foreclosure of equity interests - american bar...

FORECLOSURE OF EQUITYFORECLOSURE OF EQUITYINTERESTSINTERESTS

ComFin Fall MeetingComFin Fall Meeting

(November 7, 2007)(November 7, 2007)

John R. ClemencyJohn R. Clemency

[email protected]@gtlaw.com

Greenberg Traurig, LLPGreenberg Traurig, LLP

22

OUR MISSIONOUR MISSION

Cover foreclosures of liensCover foreclosures of liensequity interests in mezzanineequity interests in mezzaninefinancings:financings:

–– Liens on stock.Liens on stock.

–– Liens on partnership and LLCLiens on partnership and LLCinterests.interests.

With a real estate twist.With a real estate twist.

John ClemencyJohn Clemency 33

WHAT WE ARE NOT EXPLORINGWHAT WE ARE NOT EXPLORING

Perfection of liens onPerfection of liens onequity interests.equity interests.

Handy chart put togetherHandy chart put togetherby Lynn Soukup.by Lynn Soukup.



Is the mezzanine financingIs the mezzanine financingdebt or equity?debt or equity?

Or to coin a phrase used byOr to coin a phrase used byMichael Craven of MorrisMichael Craven of MorrisAnderson in an ABI article, isAnderson in an ABI article, isthe mezzanine financingthe mezzanine financingDebtQuity?DebtQuity?

Cathy or Steve can explainCathy or Steve can explainwhy that may be relevant in awhy that may be relevant in adistressed/bankruptcy settingdistressed/bankruptcy setting



What are the intercreditorWhat are the intercreditorrestrictions on foreclosure ofrestrictions on foreclosure ofthe lien on the pledged equitythe lien on the pledged equityinterests?interests?

Most holders of junior debt areMost holders of junior debt arepretty hamstrung by the seniorpretty hamstrung by the seniordebt holders when it comes todebt holders when it comes toenforcement rights.enforcement rights.

In real estate financings, theIn real estate financings, thetrend has been to providetrend has been to provide““silent second lienssilent second liens”” which whichalso would often trump mezzalso would often trump mezzdebt.debt.



Is it worth taking a lien on anIs it worth taking a lien on anequity interest?equity interest?

Is it worth foreclosing a lien onIs it worth foreclosing a lien onan equity interest?an equity interest?

Sometimes the brain damageSometimes the brain damageassociated with a lien on anassociated with a lien on anequity interest is greater thanequity interest is greater thanthe value of the lien in the firstthe value of the lien in the firstplace.place.

Possibility of beingPossibility of beingdisenfranchised in adisenfranchised in abankruptcy.bankruptcy.



The potential liability exposureThe potential liability exposureassociated with becoming theassociated with becoming theproud owner of the borrowerproud owner of the borrower’’ssdistressed business followingdistressed business followingthe foreclosure of a lien on anthe foreclosure of a lien on anequity interest.equity interest.


CLASS DISMISSEDCLASS DISMISSED

For anyone that expected anFor anyone that expected anexplanation of theexplanation of thecosts/benefits of attempting tocosts/benefits of attempting tosecure mezz debt with liens onsecure mezz debt with liens onequity interests.equity interests.


FORECLOSURE 101FORECLOSURE 101

If you are lucky enough to haveIf you are lucky enough to havevaluable collateral, donvaluable collateral, don’’t be a pig.t be a pig.

Setting aside foreclosures in the goodSetting aside foreclosures in the goodold days:old days:

–– Madrid to BFP vs. RTC, Madrid to BFP vs. RTC, 511 US 531511 US 531(1994)(regularly conducted, non(1994)(regularly conducted, noncollusive sale conforming to state lawcollusive sale conforming to state lawis not avoidable).is not avoidable).

Setting aside foreclosures today:Setting aside foreclosures today:–– Krohn v. Sweeheart PropertiesKrohn v. Sweeheart Properties, 203 Ariz., 203 Ariz.

205, 52 P3d 774 (2002)(sale price is205, 52 P3d 774 (2002)(sale price isgrossly inadequate).grossly inadequate).

–– §9-615(f) calculation of surplus or§9-615(f) calculation of surplus ordeficiency when the secured party or adeficiency when the secured party or aperson related to the secured partyperson related to the secured partyacquires the collateral throughacquires the collateral throughforeclosure.foreclosure.

Be reasonable, be commerciallyBe reasonable, be commerciallyreasonable. [§6-10(b)]reasonable. [§6-10(b)]Limits on deficiencies where realLimits on deficiencies where realestate collateral is involved.estate collateral is involved.


FORECLOSURE 101FORECLOSURE 101

Secured creditor rights uponSecured creditor rights upondefault (including foreclosure) isdefault (including foreclosure) iscovered in Part 6 of Article 9.covered in Part 6 of Article 9.

Public vs. private UCC foreclosurePublic vs. private UCC foreclosuresales.sales.

Limits on the right of the securedLimits on the right of the securedcreditor to purchase collateral at acreditor to purchase collateral at aprivate sale (9-610(c)).private sale (9-610(c)).

–– No limits in a public sale.No limits in a public sale.

–– Only collateral sold on aOnly collateral sold on arecognized market/subject torecognized market/subject towidely distributed standard pricewidely distributed standard pricequotes (publicly traded stock) canquotes (publicly traded stock) canbe purchased at a private sale bybe purchased at a private sale bythe secured creditor.the secured creditor.


FORECLOSURE ON STOCKFORECLOSURE ON STOCK

Public company stock.Public company stock.–– Read Lynn SoukupRead Lynn Soukup’’s article.s article.

Ability of lender to acquire stockAbility of lender to acquire stockat public or private saleat public or private sale

No action letters and otherNo action letters and othersecurities law challenges to asecurities law challenges to asecured lender that is attemptingsecured lender that is attemptingto foreclose on stock of a publicto foreclose on stock of a publiccompany pledged to secure acompany pledged to secure aloan.loan.

Private company stock.Private company stock.–– Read Lynn SoukupRead Lynn Soukup’’s article.s article.

UCC Article 8 implications for theUCC Article 8 implications for thelien interest itself (protectedlien interest itself (protectedpurchaser status, etc.).purchaser status, etc.).

Inability of secured creditor toInability of secured creditor toacquire the stock through aacquire the stock through aprivate sale.private sale.


FORECLOSURE OF PARTNERSHIPFORECLOSURE OF PARTNERSHIP AND LLC INTERESTS AND LLC INTERESTS

Partnership/LLC interests treatedPartnership/LLC interests treatedpretty much the same (as a pretty much the same (as a ““generalgeneralintangibleintangible””).).§9-610(c) limit on purchase of the§9-610(c) limit on purchase of thepartnership/LLC interest at a privatepartnership/LLC interest at a privatesale.sale.Accomplished following theAccomplished following thenotification provisions of §§9-611-13.notification provisions of §§9-611-13.

–– Who receives notice of the sale. [§9-Who receives notice of the sale. [§9-611]611]

While not technically required, noticeWhile not technically required, noticeto parties that have expressed anto parties that have expressed aninterest in acquiring the collateralinterest in acquiring the collateralmay bear on whether the sale wasmay bear on whether the sale wascommercially reasonable.commercially reasonable.

–– Contents of notice of sale. [§9-613]Contents of notice of sale. [§9-613]–– Timeliness of notice.Timeliness of notice.

10 day safe harbor. [§9-612]10 day safe harbor. [§9-612]

Rights of good faith transferee. [§9-Rights of good faith transferee. [§9-617]617]Strict foreclosure. [§9-620]Strict foreclosure. [§9-620]


SUCCESSFULLY COMPLETED FORECLOSURESUCCESSFULLY COMPLETED FORECLOSUREOF PARTNERSHIP OR LLC INTERESTOF PARTNERSHIP OR LLC INTEREST

What you get.What you get.

–– Foreclosure of 100% interestsForeclosure of 100% interestsin partnership or LLCin partnership or LLC

–– Foreclosure of <100% interestsForeclosure of <100% interestsin partnerships or LLCsin partnerships or LLCs

Related Related ““charging ordercharging order””device for a judgment creditordevice for a judgment creditorto realize on a debtorto realize on a debtor’’s interests interestin a partnership or LLCin a partnership or LLC


FORECLOSURE THROUGHFORECLOSURE THROUGHBANKRUPTCY & RECEIVERSHIPSBANKRUPTCY & RECEIVERSHIPS

Stay of foreclosure in aStay of foreclosure in abankruptcy case.bankruptcy case.

–– Does stay apply to foreclosure ofDoes stay apply to foreclosure ofequity interests?equity interests?

Foreclosure through a §363 sale orForeclosure through a §363 sale orplan of reorganization in aplan of reorganization in abankruptcy case.bankruptcy case.

Power of receiver to sell assets (inPower of receiver to sell assets (inlieu of a foreclosure)lieu of a foreclosure)

Retention of foreclosure rights byRetention of foreclosure rights bya secured creditor who moves fora secured creditor who moves forthe appointment of a receiver.the appointment of a receiver.

Use of professionals to assist withUse of professionals to assist withthe disposition of collateral.the disposition of collateral.

foreclosure of equity interests - american bar...

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