Mezzanine Loan Foreclosures: Effectuating a UCC

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Presenting a live 90-minute webinar with interactive Q&A

Mezzanine Loan Foreclosures:

Effectuating a UCC Foreclosure Sale

and Navigating Bankruptcy Pitfalls Protecting Lender and Borrower Interests and Overcoming Obstacles to the Sale

Today’s faculty features:

1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific

WEDNESDAY, OCTOBER 28, 2015

James S. Cochran, Partner, O'Connor Cochran, Los Angeles

James D. Prendergast, SVP, Legal Counsel-UCC Division,

First American Title Insurance Company, Santa Ana, Calif.

Steven O. Weise, Partner, Proskauer Rose, Los Angeles

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EAGLE 9® UCC Division

© 2008 First American Title Insurance

Company

FIRST AMERICAN

TITLE INSURANCE COMPANY



Company

Pepperdine Law School

Pacific Ocean

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Our Mission

Cover

foreclosure

of Article 9

security

interests on

mezz equity

collateral. 7



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FORECLOSURE

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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

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Company

US CMBS and CRE CDO: Moody’s

Approach to Rating Commercial Real Estate

Mezzanine Loans

Pledge of 100% of the equity

Opt In to Article 8

Certificate the Equity

File a Financing Statement

Control the ability to Opt Out

– hardwire or proxy

UCC Insurance

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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

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FORECLOSURE

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• Foreclosure by Public Sale

• Foreclosure by Private Sale

• Retention of Collateral in Satisfaction

of the Debt

• Judicial Enforcement

Methods of

Foreclosure

• Collection Rights under

UCC § 9-607

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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:

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Judicial sale Article 9 sale

Purpose

By whom?

Legal standard?

When final?

Judgment for

deficiency?

Sale Procedures

Compared

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Purpose Enforce mortgage

Protect “equity”

Maybe fix deficiency

By whom?

Legal standard?

When final?

Judgment for

deficiency?

Sale Procedures

Compared

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Enforce SI

Protect “surplus”


By whom?

Legal standard?

When final?

Judgment for

deficiency?

Sale Procedures

Compared

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Enforce SI



By whom? Sheriff, clerk

Legal standard?

When final?

Judgment for

deficiency?

Sale Procedures

Compared

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Enforce SI



By whom? Sheriff, clerk Secured party

Legal standard?

When final?

Judgment for

deficiency?

Sale Procedures

Compared

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Enforce SI




Legal standard? Fixed procedural

requirements

When final?

Judgment for

deficiency?

Sale Procedures

Compared

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Enforce SI





requirements

Commercially

reasonable

When final?

Judgment for

deficiency?

Sale Procedures

Compared

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Enforce SI





requirements

Commercially

reasonable

When final? On confirmation

Judgment for

deficiency?

Sale Procedures

Compared

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Enforce SI





requirements

Commercially

reasonable

When final? On confirmation Upon sale

Judgment for

deficiency?

Sale Procedures

Compared

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Enforce SI





requirements

Commercially

reasonable


Judgment for

deficiency?

Varied rules

Sale Procedures

Compared

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Enforce SI





requirements

Commercially

reasonable


Judgment for

deficiency?

Varied rules If procedure OK; and

special rule if

secured is buyer*

Sale Procedures

Compared

*§9-615(f) 25



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Enforce SI





requirements

Commercially

reasonable


Judgment for

deficiency?

Varied rules If procedure OK; and

special rule if

secured is buyer*

Sale Procedures

Compared

*§9-615(f) 26



Company

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

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Company

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.

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Company

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:

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Company

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™.


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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

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Where to Advertise

Depends on the type of collateral

Newspapers of general circulation

Trade journals

Location of likely bidders

Specialized markets

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Private Sale Significantly Cheaper

Commercially Reasonable Notice

AND Commercially Reasonable Sale

“Qualified Transferee”

Rights of Good Faith Transferee (§9-

617)


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Company

§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

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Company

§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

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§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

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Commercial Reasonableness is

like pornography, hard to define,

but you know it when you see it.*

*paraphrasing Potter Stewart in Jacobellis v.

Ohio (1964).

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Case Authority on what

constitutes Commercial

Reasonableness

Vornado PS, L.L.C. v. Primestone Inv. Partners, L.P., 821 A.2d 296, 49 UCC Rep.Serv.2d 1348 (2002).

The foreclosing creditor should seriously conduct the sale as if it really wanted to obtain the highest price for the collateral, including the hiring of respected and knowledgeable investment bankers, real estate brokers and the like.

Inside information need not always be disclosed if there is sufficient reason for confidentiality or the failure to disclose.

An external market will be dispositive of reasonable price but the highest price is not required for reasonableness.

A public sale is warranted notwithstanding Official Comments especially if the foreclosing creditor is a likely sole bidder for the collateral, which is often the case in the foreclosure of real estate mezzanine loan collateral.

The noticed rules for the conduct of the sale can be followed.

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Company

Case Authority on what

constitutes Commercial

Reasonableness

Voutiritsas v. Intercounty Title Co. of Illinois, 279 Ill.App.3d 170, 664 N.E.2d 170, 215 Ill.Dec. 773, 31 UCC Rep.Serv.2d 950 (1996).

If you are foreclosing on equity collateral pledged to secure a mezzanine real property loan, it is very prudent to describe the underlying realty that is involved because no one bidding at the foreclosure dale wants to acquire the membership certificate just to frame it. Notwithstanding what is being foreclosed, what actually is being sold?

Again, as in Vornado, the foreclosing creditor should seriously conduct the sale as if it really wanted to obtain the highest price for the collateral.

If the secured party is the only bidder at the foreclosure sale, it will have a significant burden showing that the sale was conducted in a commercially reasonable manner. Keep notes to answer the question as to why the secured party was the only bidder, e.g., the property was so far under water that the pledged equity in the owner of the real property had no value and the secured party held the sale for other legitimate reasons, such as to set a deficiency.

If the collateral being foreclosed has value, be sure the bid of the foreclosing creditor has something to do with that value.

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Company

Conclusions

Carefully follow foreclosure sale rules.

Be careful about notice of sale.

Prepare proof of reasonable price.

Focus on the procedures of the sale – not just

the price.

Note different measures of damages.

Assess the risk of counterclaims.

Use “safe harbors” where possible.

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Company

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

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Company

§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

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Company

MORAL: A foreclosing 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

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Company

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:

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Company

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).

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Company

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™

Strict Foreclosure:

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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:

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• Strategic Advantages to Secured Party

• Debtor’s Strategic Assertion of Objection to Acceptance

Strict Foreclosure:

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Deed in lieu Acceptance of

Collateral, § 9-620

System

Purpose

Formal

requirements

Consumer

exceptions

Settlement Procedures

Compared

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System Real estate

Purpose

Formal

requirements

Consumer

exceptions


Compared

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System Real estate Personal property

Purpose

Formal

requirements

Consumer

exceptions


Compared

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Purpose Settlement that

avoids foreclosure

Formal

requirements

Consumer

exceptions


Compared

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avoids foreclosure

Settlement that avoids

foreclosure

Formal

requirements

Consumer

exceptions


Compared

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avoids foreclosure


foreclosure

Formal

requirements

Deed

Consumer

exceptions


Compared

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avoids foreclosure


foreclosure

Formal

requirements

Deed 1. Authenticated agree-

ment partial satisfaction

2. Lack of objection if in

full satisfaction

Consumer

exceptions


Compared

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Company





avoids foreclosure


foreclosure

Formal

requirements

Deed 1. Authenticated agree-

ment partial satisfaction

2. Lack of objection if in

full satisfaction

Consumer

exceptions

No


Compared

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Company

Deed in lieu Acceptance of Collateral, § 9-

620


Purpose Settlement that avoids

foreclosure


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 satisfaction

3. Not while debtor has the

collateral


Compared

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Company

Deed in lieu Acceptance of Collateral, §

9-620


Purpose Settlement that avoids

foreclosure


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 satisfaction

3. Not while debtor has the

collateral


Compared

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Company

Lack of Objection

(only for full satisfaction)

Actual Agreement

(for partial or full satisfaction)

Procedures for Acceptance

(Consent)

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Company

Lack of Objection


Actual Agreement


Secured party consent:

Secured party sends

unconditional proposal to

accept in full satisfaction

§9-620(b)(1).


(Consent)

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Company

Lack of Objection


Actual Agreement



Secured party sends



§9-620(b)(1).

Debtor consent:

Secured party receives no

objection to proposal within

20 days, § 9-620(c)(2)(C).


(Consent)

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Company

Lack of Objection


Actual Agreement



Secured party sends



§9-620(b)(1).


Secured party consents in

an authenticated record §9-

620(b)(1).

Debtor consent:



20 days, § 9-620(c)(2)(C).


(Consent)

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Company

Lack of Objection


Actual Agreement



Secured party sends



§9-620(b)(1).




620(b)(1).

Debtor consent:



20 days, § 9-620(c)(2)(C).

Debtor consent: Debtor

agrees to terms in a record

authenticated after default, §

9-620(c)(1).


(Consent)

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Company

Lack of Objection


Actual Agreement



Secured party sends



§9-620(b)(1).




620(b)(1).

Debtor consent:



20 days, § 9-620(c)(2)(C).

Debtor consent: Debtor

agrees to terms in a record

authenticated after default, §

9-620(c)(1).


(Consent)

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Company

• 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:

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Company

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

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Company

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 –

Securities Law Implications:

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Company

The SEC has stated in some older no action letters that registration will not be necessary where:

(i) the public sale is necessary to assure that the "foreclosure" is commercially reasonable within the meaning of applicable UCC provisions,

(ii) the shares will be sold as a block,

(iii) an investment letter will be received from the purchaser stating that the securities have been purchased for investment and not with a view toward distribution,

(iv) the certificates will bear a standard 1933 Act legend, and

(v) the public notices states that the secured party reserves the right to bid in for the securities.

Foreclosure On Equity –

Securities Law Implications:

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Company

Foreclosure 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.

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Company

Foreclosure On

Equity:

NOTE #2: Complexities may arise due to

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.

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Company

Foreclosure On Equity:

AND THEN THE

MEZZANINE

BORROWER

FILES

BANKRUPTCY!

A TOPIC FOR ANOTHER PROGRAM

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Company

UCC EAGLE 9®

NEW PROGRAMS, NEW SOLUTIONS!

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Company

Domain Name (URL): www.eagle9.com

E-mail Address: [email protected]

Toll Free Number: 800.700.1191

UCC Division Legal Team:

Randy Scott, President & Counsel

Jim Prendergast, Senior Vice President and General Counsel

Brad Gibson, Vice President and Associate General Counsel

RESOURCES

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Company

Marketing

Jill Sharif, Vice President, National

Sales Director, 703.480.9541

Gina Sanchez, National Marketing

Coordinator, 714.250.8640

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Company

QUESTIONS

James S. Cochran

O'Connor Cochran

[email protected]

James D. Prendergast

First American Title Insurance Company

[email protected]

Steven O. Weise

Proskauer Rose

[email protected]

75

mailto:[email protected]





Company

THANK YOU

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Documents

Mezzanine Loan Foreclosures: Effectuating a UCC