enforce SI
Protect “surplus”
Maybe fix deficiency
By whom?
Legal standard?
When final?
Judgment for deficiency?
Sale Procedures Compared
EAGLE 9® UCC Division
Judicial sale Article 9 sale
Purpose Enforce mortgage
Protect “equity”
Maybe fix deficiency
Enforce SI
Protect “surplus”
Maybe fix deficiency
By whom? Sheriff, clerk
Legal standard?
When final?
Judgment for deficiency?
Sale Procedures Compared
EAGLE 9® UCC Division
Judicial sale Article 9 sale
Purpose Enforce mortgage
Protect “equity”
Maybe fix deficiency
Enforce SI
Protect “surplus”
Maybe fix deficiency
By whom? Sheriff, clerk Secured party
Legal standard?
When final?
Judgment for deficiency?
Sale Procedures Compared
EAGLE 9® UCC Division
Judicial sale Article 9 sale
Purpose Enforce mortgage
Protect “equity”
Maybe fix deficiency
Enforce SI
Protect “surplus”
Maybe fix deficiency
By whom? Sheriff, clerk Secured party
Legal standard? Fixed procedural
requirements
When final?
Judgment for deficiency?
Sale Procedures Compared
EAGLE 9® UCC Division
Judicial sale Article 9 sale
Purpose Enforce mortgage
Protect “equity”
Maybe fix deficiency
Enforce SI
Protect “surplus”
Maybe fix deficiency
By whom? Sheriff, clerk Secured party
Legal standard? Fixed procedural
requirements
Commercially reasonable
When final?
Judgment for deficiency?
Sale Procedures Compared
EAGLE 9® UCC Division
Judicial sale Article 9 sale
Purpose Enforce mortgage
Protect “equity”
Maybe fix deficiency
Enforce SI
Protect “surplus”
Maybe fix deficiency
By whom? Sheriff, clerk Secured party
Legal standard? Fixed procedural
requirements
Commercially reasonable
When final? On confirmation
Judgment for deficiency?
Sale Procedures Compared
EAGLE 9® UCC Division
Judicial sale Article 9 sale
Purpose Enforce mortgage
Protect “equity”
Maybe fix deficiency
Enforce SI
Protect “surplus”
Maybe fix deficiency
By whom? Sheriff, clerk Secured party
Legal standard? Fixed procedural
requirements
Commercially reasonable
When final? On confirmation Upon sale
Judgment for deficiency?
Sale Procedures Compared
EAGLE 9® UCC Division
Judicial sale Article 9 sale
Purpose Enforce mortgage
Protect “equity”
Maybe fix deficiency
Enforce SI
Protect “surplus”
Maybe fix deficiency
By whom? Sheriff, clerk Secured party
Legal standard? Fixed procedural
requirements
Commercially reasonable
When final? On confirmation Upon sale
Judgment for deficiency?
Varied rules
Sale Procedures Compared
EAGLE 9® UCC Division
Judicial sale Article 9 sale
Purpose Enforce mortgage
Protect “equity”
Maybe fix deficiency
Enforce SI
Protect “surplus”
Maybe fix deficiency
By whom? Sheriff, clerk Secured party
Legal standard? Fixed procedural
requirements
Commercially reasonable
When final? On confirmation Upon sale
Judgment for deficiency?
Varied rules If procedure OK, and secured is not buyer
Sale Procedures Compared
EAGLE 9® UCC Division
Judicial sale Article 9 sale
Purpose Enforce mortgage
Protect “equity”
Maybe fix deficiency
Enforce SI
Protect “surplus”
Maybe fix deficiency
By whom? Sheriff, clerk Secured party
Legal standard? Fixed procedural
requirements
Commercially reasonable
When final? On confirmation Upon sale
Judgment for deficiency?
Varied rules If procedure OK, and secured is not buyer
Sale Procedures Compared
EAGLE 9® UCC Division Public vs. Private UCC Foreclosure Sales
Public Sale –
• Not defined
• Meaningful opportunity for competitive bidding
• Some form of advertising and notice to maximize public participation
• Commercially Reasonable
EAGLE 9® UCC Division Public vs. Private UCC Foreclosure Sales
Limits on the right of the secured creditor to purchase collateral at a private sale (§9-610(c)).– No limits in a public
sale.– 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.
EAGLE 9® UCC Division
Notice:– Notification provisions of §§9-611-613.– Who receives notice of the sale. (§9-611)
• The Debtor, any secondary obligor, other secured creditors, and others requesting notice.
• 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.
Public/Private Sale:
EAGLE 9® UCC Division
Notice:– Contents of notice of sale: “time and
place of a public disposition” vs. “time after which” (§9-613).
– Timeliness of notice:10 day safe harbor (§9-612).
– UCC Foreclosure Notice Insurance Policy™ (pending).
Public/Private Sale:
EAGLE 9® UCC Division Content of Notice
§9-613 provides that notice is sufficient if it:– Describes the debtor and the secured party– Describes the collateral being sold– States the method of intended disposition– States that the debtor is entitled to an accounting of
the unpaid indebtedness and states the charge, if any, for the accounting
– States the time and place of public disposition or the time after which any other disposition will be made
EAGLE 9® UCC DivisionWhere to Advertise
• Depends on the type of collateral
• Newspapers of general circulation
• Trade journals
• Location of likely bidders
• Specialized markets
EAGLE 9® UCC Division
• Private Sale Significantly Cheaper
• Commercially Reasonable Notice AND Commercially Reasonable Sale
• “Qualified Transferee”
• Rights of Good Faith Transferee (§9-617)
Public/Private Sale:
EAGLE 9® UCC Division
§9-610(b):Every aspect of a disposition of collateral, including the method, manner, time, place, and other terms, must be commercially reasonable
Commercially Reasonable Sale
EAGLE 9® UCC Division
§9-627(b)(3):Otherwise in conformity with reasonable commercially practices among dealers in the type of property that was the subject of the disposition.
Commercially Reasonable Sale
EAGLE 9® UCC Division
§9-627(a):
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
Commercially Reasonable Sale
EAGLE 9® UCC Division Commercial Reasonableness
A commercially reasonable sale may include the following:– Marketing method– Advertising in trade publications and newspapers– Retention of brokers– Electronic forum– Providing property profiles to prospective
purchasers and access to subject property– “war room” – provide sufficient due diligence materials
and time to allow potential buyers to review– Disclaimer of warranties (§9-610(e))– Appropriate UCC insurance
EAGLE 9® UCC Division Commercial Reasonableness
Due Diligence Materials (to the extent available and not confidential), such as:
• information pertaining to the mortgage and other senior loans
• rent roll
• title report
• survey and structural and environmental assessments
EAGLE 9® UCC Division
§9-627(c)(1):
A collection, enforcement, disposition, or acceptance is commercially reasonable if it has been approved in a judicial proceeding.
Commercially Reasonable Sale
EAGLE 9® UCC Division
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.
Commercially Reasonable Sale
EAGLE 9® UCC Division
• Partial vs. Full Satisfaction – affirmative consent vs.
passive acceptance (§9-620)
• Notice (§9-621)• Acceptance – debtor and others (§9-620)
• Best way to go if Debtor consents
Strict Foreclosure:
EAGLE 9® UCC Division
Donald J. Rapson commented that strict foreclosure “provides a method of enforcement that is nonadversarial, requires lower transaction costs, and is
not likely to result in litigation.”*
* Default and Enforcement of Security Interests Under Revised Article 9, 74 Chi.-Kent L. Rev. 893. 923 (1999).
EAGLE 9® UCC Division
Notification of Proposal (§9-621)* -
• any person with an interest in the collateral who has notified the Secured Party;
• 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
• 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).
• In addition, if in partial satisfaction, to any secondary obligor.
*UCC Foreclosure Notice Insurance Policy™ (pending)
Strict Foreclosure:
EAGLE 9® UCC Division
Who must consent:
• Debtor under §9-620
• Person to whom notice is required under §9-621
• Any other person holding a subordinate interest in the collateral
Strict Foreclosure:
EAGLE 9® UCC Division
• Strategic Advantages to Secured Party
• Debtor’s Strategic Assertion of
Objection to Acceptance
Strict Foreclosure:
EAGLE 9® UCC Division
Deed in lieu Acceptance of Collateral, § 9-620
System
Purpose
Formal requirements
Consumer exceptions
Settlement Procedures Compared
EAGLE 9® UCC Division
Deed in lieu Acceptance of Collateral, § 9-620
System Real estate
Purpose
Formal requirements
Consumer exceptions
Settlement Procedures Compared
EAGLE 9® UCC Division
Deed in lieu Acceptance of Collateral, § 9-620
System Real estate Personal property
Purpose
Formal requirements
Consumer exceptions
Settlement Procedures Compared
EAGLE 9® UCC Division
Deed in lieu Acceptance of Collateral, § 9-620
System Real estate Personal property
Purpose Settlement that avoids foreclosure
Formal requirements
Consumer exceptions
Settlement Procedures Compared
EAGLE 9® UCC Division
Deed in lieu Acceptance of Collateral, § 9-620
System Real estate Personal property
Purpose Settlement that avoids foreclosure
Settlement that avoids foreclosure
Formal requirements
Consumer exceptions
Settlement Procedures Compared
EAGLE 9® UCC Division
Deed in lieu Acceptance of Collateral, § 9-620
System Real estate Personal property
Purpose Settlement that avoids foreclosure
Settlement that avoids foreclosure
Formal requirements
Deed
Consumer exceptions
Settlement Procedures Compared
EAGLE 9® UCC Division
Deed in lieu Acceptance of Collateral, § 9-620
System Real estate Personal property
Purpose Settlement that avoids foreclosure
Settlement that avoids foreclosure
Formal requirements
Deed 1. Authenticated agree-ment partial satisfaction
2. Lack of objection if in full satisfaction
Consumer exceptions
Settlement Procedures Compared
EAGLE 9® UCC Division
Deed in lieu Acceptance of Collateral, § 9-620
System Real estate Personal property
Purpose Settlement that avoids foreclosure
Settlement that avoids foreclosure
Formal requirements
Deed 1. Authenticated agree-ment partial satisfaction
2. Lack of objection if in full satisfaction
Consumer exceptions
No
Settlement Procedures Compared
EAGLE 9® UCC Division
Deed in lieu Acceptance of Collateral, § 9-620
System Real estate Personal property
Purpose Settlement that avoids foreclosure
Settlement that avoids foreclosure
Formal requirements
Deed 1. Authenticated agree-ment partial satisfaction
2. Lack of objection if in full satisfaction
Consumer exceptions
No 1. Waiver needed if debtor has paid 60% 2. No partial satisfaction3. Not while debtor has the collateral
Settlement Procedures Compared
EAGLE 9® UCC Division
Deed in lieu Acceptance of Collateral, § 9-620
System Real estate Personal property
Purpose Settlement that avoids foreclosure
Settlement that avoids foreclosure
Formal requirements
Deed 1. Authenticated agree-ment partial satisfaction
2. Lack of objection if in full satisfaction
Consumer exceptions
No 1. Waiver needed if debtor has paid 60% 2. No partial satisfaction3. Not while debtor has the collateral
Settlement Procedures Compared
EAGLE 9® UCC Division
Lack of Objection
(only for full satisfaction)
Actual Agreement(for partial or full satisfaction)
Procedures for Acceptance (Consent)
EAGLE 9® UCC Division
Lack of Objection
(only for full satisfaction)
Actual Agreement(for partial or full satisfaction)
Secured party consent: Secured party sends unconditional proposal to accept in full satisfaction §9-620(b)(1).
Procedures for Acceptance (Consent)
EAGLE 9® UCC Division
Lack of Objection
(only for full satisfaction)
Actual Agreement(for partial or full satisfaction)
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).
Procedures for Acceptance (Consent)
EAGLE 9® UCC Division
Lack of Objection
(only for full satisfaction)
Actual Agreement(for partial or full satisfaction)
Secured party consent: Secured party sends unconditional proposal to accept in full satisfaction §9-620(b)(1).
Secured party consent: Secured party consents in an authenticated record §9-620(b)(1).
Debtor consent:Secured party receives no objection to proposal within 20 days, § 9-620(c)(2)(C).
Procedures for Acceptance (Consent)
EAGLE 9® UCC Division
Lack of Objection
(only for full satisfaction)
Actual Agreement(for partial or full satisfaction)
Secured party consent: Secured party sends unconditional proposal to accept in full satisfaction §9-620(b)(1).
Secured party consent: Secured party consents in an authenticated record §9-620(b)(1).
Debtor consent:Secured party receives no objection to proposal within 20 days, § 9-620(c)(2)(C).
Debtor consent: Debtor agrees to terms in a record authenticated after default, § 9-620(c)(1).
Procedures for Acceptance (Consent)
EAGLE 9® UCC Division
Lack of Objection
(only for full satisfaction)
Actual Agreement(for partial or full satisfaction)
Secured party consent: Secured party sends unconditional proposal to accept in full satisfaction §9-620(b)(1).
Secured party consent: Secured party consents in an authenticated record §9-620(b)(1).
Debtor consent:Secured party receives no objection to proposal within 20 days, § 9-620(c)(2)(C).
Debtor consent: Debtor agrees to terms in a record authenticated after default, § 9-620(c)(1).
Procedures for Acceptance (Consent)
EAGLE 9® UCC Division
• Discharges the security interest under which the disposition is made;
• Transfers to a transferee for value all of the debtor’s rights in the collateral; and
• Discharges any subordinate security interest or other subordinate lien.
Results of Foreclosure:
EAGLE 9® UCC Division
• In the good old days: – Madrid to BFP vs. RTC, 511 US
531 (1994)(regularly conducted, non collusive sale conforming to state law is not avoidable).
• Today:– Krohn v. Sweeheart Properties,
203 Ariz. 205, 52 P3d 774 (2002)(sale price is grossly inadequate).
– §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.
• Be commercially reasonable (§9-610(b).
Setting Aside Foreclosures
EAGLE 9® UCC Division
– Read Lynn Soukup’s article.
– Ability of lender to acquire equity interests at public or private sale (§9-610(c)).
– 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.
– UCC Article 8 implications for the lien interest itself (protected purchaser status, etc.).
Foreclosure On Equity:
EAGLE 9® UCC DivisionForeclosure On Equity:
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.
EAGLE 9® UCC DivisionForeclosure On Equity:
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.
EAGLE 9® UCC Division Foreclosure On Equity:
AND THEN THE MEZZANINE BORROWER
FILES BANKRUPTCY!
FINAL THOUGHTS IF WE HAVE TIME
EAGLE 9® UCC Division Foreclosure On Equity:
BUT REMEMBER “BAD BOY”
CARVEOUTS TO NONRECOURSE
LIABILITY!
EAGLE 9® UCC Division Foreclosure Through Bankruptcy & Receiverships
• Stay of foreclosure in a bankruptcy case.– Does stay apply to foreclosure of
equity interests?
• Foreclosure through a §363 sale or plan of reorganization in a bankruptcy case.
• Power of receiver to sell assets (in lieu of a foreclosure)
• Retention of foreclosure rights by a secured creditor who moves for the appointment of a receiver.
• Use of professionals to assist with the disposition of collateral.
EAGLE 9® UCC Division
• Debt play• Equity play
Recovery Approaches in General
EAGLE 9® UCC Division
“Going Concern” Recoveries (Debt Play)
may exceed breakup liquidation value.
• Cooperative Chapter 11 / plan• Cooperative Chapter 11 / 363 sale• Foreclosure to third party
Debt Play:
EAGLE 9® UCC Division
Section 363 Sales
Increased Scrutiny for Sales
to Insiders
EAGLE 9® UCC Division
In re Medical Software Solutions, 286 B.R. 431 (2002)
• Owner/Lender case (VC)
• Sought approval of §363 sale to the VC
• Debtor requested examiner
• Examiner reported no inequitable conduct, loans made in good faith
Section 363 Sales
EAGLE 9® UCC Division
In re Medical Software Solutions, 286 B.R. 431 (2002)
• Equitable subordination rejected
• Recharacterization rejected
• §363 sale approved as having sound business reason and being undertaken in good faith
Section 363 Sales
EAGLE 9® UCC Division
LENDER as OWNER:When Lender acquires 100% of the equity of Debtor as a
recovery strategy.
Equity Play:
EAGLE 9® UCC Division
Why Acquire Equity of the Debtor?
• Cut off owners, set up other remedies• Complex assets re: transfer• Non-assignable assets• Unencumbered assets• Control for rehabilitation – Mortgage
Borrower• Absence of other collateral• Absence of other permitted remedies
Equity Play:
EAGLE 9® UCC Division
“Going Concern” Recoveries (Equity)
• Foreclose on equity
• Convert debt
Equity Play:
EAGLE 9® UCC Division
Risks of Lender/Owner
Piercing the Veil
Equitable Subordination
Management Risks
Equity Play:
EAGLE 9® UCC Division
Equitable Subordination §510(c)
...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…
EAGLE 9® UCC Division
Mobile Steel
• Inequitable conduct
• Injury to other creditors
• Not inconsistent with other Bankruptcy Code provisions
Equitable Subordination
EAGLE 9® UCC Division
• Defined BK §101(31)
• More scrutiny of insiders v. non-insiders
• “Material evidence” shifts the burden to the insider
• The insider has burden of showing its good faith and the fairness of its conduct
Equitable Subordination
EAGLE 9® UCC Division
Inequitable Conduct
(i) fraud, illegality or breach of fiduciary duties by the creditor,
(ii) use of the debtor as a mere instrumentality or alter ego
Equitable Subordination
EAGLE 9® UCC Division
Remedies Under Equitable Subordination
• Scope of subordination
• Amount of subordination
• Burden of proof to limit subordination
Equitable Subordination
EAGLE 9® UCC Division
Lender/Owner Management Risk
Fiduciary Duties of Directors
EAGLE 9® UCC Division
• Fiduciary (competence and loyalty)
• Business Judgment Rule
• Presumption of Regularity
Fiduciary Duties of Directors
EAGLE 9® UCC Division
• Duty to creditors• Loyalty emphasis• Some courts extend
to duty of competence, subject to business judgment rule
Fiduciary Duties of Directors
EAGLE 9® UCC Division
Potential Appointment of Trustee for “Cause”
Includes without limitation fraud, dishonesty, incompetency or gross mismanagement
HOSTILE BORROWER
EAGLE 9® UCC Division Cause Also Includes:
• Materiality of misconduct • Evenhandedness in dealings with insiders or
affiliated entities vis-a-vis others • Pre-petition voidable preferences or fraudulent
transfers• Unwillingness or inability of management to
pursue estate causes of action• Conflicts of interest interfering with management’s
ability to fulfill fiduciary duties to the debtor
EAGLE 9® UCC Division
UCC EAGLE 9®
NEW PROGRAMS, NEW SOLUTIONS!
EAGLE 9® UCC Division
• Domain Name (URL): www.eagle9.com• E-mail Address: eagle9.ucc@firstam.com• Toll Free Number: (800) 700-1191• UCC Division Legal Team:
– Randy Scott, President & Counsel– Jim Prendergast, Senior Vice President
and General Counsel– Brad Gibson, Associate General Counsel
RESOURCES
EAGLE 9® UCC Division
QUESTIONS
????
EAGLE 9® UCC Division
THANK YOU
EAGLE 9® UCC Division
CONTACT COLORADO NCS
Curtsey of
Colorado NCS Office
8310 S. Valley Hwy, Suite 135
Englewood, CO 80112
303-704-1878
stephensanders@fristam.com
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