FORECLOSURE OF EQUITY
INTERESTS
ComFin Fall Meeting
(November 7, 2007)
John R. Clemency
clemencyj@gtlaw.com
Greenberg Traurig, LLP
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.
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WHAT WE ARE NOT EXPLORING
Perfection of liens on
equity interests.
Handy chart put together
by Lynn Soukup.
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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
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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.
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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.
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WHAT WE ARE NOT EXPLORING
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.
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CLASS DISMISSED
For anyone that expected an
explanation of the
costs/benefits of attempting to
secure mezz debt with liens on
equity interests.
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FORECLOSURE 101
If you are lucky enough to have
valuable collateral, don’t 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.
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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.
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FORECLOSURE ON STOCK
Public company stock.
– Read Lynn Soukup’s 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 Soukup’s 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.
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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]
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SUCCESSFULLY COMPLETED FORECLOSURE
OF PARTNERSHIP OR LLC INTEREST
What you get.
– Foreclosure of 100% interests
in partnership or LLC
– Foreclosure of <100% interests
in partnerships or LLCs
Related “charging order”
device for a judgment creditor
to realize on a debtor’s interest
in a partnership or LLC
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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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