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FORECLOSURE OF EQUITY INTERESTS

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Cover foreclosures of liens equity interests in mezzanine financings: Liens on stock. ... secured lender that is attempting to foreclose on stock of a public company ... – PowerPoint PPT presentation

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Title: FORECLOSURE OF EQUITY INTERESTS


1
FORECLOSURE OF EQUITY INTERESTS
  • ComFin Fall Meeting
  • (November 7, 2007)
  • John R. Clemency
  • clemencyj_at_gtlaw.com
  • Greenberg Traurig, LLP

2
OUR MISSION
  • Cover foreclosures of liens equity interests in
    mezzanine financings
  • Liens on stock.
  • Liens on partnership and LLC interests.
  • With a real estate twist.

3
WHAT WE ARE NOT EXPLORING
  • Perfection of liens on equity interests.
  • Handy chart put together by Lynn Soukup.

4
WHAT WE ARE NOT EXPLORING
  • Is the mezzanine financing debt or equity?
  • Or to coin a phrase used by Michael Craven of
    Morris Anderson in an ABI article, is the
    mezzanine financing DebtQuity?
  • Cathy or Steve can explain why that may be
    relevant in a distressed/bankruptcy setting

5
WHAT WE ARE NOT EXPLORING
  • What are the intercreditor restrictions on
    foreclosure of the lien on the pledged equity
    interests?
  • Most holders of junior debt are pretty hamstrung
    by the senior debt holders when it comes to
    enforcement rights.
  • In real estate financings, the trend has been to
    provide silent second liens which also would
    often trump mezz debt.

6
WHAT WE ARE NOT EXPLORING
  • Is it worth taking a lien on an equity interest?
  • Is it worth foreclosing a lien on an equity
    interest?
  • Sometimes the brain damage associated with a lien
    on an equity interest is greater than the value
    of the lien in the first place.
  • Possibility of being disenfranchised in a
    bankruptcy.

7
WHAT WE ARE NOT EXPLORING
  • The potential liability exposure associated with
    becoming the proud owner of the borrowers
    distressed business following the foreclosure of
    a lien on an equity interest.

8
CLASS DISMISSED
  • For anyone that expected an explanation of the
    costs/benefits of attempting to secure mezz debt
    with liens on equity interests.

9
FORECLOSURE 101
  • If you are lucky enough to have valuable
    collateral, dont be a pig.
  • Setting aside foreclosures 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).
  • Setting aside foreclosures 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 reasonable, be commercially reasonable.
    6-10(b)
  • Limits on deficiencies where real estate
    collateral is involved.

10
FORECLOSURE 101
  • Secured creditor rights upon default (including
    foreclosure) is covered in Part 6 of Article 9.
  • 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.

11
FORECLOSURE ON STOCK
  • Public company stock.
  • Read Lynn Soukups article.
  • Ability of lender to acquire stock at public or
    private sale
  • 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.
  • Private company stock.
  • Read Lynn Soukups article.
  • UCC Article 8 implications for the lien interest
    itself (protected purchaser status, etc.).
  • Inability of secured creditor to acquire the
    stock through a private sale.

12
FORECLOSURE OF PARTNERSHIP AND LLC INTERESTS
  • Partnership/LLC interests treated pretty much the
    same (as a general intangible).
  • 9-610(c) limit on purchase of the
    partnership/LLC interest at a private sale.
  • Accomplished following the notification
    provisions of 9-611-13.
  • Who receives notice of the sale. 9-611
  • 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.
  • Contents of notice of sale. 9-613
  • Timeliness of notice.
  • 10 day safe harbor. 9-612
  • Rights of good faith transferee. 9-617
  • Strict foreclosure. 9-620

13
SUCCESSFULLY COMPLETED FORECLOSURE OF PARTNERSHIP
OR LLC INTEREST
  • What you get.
  • Foreclosure of 100 interests in partnership or
    LLC
  • Foreclosure of LLCs
  • Related charging order device for a judgment
    creditor to realize on a debtors interest in a
    partnership or LLC

14
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.
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